Let

• (CP) = cost price
• (MP) = marked price
• (SP) = selling price

Relation:

[ MP = CP + \text{mark-up} ]

[ SP = MP - \text{discount} ]

Also,

[ \text{Profit} = SP - CP ]

[ \text{Profit percent} = \frac{SP-CP}{CP}\times 100 ]

If (SP > CP), there is profit.
If (SP < CP), there is loss.

---

Numerical:

Let the cost price be Rs 100.

Marked price is 25% above cost price:

[ MP = 100 + 25% \text{ of } 100 = Rs\ 125 ]

Discount is 10% on marked price:

[ \text{Discount} = 10% \text{ of } 125 = Rs\ 12.50 ]

Selling price:

[ SP = 125 - 12.50 = Rs\ 112.50 ]

Since (SP > CP), the shopkeeper makes a profit.

[ \text{Profit} = 112.50 - 100 = Rs\ 12.50 ]

[ \text{Profit percent} = \frac{12.50}{100}\times 100 = 12.5% ]

Therefore, the shopkeeper makes a profit of 12.5%.

Measures Nepal Rastra Bank should take to attract investment into productive sectors

1. Directed/differential credit policy: Under the annual monetary policy, NRB should set mandatory sectoral lending targets (e.g. agriculture, energy, tourism, SMEs, export-oriented and import-substituting industries) and make them binding on commercial banks, with penalties for shortfalls.

2. Concessional interest rates and subsidised refinance: Expand refinance windows at low rates for productive sectors, and operate a subsidised credit line so that priority-sector loans are cheaper than general lending.

3. Higher margin lending against unproductive sectors: Keep higher risk weights, loan-to-value caps and margin requirements on real estate, shares and imports of luxury goods, so that bank credit is diverted towards productive use.

4. Priority sector lending (PSL) with directed investment: Require banks to invest a fixed percentage of deposits in productive sectors, with a compliance monitoring and reporting framework.

5. Development of long-term financing: Encourage long-term and infrastructure bonds, extend the maturity of refinance facilities, and promote a bond market so that long-gestation projects (hydro, industry) get matching long-term funds.

6. Strengthened institutional credit channels: Expand the role of the Rastriya Banijya Bank, Agricultural Development Bank and microfinance institutions in rural and productive lending; set up specialised windows for SMEs and start-ups.

7. Interest rate and monetary stability: Maintain price stability and a predictable interest rate corridor (bank rate, deposit collection rate, repo/reverse repo) so that investors can plan with confidence and real interest rates stay low.

8. Exchange rate and foreign investment facilitation: Ensure a stable exchange rate regime, simplify approval and repatriation procedures for foreign direct investment, and allow foreign loans in productive sectors within the legal framework.

9. Financial inclusion and access to finance: Expand branch networks, use digital financial services and collateral-free/group-guarantee lending to bring small farmers and micro-entrepreneurs into the formal credit system.

10. Institutional support and coordination: Coordinate with the Ministry of Finance, Investment Board and line ministries on tax incentives, industrial policy and one-window services; improve credit information, collateral registry and insolvency systems to reduce lending risk.

11. Capacity building and supervision: Train bank staff in project appraisal for productive sectors and strengthen risk-based supervision so that increased lending does not create non-performing assets.

12. Promotion of capital market and alternative instruments: Develop equity, venture capital and private equity channels so that productive enterprises can raise funds beyond bank loans.

Financial Sector Challenges in Nepal and the Role of the IMF

Introduction. Nepal's financial sector has expanded rapidly over the last three decades — over 20 commercial banks, dozens of development banks, finance companies and a large cooperative network, with branch outreach in most districts. Yet the sector remains shallow, fragile and prone to periodic stress. The IMF, as the global monetary and financial stability institution, has been assisting Nepal through surveillance, policy advice, technical assistance and, when needed, concessional financing.

Major challenges in Nepal's financial sector

1. Weak financial access and inclusion. A large part of the population, especially in remote hill and mountain districts, women, small farmers and informal-sector workers, still lacks access to formal banking, credit and insurance. Banking penetration is concentrated in urban and Tarai areas.
2. Rising non-performing loans (NPLs). After COVID-19 and the subsequent economic slowdown, NPLs in commercial banks rose sharply (crossing around 4–5 per cent in recent years), particularly in lending to SMEs, tourism, real estate and share-based loans. Recovery of bad loans is slow due to weak collateral and lengthy legal processes.
3. Cooperative sector crisis. Hundreds of savings and credit cooperatives have failed to return depositors' savings, creating a serious trust deficit in the financial system and exposing gaps in regulation and supervision of cooperatives.
4. Cyclical liquidity problem. The banking system swings between excess liquidity (low credit demand, high remittance inflow) and tight liquidity (credit expansion, capital flight, import pressure), causing volatile interest rates and a high interest-rate spread.
5. Concentration and sectoral imbalance. Credit is heavily tilted towards real estate, shares, imports and consumption rather than productive sectors such as agriculture, industry and infrastructure. This creates asset bubbles and systemic risk.
6. Underdeveloped capital and bond markets. The securities market is narrow, long-term debt instruments and the corporate bond market are negligible, and insurance penetration is low. Banks therefore carry most of the long-term financing burden, causing maturity mismatch.
7. Weak governance and supervision capacity. Cases of insider lending, weak board oversight, and shortage of skilled supervisors and modern supervisory technology limit effective oversight. Money laundering, hundi and terror-financing risks also persist.
8. Digital and cyber risks. Rapid expansion of mobile banking, QR payments and digital lending has outpaced financial literacy and cybersecurity preparedness, leading to fraud and data-security threats.
9. External sector vulnerability. Heavy dependence on remittances and imports makes reserves and the exchange rate (pegged to the Indian rupee) vulnerable to external shocks, while climate and disaster risks add further stress.

Role of the IMF in resolving these challenges

1. Surveillance and early warning. Through Article IV consultations and the Financial Sector Assessment Program (FSAP), the IMF assesses Nepal's macroeconomic and financial stability, identifies risks such as credit concentration, NPL build-up and reserve adequacy, and recommends corrective policy measures.
2. Concessional financing support. In January 2022 the IMF approved a 38-month Extended Credit Facility (ECF) arrangement of about SDR 282.42 million (≈ USD 396 million) to help Nepal address balance-of-payments pressures, rebuild reserves and support the post-pandemic recovery. Climate-related support has also been extended through the Resilience and Sustainability Trust (RST).
3. Technical assistance and capacity development. The IMF provides hands-on support to Nepal Rastra Bank and other agencies in monetary policy frameworks, bank supervision, stress testing, resolution of distressed institutions, AML/CFT compliance, and macroeconomic statistics — largely through the South Asia Regional Training and Technical Assistance Center (SARTTAC).
4. Policy advice on financial stability. The IMF advises on strengthening the regulatory framework, tightening lending standards for real estate and share loans, improving liquidity management, and developing macro-prudential tools to contain systemic risk.
5. Fiscal–monetary coordination. It recommends measures to reduce reliance on remittance-financed consumption, improve revenue mobilisation and public debt management, thereby easing pressure on the financial system.
6. Data transparency and standards. By encouraging adherence to IMF data standards (e-GDDS/SDDS), the IMF helps Nepal produce reliable, timely financial and macroeconomic data needed for sound supervision and investor confidence.
7. Coordination with other partners. The IMF works with the World Bank, ADB and other donors so that reforms in supervision, capital markets and the cooperative sector receive consistent and complementary support.

Conclusion. Nepal's financial sector faces structural weaknesses — low inclusion, high NPLs, cooperative failures, shallow capital markets and weak governance — along with new digital and climate-related risks. The IMF contributes mainly through surveillance, technical assistance and concessional financing, which together help Nepal Rastra Bank strengthen supervision, preserve stability and build a deeper, more inclusive financial system.

Direct and indirect instruments of monetary policy

Monetary policy is the policy of the central bank (Nepal Rastra Bank) to control the volume and cost of credit and money supply in the economy in order to achieve objectives such as price stability, balance of payments equilibrium and financial stability. Its instruments are classified as direct and indirect.

Direct (quantitative/administrative) instruments act by direct order or ceiling on banks, without working through the market:

1. Bank rate / discount rate — the rate at which the central bank lends to commercial banks; a change directly alters the cost of credit.
2. Credit ceiling (quantitative limit) — fixing the maximum amount of credit or the sector-wise credit limit that banks may extend.
3. Cash reserve ratio (CRR) — the compulsory cash balance banks must keep with NRB as a fixed percentage of their deposits.
4. Statutory liquidity ratio (SLR) — the minimum liquid assets banks must hold in specified form.
5. Moral suasion and direct action — persuasion, directives, warnings and penalties imposed on banks.
6. Selective credit control — directing credit to priority sectors and restricting credit for speculative or unproductive uses.

Indirect (market-based) instruments influence credit through market forces and prices:

1. Open market operations (OMO) — buying and selling of government securities by NRB to inject or absorb liquidity.
2. Repo and reverse repo — short-term lending/borrowing against securities to manage day-to-day liquidity.
3. Standing liquidity facility (SLF) — a window for banks to borrow at a penal rate.
4. Interest rate corridor — bank rate as the ceiling and deposit collection rate as the floor, with the policy rate in between.
5. Exchange rate and foreign exchange intervention — influencing money supply through purchase/sale of foreign currency.

Role of monetary policy in the stability of the financial sector

1. Price stability: By controlling money supply and credit, monetary policy keeps inflation low and predictable. Stable prices protect the real value of deposits and loans, prevent asset bubbles and reduce the risk of sudden loan defaults.
2. Liquidity management: Through CRR, SLR, OMO and repo facilities, NRB ensures that banks always have enough liquid funds to meet depositors' withdrawals. This prevents bank runs and panic in the market.
3. Controlling excessive credit growth: A rapid expansion of credit creates bad loans and asset price bubbles. Direct credit ceilings and higher reserve requirements check such overheating and keep banks' loan portfolios sound.
4. Interest rate stability: A stable and positive real interest rate encourages saving and productive investment, and prevents volatile capital flows that can destabilise banks and the exchange rate.
5. Exchange rate and external stability: By managing foreign exchange reserves and intervening in the market, monetary policy maintains a stable exchange rate, which keeps import prices and external debt servicing manageable.
6. Lender of last resort: In a crisis, NRB provides emergency liquidity to solvent but illiquid banks, preventing contagion from one bank to the whole system.
7. Support to supervision: Monetary policy works together with NRB's regulatory and supervisory tools (capital adequacy, loan classification, provisioning) to build a sound, well-capitalised and trustworthy banking system.

Conclusion: Direct instruments give quick and certain control but distort market mechanisms, while indirect instruments are market-friendly but slower. NRB uses a mix of both, with a gradual shift towards indirect instruments, so that money supply, credit and interest rates remain within safe limits and the financial sector stays stable, credible and capable of supporting sustainable growth.

Definition of Economic Development

Economic development is a multidimensional process that involves not only an increase in a country's real national income and per capita income (economic growth) but also structural changes in the economy, improvement in the standard of living, reduction of poverty and inequality, and overall qualitative progress of society. It includes improvements in health, education, employment, infrastructure, and technology.

In short, economic growth is quantitative (rise in output/income), while economic development is both quantitative and qualitative (growth plus structural and social transformation).

Present Situation of Economic Development of Nepal

The present situation can be presented under the following headings:

1. Growth of GDP and Per Capita Income

• Nepal's GDP growth rate has remained around 3–4% on average in recent years (below the target of 6–7%).
• Per capita income (GDP per capita) is around Rs 1,50,000–1,60,000 (roughly US$ 1,100–1,200 at about Rs 133–137 per US dollar), which is low compared to South Asian neighbours.

2. Structure of the Economy

• The share of agriculture in GDP has declined to about 24%, while the service sector contributes around 60% and industry around 15%.
• Despite the decline in GDP share, agriculture still employs about 60% of the labour force — showing low productivity and underemployment.

3. Human Development

• Nepal's Human Development Index (HDI) is around 0.60, placing it in the "medium human development" category (rank around 146th in the world).
• Life expectancy has improved to about 71 years, and literacy rate is around 76% (CBS estimate), but quality of education and health services remains poor.

4. Poverty and Inequality

• Poverty headcount rate has fallen to about 20% (recent estimates), but it is still high in rural and remote areas, and among marginalized groups.
• Income and regional inequality (Karnali, Sudurpaschim vs. Kathmandu Valley) is wide.

5. Employment and Remittance

• Lack of adequate employment opportunities has led to large-scale foreign employment; over 2,000 youths leave the country daily.
• Remittance contributes about 25–27% of GDP, which supports consumption but reflects weak domestic production.

6. Infrastructure and Investment

• Progress in roads, electricity (near 100% national grid access), and communication has improved.
• However, capital expenditure is low (often below 60–70% of allocated budget), industrialisation is weak, and investment climate is affected by policy instability.

7. Trade and Balance of Payments

• Nepal has a large trade deficit (imports far exceed exports), with exports concentrated in a few items (garments, pashmina, tea, cardamom).
• Dependence on imports for daily goods and fuel weakens the balance of payments.

8. Structural and Institutional Weaknesses

• Low capital formation, weak infrastructure, bureaucratic hurdles, political instability, and low productivity hinder rapid economic development.
• COVID-19 and global shocks further slowed growth and increased unemployment.

Conclusion

Nepal has made gradual progress in income, infrastructure, and human development, but it still remains a least developed country (LDC) with low per capita income, high dependence on remittance and imports, and weak industrial base. For real economic development, Nepal needs higher capital investment, industrialisation, export promotion, good governance, and political stability.

Differences between GDP and GNP

Relationship: GNP = GDP + Net Factor Income from Abroad (NFIA), where NFIA = factor income earned by residents from abroad − factor income earned by non-residents within the country. For Nepal, remittances make NFIA large and positive, so GNP is considerably higher than GDP.

Relationship among Consumption, Saving and Investment in Nepal's GDP

Using the expenditure approach, for an open economy:

$GDP = C + I + G + (X - M)$

where C = private consumption, I = gross investment (capital formation), G = government expenditure, and (X − M) = net exports.

1. Consumption and Saving (income side): National income is either consumed or saved:

$Y = C + S + T$

where Y = national income, S = saving, T = taxes. Rearranging, S = Y − C − T. Thus saving is the residual income left after consumption; higher consumption at a given income means lower saving. In Nepal, consumption is very high (around 85–90% of GDP) because of low per-capita income and high remittance-financed spending, so the saving rate remains low.

2. Saving and Investment (financial side): In equilibrium,

$S + (M - X) + \text{net transfers} = I$

i.e. I = S + (M − X) for an open economy. Domestic saving plus foreign saving (the resource gap, M − X) finances investment. Nepal's domestic saving falls short of its investment need, and the gap is filled mainly by remittances and foreign aid/loans, not by export earnings. Hence Nepal invests more than it saves, running a persistent trade deficit.

3. Consumption, Saving and Investment together: A rise in consumption reduces saving, which at full employment reduces funds available for investment and hence future growth. In Nepal, high remittance inflows raise consumption and imports simultaneously, so investment is financed largely from abroad. For sustained GDP growth, Nepal must raise the marginal propensity to save, channel remittances into productive investment, and reduce the import content of consumption.

Conclusion: GDP and GNP differ by NFIA; in Nepal GNP > GDP due to remittances. Consumption, saving and investment are interlinked through Y = C + S + T and I = S + (M − X); Nepal's low saving and high consumption make foreign inflows essential for financing investment.

Answer (10 marks)

Economic policies of the State in the Constitution of Nepal

Part 4 of the Constitution of Nepal (Articles 50 and 51) contains the Directive Principles, Policies and Obligations of the State. Article 51 (b) deals with economic policy. Its main provisions are:

1. To build a self-reliant and prosperous national economy by protecting and promoting national interest.
2. To increase national production and productivity, and to ensure equitable distribution of the fruits of economic development.
3. To develop and manage natural resources, and to give priority to national investment in the exploitation of such resources.
4. To encourage cooperatives and public and private sectors for economic development, keeping the cooperative sector as the foundation.
5. To modernise and commercialise agriculture, and to ensure food security and food sovereignty.
6. To develop infrastructure such as roads, electricity, irrigation, drinking water and communication.
7. To promote industry, trade and employment, and to reduce unemployment and poverty.
8. To ensure social security and social justice, and to reduce economic inequality.
9. To promote balanced and inclusive development among all provinces, regions and communities.
10. To promote tourism, water resources and information technology as areas of high economic potential.

How these policies guide Nepal towards a self-reliant and advanced economy

1. Self-reliance through national production — The policy of increasing production and productivity directs the State to reduce dependence on imports and foreign aid, and to rely on internal resources. This is the base of self-reliance.
2. Use of natural resources — Nepal has abundant water, forest, minerals and tourism potential. The policy of developing and managing these resources with priority to national investment guides the country to earn foreign currency and create jobs at home.
3. Cooperative-based economy — Making cooperatives the foundation helps to mobilise small savings, spread capital to rural areas and involve common people in production. This supports inclusive growth.
4. Agricultural modernisation — Since most Nepalis depend on agriculture, commercialisation and modernisation of farming raise rural income, ensure food security and supply raw materials to industry.
5. Infrastructure development — Roads, electricity, irrigation and communication are the base of industrial and service-sector growth. The policy directs investment into these areas, which raises the capacity of the economy.
6. Industrial and employment policy — Promotion of industry, trade and employment reduces unemployment and increases national income, which is a mark of an advanced economy.
7. Social security and justice — Economic progress without social justice is not sustainable. These policies guide the State to reduce inequality and poverty so that development reaches all.
8. Balanced provincial development — Inclusive and balanced development among provinces and communities helps to use the resources of all regions and prevents migration and regional imbalance.
9. Diversification of the economy — Priority to tourism, water resources and information technology guides Nepal away from a single-sector economy and towards a modern, advanced economy.

Conclusion

The economic policies of the Constitution give a clear direction: use of own resources, cooperative-based inclusive growth, modern agriculture, industrial development and social justice. If these policies are honestly implemented, they can make Nepal's economy self-reliant and advanced.

Money Market vs Capital Market

Contribution of Capital Market to Economic Development

1. Mobilisation of savings: It collects scattered small savings from the public through shares, debentures and mutual funds and channels them into productive investment.
2. Capital formation: By converting idle savings into long-term investment, it increases the rate of capital formation, which is essential for growth.
3. Financing industry and infrastructure: Companies raise long-term funds for plant, machinery and expansion without depending only on bank loans; this supports industrialisation and large projects.
4. Efficient allocation of resources: Funds flow to those firms and sectors that offer better returns, improving the overall productivity of the economy.
5. Employment generation: New industries and expansion of existing ones create employment opportunities, raising income and living standards.
6. Development of financial institutions: It promotes banks, insurance companies, mutual funds, brokers and credit rating agencies, deepening the financial system.
7. Government revenue and borrowing: Government bonds and securities are traded here, helping the government raise funds for development works; taxes on transactions add to revenue.
8. Attracting foreign investment: A well-regulated capital market with NEPSE and SEBON builds investor confidence and attracts foreign direct and portfolio investment.
9. Liquidity and price discovery: Investors can buy and sell securities easily, and market prices reflect the true worth of companies, improving corporate governance and transparency.
10. Reducing dependence on foreign aid: Domestic long-term capital reduces reliance on external loans and grants for development financing.

Conclusion: The money market manages short-term liquidity while the capital market supplies long-term capital. For a developing country like Nepal, a strong and well-regulated capital market is a key instrument for accelerating economic development.

Concept of Economics

Economics is the social science that studies how individuals, households, firms, and governments allocate scarce resources to satisfy unlimited human wants. It deals with production, distribution, exchange, and consumption of goods and services, and examines how choices are made when resources (land, labour, capital, entrepreneurship) are limited relative to wants.

Key points:

• Scarcity is the central problem — resources are limited, wants are unlimited.
• It studies choice — what to produce, how to produce, and for whom to produce.
• It covers both wealth (income, output, employment) and welfare (standard of living) aspects.
• Modern definition: economics is the study of allocating scarce means among competing ends (Lionel Robbins).

Difference between Micro and Macro Economics

Conclusion: Micro and macro economics are not opposed but complementary — micro provides the foundation on which macro aggregates are built, and macro policies shape the environment in which micro units operate. Both are essential for sound economic analysis and policy-making.

Six Major Objectives of Monetary Policy

1. Price Stability — Controlling inflation and keeping the general price level stable.
2. Balance of Payments Stability — Maintaining a healthy foreign exchange reserve and a sustainable external sector position.
3. Exchange Rate Stability — Keeping the external value of the Nepalese rupee stable.
4. Interest Rate Stability — Keeping interest rates low, stable and predictable to support investment.
5. Financial Sector Stability — Ensuring a sound, safe and trustworthy banking and financial system.
6. Supporting Economic Growth and Employment — Channeling adequate credit to productive sectors to promote growth and employment.

Provisions for Interest Rate Stability in the Monetary Policy, 2080/81

1. Bank Rate — The bank rate was kept unchanged at 6.5 percent.
2. Deposit Collection Rate — The deposit collection rate was kept at 3.0 percent.
3. Interest Rate Corridor — The corridor was maintained between the deposit collection rate of 3.0 percent (floor) and the bank rate of 6.5 percent (ceiling), giving a corridor width of 3.5 percentage points, with the policy rate at 5.5 percent, so that short-term market interest rates remain within this band.
4. Standing Deposit Facility — The standing deposit facility rate was kept at 3.0 percent to absorb excess liquidity and prevent a fall in rates.
5. Refinancing Facility — Concessional and general refinancing facilities were continued at low, fixed rates to direct credit to productive sectors.
6. Spread Regulation — The interest rate spread (difference between lending and deposit rates) of commercial banks was capped at 4.0 percent.
7. Base Rate — Banks were required to determine their base rate transparently and publish it, so that lending rates remain fair and stable.
8. Liquidity Management — Open market operations, outright purchase/sale of securities and the interest rate corridor were used to keep liquidity balanced and interest rates stable.

Bases for Determining the Quota and Facilities of the IMF in Nepal's Monetary Economy

Introduction. Nepal became a member of the International Monetary Fund in 1961. The IMF's engagement with Nepal runs mainly through (i) the quota — Nepal's capital subscription and voting share in the Fund — and (ii) lending facilities and surveillance (Article IV consultations), which directly influence Nepal's monetary, fiscal and external-sector policy.

1. Bases for Determining the Quota

The quota of every member, including Nepal, is fixed under the IMF's quota formula, which is a weighted average of four variables:

The computed figure is then adjusted by a compression factor (to narrow the gap between large and small members) and every member gets basic votes (a fixed number independent of quota) to protect the voice of small countries. Quotas are revised only through General Reviews of Quotas (the 16th Review, 2023, raised quotas equiproportionally by 50%).

Nepal's position. Nepal's quota is small — about SDR 157 million before the 16th Review (roughly 0.03% of total quotas and voting power), rising to about SDR 235 million after the equiproportional increase. This small quota reflects Nepal's small GDP, low openness relative to large traders, and modest reserves.

What the quota determines for Nepal:

• Subscription: 25% payable in reserve assets (SDR/USD), 75% in Nepalese rupees.
• Voting power in the Board of Governors and Executive Board.
• Access limits to IMF financing (normally 145% of quota per year, 435% cumulative under the General Resources Account).
• Share in SDR allocations — Nepal received roughly SDR 180 million (about USD 250 million) in the August 2021 general allocation, which boosted Nepal Rastra Bank's reserves.
• Burden sharing and eligibility for concessional windows of the Poverty Reduction and Growth Trust.

2. Facilities Provided by the IMF to Nepal

(a) Concessional facilities (PRGT), most relevant to Nepal as a low-income country:

• Extended Credit Facility (ECF) — medium-term balance-of-payments support. Nepal obtained a multi-year ECF arrangement of about SDR 282.42 million (≈ USD 396 million) in January 2022 to cushion COVID-19 shocks and support recovery.
• Standby Credit Facility (SCF) and Rapid Credit Facility (RCF) — short-term and emergency support.

(b) Non-concessional facilities:

• Stand-By Arrangement (SBA) and Extended Fund Facility (EFF) — for short-term and longer-term adjustment.
• Rapid Financing Instrument (RFI) — Nepal drew about SDR 156.9 million (≈ USD 214 million) under the RFI in 2020 to meet pandemic-related balance-of-payments needs.
• Flexible Credit Line, Precautionary and Liquidity Line, Short-term Liquidity Line — precautionary lines for strong performers.

(c) Other support:

• SDR allocations (2021) credited to Nepal Rastra Bank.
• Resilience and Sustainability Trust (RST/RSF) — climate-related financing.
• Technical assistance and training — in monetary operations, bank supervision, statistics, tax administration and AML/CFT.
• Article IV consultations — annual surveillance of Nepal's exchange rate, monetary, fiscal and financial-sector policies.

3. Major Challenges in the Implementation of IMF Consultations

1. Data gaps and weak statistical capacity. Nepal's national accounts are published with long lags and limited frequency; reliable data on GDP, employment, credit and the informal sector are scarce. This weakens the factual basis of Article IV assessments and makes recommendations imprecise.
2. Weak follow-up and low policy ownership. Recommendations on revenue mobilisation, capital expenditure execution and subsidy reform are often accepted in principle but not implemented, because they are politically unpopular or conflict with coalition compulsions.
3. Political instability and discontinuity. Frequent changes of government and of finance ministers break the continuity needed to carry out multi-year adjustment programmes agreed during consultations.
4. Structural rigidities of the economy. Heavy dependence on remittances, a narrow export base, and the peg of the Nepalese rupee to the Indian rupee leave Nepal Rastra Bank with little independent monetary space; IMF advice on exchange-rate and interest-rate policy therefore has limited operational room.
5. Coordination problems. The Ministry of Finance, Nepal Rastra Bank, the National Planning Commission and line ministries do not always work in step, so surveillance findings are not translated into a single coherent budget–monetary framework.
6. Financial-sector vulnerabilities. High non-performing loans, the dual regulation of cooperatives, weak capital markets and slow implementation of FSAP recommendations make financial-sector advice difficult to enforce.
7. Conditionality and sovereignty concerns. Perceived conditionality attached to IMF-supported programmes creates domestic political resistance and delays agreement on programme design.
8. Exogenous shocks. Earthquakes, the COVID-19 pandemic, floods, and spillovers from India and China repeatedly overturn the macroeconomic assumptions on which consultations are based.
9. Limited technical and institutional capacity. Shortage of trained economists and statisticians in implementing agencies slows the absorption of technical assistance.
10. Delays in quota and governance reform. Prolonged General Reviews and the small quota of developing members like Nepal reduce the Fund's legitimacy and the willingness of members to act on its advice.

Conclusion

Nepal's IMF quota is determined by the standard four-variable formula — GDP, openness, variability and reserves — and it fixes Nepal's subscription, voting power, access to facilities and share of SDR allocations. The facilities actually used by Nepal are the RFI, the ECF and the 2021 SDR allocation, supported by technical assistance. The main obstacles to effective consultation are data weakness, political instability, structural rigidities such as the INR peg and remittance dependence, poor inter-agency coordination, and slow financial-sector reform. Strengthening statistics, building domestic policy ownership and improving coordination between the Ministry of Finance and Nepal Rastra Bank would make IMF surveillance far more useful for Nepal's monetary economy.

Remittance income is the money sent home by Nepali migrant workers employed abroad. It is transferred through formal channels such as banks, remittance companies and digital wallets (and partly through informal hundi). In Nepal it is the single largest source of foreign exchange and a major component of Gross National Income.

Positive aspects observed in Nepali society

1. Foreign exchange and balance of payments: Remittance is the biggest earner of foreign currency, covering the large trade deficit and keeping the balance of payments in surplus.
2. Poverty reduction and higher living standards: Remittance-receiving households spend more on food, education, health and housing, which has helped reduce poverty.
3. Source of capital: It finances land purchase, house construction, small enterprises, education and repayment of loans.
4. Support to the economy: It raises national savings, increases bank deposits and lending, and adds to government revenue through taxes on consumption.
5. Employment and skills: Migration provides work to surplus labour and exposes workers to new skills and technology.

Negative aspects observed in Nepali society

1. Dependency and decline in production: Easy remittance income has made people and the economy dependent on foreign earnings; agriculture and domestic industry are neglected, and land is left barren.
2. Rising imports and consumption: Remittance is largely spent on imported consumer goods and luxury items rather than productive investment, widening the trade deficit.
3. Labour shortage and brain drain: Large-scale migration of young and skilled manpower has created a shortage of workers in agriculture, industry and construction, and the country loses talent permanently.
4. Social problems: Long absence of family members leads to broken families, neglect of children and elderly parents, and problems such as alcoholism, gambling and domestic disputes.
5. Exploitation and risk: Workers face cheating by manpower agencies, low wages, poor working conditions and even death abroad, while remittance is also partly lost through illegal hundi channels.
6. Inequality: Remittance benefits only migrant households, creating income inequality between remittance-receiving and non-receiving families and regions.

Conclusion: Remittance has kept Nepal's economy afloat and improved living standards, but its use in unproductive consumption and the resulting dependency and social costs show that it should be channelled into productive investment and employment generation within the country.

Challenges Faced in the Economic Development of Nepal and Appropriate Measures to Address Them

Introduction

Nepal is a developing country with abundant natural and human resources, yet its economic development has remained slow. Various structural, geographical, and institutional challenges have hindered the pace of development. Identifying these challenges and adopting appropriate measures is essential for sustainable economic progress.

Challenges Faced in Economic Development of Nepal

1. Political Instability: Frequent changes in government, weak implementation of policies, and lack of political commitment have obstructed long-term development planning.

2. Dependence on Agriculture: Agriculture contributes about one-fourth of GDP and employs a large portion of the population, yet it is subsistence-based, monsoon-dependent, and low in productivity.

3. Low Industrial Development: Limited industrialization, lack of capital, poor infrastructure, and unfavorable investment climate have restricted industrial growth and employment generation.

4. Unemployment and Underemployment: High unemployment, especially among youth, has led to massive foreign employment and brain drain.

5. Weak Infrastructure: Inadequate roads, electricity, irrigation, communication, and transportation facilities, particularly in rural areas, have increased production costs and hindered market access.

6. Poverty and Inequality: Widespread poverty, unequal distribution of income and resources, and regional imbalance have limited people's access to basic services.

7. Trade Deficit: Heavy dependence on imports and low export capacity have created a persistent balance of payments problem.

8. Dependence on Foreign Aid and Remittance: Over-reliance on foreign aid and remittance has made the economy vulnerable and less self-reliant.

9. Natural Calamities: Floods, landslides, earthquakes, and droughts frequently damage infrastructure and productive assets.

10. Weak Human Resource Development: Inadequate education, health facilities, and skill development have reduced labor productivity.

Appropriate Measures to Address These Challenges

1. Political Stability and Good Governance: Ensure stable government, strong political commitment, transparency, and accountability for effective implementation of development plans.

2. Modernization of Agriculture: Promote commercial, mechanized, and diversified agriculture through irrigation, improved seeds, fertilizers, training, and market linkages.

3. Industrial Promotion: Encourage small, medium, and cottage industries by providing loans, subsidies, tax concessions, and a favorable investment climate.

4. Employment Generation: Create employment opportunities through infrastructure development, tourism, agro-based industries, and skill-based training programs.

5. Infrastructure Development: Invest in roads, electricity, irrigation, communication, and transportation to reduce production and transaction costs.

6. Poverty Alleviation and Balanced Regional Development: Implement targeted programs for marginalized groups and develop backward regions to reduce inequality.

7. Export Promotion and Import Substitution: Encourage export-oriented production and reduce unnecessary imports to improve the trade balance.

8. Optimal Use of Foreign Aid and Remittance: Channel foreign aid and remittance into productive sectors like infrastructure, education, and industry.

9. Disaster Preparedness: Adopt effective disaster management policies, early warning systems, and climate-resilient infrastructure.

10. Human Resource Development: Improve quality of education, health services, and technical/vocational training to enhance labor productivity.

11. Promotion of Tourism: Develop tourism infrastructure and promote Nepal's cultural and natural heritage to earn foreign exchange.

12. Encouragement of Private Sector and Foreign Investment: Create a conducive environment for private and foreign investment through legal reforms and security.

Conclusion

Nepal's economic development challenges are multidimensional, but they are not insurmountable. With political stability, proper utilization of resources, infrastructure development, human resource development, and effective implementation of policies, Nepal can achieve sustainable and inclusive economic growth. The key lies in strong political will, good governance, and active participation of all stakeholders.

(b) अर्थ मन्त्रालय

Fiscal policy (सरकारको आय–व्यय नीति) is framed and implemented by the Ministry of Finance; Nepal Rastra Bank implements monetary policy.

(b) 6.62

In FY 2078/79 (2021/22) Nepal's average consumer price inflation was reported at 6.62 percent, up from about 3.6 percent in the previous year, driven by higher food and fuel prices.

(b) रु. १५,३०,६२,२६,००,००० (Rs 15,30,62,26,00,000, about Rs 15.31 kharba)

The half-yearly evaluation of the FY 2080/81 budget revised the total expenditure estimate downward from the original appropriation of about Rs 17.51 kharba, because of slow capital spending and revenue shortfall. Option (b) is the revised figure; the other options are not the revised estimate.

(b) John Maynard Keynes

John Maynard Keynes is called the father of macroeconomics because his 1936 book The General Theory of Employment, Interest and Money established macroeconomics as a separate branch, focusing on national income, aggregate demand and employment as a whole.

(c) A.C. Pigou has supported the definition of economics as given by Adam Smith.

This statement is not true. Pigou was a follower of Alfred Marshall and supported the welfare definition, which studies the material requisites of well-being. Adam Smith's definition is the wealth definition. The other statements are true: Smith treated wealth as the end of economic activity, Marshall called economics a social science, and Robbins's scarcity definition is considered the most relevant today.

(d) देशको कुल गार्हस्थ्य उत्पादन र जनसंख्याको अनुपात

Per Capita Income (प्रतिव्यक्ति आय) is calculated by dividing a country's total Gross Domestic Product (GDP) by its total population. It shows the average income earned per person in a country in a given year.

Introduction

Remittance is the backbone of Nepal's economy. According to Nepal Rastra Bank, remittance inflow stood at about Rs 1,445 billion in FY 2080/81, equal to more than one-fifth of GDP. It finances a very large share of the country's import bill and has kept the balance of payments in surplus despite a large trade deficit. However, excessive dependence on remittance is not appropriate for the long run, because it makes the economy vulnerable and brings several structural problems along with it.

Why excessive dependence on remittance is not appropriate

1. Uncertainty and external shocks. Remittance depends on the economic condition of host countries. The COVID-19 pandemic, the Gulf economic slowdown and falling oil prices have shown how quickly remittance can shrink. Any recession, policy change or conflict in destination countries directly hits Nepal's foreign exchange earnings.

2. Dutch disease effect. Heavy remittance inflow raises consumption and imports, making domestic production less competitive. It can appreciate the real exchange rate and discourage export-oriented and import-substituting industries.

3. Rising import and consumption culture. A large part of remittance is spent on imported consumer goods, land, jewellery and unproductive assets rather than on productive investment. This widens the trade deficit and does not create sustainable jobs.

4. Labour shortage and falling production. Thousands of young Nepalis leave the country every day for foreign employment. This creates a shortage of skilled and unskilled labour in agriculture, industry and construction, leaving land barren and factories underutilised.

5. Social costs. Migration breaks families, increases the burden on women and the elderly, and creates problems of child care and education. Many migrant workers face exploitation, low wages, unsafe working conditions and even death abroad.

6. Dependency mentality. Easy remittance income reduces the incentive for hard work, entrepreneurship and innovation among the youth, weakening the country's long-term productive capacity.

Measures to create an alternative to remittance

1. Promote productive investment of remittance. The government and Nepal Rastra Bank should encourage remittance-receiving households to invest in small and medium enterprises, agriculture, tourism, hydroelectricity and cooperatives through attractive interest rates, tax concessions and matching grants.

2. Develop agriculture and agro-based industry. Modernise farming through irrigation, mechanisation, high-yielding seeds and market linkage so that agriculture becomes profitable and creates employment at home.

3. Exploit hydropower and tourism potential. Nepal has about 42,000 MW of economically feasible hydropower capacity. Developing hydropower and tourism can generate electricity export earnings and jobs, reducing the need to go abroad.

4. Promote export-oriented industries. Provide concessional loans, tax rebates and export incentives to industries producing goods such as tea, coffee, cardamom, ginger, pashmina, handicrafts and processed food.

5. Skill development and employment generation. Expand technical and vocational education (CTEVT), establish industrial estates and special economic zones, and encourage youth entrepreneurship so that young people find work within the country.

6. Improve the investment climate. Ensure political stability, good governance, easy access to credit, reliable electricity and one-window service to attract domestic and foreign investment.

7. Make migration safe and dignified. Under the Foreign Employment Act, ensure proper skill training before departure, fair wages, insurance and welfare funds for migrant workers, so that migration becomes a choice rather than a compulsion.

Conclusion

Remittance has been a lifeline for Nepal's balance of payments and poverty reduction, but it cannot be a permanent substitute for domestic production. Excessive dependence makes the economy fragile and unproductive. Therefore, Nepal should treat remittance as a bridge, not a destination — using it to build agriculture, hydropower, tourism and industry so that the country can stand on its own feet in the long run.

Economic Development

Economic development is the sustained, long-term improvement in the economic well-being of a country's people. It is broader than economic growth. Economic growth means only an increase in output (rise in GDP), but economic development includes growth plus structural change and improvement in the quality of life — rise in per capita income, reduction of poverty and unemployment, better education, health, housing, and a fairer distribution of income. In short, growth is quantitative while development is both quantitative and qualitative.

Common indicators of economic development are per capita income (GDP per capita), the Human Development Index (HDI), life expectancy, literacy rate, and the poverty ratio.

Challenges of Economic Development in Nepal

1. Low capital formation and low savings — Per capita income is low (around Rs 1.4 lakh per year), so people consume most of their income. Domestic savings and investment are therefore too small to finance rapid development.

2. Dependence on agriculture — Agriculture still employs about 60% of the workforce but contributes only about 24% of GDP. Low productivity, subsistence farming, and dependence on monsoon rainfall keep rural incomes low.

3. Weak industrial base — Industries are small, mostly agro-based or trading, and concentrated in a few urban areas. Lack of electricity, raw materials, technology, and skilled labour discourages large-scale industrialisation.

4. Unemployment and underemployment — Every year a large number of youths enter the labour market, but jobs are not created at the same rate. This leads to massive foreign employment and brain drain.

5. Poverty and inequality — Though poverty has fallen, a large section of the population still lives near the poverty line. Income and wealth are unevenly distributed between regions (Terai, Hills, Mountains) and between rich and poor.

6. Inadequate infrastructure — Poor roads, unreliable electricity, limited irrigation, and weak communication links raise the cost of production and reduce market access, especially in remote districts.

7. Political instability and weak governance — Frequent changes of government, policy inconsistency, bureaucratic delays, corruption, and weak law and order discourage both domestic and foreign investment.

8. Low human resource development — Despite progress, literacy and skill levels remain low. Poor quality of education and health services reduces labour productivity.

9. Geographical difficulties — A landlocked country with rugged mountains and hills has high transport and construction costs. Natural disasters such as earthquakes, floods, and landslides regularly destroy development gains.

10. Dependence on foreign aid and remittance — Development plans rely heavily on foreign loans and grants, while remittance is used mainly for consumption rather than productive investment. This makes the economy vulnerable to external shocks.

Conclusion

Nepal has good potential in hydropower, tourism, agriculture, and remittance-funded investment. Economic development can be accelerated by political stability, good governance, control of corruption, investment in education and health, infrastructure development, and productive use of remittance. Without these, the country will continue to face the same challenges.

Role of the World Bank, IMF and ADB in the Development of Nepal

(a) World Bank (WB)

• Established in 1944; Nepal became a member in 1961. Its affiliate IDA provides soft loans and grants to poor countries.
• Finances infrastructure: highways (Prithvi, Arniko), hydropower (Kulekhani), irrigation, rural roads, and water supply.
• Supports education (Basic and Secondary Education Programme), health, and poverty reduction through the Poverty Reduction Strategy Paper (PRSP).
• Provides policy advice, technical assistance and debt relief under HIPC/MDRI.
• Recent focus: federalism support, COVID-19 recovery, and climate-resilient development.

(b) International Monetary Fund (IMF)

• Established in 1944; Nepal joined in 1961. It is a balance-of-payments and monetary cooperation institution, not mainly a project lender.
• Provides loans under ECF, EFF and Rapid Credit Facility during BOP crises (e.g., earthquake 2015, COVID-19).
• Gives policy advice on fiscal discipline, monetary policy, exchange rate and financial-sector reform.
• Conducts Article IV consultations, publishing reports on Nepal's macroeconomic health.
• Provides technical assistance to Nepal Rastra Bank and the Ministry of Finance; allocates SDRs to boost reserves.

(c) Asian Development Bank (ADB)

• Established in 1966; Nepal is a founding member. Headquartered in Manila.
• Major financier of energy (Kali Gandaki A, hydropower transmission), transport (Kathmandu–Bhaktapur road, Melamchi water supply), and urban development.
• Supports education, TVET, agriculture and rural finance, and regional connectivity under SASEC.
• Provides loans, grants, and guarantees; also gives technical assistance for project preparation.
• Focus on inclusive growth, climate change and private-sector development.

(d) Overall Assessment

• Together they supply a large share of Nepal's foreign aid, fill the savings-investment gap and BOP gap, and finance projects the government cannot fund alone.
• They promote reform, good governance and institutional capacity.
• Limitations: conditionalities, tied aid, debt burden, and slow disbursement reduce effectiveness. Aid should be used in productive sectors with strong monitoring to ensure sustainable development.

National Objective and National Strategies of the Fifteenth Plan (FY 2076/77–2080/81)

National Objective

The Fifteenth Plan, which came into effect from FY 2076/77 BS (2019/20 AD), set as its national objective:

"To achieve sustainable and inclusive economic growth with the goal of graduating from the Least Developed Country (LDC) status by 2026 AD and reaching the status of a middle-income country by 2030 AD, while ensuring social justice and prosperity for all Nepali citizens."

In essence, the plan aimed to:

• Attain sustained, high and inclusive economic growth (targeted average growth of about 9.4% per annum),
• Graduate Nepal from the LDC category by 2026 AD,
• Reduce poverty and inequality and improve the living standard of the people,
• Build a prosperous, socialist-oriented, and just society through balanced and sustainable development.

National Strategies

The Fifteenth Plan adopted the following major national strategies:

1. Graduation from LDC status — Fulfilling all three LDC graduation criteria (GNI per capita, human assets index, and economic vulnerability index) by 2026 AD.

2. High and sustainable economic growth — Raising domestic production and productivity, promoting domestic and foreign investment, and increasing capital formation to achieve around 9.4% average annual GDP growth.

3. Infrastructure development — Expanding and upgrading physical infrastructure such as roads, railways, airports, hydropower, irrigation, and information technology to support growth.

4. Human resource development — Ensuring quality education, health services, and skill development to build capable and productive human capital.

5. Employment and poverty reduction — Creating employment opportunities within the country, reducing dependence on foreign employment, and alleviating poverty through inclusive and targeted programmes.

6. Balanced and inclusive development — Reducing regional, social, and economic disparities through balanced development of all provinces, and ensuring inclusion of women, Dalits, Janajatis, Madhesis, and marginalized groups.

7. Good governance and institutional reform — Strengthening federalism, improving public service delivery, ensuring transparency and accountability, and institutionalising the federal democratic republic.

8. Sustainable development and climate resilience — Promoting environmental protection, disaster risk reduction, and climate change adaptation in line with the SDGs.

9. Economic diplomacy and international cooperation — Expanding foreign trade, promoting tourism and remittance, and mobilising foreign investment and development assistance.

10. Private sector and employment promotion — Encouraging private sector participation, promoting small and medium enterprises, and developing a self-reliant economy.

---

Note: The Fifteenth Plan was prepared by the National Planning Commission (NPC) and approved by the Government of Nepal. Its long-term vision is aligned with the "Prosperous Nepal, Happy Nepali" national aspiration.