In recent years in Nepal, the issue of coordination between financial policy and monetary policy has been raised time and again. There are three basic reasons for this: First- lack of understanding about the scope of finance policy and monetary policy, second- confusion in the private sector about the scope of monetary policy and financial sector management policy (Financial Sector Management Policy) and third- personal conflict that is seen from time to time between the leadership of the Ministry of Finance and the leadership of Nepal Rastra Bank i.e. lack of professionalism.

The basic function of the financial policy (budget) is to determine the size of government expenditure and government revenue and the budget deficit. The basic function of monetary policy is to determine how much money will flow into the economy. Its main objective is to maintain stability in the economy. The basic objective of monetary policy is to maintain economic stability, control inflation and control foreign exchange based on the country's economic growth goals and financial policy.

How much money will flow into the economy is determined by the size of government spending, revenue policy and the size of revenue and basically the size of the budget deficit. A rise in government spending and budget deficit poses a risk of inflation. In this case, the central bank adopts a somewhat stricter monetary policy to maintain stability in the economy.

When the revenue policy of the government is to raise more taxes and the budget deficit is less, then a flexible monetary policy is taken to increase the flow of money in the economy. It is also influenced by the national and international economic environment and scenario. In the context of Nepal, India's consumer inflation has also affected it. The central bank controls the money flow through policy rates and other measures.

Financial sector management policy deals with bank and financial sector management and regulation. The role of the Ministry of Finance on behalf of the Government of Nepal is the role of the Ministry of Finance in policy matters, while the operation and regulation work is done by the National Bank under the Act on Banks and Financial Institutions. Nepal's private sector seems to understand this as monetary policy. This is the reason why Nepal's monetary policy has suffered unnecessary infamy in recent days. Like working capital loan guidelines and credit limit disputes related to share trading. Which are basically regulatory matters. 

Another controversial issue in the recent days is the demand that Nepal Rastra Bank should intervene and reduce the interest rate of loans provided by commercial banks to the private sector. It has also been seen that the private sector is using its relationship with the government to exert pressure or exert direct pressure on the governor. The Central Bank sets the policy rate as a monetary instrument and determines the interest rate limit for transactions between Nepal Rastra Bank and Commercial Bank. Taking this as a signal, commercial banks set interest rates competitively. In India it is called the policy repo rate, in the US it is called the Federal Funds Rate and in the UK it is called the England Base Rate or the Official Wease Rate. 

Nepal Rastra Bank has currently put the interest rate corridor into use. In which the bank rate as the upper limit of the interest rate, the policy rate as the middle instrument and the deposit collection rate as the lower limit have been determined. Basically, based on the policy rate and other two rates, the commercial banks have been determining their base rate and the interest of the loan provided on that basis.

Coordination in achieving aggregate objectives depends on interactions between the government's budget deficit and its impact on monetary management. The stance of monetary policy affects the borrowing capacity of the government. Which can be done by reducing the cost of the loan through the interest rate or by expanding or shrinking the sources that can raise the loan.

On the other hand, the government's development strategy and its financial needs, i.e. the size of the debt it raises, create pressure on the autonomy of the monetary authority. In this case, the stance of monetary policy is taken by looking at the direction of the financial policy. This is the foundation of coordination. Such coordination is also happening in Nepal. There may be questions about the amount of its effectiveness. 

The monetary authority i.e. Nepal Rastra Bank submits a recommendation report to the Ministry of Finance before formulating the annual budget. Usually those suggestions are included in the budget. Nepal Rastra Bank takes the size of the budget deficit and the objectives of the financial policy as the basis for deciding the stance of the monetary policy. The global economic scenario and other external factors are also considered. The governor of Rashtra Bank stays in the hall of the Ministry of Finance during the meeting to finalize the budget statement. The score given by the governor regarding the inflation target is included in the budget statement. Despite the bitter relationship between the finance minister and the governor, this professional relationship has not been broken yet.

In terms of institutional and operational coordination, the sensitivity of one policy to another policy, the autonomy of the monetary authority or the freedom to decide and implement the monetary policy, the issue of controlling unwanted conflicts between the two institutions (financial authority and the monetary authority), the issue of controlling the deficit limit, the role of the central bank in the operation of the reserve fund, the center and operation of government debt, and the issue of coordination in the operational matters of monetary policy.

The National Bank Act and the rules and procedures made under it have specified institutional and operational coordination. Generally, one policy is sensitive to another. Nepal Rastra Bank is independent in formulating monetary policy. There is a provision to have a finance secretary in the board of directors of Nepal Rastra Bank. It has done institutional coordination. It is arranged that there will be a senior official member of Nepal Rastra Bank in the government's debt management committee chaired by the revenue secretary. 

Before the Public Debt Management Act, this committee was in Nepal Rastra Bank. It is arranged that the Economic Policy Analysis Division of the Ministry of Finance will be the chief representative in the Open Market Operation Committee established to implement the monetary policy. There is usually no disagreement in these three committees. It is natural to have a topical discussion. In some cases, apart from the problem created by personal egos at the leadership level, generally there is no problem in coordinating the institutional and operational aspects of these two policies.

What is fundamentally wrong in Nepal is the tendency of the political leadership to set the target of economic growth 2/3 percent higher than possible in the budget statement, the tendency to keep the revenue source and spending capacity higher than the expenditure limit and the revenue limit, and sometimes there is no complex problem in coordination between these two policies in Nepal except for the problem of ego seen at the leadership level of both organizations.