Nepal  maintained throughout a close relationship with India, with whose rupee its own rupee was freely convertible, but at times it had an official peg to the USD as well; while the exchange rate against the USD had a strong depreciating trend interrupted by short periods of stability, the exchange rate against the Indian rupee (INR) varied, though less so after 1985, and less so again after 1993 when there was a formal peg to the INR. Its central bank used initially direct but later indirect monetary instruments, but financial development remained weak and monetary operations far from fully effective.


Targets and attainment



in small economy highly open in trade to India, Nepalese rupee is initially fixed to both USD and Indian rupee (INR, which floats with GBP vs USD) and freely convertible with INR, with additional exchange rates vs USD for some exports via Exporters’ Exchange Entitlement (EEE) scheme (to encourage exports to other than India); 1975 devaluation vs USD (to correct broken cross rates); 1978 devaluation vs INR and revaluation vs USD, and multiple exchange rates vs USD under EEE replaced by dual rates (basic rate plus second depreciated rate for most non-Indian trade); financial system limited, but central bank has standard functions, and mostly direct instruments: refinance facilities, reserve requirements, setting of ranges for interest rates, selective credit controls and moral suasion; monetary growth strongly affected by lending to government and public enterprises, in context of high development spending and low tax revenue; 1980 small revaluation vs USD; 1981 exchange rates vs USD unified; 1981 credit ceilings ended but banks subject to temporary liquidity ratio; late 1982 devaluation vs USD to eliminate broken cross rates; 1983 peg switched from USD to trade-weighted currency basket, with USD as intervention currency but rate against INR kept stable; 1983 government issues savings certificates; late 1985 devaluation vs both INR and USD, followed by more frequent adjustments to avoid broken cross rates and maintain competitiveness (with trend depreciation vs USD but smaller and less frequent changes in both directions vs INR); 1986 new basket, now including INR; from 1987 reforms including interest rate liberalisation, 1988 issue of Treasury bills by auction, 1989 restructuring of central bank refinancing facilities and issue of government bonds, with gradual shift towards indirect monetary instruments; monetary policy focused on external reserves and growth, with inflation largely determined by Indian developments; 1989 trade treaty with India lapsed, restored 1990; 1991 devaluation after INR adjustment, 1992 dual exchange rate after similar move in India; statistical database weak

loosely structured discretion LSD


1993 current account convertibility, exchange rates unified and liberalised (followed shortly by India), with small appreciation of parity vs INR, rupee then fluctuates vs INR mostly within relatively wide margins; liquidity ratio scrapped; open market (primary) operations become key instrument, but secondary market remains thin; recurring problem of excess liquidity; structural reforms obstructed by changes in government, by civil war from 1995 to 2006 and then by continuing  political instability; 1- and 3-year government securities introduced 1996; mid-1990s non-performing loans high and financial management weak at two major commercial banks (one state-owned, one majority private), which take over a decade to resolve, partly because of weak supervision structures and capacity at the central bank; GFC exposes weaknesses of economy and financial sector; 2011 capital controls tightened, leading to parallel market depreciation; financial infrastructure weak, central bank non-autonomous; by 2014 challenges for monetary policy posed by growing remittances from emigrant workers (now up to 30% of GDP) and fall in inflation in India with move to inflation targeting; 2016-18 interest rate corridor created but implementation and transmission weak; statistical database by end of period adequate

loose exchange rate targeting LERT

Selected IMF references: RED 1974 pp34-5, 61-5; SR 1974 p19 RED 1976 pp30-2, 40-1; RED 1978 pp38-40 54-6; SR 1978 pp9-112; RED 1979 pp56-7; RED 1981 pp54-6; RED 1982 pp29-34, 41-3; RED 1983 pp38-41; RED 1984 pp35-7, 54-6; RED 1985 pp32-3 48; SR 1987 pp16-17, 18-19; SR 1989 pp11, 17, 20-21; RSR 1991 pp19-33; SR 1992 pp2, 8-11; BP 1993 pp50-2, 53-4, 59-64; SR 1993 pp44-5; BP 1995 pp40-3; SI 1996 pp57-60; RED 1997 pp20, 23, 30; SR 2000 pp11-13; SR 2003 pp6, 15-16; SR 2005 pp14-15; SI 2008 pp8-10; SR 2008 pp7, 10-15; SR 2010 pp6-19; SR 2011 pp10-13; SR 2012 pp7-12; SR 2017 pp4, 12-13, 24, 36-7; SI 2019 pp4-6; SR 2019 pp11-12; SR 2010 pp9-11, 37-8.

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