7 policy failures behind Nepal’s economic downturn

Kathmandu: Former Executive Director of Nepal Rastra Bank, Nar Bahadur Thapa, has pointed out seven major policy failures that have led to the current economic slowdown in Nepal.

He outlined these issues during a meeting of the Finance Committee under the Federal Parliament on Wednesday.

Participating in the discussion on what the Monetary Policy for the upcoming fiscal year 2025/26 should address, Thapa primarily questioned the direction of Nepal’s monetary policy and the central bank’s decisions. He emphasized that Nepal currently has ample liquidity and low interest rates, yet economic activity remains sluggish.

Thapa argued that since the fiscal policy (budget) has already been announced, the supporting monetary policy should address past mistakes and be corrective in nature. He identified the following seven key policy weaknesses:

1. Stagnant Economy Due to Policy Missteps
   The economy is not functioning actively and is in a state of despair, which Thapa attributes mainly to flawed policies introduced by the government and Nepal Rastra Bank. For the past 10 to 15 years, the central bank focused heavily on mergers and acquisitions, neglecting institutional improvements like staffing and operational systems. In the name of mergers, many banks and financial institutions were undermined. There was a need to preserve a proper number of development banks and finance companies. It now seems the central bank was overly aggressive in pushing active companies into forced mergers. These institutions could have contributed to credit flow at the local level and supported entrepreneurship. Now, despite high liquidity, Small and Medium Enterprise (SME) financing hasn’t materialized. This has led to a trend of increasingly contractionary monetary policies year after year.
2. Ban on New Banks Since 2008
   Since 2008, Nepal Rastra Bank has stopped issuing licenses for new banks and development banks. Thapa raised the question of whether such a monopoly should exist. He argued that current poor credit flow, despite high liquidity, is partly due to this monopolistic restriction. The central bank should consider opening avenues for new banks and financial institutions.
3. Excessive Refinancing During COVID-19
   During the COVID-19 pandemic, the central bank provided excessive refinancing—far beyond what was necessary. While there was a Rs. 42 billion refinancing provision, the central bank expanded it nearly fivefold to Rs. 200 billion. This easy refinancing led many people to stay home and invest in land, rather than productive ventures. As a result, land prices have soared beyond the reach of ordinary people. Thapa stated this was a case of failing to guide the economy in the right direction.
4. Unchecked Credit Growth Post-Pandemic
   After the pandemic, monthly credit growth reached up to 30 percent, but there was no timely intervention to curb it. As a result, private sector credit as a share of Gross Domestic Product (GDP) jumped from 65 percent in FY 2016/17 to 95 percent in 2020/21. This has significantly contributed to current economic vulnerabilities.
5. Stringent Policy During Foreign Reserve Pressure
   Another major mistake was implementing overly restrictive policies when foreign exchange reserves were under pressure—comparable to Sri Lanka. Nepal Rastra Bank imposed a 50 percent to 100 percent LC (letter of credit) margin requirement. Meanwhile, the government banned the import of 10 goods out of fear. This reduced revenue collection and weakened overall economic activity.
6. Lack of Long-term Vision in Monetary Policy
   Thapa criticized the central bank for not developing a structured or strategic monetary framework. Instead, it adopted short-term, reactive policies. While these may have provided temporary relief, they led to long-term difficulties and instability.
7. Land Plotting Ban and Its Consequences
   Although not directly part of monetary policy, the government’s decision to ban land plotting had significant spillover effects. Following this ban, many cooperatives started collapsing, and banks also experienced difficulties. Thapa emphasized that policies need to be long-term in nature to ensure stability in both financial and real estate sectors.