Finance Sector Reform in Nepal - What Works, What Doesn’t

Abstract

"Nepal is a small landlocked country with a per capita gross national income of $700 in 2012. Despite the small size of its economy, Nepal has a relatively diversified finance sector. Before reaching its current state, the finance sector went through two major reform programs. The first reform program began in 1985 when the country faced an economic crisis, which prompted the government to initiate a structural adjustment program with the International Monetary Fund. The second reform program was initiated in 2002 and was trigged by a political crisis—in particular the Maoist insurgencies in the late 1990s—which compelled the Government of Nepal to embark on broader economic reforms. International development agencies played a role in these reforms. Overall, the reform programs contributed to the finance sector’s growth and improved governance. The government decided to restructure and privatize the three major state-owned banks: Agricultural Development Bank Limited, Nepal Bank Limited, and Rastriya Banijya Bank. However, privatization of these state-owned banks has yet to be completed. Nepal Rastra Bank’s supervisory capacity has generally improved, but its independence and enforcing authority is still weak. The report identifies key success factors and constraints in Nepal’s finance sector reforms. It finds continuous donor engagement and dialogues, strengthening of the central bank’s independence, and maintenance of sound finance sector policies to be key for successful reform outcomes. "