Impact of Financial Policy Reforms on Financial Development and Economic Growth in Nepal

Abstract

This paper attempts to analyze the impact of policy reforms on financial development and economic growth in Nepal by employing the annual data spanning from 1965 to 2009. Based on the Augmented Dickey Fuller test and exogenous break test we examine the impact of policy reforms. Findings tell that all variables except domestic credit are non-stationary at the level. When time series properties of variables that help to detect the impact of policy reforms are examined with a structural break, only economic growth experienced a shock, growing positively after the liberalization. Similarly, domestic credit provided by banks experienced negative growth, and it decreased in pace after policy reforms, which implies that the role of government declined after the liberalization. However, there is no impact of policy reforms on some of the indicators. Some problems in the banking sector, such as inadequate expansion of commercial banks and their branches in the rural non-monetized sector, non-performing loans that discouraged credit allocation, and so on, may be the reasons policy reforms for financial development were ineffective.

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