A study on financial repression in the context of Nepal

Abstract

American Economists Ronald McKinnon and Edward Shaw in 1973 labelled the set of well-intended but counterproductive financial policy as financial repression (FR) in relation to slower development of South Korea. Major tools for financially repressive policy are interest control, capital control, foreign exchange control, forced reserve requirement and appropriation of credit. They have huge implication in savings, consumption, and investment and government finance from macroeconomic perspective. For example, the forced interest rate below market clearing rate may increase demand of loan causing imbalance with supply which may bring the uneconomic rationing of loans and may cause inefficiency and dead weight loss. It may distribute the financial welfare from savers to burrowers. This study tries to study the FR policy tools from the perspective of the development of economic theories and policies globally from different angle: for and against. Also, this study tries to analyze the Nepalese macroeconomic indicators. It mainly focuses in three parts: the effect of FR in government finance, relation of FR to economic growth and finally the channels (saving-investment or volume channel and efficiency channel). Since, the present study is only indicative, simple tools of analysis such as time series plot, correlation, lagged correlation were used. The findings revealed that the government revenue is positively correlated with FR policy tools. Saving and investment are not very well correlated with FR policy tools. The reason may be the price signal distortion due to capital and foreign exchange control. Efficiency of investment is negatively correlated to FR policy tools such as interest rate and money supply. In the existing scenario, long term growth may have relation to long term growth through efficiency channel. Almost all of government practices includes some form of FR for the purpose of optimization of revenue, to mitigate the future risk of default and to direct financial resources in the desired directions. As compared to tax policy for the government, the financial policy tools are intricate, complex and less debated, but their effect are long term in nature. So, it is very important that the effect of financial policies should be examined periodically to ensure that they do not create FR and adversely affect savinginvestment channels and their efficiencies.