Sixty Years of Nepal Rastra Bank Nepal Rastra Bank Kathmandu, Nepal April 2018 ©Nepal Rastra Bank, 2018 Address Central Office Baluwatar, Kathmandu Nepal Telephone: 977 1 4410386 Fax: 977 1 4410159 Sixty Years of Nepal Rastra Bank Published: April 2018 ISBN: Printed by UDAYA PRINT MEDIA PVT. LTD. Baneshwor-10, Kathmandu Phone No.: 01-5172093 [email protected] All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. An electronic copy of this book is available at www.nrb.org.np. Foreword Nepal Rastra Bank (NRB) was established as the central bank of the country on April 26, 1956. During its six-decade long journey, NRB has made a significant progress in monetary, foreign exchange, and financial sectors. This publication 'Sixty Yeears of Nepal Rastra Bank' has been commissioned to commemorate NRB's reaching its sixty-year milestone by taking a walk down the memory lane of the major course of actions taken, progression of institutional development and evolution of its major functions. During the span of six decades, besides responsibly carrying out the traditional central banking roles and responsibilities, NRB has remained a firm anchor, constantly providing the solid foundation for ensuring monetary and financial stability. Over the years, monetary management has been streamlined and strengthened while the financial sector has been expanded and consolidated. For undertaking such responsibilities, NRB has transformed its organizational structure and management process for catalyzing the opportunities and proactively mitigating the challenges. Nepal Rastra Bank has sought to devise and implement appropriate and timely policy measures to promote financial sector development, orient monetary management towards improving price, balance of payments, financial sector and exchange rate stability, as well as facilitating the overall development of the economy. In order to carry out effective regulation and supervision (especially with the enactment of the new NRB Act and Banks and Financial Institutions Act), NRB has been issuing and refining the unified directives comprising regulatory measures of international standard. Likewise, the financial sector reform was carried out by restructuring of Nepal Bank Ltd. and Rastriya Banijya Bank, re-engineering NRB and building capacity in financial sector, comprising reforms in financial sector legislation, assisting debt recovery tribunal, improving credit information center and providing training for upgrading financial journalism. Further, through its oversight tools, NRB has been able to ensure stable and efficient payment system. To enhance the access of all citizens to the whole range of financial services, financial literacy and financial education have been prominently focused by NRB. On the whole, NRB has been successful to foster the confidence and credibility on several fronts including country's monetary management, exchange rate system and financial sector, thereby laying a solid foundation for promoting overall economic stability of the nation. In the sixtieth year of the NRB's existence, I would like to take this occasion to offer my deepest gratitude to my predecessors, the respected fellow Governors of NRB, whose drive to relentlessly pursue the central banking vision into reality has shaped NRB to its present form. I would also like to commend their invaluable contributions to "Reflection of Former Governors", a separate supplement of this publication. This publication would not have come out in its present shape and form without the dedication of a number of key individuals and entire departments at NRB. First of all, the Editorial Team led by Mr. Nara Bahadur Thapa, Executive Director, Research Department & Coordinator of the Central Editorial Board, deserves special recognition for his role of leadership and coordination which he professionally discharged in bringing out this historic publication in the present form. My appreciation also goes to all the related departments and offices of NRB for their role and contribution in writing and finalizing the respective chapters. I appreciate Dr. Nephil Matangi Maskay, Executive Director, Office of the Governor, for his dedication in supervising the work during the final stages of the publication. I would like to extend my special thanks to Dr. Bhubanesh Pant, Executive Director and Dr. Prakash Kumar Shrestha, Director, for initiating this publication. I deeply appreciate the amount of hard work put by Mr. Tula Raj Basyal, former Executive Director of NRB, for meticulously editing the entire manuscript. I am confident that this work will help in crystallizing the understanding of evolutionary developments during the sixty years of central banking practice in Nepal. Going forward, NRB shall endeavor in maintaining macroeconomic and financial stability conducive for inclusive and broad-based economic growth, employment and overall prosperity of the country. (Dr. Chiranjibi Nepal) Governor Nepal Rastra Bank Acknowledgements On the historic occasion of the completion of six decades of Nepal Rastra Bank's establishment, I am honored to have led the preparation of this introspective publication 'Sixty Years of NRB'. This publication is the continuation of earlier publications of similar nature such as NRB in 25 years (in Nepali), 40 years of NRB, and NRB in 50 years. It attempts to highlight, document and reflect on policies and programs undertaken and achievements made in Nepal's central banking functions over the period. This publication is the outcome of a team effort starting with designing table of content of the publication, then drafting the chapters from the respective departments and synthesizing them. In my capacity as coordinator of the Central Editorial Board, I would like to acknowledge the contributions made by all the Departments of the Bank in bringing out this publication. First, I would like to acknowledge the contribution of the members of the Central Editorial Board for their sincere efforts towards overseeing the manuscripts and ensuring their authenticity. I appreciate the untiring efforts put by Dr. Bhubanesh Pant, Dr. Gunakar Bhatta and Dr. Prakash Kumar Shrestha in editing the manuscripts. I would like to convey that this activity was in the annual program of the Office of the Governor and thus they made a special effort in this regard. In addition to those recognized above by the Governor, I would like to further highlight efforts of Deputy Director Bibhu Prasad Aryal and Assistant Director Sarthak Karki. I would also like to acknowledge the contribution made by Deputy Director Mr. Pitambar Sapkota for organizing the meetings of Central Editorial Board and to extend my thanks to Deputy Director Mr. Ganesh Man Maharjan and Assistant Director Mr. Sanu Bhai Maharjan for their significant role in proof reading, formatting and designing this publication. Last but not the least, I would again like to express my sincere thanks to all those who helped directly or indirectly to produce this important document in its present form. (Nara Bahadur Thapa) Executive Director Research Department and Coordinator of Central Editorial Board Table of Contents Page List of Tables vii List of Charts ix List of Boxes x List of Abbreviation xii Summary a-b Part 1: Institutional Development 1-50 1. Organizational Development 1 1.1 Inception of Nepal Rastra Bank 1 1.2 Organization Structure 2 1.3 Departments and Offices of Nepal Rastra Bank 7 1.4 Corporate Governance and Internal Control System 22 1.5 Risk Management 24 1.6 Decision Making Process 29 1.7 Strategic Planning 31 1.8 Transparency: Communication and Publication 33 1.9 Infrastructure Development and Planning 35 1.9.1 Buildings 35 1.9.2 Other Infrastructure and Facilities 35 1.9.3 Infrastructure Development in Strategic Plans 36 1.9.4 Investment in Fixed Assets 36 1.9.5 Reconstruction of Buildings in Baluwatar and Thapathali 37 2. Human Resource Management 39 2.1 Human Resource Structure 39 2.2 Policies and Practices: Recruitment to Retirement 41 2.2.1 Recruitment and Selection Policy 42 2.2.2 Promotion Policy 44 2.2.3 Placement Policy 46 (i) 2.2.4 Transfer Policy 46 2.2.5 Retirement Policy 46 2.2.6 Post Retirement Policy 47 2.3 Human Resource Planning and Development 47 2.3.1 Human Resource Planning 47 2.3.2 Human Resource Development 48 2.3.3 Motivation 49 2.4 Employee Relation 50 Part 2: Monetary Policy 51-156 3. Macroeconomic Performance 51 3.1. Economic Growth 51 3.2 Consumption, Saving and Capital Formation 55 3.3 Plans and Budgetary Development 56 3.3.1 Overview of Planned Development 56 3.3.2 Government Budgetary Developments 59 3.4 Inflation 64 3.4.1 History of Price Collection and Household Budget Surveys 64 3.4.2 Inflation Trend in Nepal : 1960s to the Present 65 3.5 Monetary Sector Development 68 3.6 External Sector Development 71 3.6.1 Trade Relation with India 71 3.6.2 Trade Relation with China 73 3.6.3 Domestic, Bilateral and Multilateral Arrangement for Trade Promotion 74 3.6.4 Performance of External Sector 76 4. Monetary Policy 85 4.1 Formulation of Monetary Policy 85 4.2 Monetary Policy Strategy 87 4.3 Monetary Policy Implementation 88 4.4 Monetary Policy Instruments 89 (ii) 4.5 Liquidity Monitoring and Forecasting Framework (LMFF) 92 4.6 Open Market Operations (OMOs) 93 4.7 Interest Rate Corridor System 95 4.8 Interest Rate Spread and Base Rate 95 5. Public Debt Management 109 5.1 Process of Issuance of Domestic Debt 109 5.1.1 Issuance of Treasury Bills 109 5.1.2 Issuance of DB 110 5.1.3 Issuance of CSB, NSB and FESB 110 5.1.4 Interest Rate Determination Mechanism 111 5.2 Composition of Outstanding Domestic Public Debt 112 5.3 Institutional and Domestic Procedural Changes 112 5.3.1 Accounting of Government Securities 112 5.3.2 Interest Payments of Bonds 113 5.3.3 Market Makers and Sales Agents 113 6.