Central bank independence refers to its ability to formulate and execute policies without undue influences. There are plenty of arguments in favour of central bank independence. The most important one is maintaining price stability. Various empirical studies have concluded that central banks with more independence tend to produce better results in terms of price stability without compromising on economic growth. Second, it is also believed that independent central banks reduce the scope of monetisation of government deficits. If the government controls the central bank, there is a strong chance that its money-printing powers will be abused to help finance the budget deficit.

Such undue political influence may tarnish the central bank's inflation-fighting credibility too. Moreover, an appropriate degree of independence is also important from the regulatory perspective. More independent central banks can maintain financial stability through prudent regulation and supervision of banks and financial institutions without being influenced by political pressure or lobbying.

Level of independence

Various scholars have prescribed different ways to measure the level of independence of a central bank. They can be grouped into two broad categories—de jure and de facto measures. De jure measures give formal or statutory independence which is stipulated or guaranteed by legislation. It relies on the charter of the central bank. However, the independence granted by the charter may not coincide with actual independence due to various reasons, for example, laws may be incomplete. This provides room for interpretation and interference by other stakeholders hindering its actual implementation. Even if the law is clear and complete, poor compliance with it may affect actual independence. Besides, various structural issues may also affect the actual independence of a central bank. Thus, there is a practice to compute de facto measures of central bank independence to assess the actual level of independence.

While talking about central bank independence in the context of Nepal, legislative reforms initiated in the early 2000s provided some important output. From the de jure perspective, Nepal's central bank achieved a significant level of independence after the promulgation of the Nepal Rastra Bank Act 2002. The act has explicitly mentioned the objectives of the central bank. It has ensured a fixed tenure of five years for central bank governors, insulating them from threats that may arise due to political instability.

There are provisions limiting the credit that can be given to the government to prevent it from borrowing excessively: The government cannot get an overdraft from Nepal Rastra Bank exceeding 5 percent of the revenue income in the preceding fiscal year. The total amount of debt bonds purchased by Nepal Rastra Bank from the government and taken into its ownership shall not be more than 10 percent of the revenue income of the preceding fiscal year. The Nepal Rastra Bank Act 2002 has given financial independence to the central bank by granting authority to prepare and execute its own budget. The act has also enhanced accountability, lender of last resort functions and foreign exchange related rights for Nepal Rastra Bank.

From the de facto perspective too, the level of independence enjoyed by Nepal Rastra Bank has improved after 2002. Due to the strong protection provided by the charter, the turnover rate of the central bank governor has become relatively stable. The political vulnerability index, another popular method of assessing de facto independence, also seemed to be lower after 2002.

Although facts and data depict that central bank independence in Nepal is improving, guarding it is not free from challenges. Globally, central bank independence is being challenged after the global financial crisis, and Nepal will not be an exception. Thus it is imperative to act seriously to guard the independence granted by law. Enhancing accountability could be a good strategy in this direction for Nepal Rastra Bank as accountability and independence are considered to be two sides of the same coin. Moreover, being a public institution, Nepal Rastra Bank should be accountable to the people. In fact, Nepal Rastra Bank is practicing accountability by promoting a certain degree of transparency in various areas, for example, by publicising its financial statement, policies and other documents.

Maintaining transparency

However, there is room for improvement. Nepal Rastra Bank can improve in maintaining transparency in its governance, policies, operations, outcomes and official relations, as prescribed by the International Monetary Fund. Nepal Rastra Bank can also play a more proactive role in increasing access to finance, financial consumer protection, financial education and grievance handling issues. Moreover, the central bank should play a more pivotal role in increasing the share of the financial sector in the country's economic growth. Such activities will enhance its credibility and effectiveness which ultimately helps to nurture its independence.

Central bank independence is not and should not be a matter of interest for Nepal Rastra Bank only. All the stakeholders should be serious in guarding the independence of the central bank as a weak monetary authority is not good for the country. However, the onus is on Nepal Rastra Bank to nurture and guard its independence by enhancing central bank governance, transparency and accountability.

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