The High-Level Economic Reforms Recommendation Commission, led by former Finance Secretary Rameshore Khanal, has submitted its final report to the Ministry of Finance, offering an in-depth analysis of Nepal’s economic challenges and a sweeping set of proposals to stimulate recovery and long-term growth. The commission was formed on October 7, 2024, and began its work on October 23. It had earlier submitted an interim report to Deputy Prime Minister and Finance Minister Bishnu Paudel on December 9.
The report outlines that prior to the COVID-19 pandemic, Nepal’s economy was growing at an average annual rate of 7.5 percent, driven by post-earthquake reconstruction, political ‘stability’ with the formation of local and provincial governments following the promulgation of the 2015 constitution. However, the report cautions that these growth rates were built on fragile foundations, casting doubt on their long-term sustainability.
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Following the Covid pandemic, Nepal saw a relatively swift economic revival. However, a delay in phasing out emergency monetary measures, poor implementation of necessary policies, underwhelming government spending, and import restrictions gave rise to new economic issues, the report says. The economy has since shown signs of stagnation for the past two fiscal years.
The report attributes the slowdown to weakened aggregate demand caused by declining consumption and investment, lower income growth, a downturn in the real estate market, widespread financial misconduct in cooperatives, delays in government decision-making, and a deteriorating business climate.
To reverse the downturn, the commission emphasizes that addressing demand-side issues alone is insufficient. It calls for far-reaching structural reforms to reduce production costs, enhance competitiveness, and attract investment. These reforms are built on six key principles: ending economic stagnation, creating new economic opportunities, restoring trust in institutions, ensuring sustainable use of natural resources, building economic resilience, and achieving high growth with macroeconomic stability.
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In its interim report, the commission made several short-term policy recommendations aimed at immediate economic relief. These include clearing all government dues to contractors and subsidy arrears, providing targeted credit support to distressed borrowers, and establishing a public-private asset management company to deal with non-performing assets. Other recommendations included introducing a Commercial Credit Act, offering temporary relief to small depositors affected by the cooperative sector crisis, and amending the Cooperative Act to strengthen governance and oversight.
To boost capital expenditure, the commission proposed deploying a task force to monitor projects exceeding Rs 100 million and fast-tracking reconstruction in disaster-hit areas. It also urged expedited compensation for land acquisition, relaxed customs provisions for Indian tourists and wedding parties, and reforms in vehicle tax collection to prevent unnecessary issues on highways.
The report also presents a roadmap for monetary and fiscal reform. It calls for a more active use of the interest rate corridor to keep interbank lending rates aligned with policy rates, tighter liquidity management to reduce volatility, and better coordination of exchange rate policies with monetary objectives.
Instead of a fixed single-digit inflation target, the commission recommends a flexible range of 4 to 6 percent, and maintaining foreign reserves adequate to cover five to seven months of imports.
In terms of interest rate policy, the commission suggests providing fixed-rate loans to productive sectors and first-time homebuyers, reducing banking system operational costs, maintaining positive real interest rates on deposits, and setting loan interest rates in the single or low double-digit range. It further recommends developing bond markets and expanding access to alternative credit sources to reduce reliance on informal finance.
To control inflation, the commission urges that price stability be established as the core objective of monetary policy. During inflationary periods, it advises a contractionary fiscal stance—lowering government spending and cutting indirect taxes. Production costs should be brought down by ensuring affordable electricity and accessible land, while black market activity must be curbed and market supply chains safeguarded.
The report also addresses exchange rate policy, warning that Nepal’s fixed peg with the Indian rupee may become unsustainable in the face of a widening trade deficit and potential capital account liberalization. It recommends beginning discussions and research on alternative exchange rate frameworks while improving infrastructure, human capital, and productivity to enhance competitiveness. Strengthening the Nepali currency, it argues, will require effective monetary and fiscal management, promotion of exports, import substitution, and preventing real exchange rate depreciation through low inflation and improved productivity.
