Parliamentary Committee Undermines Nepal Rastra Bank Autonomy

Nepal's financial sector's backbone, Nepal Rastra Bank's institutional autonomy and professional impartiality, has once again raised serious questions. The recent agreements made by the Finance Committee under the House of Representatives, formed to amend the 'Nepal Rastra Bank Act, 2058', appear to be a scheme to keep the central bank under political and administrative pressure rather than making it autonomous and empowered. This will certainly deal a serious blow to the central bank's institutional independence and professional impartiality. In fact, the main background of this amendment process was the agreement made in the past while taking the Extended Credit Facility (ECF) from the International Monetary Fund (IMF). The main subject of that agreement was to make the Rastra Bank free from political interference, reduce the direct influence of the Ministry of Finance, and make financial sector regulation transparent. However, by reversing the reformist proposals presented in the bill, the Finance Committee has attempted to make the central bank a mere department of the Ministry of Finance or a shadow body similar to the Securities Board and the Insurance Committee. An attempt has been made here to discuss some inconsistent and controversial issues that have come to light through various means: Leadership term reduction and reappointment issue The intention is to destabilize the leadership by hanging the political noose or sword of leadership term reduction and reappointment. According to the new amendment of the bill, the current 5-year uninterrupted term of the Governor, Deputy Governor, and Board of Directors members has been reduced to 3 years, and a provision for reappointment for an additional 2 years 'based on performance' has been added. This will surely increase instability and political pressure. Like periodic plans and budgets, the central bank's leadership requires a full 5-year term for long-term policy formulation. Reducing the term to 3 years will disrupt policy continuity. The excuse of performance evaluation for an additional 2-year term will prevent the central bank's top officials from taking any strict monetary or regulatory actions against the wishes of the government or ruling politicians. This ensures the risk of making the Governor and Deputy Governor political pawns and creates a compulsion for the central bank's leadership to act on favor. Executive directors who have spent two and a half decades within the Rastra Bank and become experts are reluctant to take the position of Deputy Governor after the term was reduced to 3 years. This adds frustration to internal manpower and lowers the organizational morale within the institution. Relaxed eligibility criteria and conflict of interest issue The Finance Committee has made the professional qualification and experience criteria required for the top leadership of the central bank extremely relaxed. This has a high possibility of causing 'Regulatory Capture'. There has been a significant reduction in experience criteria. The minimum limit of 10 years of work experience proposed for the post of Governor has been reduced to 4 years. Such a short experience is not enough to run a professional institution like the central bank. On the other hand, the door has been opened for current or recently retired Chief Executive Officers (CEOs) of private and commercial banks to become Governor and Director of Rastra Bank within two years of retirement. This creates a conflict of interest when regulating commercial banks where they previously worked or held shares, and increases the possibility of irregularities in the financial system. Issue of fiscal policy control over monetary policy The primary responsibility of the central bank is to maintain price stability, control inflation, and manage foreign exchange reserves. The government's job is to collect revenue and spend on development. The new amendment adds the objective of 'assisting in the implementation of the government's economic policy without affecting the maintenance of price stability'. This forces the Rastra Bank to become a supporter of the government's populist and vote-centric fiscal policy. The original draft of the bill had a proposal to remove the Finance Secretary from the Board of Directors and close legal loopholes that would allow the government to exert direct pressure and directives. However, the committee has removed that provision. Issues affecting international and institutional credibility Amending the Act contrary to the terms of the agreement made by Nepal with the IMF will lead to the country's credibility in the international financial forum becoming unreliable and weak. In times of foreign exchange crisis or balance of payments deficit, assistance or loan facilities from international organizations may be hindered. If these amendments made by the Parliamentary Finance Committee are passed by the parliament as they are, the legal, functional, and financial autonomy of Nepal Rastra Bank will be completely समाप्त. Financial sector stability is not possible without an autonomous central bank. Therefore, the parliament must reconsider these controversial issues and protect the autonomy of Nepal Rastra Bank. This will be in the long-term economic interest of the country.