A team from International Monetary Fund (IMF) held discussions with a broad range of stakeholders in the context of the 2023 Article IV consultation including Nepal’s GDP and the combined first and second reviews of the authorities’ economic programme supported by the IMF’s Extended Credit Facility (ECF).
The team led by Jarkko Turunen, Deputy Division Chief and Mission Chief for Cambodia in the Asia and Pacific Department (APD) of IMF visited Kathmandu from February 15 to 28.
At the end of the mission, Turunen issued a statement that said, “The Nepali authorities and IMF staff conducted discussions for the 2023 Article IV consultations and reached staff-level agreement on the policies and reforms needed to complete the combined first and second reviews under the ECF including Nepal’s GDP. The agreement is subject to approval by the Executive Board. Completion will make available special drawing rights (SDR) 39.20 million (about $52.2 million), bringing total disbursements under the ECF thus far to SDR 177.70 million (about $156.6million), from a total of SDR 282.42 million (about $375.8 million).
Further IMF Deputy Division Chief and Mission Chief Turunen stated, “Despite a challenging global and domestic environment last year, including the impact of Russia’s war in Ukraine, Nepal continued to make progress in GDP with the implementation of the ECF-supported programme. Notable achievements include the external audit of the Nepal Rastra Bank (NRB) with the assistance of international auditors – in line with international best practices, publication of reports on both Covid-related spending and custom exemptions to enhance transparency, drafting of amendments to bank asset classification regulations, and strengthening bank supervision by launching the donor-supported Supervision Information System. IMF staff welcomed the progress made towards implementing other structural reforms in the authorities’ policy agenda and discussed priorities looking forward.”
The statement read, “The Nepali authorities have taken decisive actions to maintain a stable macroeconomic environment. The much-needed monetary policy tightening last year, together with the gradual unwinding of Covid support measures, helped moderate credit growth and contributed to the moderation of inflation stemming from the global commodity price shock caused by the Ukraine war. As a result, and in the context of resilient remittances, external pressures eased, and international reserves stabilised in the first half of FY2022/23. The temporary import restrictions, mostly aimed at reducing the rapid post-pandemic growth of imports, were removed. The slowdown in imports nevertheless dampened tax collections during the first half of FY2022/2023, which has required expenditure rationalisation in the mid-year budget review to preserve fiscal discipline and debt sustainability. Bank asset quality has deteriorated, reflecting a decline in the repayment capacity of borrowers due to higher lending rates and rising leverage, a concern that is moderated by banks’ capital-adequacy ratios that are above the regulatory minima.”
“Real GDP growth is projected to soften to 4.4% in current FY2022/23 but is supported by the ongoing recovery of tourism, strong agriculture sector performance in the first half of the year and resilient remittances. However, the global outlook remains subject to an unusually high level of uncertainty. Nepal remains vulnerable to shocks, from volatile and higher global commodity prices and from natural disasters and weather variability. Accordingly, cautious monetary policy remains appropriate to bring the still elevated inflation down towards the NRB’s 7% target and to allow the economy to grow without placing undue pressure on international reserves. The government further aims to address near-term fiscal pressure by rationalizing expenditure. Discussions recognised the need to protect high-quality infrastructure expenditure and social spending.”
“Nepal remains committed to the policies and reforms envisaged in the ECF-supported programme, in particular,
(i) formulating a comprehensive revenue mobilisation strategy, aimed at enhancing tax collection and making room for priority spending;
(ii) strengthening the management of fiscal risks, especially those arising from public enterprises, by developing systems for their prompt identification and monitoring;
(iii) improving efficiency and transparency of public investment spending;
(iv) continuing to advance reforms on banking regulations and supervision and ensuring bank asset quality; and
(v) further strengthening NRB’s governance by amending the NRB Act in line with best international practices. In addition, Nepal remains committed to implementing recommendations from the ongoing AML/CFT Mutual Evaluation conducted by the Asia/Pacific Group.
“The ECF-supported programme will help Nepal’s economy to remain on a sustainable path over the medium term with the economy projected to grow at around 5% and inflation at around 6%, while maintaining adequate levels of international reserves and keeping public debt at a sustainable level. The authorities and IMF staff agreed that priority should be given to achieving a fiscal deficit that ensures debt sustainability while securing additional concessional financing and enhancing debt management. Monetary policy should maintain a cautious and data-driven stance supported by macroprudential measures. This will help avoid large boom-bust credit cycles, which can create financial sector instability and are not supportive of sustainable growth. Discussions recognised the need for the NRB to ensure appropriate reclassification of loans and close monitoring of the impact of a potential deterioration in repayment capacity of borrowers.
“Discussions also covered the need for Nepal to adopt an ambitious structural reform agenda to help establish a sustainable and inclusive long-term growth path. Reducing the cost of doing business and barriers to FDI would support growth potential, especially in sectors such as high-value agricultural products, information technology, energy, and tourism. Reforms to develop financial instruments tailored to migrant workers, promoting better access to finance and improving financial literacy can enhance financial inclusion. Further progress with digitalisation and strengthening of anti-corruption institutions would improve provision of public goods. Better-targeted social assistance, investing in resilient infrastructure and boosting agricultural productivity are key to reducing poverty, and addressing Nepal’s vulnerability to food security risks related to climate change and natural disasters. Enhanced transparency and financial oversight of public enterprises can reduce fiscal risks while promoting their operational efficiency.
The IMF team expressed gratitude to the Nepali authorities for their hospitality and for open and constructive discussions to discuss on GDP and overall growth. The team met with Prime Minister Pushpa Kamal Dahal, Deputy Prime Minister and former Minister for Finance Bishnu Prasad Paudel, NRB Governor Maha Prasad Adhikari, National Planning Commission Vice-Chairman Min Bahadur Shrestha, other senior government and NRB officials, development partners and representatives of the business community.
