Speaking at an interaction program entitled 'Review of Nepalese Monetary Policy Framework' organized by Nepal Rastra Bank (NRB) on Thursday, central bankers, executives of bank and financial institutions, government officials and economists, said that the monetary policy framework should address and deliver the growth.
However, they were divided over a number of basics like whether it should have multiple or single objective, what should be the operating target and whether there should be more flexibility on the exchange rate, among other issues.
“Many macro analysts argue that the current framework is not delivering on growth. It is often argued that the current framework has failed to address the issue of our trade gap apart from the price stability concern,” Nar Bahadur Thapa, executive director at Research Department of NRB, said, presenting a thematic paper. “Hence, the current strategy is not appropriate and should be changed.”
Most of the speakers focused on the choice of nominal anchor in the monetary system that has pegged exchange rate between the currencies of Nepal and India, cautioning the implications of stripping the current currency exchange regime.
Bhisma Raj Dhungana, executive director of Foreign Exchange Department of NRB, said that free flotation of the currency can be embraced only if there is trade surplus in the country. “Donors, including International Monetary Fund, have supported the current peg system. We can go for another currency regime only if our economic fundamentals support that,” he added.
Similarly, Anil Keshary Shah, vice president of Nepal Bankers Association (NBA), said a mechanism that moves the Nepali and Indian currencies up and down to a certain band can be a better bet for Nepal.
Most of the speakers, however, said that it was still not the time for the monetary policy of Nepal to have a single target. “There is no doubt that the monetary policy should have a single target of price stability. However, external factors and informal economy are dominant here. Setting a single target will be problematic until we settle these issues,” said Baikuntha Aryal, joint secretary at the Ministry of Finance.
The central bank sets multiple targets, including price stability, external sector stability and facilitation of the growth target of the government, in the monetary policy.
NRB Governor Chiranjibi Nepal, however, said he was not in favor of changing the framework of the monetary policy. “I do not think it is appropriate to bring massive changes in the current structure and framework of our monetary policy until our economy become stable and grows smoothly,” he said.
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