Highlights of the Mid-term review report of Monetary Policy 2077/78

The issuance of monetary policy is one of the major tools that a national government uses to achieve economic growth goals while maintaining macroeconomic stability. The central bank of Nepal, Nepal Rastra Bank (NRB), began the practice of announcing and publishing monetary policy statements formally from the fiscal year 2002/03, which proved to be a breakthrough as it provided a strong institutional and transparent framework.

Along the same lines, NRB issued the monetary policy for the FY 2077/78 on 17 July 2020. Amidst the health and economic instability created by the COVID-19 pandemic, the monetary policy aimed at contributing significantly to the economic recovery by maintaining macroeconomic stability and targeting economic growth of 7 percent by the end of 2021.

Six months after the release of the monetary policy, NRB has published a mid-term review report on 14 February 2021. The report has been made public keeping in view the economic and financial situation up to six months of the current fiscal year, implementation status of policies and programs mentioned in the monetary policy, semi-annual review of the budget of the Government of Nepal for the current fiscal year and the national as well as the international economic scenario.

Figure 1: Highlights of Mid-term Review of Monetary Policy of 2077/78

Highlights of Mid-term Review of Monetary Policy of 2077/78

Source: Author’s own

Some of the highlights of the mid-term review are presented below:

First quarterly review completed in December 2020: The economy, which has been affected by measures taken nationally and internationally to control and prevent the COVID-19 outbreak, is gradually improving. The first quarterly review of the monetary policy was conducted on 3 December 2020 keeping in view the economic and monetary targets set by the annual monetary policy. In this regard, the macroeconomic and financial indicators have been positive in the first six months of the current fiscal year. Some of the indicators have been presented in the following table.

Impact of COVID-19 on businesses/industries

Inflation under control: Inflation is under control during the review period. Particularly, the inflation of food items including pulses and nuts, ghee and edible oil, meat and fish remained high during the review period. However, the overall inflation declined due to lower inflation in non-food items and services including housing, education and clothing. Regarding consumer price inflation, the six-month average consumer price inflation stood at 3.72 percent in the FY 2077/78 against the target of keeping it within the range of 7 percent.

Exports increased while imports declined: Exports increased by 6.1 percent to NPR 60.80 billion while imports declined by 4.8 percent to NPR 661.25 billion. As a result, the trade deficit improved by 5.8 percent. Further, the balance of payments (BOP) witnessed a surplus as it reached NPR 124.92 billion.

Foreign exchange reserves in a favorable position: The target laid out in the monetary policy was to maintain foreign exchange reserves sufficient to support at least seven months of imports of goods and services. Considering this, the review period revealed that there is enough foreign exchange reserves to support monthly imports of goods and services for up to 12.6 months. Hence, foreign exchange reserves are in a favorable position.

Appreciation of Nepali rupee against the US dollar: The Nepali rupee appreciated by 2.95 percent against the US dollar in mid-December 2020 in comparison to mid-July 2020 and reached at a rate of NPR 116.91. However, in the corresponding period of the previous year, the Nepali rupee had depreciated by 3.29 percent against the US dollar.

Expansion of economic activity: With the decline in the COVID-19 infection rate in the country, economic activity has begun to expand. With the expansion of the economy, imports are likely to increase, putting pressure on liquidity and external sector management. Financial resources need to be encouraged in the productivity growth, job creation and entrepreneurship development.

Increased electronic financial transactions: With the expansion of financial access, electronic financial transactions have been increasing. BFIs and remittance service providers can enter Nepal through electronic means and payments can be made in Nepal through electronic payment devices such as mobile banking, internet banking, electronic card, etc. To strengthen the payment system and maintain records of all types of electronic transactions, Nepal Clearing House Limited has set up a principle to establish a national payment switch, which has been approved as well. Likewise, the provision of service charges from BFIs, payment service providers, and payment system operators for providing electronic payment services has been reviewed during the review period. Further, in order to manage the payments made through Quick Response (QR) Code in electronic payments, the relevant criteria have been drafted and made public for the opinion of stakeholders. Apart from this, additional policy arrangements will be made for the promotion of electronic transactions including QR codes.

New arrangement in the stock market: Stock market trading and index insurance have also expanded. Considering this, an arrangement has been made in the review period which states that foreign investors of Nepali companies or industries can now borrow up to 60 percent of the investment in capital or shares in Nepal.

Growth in deposits and credits: During the review period, deposits in BFIs increased by NPR 352.21 billion, and credits to the private sector increased by NPR 366.33 billion. On the contrary, in the corresponding period of the previous year, deposits had increased by NPR 199.91 billion whereas credits had risen by NPR 247.36 billion.

Inter-bank transactions improved: In the first six months of FY 2077/78, commercial banks disbursed NPR 189.18 billion and other financial institutions contributed NPR 101.60 billion. There were also a total of NPR 290.78 billion in inter-bank transactions. In the corresponding period of the previous year, the total inter-bank turnover was NPR 1017.95 billion with NPR 926.53 billion from commercial banks and NPR 91.42 billion from other financial institutions.

Contribution in agricultural and energy sector: The monetary policy of 2077/78 had laid out targets such that commercial banks are required to disburse a minimum of 11 percent of the total loan investment by mid-July 2021, 13 percent by mid-July 2022 and 15 percent by mid-July 2023 in the agricultural sector whereas 6 percent by mid-July 2021, 7 percent by mid-July 2022 and 10 percent by mid-July 2023 in the energy sector. Considering this, as per the mid-term review report, 11.02 percent has been credited to the agricultural sector and 5.72 percent credit has flown to the energy sector as of mid-January 2021.

Use of concessional loan and refinancing increasing: With the objective of developing entrepreneurship, increasing production and creating employment as laid out in the monetary policy, the use of concessional loan is increasing. Concessional loans have been disbursed to 60,879 borrowers by mid-January 2021 as a result of programs implemented with modifications this year. Out of this, NPR 76.59 billion was disbursed to 33,817 borrowers under agriculture and livestock business whereas NPR 23.77 billion was outstanding to 27,062 debtors under other headings of concessional loan.

Likewise, the industries, businesses as well as agriculture and small and medium enterprises (SMEs) affected by COVID-19 have also opted for refinancing facilities. A refinancing arrangement of NPR 87.87 billion has been approved until mid-February 2021.

BFIs to provide loans at 5 percent: As the base rate of banks and financial institutions (BFIs) has declined, interest rates on loans have come down. The Council of Ministers of Nepal have approved ‘Business Continuity Loan Flow Procedure 2077’ in order to provide loans at 5 percent from BFIs for the payment of wages of workers/employees involved in COVID-19 affected tourism businesses or SMEs. This type of loan facility was started in mid-December 2020.


When the monetary policy of 2077/78 was announced, at a time when the Nepali economy, as well as the whole world, was battling the negative consequences of the COVID-19 pandemic, it provided a respite by targeting economic growth and hinting towards progress that was achievable as well as much needed, especially for the affected industries and sectors.

Having established a baseline about monetary policy, its importance, and the state of its implementation in the mid-term review report, it is now vital to understand that many new arrangements have taken place in order to achieve the targets laid out in the policy. All in all, effective and consistent implementation of monetary policy remains pivotal to revive the Nepali economy and to maintain overall economic as well as financial stability.