Year 1
NRB Announces Monetary Policy
Risk to inflation is likely to arise from expansionary fiscal policy
“NRB is very careful while
drafting the monetary policy
that it must be geared to
anchor inflationary
expectations and dampen
aggregate demand.” Mr. K.B.
Manandhar, Acting Governor
of NRB delivered this
statement while announcing
the monetary policy for 2007/
08 on July 23, 2007. Planners,
3rd SEACEN-IMF Course in Kathmandu
NRB organized the 3rd
SEACEN-IMF Course on
‘Balance of Payments
Management’ in Kathmandu.
The course was started on 3rd
September 2007.
That opening ceremony
started off with Mr. Krishna
Bahadur Manandhar, Acting
Governor of NRB stating that
the economic developments
recorded in a countries’ BOP
reflect the interplay of forces in
Issue VII / VIII
Policy Makers, Economists,
Bankers, Businessmen,
representatives of foreign
institutions and NRB officials
were presented on the occasion.
NRB has formularized and
implemented monetary policy
for five fiscal years since the
enactment of Nepal Rastra
Bank Act, 2002.
The Monetary Policy has
the domestic and the global
economy. He added timely,
reliable and comprehensive BOP
statistics is an indispensable tool
Opening Session
July-August 2007 Volume 6
been formulated based on the and programs embodied in this
analysis of existing and emerging Monetary Policy will facilitate
economic and financial situation. the expansion of economic
It is believed that the information activities and help maintain
and analysis presented in the macroeconomic stability.
Monetary Policy will help the NRB believed that the
general public better understand concerned parties would
the existing situation of the cooperate, as always, in the
economy. implementation of policies and
NRB viewed that the programs provisioned in the
implementation of the policies Monetary Policy.„
Money Supply Rs. Million
Money Mid July 2005 Mid July 2006
Narrow Money(M 1) 10,020.54 11290.53
Broad Money(M2) 30,043.99 34,666.86
Broad Money
Liquidity(M3) 32,199.71 37175.68
Acting Governor Mr. Manandhar
(left) announcing Monetary Policy
for economic analysis and policy On the occasion, he
making because of the relationship informed, that the regional GDP
between external and domestic increased to 8.3% in 2006,
developments. Continued to page 6
Photo Session
 GDP Decelerated in 2006/07
N
epal witnessed a 2.5 percent
growth in GDP in 2006/07. As
per the preliminary estimates of
Central Bureau of Statistics (CBS), the
agriculture sector grew by 0.7 percent and
non-agriculture sector by 3.6 percent. The
GDP grew by 2.8 percent in 2005/06.
The decline in the production of food-
grains and cash crops resulted a lower
growth of agriculture sector. In the year,
production of paddy decreased
significantly as a consequence of
insufficient rainfall at the time of paddy
plantation. The production of potato and
oil seeds was also declined.
Of the source of GDP, services sector
increased by 4.1 percent. The real estate,
rent and commercial services sector and
financial intermediation sector grew by
8.6 percent. Transportation, storage and
July-August 2007
communication sector witnessed a growth
of 8.1 percent while education sector
increased by 5.6 percent.
The fiscal year 2006/07 was the final year
of the Tenth Plan. The Plan had set an
optimistic economic growth target of 6.2
percent and the normal growth target of
4.3 percent. However the actual average
growth remained at 3.4 percent. The lower
2 economic growth was on account of less
than satisfactory peace and security
situation in the country. The lower growth
of private sector investment, hindrance in
NRB News
supply of goods due to strikes, a low level
of capital expenditure and an adverse
weather condition were caused for the
same.
Inflation
The year-on-year (y-o-y) inflation
moderated to 5.1 percent in mid-July
2007. It was 8.3 percent in the
corresponding month of the previous year.
The deceleration in the growth of non-food
and services group index was largely on
account of the base effect of the hike in
prices of petroleum products in March
2006. The appreciation of the Nepalese
currency against the US dollar also
contributed to dampen the prices of
imported goods. Both these factors helped
to moderate the overall price level in
2006/07.
Exports and Imports
Total exports rose marginally by 0.9
percent in 2006/07 compared to a growth
of 2.6 percent in the previous year. A
number of factors accounted for the
deceleration in the growth of exports.
Among them, the problem in peace and
security, frequent bandhs and power
shortages were the major ones. Exports to
India went up by 2.8 percent and exports to
other countries declined by 3.1 percent.
Total imports rose by 10.3 percent in 2006/
07 in comparison to a higher growth of 16.3
percent in the previous year. Imports from
India increased by 9.9 percent in the review
period compared to a significant growth of
20.8 percent in the previous year. Likewise,
imports from other countries rose by 11
percent in the review year in comparison
to a growth of 9.6 percent in the preceding
year.
Owing to the higher rate of growth of
imports relative to exports, the trade deficit
expanded by 15.3 percent in 2006/07. The
trade deficit had widened by 25.1 percent
in 2005/06.Relatively lower rate of growth
in imports contributed to the compression
in trade deficit.
The overall balance of payments (BOP)
recorded a surplus of Rs. 5.88 billion in
2006/07. The current account surplus of
Rs. 3.50 billion and the capital and
Ministry of Finance
financial account surplus of Rs 2.38 billion
summed the BOP surplus at Rs 5.88 billion.
The BOP surplus was at a higher level of
Rs 25.60 billion in 2005/06. The current
account had recorded a surplus of Rs. 14.22
billion in 2005/06. Remittance inflows
recorded an increase of 2.5 percent in
2006/07 compared to a significant upsurge
of 49.0 percent in the previous year.
However, the increase in remittance inflows
was mainly responsible for such a current
account surplus.
Foreign Exchange
The gross foreign exchange reserves
accumulation was Rs. 165.11 billion as at
mid-July 2007. It was almost at the same
level as at mid-July 2006. In terms of US
dollar, the gross foreign exchange reserves
went up by 14.3 percent to US$ 2.55 billion
in mid-July 2007. In mid July 2006, such
reserves had gone up by 20.6 percent. The
share of convertible reserves in the total
reserves fell to 94.1 percent as at mid-July
2007 from 94.5 percent in mid-July 2006,
resulting in a corresponding increase in the
share of the nonconvertible reserves to 5.9
percent from 5.5 percent. The current level
of reserves is sufficient for financing
merchandise imports of 10.3 months and
merchandise and service imports of 8.5
months.
In comparison to mid-July 2006, the
Nepalese currency vis-à-vis the US dollar
appreciated by 14.3 percent in mid-July
2007. It had depreciated by 5.1 percent in
the corresponding period of the previous
year. The exchange rate of one US dollar
stood at Rs. 64.85 in mid-July 2007
compared to Rs. 74.10 in mid-July 2006.
Government Expenditure
Total government expenditure on a
cash basis increased by 23.4 percent to
Rs.125.43 billion in 2006/07 compared
to a rise of 12.5 percent in 2005/06. A
higher level of growth in both recurrent as
well as capital expenditure contributed to
such an acceleration in total expenditure.
The recurrent expenditure of the GON rose
by 14.8 percent to Rs.74.12 billion in
2006/07. Increased spending on
compensation and financial support to
conflict-hit people, payments of liabilities
of public enterprises, a rise in allowances
to civil servants, reestablishment of police
posts, Maoist cantonment management as
well as maintaining peace and security
exerted a pressure on recurrent
expenditure.
Capital expenditure increased by 58.3
percent to Rs.32.43 billion in 2006/07
compared to a rise of 24.6 percent in the
previous year. A significant amount
released to local authorities at the end of
the fiscal year and the loan to NOC
amounting to Rs.1 billion pushed up the
capital expenditure in the review period.
Government Revenue
Total revenue of the GON grew by 20.9
percent to Rs. 87.35 billion in 2006/07
compared to a very low growth of 3.1
percent in the previous year. Reforms in
revenue administration and special
attention of the government to mobilize
revenue helped an increase in revenue at
high rate. Furthermore, relatively smaller
revenue base (revenue grew by 3.1
percent in the previous fiscal year) also
contributed to the robust growth of revenue
in the review period.
Amongst the components of revenue, the
Value Added Tax (VAT) collection increased
by 21.1 percent to Rs 26.56 billion in the
review period. compared to a rise of 16.1
percent in 2005/06. The establishment of
Large Taxpayers Unit (LTU), strengthening
of billing system and management of non-
filers, suspended return and outstanding
contributed to the rise in VAT collection.„
 Entry Restriction or Regulatory Reform
enior official have to banking sector development and Far Western do have very

"S terminate from NRB if

deputed to other
institution.” said Deputy
Governor Bir Bikram
Rayamajhi in an interaction
program organized to present
Research Report on “Nepalese
Financial System: At a
crossroad of the choice between
Optimal Number
Determination and Regulatory
Reform” by Financial
Institution Division, Research
Department of NRB. Interaction
program was held on July 4,
2007 to discuss the findings of
the research report among the
officials of NRB. The report
team consists of Mr. Gunakar
in Nepal considering the large
role of commercial banks in
the financial intermediation.
Perspectives of financial
deepening, deposit credit
operation, concentration,
ownership structure and
profitability. In this
background intra-country
comparison has been made to
evaluate the level of financial
access and cross-country
comparison to evaluate the
depth, efficiency, stability and
outreach of the Nepalese
financial system in comparison
to other neighboring economies.
The finding of the intra-country
analysis has suggested that there
limited financial outreach. The
analysis has revealed a positive
relationship between low level of
living and limited financial
outreach.
In his foreword message to the
Report, Acting Governor Mr K. Scan of book cover
B. Manandhar expressed his
acceptance that it is difficult to
limit the market in a liberalized
financial environment and is
also against the spirit of the open
market economy. He further
added, ‘open entry and exit
rules in the financial system
facilitate the market
mechanism, spur competition, Department of the World Bank
contribute to the development currently at the Williams College,
of financial sector and US commented and has given

Bhatta, Deputy Director and
Mr. Hem Prasad Neupane,
Assistant Director from the
Department.
The study has overviewed the
are relatively under banked
areas. Comparing the number
of branch of commercial banks
with population, the two least
developed regions: Mid-Western
ultimately work as a conduit of
economic expansion’.
Professor Gerard Caprio, the
former Director, Financial
Sector Strategy and Policy
July-August 2007
suggestion about the research report.
He has emphasized that ‘neither
the government nor anyone else has
the tools to deduce what is the
optimal number of banks.’„

Goals of Monetary Policy from 3.5% to 2.5%. It is not changed for

Sick Industrial Loans from 1.5%. The CRR
will continue at 5%, subject to revision 3
T he main goals of monetary policy 2007/
08 are designed to achieve in three sectors.
The first is implicit inflation target. NRB set it
billion loan to government in 2007/08 should economic and monetary conditions
compared to Rs 8.3 billion in 2006/07. warrant. The standing liquidity facility
It expected an increment of 18.5% in (SLF) is limited to 50 % of holding of

NRB News
to confine at 5 to 5.5% in 2007/08. It was private sector credit in 2007/08. The GON’s development bonds and treasury
estimated 6.4 % in 2006/07. bills.
The second is the target for BOP. NRB Targets of Monetary Policy The SLF penal rate is increased
estimated a BOP surplus of Rs 8 billion in to 2% from 1.5 %.
2007/08. In 2006/07, NRB estimated BOP 1. Broad Money (M2) : 15.6% NRB will continue using
surplus of Rs 7.0 billion. various instruments in open market
The third goal is GDP growth. It was 2. Domestic Credit : 17.1% operations (OMOs). It will use sale
estimated to remain at 4.5 to 5 % in 2007/08 auction and reverse repo auction to
compared to 2.5 % in 2006/07. 3. Loans to government : Rs 10.5b absorb liquidity, and purchase
auction and repo auction to inject
Goals of Monetary Policy 4. Private Sector Credit : 18.5%
liquidity in the economy.
LMFF will
1. Inflation Target 5.0 to 5.5% continue to be the basis
5. Excess Liquidity of commercial banks to mop up of OMOs.„

2. BOP Target Rs 8 b surplus private sector credit was estimated to

3. GDP Growth 4.5 to 5.0%
NRB pointed out some intermediate
targets too. It estimated the growth of broad
money (M2) at 15.6% in 2007/08 compared
to 15% in 2006/07.The domestic credit (DC)
is estimated to increase at 17.1% in 2007/08.
It was increased at 16.6 % in 2006/07.
NRB expects that banks and
financial institutions provide Rs 10.5
increase at 17.5 % in 2006/07. Instruments of Monetary Policy
The management of excess liquidity of 1. Refinance of Rs 2 b to sick
commercial banks is taken as operating target industries annually.
of monetary policy of 2007/08. The refinance
rate, bank rate, CRR SLF and open market 2. Bank rate 6.25%
operations are taken as monetary policy
instruments. 3. CRR 5.0%
The refinance to sick industries will be
provided annually Rs 2 billion. The bank 4. SLF 50% of GON’s development
rate will continue to be at 6.25%. The bond and treasury bills
refinance rate for loan provided to export in
local currency and Rural Banks is reduced GON = Government of Nepal
b = billion

„ Rajan Krishna Panta
Assistant Director, Research Department
D uring the last decade or
so inward remittance
has emerged as the
backbone of many developing
countries. Officially recorded data
for workers’ remittances to
developing countries rose to US $
167 billion in 2005 up 73 per
cent from 2001. More than half
July-August 2007
of the increase from 2001 to 2005
in remittances occurred in China,
India, Mexico and Philippines.
The growing importance of
remittances as a source of foreign
exchange is reflected in the fact that
remittance growth has outpaced
private capital flows and official
development assistance over the
4 last decade.
Measuring the impact of
remittances is complex mainly
because of the difficulties of
NRB News
accounting for the potential
(counterfactual) loss of income from
migration i.e. what migrants
would have earned if they had
stayed home. The impact of
remittance on poverty is considered
positive though evidence of its effect
on inequality and long-term
growth is mixed. Remittances
directly affect poverty by
increasing the income of the
recipient. For e.g. children in
households receiving remittances
are more likely to receive better
education and health care. They
also indirectly affect poverty in the
recipient country through their
effects on growth, inflation,
exchange rates and access to
capital. Adam and Page examined
the impact of remittances on
poverty in 71 developing countries.
The result shows that both
international migration and
remittances significantly reduce
the level, depth and severity of
poverty in these areas. The study
has shown that a 10 percent
Role of Remittances
in the Economy
increase in per capita official
international remittances leads to
a 3.5 percent decline in the share
of people living in poverty.
Remittances have positive
impact on a country’s BOP.
Remittance receipts enable a
country to pay for imports and
repay foreign debt. Remittances act
as a stable source of external finance
and help in bridging the deficit on
the current account. Remittances
also help in improving several
macroeconomic indictors like the
debt service ratio and other
indicators. Moreover, it is seen that
the volatility of worker remittances
in most countries is lower than the
volatility of private capital flows.
By generating a steady stream of
foreign-exchange earnings,
remittances can improve a
country’s creditworthiness for
external borrowing and through
innovative financing mechanism
they can expand access to capital
and lower borrowing costs for
example through securitization and
using future remittances as
collateral such as in Mexico, El
Salvador, Turkey and Brazil.
Realizing the important role
of remittances in the economy,
international agencies like the
IMF and the World Bank and
national governments have shown
increased attention in this area.
Various studies have been
conducted and policies have been
implemented to increase the flow of
remittances, to bring it through the
formal channels and to use it
productively for the development in
the recipient country. In this
context, various countries have
provided incentives including
travel and custom privileges for
returns and imported goods, the
higher interest rates on the foreign
currency accounts, loans/pension
schemes and bonds targeting at
diasporas, support to home town
associations and matching grants
for the development of local
infrastructure projects etc.
In Nepal, remittances have
played a major role in
maintaining an overall economic
stability and exchange rate
stability in the face of low economic
growth and sluggish performance
of other sectors such as industrial
sector, tourism and exports. It is
estimated that in Nepal
remittances may explain a quarter
to a half of the 11-percentage point
reduction in the poverty head
count rate over the period from
1995/96 to 2003/04.
Remittances have emerged as a
major source of foreign exchange
earnings in the country. The share
of remittances to total foreign
exchange earning has reached to
46.5 percent against only 29.8
percent of exports in FY 2005/06.
The strong external position has
allowed the NRB to build official
reserves to high levels, reducing its
vulnerability to external shocks.
The contribution of
remittances in the economy mainly
depends on the role it plays in
increasing employment or the
national income. This crucially
depends on the productive use of
remittance or investment in the
economy. It has been found that
about 80 per cent of remittances is
used on repaying the debt,
consumption purposes like
purchasing lands, more expensive
education for the children,
expenditure on social functions like
marriage and other ceremonies etc.
Only remaining 20 percent is used
for productive purposes like small
business, investment in the
industry, agricultural business etc.
Therefore, some authors believe that
remittance have greater negative
impact in the economy including
the unproductive expenditure and
demonstration effect of the
migrants, domestic currency
appreciation and inflation. The
human and social aspects of
migration are also an important
factor which should not be
neglected.
The major challenge for
Nepal is to formalize the
remittance through the formal
channel and to enhance the impact
of remittance in the economy. In
this context, it is believed that after
Nepal Rastra Bank granted licenses
to private sector organizations
interested in remittance-transfer
business, majority of remittances
from the Nepalese workers’ in Gulf
and other countries have started to
come through the banking
channels. However, a significant
amount of remittance from India
still comes through the informal
channels. Nepal Living Standard
Survey II shows that only 0.8
percent of the remittances from
India comes through the banks and
financial institutions and the rest
are carried by the friends, relatives
or the workers themselves. A recent
pioneering study by the NRB on
the Indian remittance also confirms
these facts. The study has
highlighted various problems faced
by the Nepalese workers in
remitting the money through
formal channels, reviewed the
policies of the SAARC and other
countries and also put forward some
recommendations to bring it to the
formal channel.
The government and NRB
should explore the possibility of
providing the various measures
and incentives to bring the
remittance through the formal
channel and to enhance its
development impact especially
considering the experiences and
policies of neighboring countries
like India and Bangladesh. The
policies should focus on the access
of financial services and reducing
the fees for sending and receiving
remittances. It’s a huge challenge
for us to bring the remittances
from India through the formal
channel, which has also become
important in the face of global
concern for the terrorist financing
and money laundering. The
government and the central
banks of the two countries
should work together to enhance
the cooperation among them to
encourage the migrant workers
in using the formal remittance
channels.„
 WIDE ANGLE
Opening the Gates
of Finance
„ Gunakar Bhatta
Deputy Director
Research Department
N epalese financial system has witnessed
a significant change over the years.
The policy measures adopted in
different time periods have paved the way for
smooth expansion of the system. One of the
salient features of this expansion is the
considerable participation of the private sector.
Record shows that joint ventures and the
private sector banks hold almost 60 percent
share in the total assets of the commercial banks
compared to their nonexistence in the early
1980s. In this background of faster expansion,
there are concerns about the open entry policy
in the banking system. Also the overwhelming
number of entry aspirants has made this
contentious. A case in point is the
establishment of 16 bank and financial
institutions only in the fiscal year 2006/07.
Those arguing for the entry restriction opine
that unwarranted influx of new entrants will
pose challenges to the sustainability and
stability of the financial system. In the first
sight, their concern seems plausible.
However, there are instances revealing the
financial deprivation as a matter of prime
concern. Indicators show that access to
financial services is highly skewed towards a
few development regions in the country.
Comparing the number of the branch of
commercial banks with population, the two
least developed regions: Mid-Western and Far-
Western do have very limited financial
outreach. But the case is quite different for the
Central Development Region where
population per bank branch is relatively low.
And in this region, it is the Kathmandu Valley
enjoying the benefit of the spectacular growth
of the financial institutions. Second to the
Central Development Region, financial
outreach is wider in Western Development
Region. The level of financial deprivation
among various geographical regions of the
country recommends that there is the need of
a competitive financial system that can be
instrumental in addressing the problem of
deep-rooted poverty and widening income
inequality.
In addition to the intra-country
comparison, the cross-country comparison also
suggests that financial widening, stability, and
efficiency are the issues of concern for the
Nepalese financial system. While the level of
Nepal’s financial development is relatively at
par with other economies such as Pakistan and
Sri Lanka, it is behind Thailand and India.
While the efficiency indicator reveals a lesser
competition in the Nepalese banking industry,
both NPL ratio and negative capital adequacy
give a low weight to the financial stability. And
more strikingly, Nepal lags behind India,
Pakistan, Sri Lanka, and Thailand-all the
countries included in the study-on the
financial outreach front.
Although studies recommend that
Nepal’s banking sector has a large
responsibility of widening financial outreach,
there are arguments that further opening the
entry is not necessary since the issue of
financial deprivation can be handled by
expanding the branch network of the existing
financial institutions. Nevertheless, one
should be very clear that the idea of opening
entry is not intended only to address one or
two particular issues. Rather it is developed
on the premise of financial liberalization.
Theories as well as empirical evidences reckon
that entry restriction favors the incumbents,
promotes regulatory capture, and signals
policy inconsistency. This is the main
argument against entry restriction. Restricting
competition does not support the public
interest view of regulation rather it is
consistent with the private interest view of
regulation, which predicts that restrictions
on entry will tend to have higher levels of
corruption with no corresponding
improvement in bank performance or
stability. However, it does not mean that there
should be the gratuitous inflow of new
entrants distorting the financial system as a
whole. Only the point is that the goal of entry
regulations should not be to protect
individual banks by providing them with
monopoly rents but it should be to bring
about a banking system that efficiently serves
the economy and the public interest. Well-
designed licensing procedures ensure that
banks entering the system are sound and will
be operated in a safe and prudent manner.
Opening up is also accompanied by risks
however, particularly a higher risk of financial
crisis, and therefore needs to be synchronized
with improvements in institutional
environment. And because of this, the
regulatory reform in the financial system should
be taken as a sine qua non. Instead of restricting
entry, regulatory reform should be taken as a
process by driving resources towards
institution building, further enhancing the
capability of the central bank, and improving
corporate governance and disclosure practices
of financial institutions. Clearly private
banking has expanded over the years, and
ensuring that the regulatory framework is
suitable for safe expansion is important.
But unquestionably, the regulatory
reform that is viewed as a public good is not
an easy task. It requires firm commitment,
dedication to establish a system that can last
for decades even if not for generations, and
prioritization of public interest over the private
one. The Glass Steagall Act of 1933 and a
July-August 2007
number of legislative and institutional reforms
in the subsequent years have prevented the
American banking system from the
catastrophe like that of the 1930s when on
average 2000 banks failed annually during
1929-1933. Barth, Caprio, and Levine have
reminded the complexity of bank regulation
by quoting the words of James Madison: “If
men were angels, no government would be
necessary. If angels were to govern men, neither
external nor internal controls on government
5
would be necessary. In framing a government
which is to be administered by men over men,
NRB News
the great difficulty lies in this: you must first
enable the government to control the
governed; and in the next place oblige it to
control itself.”
Thus in a liberalized financial system,
instead of restricting the entry, we should focus
on building financial infrastructures that
enhance transparency and promote private
monitoring. We need a system that opens the
gates of aristocratic clubs-which are usually
open only for the rich ones-for everyone by
putting ordinary citizens at the center of
economic activities. When finance is easily
available, it is skills, ideas, hard work, and
inescapably, luck that create wealth. „
References
Barth, James R. Gerard Caprio, Jr. and Ross
Levine. 2006. Rethinking Bank Regulation: Till
Angels Govern. Cambridge University Press, USA.
Nepal Rastra Bank, Research Department,
Financial Institutions Division. 2007. Optimal
Number Determination or Regulatory Reform.
Kathmandu.
Rajan, Raghuram G., and Luigi Zingales. 2003.
Saving
Capitalism from the Capitalists. Princeton
University press, (New Jersey).
 Main Concerns of Monetary Policy
T
he monetary policy
framework for 2007/08
has been designed to
address the following concerns to
the extent possible.
1. Low Economic Growth
Nepal’s economic growth
crucially depends on capital
expenditure of GON, confidence
of private sector, external sector’s
demand for Nepalese goods and
services, and Monsoon.
The past experiences show
that monetary policy has a little
role in accelerating economic
Table 1: Economic Growth of Nepal (in %)
2004/05
GDP@PP 3.1
July-August 2007
rate was also lowered from 9 % to
5.5 %, then up to 6.25%. A
significant amount of liquidity is
being provided through SLF.
Despite these measures,
economic growth remained lower
(see table 1), for other factors
affecting growth were not
conducive.
2. Risk to Inflation
Although the rate of
inflation is decelerating in recent
months owing to the base effect,
the risk to inflation is likely to arise.
It is because of potential hike in
2005/06 2006/07
2.8 2.5
aggregate demand (AD).
3. External Sector Stability
The threat to external
sector stability arises mainly
from five factors. They are a
significant deceleration in
e x p o r t g r ow t h , t h e Te r a i
situation accentuating the
problem of export to India, the
appreciation of Nepali rupee
by 14.3% in 2006/07, the low
nominal interest rate and the
negative real interest rate and
the purchase of IC to finance,
among others, the trade deficit
with Indian by way of selling
US dollar. The sales of US
dollar 92 crore (Rs 64 billion)
in 2006/07 compared to $60
crore in 2005/06 is a matter
loan. The level of NPA in state
owned banks and some private
sector banks is still high.
Especially, the quality of
consumer and real estate loans
seems to be poor. Asset price
' '
bubbles in both real estate and
share prices. For example, NEPSE
index skyrocketed by 76.8
percent to 683.95 in mid-July
2007 from 386.9 a year ago.
Likewise, market capitalization
went up from 15% of GDP in
mid July 2006 to 25.9 % of
GDP in mid July 2007.
Economic fundamentals do not
support this surge. The stock
market in Nepal is likely to crash
at any time.
5. Low Nominal and Negative

Agriculture 3.5 1.1 0.7 of concern. Real Rate of Interest

Industry 3.0 4.3 2.2 The review of the peg is not Among others, low nominal
possible at the moment on interest rate has been due to easy
Services 2.5 4.7 4.1 account problems relating to oil. access to liquidity from NRB on
The monetary policy must account of CRR, bank rate and
growth. oil prices, expansionary fiscal be geared to push up nominal SLF. NRB cut in CRR from 12%
Monetary policy can policy, election to constituent interest rate and to keep inflation to 5 %, albeit gradually. It cut in
facilitate the growth process, if it assembly and higher food prices low. the bank rate from 9 % to 6.25
is taking place, through the as monsoon failed. 4. Financial Sector Stability percent. Similarly, NRB made a
6 provision of liquidity. NRB Monetary policy must be The risk to financial sector provision of SLF, which
lowered CRR gradually from 12 geared to anchor inflationary stability arises mainly from high amounted to Rs 47 billion in
% to 5 % in the recent past. Bank expectations and dampen lever NPA and poor quality of 2006/07.„
NRB News

with eight founder central banks. NRB is one

3rd SEACEN...
Continued from page 1
which was faster than any year, since 1995.
He clarified that the growth was aided by a
highly favorable external environment, begin
domestic circumstances and better economic
management.
He viewed that the large current account
surplus made a significant contribution to
reserve accumulation. He informed, in this
context, the developing Asia’s stock of foreign
exchange reserves at end of 2006 reached to
US dollar 2.3 trillion. He stressed the region’s
long-term economic growth potential hinges
critically on its ability to respond and adopt to
a constantly changing environment.
In the welcome address, Dr. A.G.
Karunasena, Executive Director of SEACEN
mentioned that the importance of compilation
and analysis of balance of payments has been
increasing with globalization and expansion
of external trade and capital flows. He hoped
that the course will be beneficial for the
participants to gain knowledge in the
compilation, analysis and forecasting of BOP
statistics.
On the occasion, Dr. Sunil Sharma,
Director of IMF-Singapore Regional Training
Institute, shared his experience in the
ceremony. He is one of the resource persons of
the course.
Officials of SEACEN and NRB, resource
persons and participants of the course were
presented on the occasion.
The first objective of the course is to
update the concepts, principles and practices
in balance of payment managements. To equip
the participants with the skills required in
compiling, interpreting, analyzing and
forecasting balance of payments statistics is the
second. And the final is to provide participants
with practical hands-on application of the
techniques, skills and knowledge gained from
the course.
The South East Asian Central Banks
Research and Training Centre is called the
SEACEN Centre. It was established in 1982
of the founder members. Now, there are sixteen
members in the centre. Among them Bank
Indonesia, Bank Negara Malaysia, Central Bank
of Myanmar, Bangko Sentral ng Pilipinas,
Monetary Authority of Singapore, Central Bank
of Sri Lanka and Bank of Thailand are other
founder members. The bank of Korea joined
the centre in 1990, Central Bank of the
Republic of China (Taiwan) in 1992, Bank of
Mongolia in 1999, Ministry of Finance, Brunei
Darussalam in 2003, Reserve Bank of Fiji in
2004, Bank of Papua New Guinea in 2005,
National Bank of Cambodia and State Bank of
Vietnam in 2006.
The centre reviews and analyses financial,
monetary, banking and economic
developments its constituent member
countries and in the region as a whole. It
stimulates and facilitates cooperation among
member central banks focused on the policy
and operational aspects of central banking and
conducted through dialogues, meetings,
seminars, workshops and training courses.„
New Member in NRB Board Shambhu Sharan Prasad Kayastha
received Master Degree in Commerce in 1969 from
The Government of Tribhuvan University. He has done Diploma in
Nepal, Council of Fiscal Administration from East West Center,
Ministers has University of Hawai, U S A in 1967.
appointed Mr. He had represented Government of Nepal as
Shambhu Sharan Chairman of Board of Directors in various institutions like Nepal
Prasad Kayastha as Bank Limited - 1993, 2001 - 2002, Timber Corporation Nepal
the member of 1984, Oil Corporation 1992-1997, National Trading Limited,
Board of Directors of 1993-97, Nepal Water Supply Corporation.
the Nepal Rastra Mr. Kayastha (right) taking official oath He had obtained professional trainings in the subjects:
Bank commencing from July 24, 2007. The post was vacant after the Development Planning, Administration and Management, Fiscal
completion of the tenure of Mr. Bishwa Keshar Maskay as the Director Administration and Budgeting Accounting and Reporting. He had
of the NRB Board. As per the section 14 of Nepal Rastra Bank Act, been decorated with various Medals from Government of Nepal.„
2002, the Board of Nepal Rastra Bank comprisees of seven members.„

Workshop on Training on “Regulation

and Supervision”
Off-Site Supervision
F inancial Institution Supervision the role of effective supervision system A training on “Regulation and Supervision of Micro-
finance Institutions” was organized by Micro-

Department (FISD) organized a
workshop on ‘Off-site Supervision
Manual’ at Dhulikhel on June 13 and
14, 2007.
Addressing the workshop, Acting
Governor Mr. Krishna Bahadur
Manandhar highlighted the
importance of Early Warning Signal
(EWS) obtained from the off-site
supervision in adopting the Prompt
Corrective Action (PCA) to the
financial institutions. He also
emphasized the need to improve the
Long Form Audit Report (LFAR) as a
of the central bank towards
maintaining overall financial stability
in the paper.
Similarly, Director Mr. Lok
Bahadur Khadka presented a paper on
‘Review of Annual Returns and
Preparation of Reports’ and Director
Mr. Shiba Raj Shrestha presented a
paper on ‘Financial Ratio Analysis’.
Deputy Director Mr. Balaram
Parajuli and Assistant Director Mr.
Sanjaya Ballav Pant jointly discussed
on overall evaluation of financial
institutions and procedure of
July-August 2007
finance Training and Research Institute (MIFTARI),
Nepal on July 20-22, 2007 in Kathmandu. Executive
Director of Financial Institution Supervision
Department, Mr. Bhola Ram Shrestha inaugurated the
program on July 20. On the occasion, He highlighted
the best practices of bank regulation and supervision.
He underlined the role of micro-finance and micro-
finance institutions (MFIs) in Nepalese economy as well
as the role played by NRB in promoting the sector and
implementing liberal regulations for expanding micro-
finance services in rural areas.
7
Chairman of MIFTARI, Nepal, Mr. Krishna
Pradhan welcame the participants and shed light on
the objectives of the program.

tool for effective off site supervision.
Deputy Governor Mr. Bir Bikram
Rayamajhi, in the closing ceremony of
the program, shed light on the
importance of the Manual in enhancing
the quality of off-site supervision. He
also expressed his views as to making
improvements in the Manual as per
necessity in the days to come.
At the beginning of the program,
Executive Director of FISD Mr. Bhola
Ram Shrestha, highlighted on the
objectives of the workshop and various
aspects of the Manual. He expressed
his views that the new Manual is a
guideline for off-site supervision. It will
positively enhance the effectiveness of
supervision of financial institutions. He
expected that the Manual would help
to minimize the discrepancies and
maintain uniformity in presentation of
reports of various financial institutions.
Executive Director Mr. Shrestha
presented a paper entitled ‘Purpose
and Importance of Off-site
Supervision Manual and Periodic
Compliance Review’. He highlighted
comparative study on their paper
entitled, ‘CAELS Rating and Peer
Group Construction’.
Acting Executive Director of
Bank and Financial Institution
Regulation Department Mr. Narayan
Prasad Paudel, Director of Bank
Supervision Department Mr. Bhisma
Raj Dhungana and Director of
Financial Institution Supervision
Department Mr. Purna Bahadur
Khatri also expressed their views about
the Manual on the occassion.
A two-day workshop was
attended by supervisors of FISD and
officers from Bank and Financial
Institution Regulation Department,
Bank Supervision Department and
Internal Audit Department. The new
Supervision Manual prepared by FISD
covers various aspects of off-site
supervision pertaining to development
banks, finance companies and micro-
finance developments. According to
FISD, the Manual will be put into
practice with effect from the current
fiscal year.„
NRB News
During the training, a panel discussion on “Issues
and Challenges in Regulation and Supervision of MFIs,
with special reference to Second-Tier Institution” was
held on July 22. In the discussion, Executive Director
Mr. Shrestha expressed that the setting of an independent
regulatory and supervisory institution (STI) which is in
offing after the formulation of a national micro-finance
policy, will definitely contribute towards making MFIs
more service-oriented, transparent and sustainable.
Similarly, Chairman and Chief Executive Officer
of Development Projects Services Centre (DEPROSC),
Mr. Pitambar Acharya, emphasized the importance of
the proposed STI and underlined the need for its
sustainability. On that occasion, Mr. Shyam Dev Yogi,
Executive Director of Purwanchal Gramin Bikas Bank
and Mr. Vijaya Ram Mathema, Executive Chairman of
Development and Finance Study Centre also expressed
views on STI. In the moderation, Mr. Krishna Pradhan
elaborated some issues on micro-finance services and
the role of STI.
In the closing session, Executive Director Mr.
Shrestha distributed certificates to the participants on
July 22, 2007. The three-day program, held at SAP
Phalcha in Kathmandu, was attended by l9 participants
and observers from rural development banks, micro-
finance development banks and financial intermediary
NGOs.„
 NRB Management in Extract
Nepal Bank Limited
Nepal Rastra Bank has assigned
a team to manage Nepal Bank
Deputy Director
Numanath Poudyal as the
Mr. Board
Limited from July 27, 2007.
The management team consists
members. Prior to this, the
management contract with ICC
member of
of Director Dr. Binod Aatreya, Consulting, Bank of Scotland
as the convener, Director Mr. (Ireland) Limited had been NRB Dr.
Laxmi Prapanna Niraula, and terminated on July 21, 2007.„
Bishwambher
Know-About Pyakuryal
Circular flow of Income: A simple model of the working of an economy
depicting the movement of resources between producrs and consumers. said “We
A number of flows comprise the circular flow of income : a) the wages
and salaries paid by firms to - households and b) the money spent by
received by firms.„
still don’t know the safe
level of forex reserves for
NRB ACTIVITIES
the country” in a write-up
July-August 2007

Mr Basyal at MOF Senior Economic Advisor.

Executive Director Executive Director of published in the
of Public Debt Banker's Training Center
Management Department Mr. Gopal Prasad Kaphle Kathmandu Post daily of
Mr. Tula Raj Basyal has has been transferred to
been deputed to the
Ministry of Finance as
Public Debt Management
Department.„
August 7, 2007.
8 Promotion
NRB has
promoted Mr. Ashwini International Participation
Kumar Thakur, Mr.
NRB News

Deputy Governor Mr. Bangkok.

Vishnu Nepal, Mr.
Krishna Bahadur Acting Executive
Gokul Ram Thapa and
Mr. Ramjee Regmi to Manandhar participated in Director of Foreign
Mr. Thakur
the post of Executive the 77th Annual General Exchange Management
Director. Human Meeting of the BIS (Bank for Department Mr. Ramjee
Resource Management International Settlement). Regmi participeted in annual
Department assigned The meeting was held in meeting and forum.
them to Financial Basel, Switzerland from June Director of Research
21 to 27, 2007. Department Mr. Nara DG Mr. Manandhar
Management
Mr. Nepal Department, Internal Deputy Governor Bahadur Thapa attended in
Audit Department, Mr. Bir Bikram Rayamajhi the conference and
Corporate Planning took part in the APG and SEACEN meeting.
Department and SEACEN Annual meeting Executive Director of
Foreign Exchange and Annual Forum on NRB Mr. Tula Raj Basyal
Management Technical Assistance presently Senior Economic
Department 2007. The program was Advisor at Ministry of
Mr. Thapa respectively. Prior to held in Perth, Australia Finance took part in the
this, they were working from July 19 to 31, 2007. training program on
as acting EDs in the DG Mr. Rayamajhi
On the way he attended public debt management:
respective SEACEN Governors' new approaches to Training Institute
departments.NRB News conference and the 26th developing an operational organized the training
felicitates congratulation meeting of the SEACEN framework. IMF- from July 21 to 29 in
to all of them.„
Mr. Regmi Board of Governors in Singapore Regional Singapore. „

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