Economic Policies and Reforms

Economic Policies and Reforms refer to the deliberate actions and strategies governments or institutions implement to influence a country’s economic performance. These policies are designed to achieve specific financial objectives, such as promoting growth, reducing unemployment, controlling inflation, and ensuring equitable distribution of wealth.

Economic Policies and Reforms

Privatization

Privatization is transferring ownership, property, or business from the government to the private sector. The privatization of public enterprises is one of the important aspects of Nepal’s economic liberalization. Its main goals are enhancing productivity, effective resource allocation, and reusing government from budgetary burden. Privatization has been taken as a means of improving the performance of public enterprises.

Method of Privatization

Privatization is the process of transferring the ownership of public enterprises to the private sector. Several methods may be adopted for privatization. They are as follows:

Assets Sales

Asset sales involve the government selling specific non-core assets of a public enterprise, such as real estate, equipment, or intellectual property, rather than the entire company. This helps the government get money quickly while controlling the main business. Some of the public enterprises in which this method of privatization was applied along with the business sales method are Bhrikuti Paper Factory, Harisiddhi Brick and Tile Factory, and Bansbari Leather and Shoes Factory Limited.

Business Sales

Business sales involve the government selling an entire state-owned company to a private buyer. This can bring in a lot of money and shift the business’s responsibility to the private sector, making it more efficient. However, selling a public enterprise can result in a loss of public control over essential services, and there is a risk that the new private owner may engage in monopolistic practices if they dominate the market.

Share Sales

Share sales happen when the government sells its shares in a company that is publicly traded. This can raise a lot of money and allow more people to own a part of the company, which can make it more open and accountable. But if the government sells too many shares, it might lose control, and the value of the shares can change based on the market.

Management Contract

Management contracts allow the government to keep ownership of a company while hiring a private firm to run it. This way, the government can benefit from the private company’s skills and improve how things are done. However, the government still takes on some financial risks, and it can be hard to see how well the private manager is doing.

Lease Assets

Leasing assets means the government rents out public property to a private company for a set time. This brings in money for the government and allows private investment to improve services. However, long leases can limit what the government can do in the future, and there might be disagreements about service quality and costs.

Privatization Policy and Practices in Nepal

The Privatization Act, 1994 defines privatization as involving the private sector in the management of the enterprise or selling or leasing it, or transferring government ownership to the private sector or workers, or the desirous group either wholly or partially. The main features of this act are as follows:

Formation of privatization committee

A privatization committee is formed to organize the privatization of enterprises under the chairmanship of the minister or state minister for finance. The committee typically includes representatives from various government ministries, financial experts, and legal advisors to ensure a comprehensive approach to privatization. The members are appointed by the government, and the committee operates under the Ministry of Finance.

Power, functions, and duties of the committee

The power, functions, and duties of the committee are as follows;

• To recommend, programs and priorities for privatization
• To conduct study or research to formulate privatization programs
• To evaluate the enterprise and recommend it to the government
• To remove hindrances faced in privatization programs
• To follow up on the decisions and agreements related to privatization
• To constitute sub-committees as may be necessary
• To perform other works if necessary

Process of Privatization

• Sale of shares
• Formation of cooperatives
• Selling assets of the enterprise
• Leasing out the assets of the enterprise
• Involving the private sector in the management of the enterprise
• Adopting any other modalities considered appropriate by the government based on the recommendation of the committee.

Evalutaion of proposal

• Attractive price
• Management of the enterprise without changing its nature
• Retention of the services of present workers and employees
• Enhancement of the employment opportunity
• Managerial experience
• Expansion of the enterprise and business by preparing a good business plan and making additional investments.

Settlement of dispute

If any dispute arises, it is resolved through mutual consultation among concerned parties.

Continuity of the present workers

The government may ensure the continuity of service of the present workers of the enterprise to be privatized.

Liquidation of enterprise

• The government can dissolve wholly owned enterprises by publishing a notification in the Nepal Gazette.
• All arrears due to the enterprise liquidated are recovered as government dues.
• The government may transfer the assets and liabilities of the enterprise liquidated to any other body.
• If all liabilities of the enterprise cannot be fully settled from the assets of the enterprise, the residual liabilities can be settled according to existing laws.

Industrial Policy, 2010

Industrial policy refers to government strategies aimed at promoting specific sectors of the economy to enhance growth, create jobs, and improve overall economic performance.

Vision

To make remarkable contributions to the national economy through sustainable and broad-based industrial development in an effective, coordinated, and collaborative partnership of public, private, and cooperative sectors thereby supporting poverty alleviation.

Objectives

• To stimulate overall economic growth by promoting industrial development and enhancing productivity across various sectors.
• To generate employment opportunities by supporting the establishment and expansion of industries, particularly in sectors with high potential for job creation.
• To enhance the global competitiveness of domestic industries by encouraging innovation, technology adoption, and skill development.
• To diversify the industrial base by supporting a range of sectors, reducing dependency on a limited number of industries, and fostering resilience against economic shocks.
• To protect industrial intellectual property rights.

Policies

• Support research and new ideas to help businesses create better products and improve their processes.
• Provide training and education programs to help workers learn the skills needed for new jobs in growing industries.
• Create rules and rewards for businesses to use environmentally friendly methods and reduce waste.
• Set up programs that offer low-interest loans and grants to help small and medium businesses get the money they need to grow.
•  Develop plans to make supply chains more efficient and reliable, so businesses can operate smoothly and adapt to changes.
• Create strategies to assist local businesses in selling their products in other countries, including trade agreements and marketing help.
• Make regulations easier to understand and follow, so businesses can spend less time on paperwork and more time growing.
• Promote partnerships between the government and private companies to work together on big projects and improve infrastructure.
• Focus on helping less developed areas grow by encouraging industries to set up there, so everyone can benefit from economic growth.
• Invest in technology and internet access to help businesses modernize and become more efficient.

Commerce/ Trade Policy, 2015

The Commerce/Trade Policy of 2015 is a set of guidelines and strategies established by the government to promote and regulate trade and commerce within the country and with international partners. Its primary goals include boosting exports, enhancing the competitiveness of local products, attracting foreign investment, supporting small and medium-sized enterprises (SMEs), and promoting sustainable trade practices. The policy outlines specific measures, such as export incentives, trade agreements, and capacity-building initiatives, aimed at creating a favorable environment for businesses to thrive and contribute to economic growth.

Long Term Vision

Achieve economic prosperity by enhancing the commerce sector’s contribution to the national economy through export promotion.

Goal

To achieve inclusive and sustainable economic growth through export promotion.

Objectives

• To enhance supply-related capacity, reduce trade deficit by increasing exports of value-added and competitive goods and services.
• To increase access of goods, services, and intellectual property to the regional and global markets.

Labour and Employment Policy, 2005

The Labour and Employment Policy of 2005 is a set of rules created by the government to improve work conditions and create more job opportunities. The main goals are to protect workers’ rights, ensure fair treatment, and help people find good jobs. This policy focuses on making workplaces safer, providing training to help workers gain new skills, and offering support like health care and benefits. It also aims to reduce unemployment and make sure that both workers and employers can work together happily. Overall, the policy is about making work better for everyone.

Long-term Goal

To provide productive, non-discriminatory, exploitation-free, decent, safe, and healthy work opportunities for citizens of the working ages by building an environment of friendly investments, in addition to building and managing a labor market that contributes to the national economy so that it can compete at the global market.

Objectives

• To promote employment opportunities by creating more job openings for all, especially for youth and marginalized groups.
• To enhance working conditions by improving safety, health, and overall work environments in various industries.
• To protect workers’ rights by ensuring fair wages, reasonable working hours, and the right to organize.
• To support skill development by providing training and education programs that help workers gain new skills and improve their employability.
• To encourage social security by establishing systems that provide support for workers during unemployment, illness, or retirement.
• To promote gender equality by ensuring equal opportunities and fair treatment for all workers, regardless of gender.
• To foster labor market flexibility by creating a labor market that can adapt to changing economic conditions while protecting workers’ rights.
• To encourage informal sector integration by supporting the transition of workers in the informal sector to formal employment, providing them with better protections and benefits.
• To strengthen labor relations by promoting positive relationships between employers and employees to foster cooperation and resolve disputes effectively.
• To monitor and evaluate policies by regularly assessing the effectiveness of labor policies and making necessary adjustments to improve outcomes for workers and employers.

Strategies

• Create programs that help workers keep learning and improving their skills throughout their careers.
• Promote flexible work arrangements, like part-time jobs and remote work, to help people balance their work and personal lives.
• Develop programs that offer help to people who lose their jobs, including unemployment benefits and training to find new work.
• Work towards equal pay and opportunities for women in the workplace, and support parental leave for both mothers and fathers.
• Make it easier for small businesses to get loans and reduce unnecessary rules so they can thrive and create jobs.
• Set up specific programs to help young people, older workers, and those facing challenges find jobs and succeed in the workforce.
• Foster cooperation between the government, employers, and workers to create effective and fair employment policies.

Tourism Policy, 2008

The Tourism Policy of 2008 typically outlines the framework and strategies for developing and promoting tourism in a specific country or region. While I don’t have access to the exact text of the policy, I can provide a general overview of what such a policy might include based on common elements found in tourism policies.

Objectives

The main objectives of Tourism Policy 2008 are as follows:

• To develop tourism as an important sector of the national economy by developing linkages between tourism and other sectors.
• To diversify tourism down to rural areas to improve employment opportunities, foreign currency earnings, growth of national income, and regional imbalances.
• To improve the natural, cultural, and human environments of the nation to develop and expand the tourism industry.
• To maintain a good image of the nation in the international community by providing quality service and a sense of security
• To develop and promote Nepal as an attractive tourism destination.

Characteristics

The following are some of the notable characteristics of tourism policy, 2008:

• Focus on marketing strategies to attract tourists to Nepal.
• Improve and expand air travel options to make it easier for tourists to visit.
• Promote eco-friendly tourism that protects the environment and local culture.
• Engage local communities in tourism planning to ensure their needs are met.
• Upgrade roads, hotels, and facilities to enhance the tourist experience.
• Set rules for service quality and safety in the tourism industry.
• Provide training for workers in the tourism sector to improve skills and service.
• Promote different types of tourism, such as adventure, cultural, and eco-tourism.
• Encourage cooperation between the government and private businesses to boost tourism.
• Prepare strategies to handle emergencies that could affect tourism.

Policy

• Local people will be involved in programs to protect the environment, helping to create sustainable tourism.
• Efforts will focus on reducing differences between regions, ensuring tourism benefits all areas, especially less developed ones.
• The promotion and protection of Nepal’s rich culture and traditions will be integral to tourism development.
• Investment will be made in better roads, airports, and hotels to facilitate easier access for tourists.
• Eco-friendly practices will be encouraged to protect nature and conserve resources.
• Training programs will be provided for individuals working in tourism to enhance skills and service quality.
• Marketing plans will be created to promote Nepal as an attractive destination for both local and international tourists.
• Cooperation between government and businesses will be encouraged to improve tourism.

Monetary Policy

Monetary policy is a macroeconomic policy. It is concerned with the monetary system of a country. It is formulated by the central bank. it involves the management of money supply and interest rates. Monetary policy is used by the government of a country to achieve macroeconomic objectives like price stability, economic growth, and balance of payment stability.

The objectives of monetary policy are as follows:

• To stabilize the price level since fluctuations in prices bring uncertainty and instability to the economy.
• To increase investment for full employment.
• To have rapid economic growth with stability.
• To maintain equilibrium in the balance of payments.

Instruments of Monetary Policy

Quantitative Instruments

Bank Rate Policy

The bank rate is the interest rate that a central bank charges commercial banks for borrowing money. When the central bank raises this rate, it makes borrowing more expensive, leading to higher interest rates for customers and slowing down spending. Conversely, lowering the bank rate makes borrowing cheaper, encouraging banks to lend more money, which can boost economic activity.

Open Market Operations (OMO)

Open market operations involve the buying and selling of government bonds by the central bank. When the central bank buys bonds, it increases the money supply in the banking system, leading to lower interest rates and encouraging borrowing and spending. When it sells bonds, it decreases the money supply, raising interest rates and helping to control inflation.

Variation in Reserve Ratios

Reserve ratios are the percentage of deposits that banks must keep on hand and not lend out. Lowering the reserve requirement allows banks to lend more, increasing the money supply and encouraging spending. Raising the reserve requirement means banks can lend less, decreasing the money supply and helping to control inflation.

Qualitative Instruments

Fixing Margin Requirements

Fixing margin requirements sets rules on how much money investors must put down when buying securities on credit. Increasing margin requirements limit speculative investments while lowering them encourages more borrowing for investments.

Consumer Credit Regulations

Consumer credit regulations control how much credit banks can extend to consumers for purchases. Tightening these regulations limits consumer borrowing to prevent excessive debt while relaxing them encourages more consumer spending.

Publicity

Publicity involves the central bank communicating its policies to the public and financial markets. Clear information about monetary policy can influence expectations and behavior, encouraging borrowing and spending.

Credit Rationing

Credit rationing limits the amount of credit available to borrowers, especially during economic uncertainty. This ensures lending is directed toward productive uses and helps maintain financial stability.

Moral Suasion

Moral suasion is a non-coercive approach where the central bank persuades banks to follow its policy guidelines through informal discussions or public statements, influencing their behavior.

Directives

Directives are formal instructions from the central bank to financial institutions regarding specific lending practices. They can set limits on loans or require banks to follow certain guidelines to achieve monetary policy goals.

Monetary Policy, 2024/25

Nepal Rastra Bank (NRB), the central bank of the country, released the Monetary Policy for the Fiscal Year 2024/25. Monetary policy is the process by which a central bank or monetary authority manages the supply of money, interest rates, and credit in an economy to achieve specific economic objectives. These objectives typically include controlling inflation, managing employment levels, stabilizing the currency, and fostering economic growth.

Economic and Monetary Targets

• The NRB aims to maintain inflation within a target of 5.0% for the fiscal year 2024/25.
• The government has set a target for achieving 6.0% economic growth in the budget for 2024/25.
• The BoP is projected to remain in surplus, supporting overall economic stability.
• The target is to maintain foreign exchange reserves sufficient to cover at least 7 months of imports of goods and services.
• The growth rate of the broad money supply is projected to be limited to 12.0% for 2024/25.
• The NRB targets a growth rate of 12.5% in credit extended to the private sector.
• The NRB will manage the weighted average interbank rate as an operating target, aiming to keep it close to the policy rate.
• The NRB will implement measures to manage liquidity effectively in the banking system to support economic activities.
• The restriction on opening new BFIs is continued.

Fiscal Policy

Fiscal policy refers to the use of government spending and taxation to influence a country’s economic activity. It is a key tool used by governments to manage economic fluctuations, promote economic growth, and achieve specific economic objectives. Every financial year government presents a Budget showing the source of finance and the allocation of the budget.

Objectives of the Budget

The following are the objectives of the budget, 2024/25:

• To help the economy grow by spending money on things that create jobs and boost businesses.
• To plan how the government will earn money through taxes and other sources to pay for its activities.
• To ensure that people have access to important services like education, healthcare, and roads.
• To keep spending in check so that the government does not spend more money than it earns.
• To help those in need by funding programs that support low-income families and vulnerable groups.
• To create a stable environment where businesses and people can plan for the future without worrying about sudden changes.
• To provide quality service to all Nepali people.

Priority Area

• Investing in hospitals, clinics, and public health programs to improve the health and well-being of the population.
• Funding for schools, universities, and vocational training programs to enhance educational opportunities and skills development.
• Building and maintaining roads, bridges, public transportation, and utilities to support economic growth and improve connectivity.
• Programs aimed at supporting low-income families, the elderly, and vulnerable groups to reduce poverty and inequality.
• Initiatives to promote business growth, attract investment, and create jobs, including support for small and medium-sized enterprises (SMEs).
• Supporting farmers and agricultural development to ensure food security and boost rural economies.
• Funding for environmental protection, conservation efforts, and initiatives to combat climate change.
• Resources for law enforcement, emergency services, and disaster preparedness to ensure the safety of citizens.

Liberalization in Nepal

Liberalization is when a government reduces rules and restrictions on businesses and the economy to allow for more freedom and competition. This means making it easier for people and companies to trade, invest, and operate without too much government control.

In Nepal, liberalization has been an important part of the country’s economic development, especially since the early 1990s. This period marked a significant shift in the economic policies of the country, moving from a centrally planned economy to a more market-oriented approach.

Requirement of Liberalization

Role of the Government as Facilitator

The government should act as a facilitator rather than a regulator. This means creating an environment that encourages business growth by providing support, infrastructure, and services that help businesses thrive, rather than imposing excessive controls.

Increased Role of the Private Sector

Encouraging the private sector to take a leading role in the economy is crucial. This involves promoting entrepreneurship, allowing private companies to operate freely, and reducing government intervention in business operations.

Abolishing License Requirements

Removing unnecessary licensing requirements for businesses can help reduce bureaucratic hurdles. This allows entrepreneurs to start and operate businesses more easily, fostering innovation and competition.

Freedom in Business Decisions

Businesses should have the freedom to make their own decisions regarding production, pricing, and investment without excessive government interference. This autonomy encourages efficiency and responsiveness to market demands.

Removal of Restrictions

Eliminating restrictions on trade, investment, and business operations is essential. This includes reducing barriers to entry for new businesses and allowing for greater flexibility in operations.

Reduction of Tax Rates

Lowering tax rates can incentivize investment and consumption. A more favorable tax environment can attract both domestic and foreign investors, stimulating economic growth.

Simplification of Foreign Trade

Streamlining customs procedures and reducing tariffs can facilitate easier and more efficient international trade. This encourages exports and imports, contributing to economic growth.

Facilitate Foreign Direct Investment (FDI) and Technology Transfer

Creating a welcoming environment for foreign direct investment is crucial. This includes offering incentives for foreign investors and ensuring that there are mechanisms in place for technology transfer, which can enhance local capabilities and innovation.

Current Account and Capital Account Reform

Reforming the current account and capital account is necessary to allow for greater flexibility in foreign exchange transactions. This includes allowing for the free movement of capital and improving the balance of payments, which can enhance economic stability.

Internal/ External Liberalization

Liberalization may be viewed from two perspectives. They are internal and external liberalization.

Internal Liberalization

Financial Sector Reforms

Making changes in banks and financial services to make them better and more competitive. This includes allowing more private banks to open, improving services, and making it easier for people and businesses to get loans.

Fiscal Reforms

Adjusting how the government spends money and collects taxes. This means making sure the government uses its money wisely and collects enough to pay for its services.

Monetary Policy

The central bank’s actions to control how much money is in the economy and the interest rates (the cost of borrowing money). Good monetary policy helps keep prices stable and ensures there is enough money for growth.

One Window Policy

A system that allows businesses to handle all their paperwork and approvals in one place. This makes it easier and faster for people to start and run their businesses.

Removal of Subsidies

Stopping government financial support for certain products or industries. This encourages businesses to be more efficient and competitive without relying on help from the government.

Public Sector Reform

Making changes in government offices to improve how they work. This includes making sure public services are better and that government workers do their jobs well.

Insurance Sector Reform

Improving the insurance industry to make it more competitive and easier for people to use. This includes allowing more private insurance companies to enter the market and offering more choices for consumers.

Capital Market Reform

Making changes to the stock market and other financial markets to make them work better and attract more investors. This includes improving rules, making things clearer, and encouraging more companies to sell their shares.

External Liberalization

External liberalization involves making changes that help Nepal connect better with the global economy. Here are the main areas of external liberalization in Nepal:

Reforms in Trade Sector

Making changes to improve how Nepal trades with other countries. This includes reducing tariffs (taxes on imports), simplifying customs procedures, and encouraging exports to make it easier for businesses to sell their products abroad.

Reforms in Foreign Exchange

Adjusting the rules about how money is exchanged between different currencies. This helps businesses and individuals easily buy and sell foreign currencies, making international trade and travel smoother.

Current Account Reform

Changing the rules that govern the current account, which tracks money coming in and going out for trade in goods and services. This reform aims to make it easier for Nepal to manage its trade balance and ensure that it can pay for imports while earning from exports.

Capital Account Reform

Making changes to the capital account, which deals with money coming in and going out for investments. This includes allowing more foreign investment in Nepal and making it easier for Nepali investors to invest abroad. This helps attract more capital and supports economic growth.

Effects of Liberalization on the Financial and Capital Market Sectors

Liberalization can have significant impacts on both the financial sector and the capital market sectors in Nepal. Here are the effects of liberalization in these areas:

Financial Sector Reforms

Increased Competition: Liberalization leads to more banks and financial institutions entering the market. This competition can result in better services, lower fees, and more options for consumers and businesses.

Improved Access to Credit: With reforms, more people and businesses can access loans and credit. This helps stimulate economic growth as businesses can invest and expand, and individuals can finance their needs.

Better Financial Services: Financial sector reforms often lead to the introduction of new products and services, such as online banking and mobile payments, making it easier for people to manage their finances.

Stronger Regulatory Framework: Liberalization usually comes with improved regulations to ensure the stability and safety of the financial system. This helps build trust among consumers and investors.

Foreign Investment: Opening up the financial sector can attract foreign banks and investors, bringing in more capital and expertise, which can enhance the overall efficiency of the sector.

Capital Market Reforms

Increased Investment Opportunities: Capital market reforms can lead to more companies being listed on the stock exchange, providing investors with a wider range of investment options.

Greater Market Efficiency: Liberalization can improve the functioning of capital markets by enhancing transparency and reducing barriers to entry. This leads to more efficient pricing of stocks and bonds.

Attracting Foreign Investors: By making the capital market more accessible and appealing, liberalization can attract foreign investors, which can increase the amount of capital available for local businesses.

Development of Financial Instruments: Reforms can lead to the introduction of new financial products, such as derivatives and mutual funds, which can help investors diversify their portfolios and manage risks better.

Economic Growth: A well-functioning capital market can support economic growth by providing businesses with the funds they need to expand and innovate, ultimately leading to job creation and improved living standards.

Effects of Liberalization/ Emerging Business Environment in Nepal

Liberalization has led to significant changes in the business environment in Nepal. Here are the key effects:

Increased Private Investment in Core Businesses: Liberalization encourages more private sector investment in essential industries such as agriculture, manufacturing, and services, leading to economic growth and job creation.

Rise of Financial Institutions: The liberalized environment has led to the establishment of more banks and financial institutions, providing better access to credit and financial services for individuals and businesses.

Increase in Foreign Direct Investment (FDI): With improved policies and a more open economy, Nepal has seen an increase in foreign direct investment, bringing in capital, technology, and expertise from abroad.

Rise of Multinationals: Liberalization attracts multinational companies to enter the Nepali market, which can enhance competition, introduce new products, and improve service standards.

Rising Trade Deficit: As imports increase due to liberalization, Nepal may experience a rising trade deficit, where the value of imports exceeds that of exports, posing challenges for the economy.

Development of Capital Market: Liberalization has led to the growth of the capital market, providing businesses with more opportunities to raise funds through stock and bond markets, and offering investors more options.

Changing Role of the Government: The government’s role shifts from being a direct player in the economy to a facilitator, focusing on creating a conducive environment for business and investment rather than controlling industries.

Changing Marketplace Scenario: The business landscape becomes more competitive and dynamic, with new players entering the market and existing businesses adapting to changing consumer preferences and demands.

Growing Urban Population: Liberalization often leads to urbanization as people move to cities for better job opportunities, resulting in a growing urban population that drives demand for goods and services.

Rising Economic Agenda: The focus on economic growth and development becomes more pronounced, with policymakers prioritizing reforms that enhance productivity, investment, and overall economic performance.

Use of Modern Technologies: Businesses increasingly adopt modern technologies to improve efficiency, enhance productivity, and meet the demands of a more competitive market.

Integration to the World Economy: Liberalization helps Nepal integrate more into the global economy, allowing for greater trade, investment, and collaboration with international partners.

Shift Towards Service Industry: There is a noticeable shift toward the service sector, with growth in areas such as tourism, information technology, and financial services, contributing significantly to GDP.

Workforce Diversity: As businesses expand and attract talent from various backgrounds, the workforce becomes more diverse, bringing in different perspectives and skills that can drive innovation and growth.

Conclusion

In conclusion, liberalization in Nepal has changed the economy by making it more open and competitive. This has led to more private and foreign investments, the growth of banks and financial services, and the rise of multinational companies. While these changes have created jobs and improved access to money for businesses, challenges like a growing trade deficit remain. The government’s role has shifted to supporting businesses rather than controlling them. As Nepal continues to connect with the global economy, using new technologies and embracing a diverse workforce will be important for ongoing success. Overall, liberalization has laid a strong foundation for a more vibrant economy in Nepal.

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