Basic of Nepalese Monetary Policy

This blog basically deals with the fundamental concept of monetary policy. This is assumed to be beneficial to beginners.

Meaning of Monetary Policy

It is a set of instruments adopted by the central monetary authority incorporating with the fiscal policy to control the price level. The monetary policy is defined as a discretionary action undertaken by the authorities designed to influence the supply of money and interest rate. Here the policy instruments are; Bank Rate, CRR, SLR, Repo and Reverse Repo, used to control the flow of money supply.

Types of Monetary Policy

Generally, monetary policy has been classified into two catagories:

A. Based on the Objectives: 

There are two sets of objectives viz. 

A.1 Single-Minded Monetary Policy: only aims to set a target either on inflation or nominal GNP growth etc.
A.2 Multi-Objective Monetary Policy: is responsible to accomplish multiple tasks viz. Monetary (money supply, inflation and so on) and Development related activities (supporting to increase government capital expenditure).

B. Based on the Money Supply(M₂ )

B.1 Contractionary: Money is infused into the economy.

B.2 Expansionary: Money is defused into the economy.

It should be noted here that Nepal has been adopting the multi-objective monetary policy. 

Goals

The end of the continuum is goal variables, which represent the ultimate objectives of policy and so may be thought of as arguments appearing in the policymakers' objective function. The goals of monetary policy are:

• Price Stability
• Economic growth
• Exchange Stability
• Full Employment.

Objectives 

It is the specific and precise form of goals of monetary policy. Nepal’s monetary policy objectives are:

• Maintaining price and external sector stability, financial stability and
• Facilitating high and sustainable economic growth
• The top priority for increasing financial access.

Instruments

Instruments are those tools or means of authority which is used to control directly by the relevant policy authority. In the context of Nepalese monetary policy, the list of potential instruments are:

• Bank Rate,
• Cash Reserve Ratio (CRR),
• SLR (Statutory Liquidity Ratio),
• Repo and Reverse Repo

The rate of these variables changes over a period of time. 

Instruments have been classified into two headings, viz. quantitative and qualitative instruments. 

Under quantitative instruments: Bank Rate, Open Market Operation, CRR and SLR, Refinance Rate and so on. 

Qualitative instruments comprise Marginal Requirement,  Rationing of Credit, Issue of Directives, Moral Suasion, Publicity and Direct Action.

Indicators

Indicators are neither instruments nor goals, but their role is to provide information to the policymaker regarding the current state of the economy.

Illustrations:

• The economic growth rate remained at 3.6 per cent in 2012/13
• The inflation rate is estimated to be at 9.9 per cent in 2012/13
• BOP surplus during the last two consecutive years helped to maintain external stability.
• The merger of BFIs has been encouraged,
• High priority has been given to expand inclusive access to finance.

Targets

Values of specific economic variables that the monetary authority seeks to achieve with monetary policy. These targets are usually intermediate targets that are neither an instrument nor a goal, but one which serves as an operational guide to policy. It leads to desirable outcomes for the goal variables. In FY 2013-14, Monetary Policy has the following targets;

• Economic growth - 5.5 %
• Inflation at 8 %
• Foreign exchange reserves -  imports of goods and services at least for 8 months.
• Growth of broad money by 16%,
• Domestic credit growth is projected at 17.1 % of which, credit to the government and credit to the private sector is projected to be 12.3 per cent and 18 per cent respectively.

Limitations 

Limitations of Monetary Policy in Developing countries like Nepal.

• Weak Institutions
• Political Intervention
• Lack of Central Bank Independence
• There exist a Non-Monetized Sector
• Excess Non-Banking Financial Institutions (NBFI)
• Existence of Unorganized Financial Market
• Monetary and Fiscal Policy Lacks Coordination
• Lack of Transparency and Accountability.

Thank You!!!

Categories: Lecturer Notes