The International Monetary Fund (IMF) Executive Board has completed the fifth review under the Extended Credit Facility (ECF) Arrangement for Nepal, granting the country access to Special Drawing Rights (SDR) 31.4 million (approximately US$ 41.8 million). This brings total disbursements under the ECF for Nepal’s budget support to SDR 219.7 million (around US$ 289.1 million).
According to an IMF press statement issued on Friday, Nepal has made tangible progress in implementing reforms under the program, contributing to early signs of economic recovery while maintaining macroeconomic and financial stability and protecting vulnerable populations. The review was completed on March 12.
Economic Outlook and Challenges
Despite progress, Nepal’s economy continues to face challenges due to subdued domestic demand. The IMF projects moderate economic growth of 4.2 percent in FY 2024/25, supported by increased capital spending on reconstruction, an accommodative monetary policy stance, and additional hydropower generation. The September 2024 floods caused disruptions, but post-flood supply-side pressures are expected to be short-lived. Inflation is projected to remain close to Nepal Rastra Bank’s target of about 5 percent.
The IMF emphasized the importance of mobilizing revenues to sustain development spending and fiscal stability. However, key downside risks include under-execution of capital spending, financial sector vulnerabilities, and political instability.
Policy Recommendations
IMF Executive Directors recommended a gradual and growth-friendly fiscal consolidation to stabilize debt. They welcomed Nepal’s newly adopted Domestic Revenue Mobilization Strategy to support higher capital spending and protect vulnerable communities. Strengthening public investment management and advancing fiscal transparency were also highlighted as essential for improving capital spending execution and containing fiscal risks.
Monetary policy should remain cautious and data-driven to maintain price and external stability, the IMF noted. Additionally, Directors stressed the importance of amending the Nepal Rastra Bank Act to enhance its governance, independence, and accountability.
Addressing financial sector vulnerabilities is also a priority, with the IMF urging Nepal to align financial sector regulations with international standards, conduct a Loan Portfolio Review, and develop a strategy to tackle problematic savings and credit cooperatives. In light of Nepal’s recent grey-listing by the Financial Action Task Force (FATF), the IMF stressed the urgency of strengthening the country’s anti-money laundering (AML) and counter-financing of terrorism (CFT) frameworks.
Structural Reforms for Sustainable Growth
The IMF called for ambitious structural reforms to foster sustainable and inclusive growth. It recommended reducing the high cost of doing business, enhancing the investment climate, improving governance, and strengthening anti-corruption institutions. Given Nepal’s vulnerability to natural disasters, the IMF also underscored the importance of improving resilience to climate shocks.
The completion of the fifth ECF review signals continued IMF support for Nepal’s economic recovery efforts while emphasizing the need for further reforms to ensure long-term financial and macroeconomic stability.
