IMF paints bleak economic picture

The International Monetary Fund (IMF) -- apart from painting a bleak picture of the economy and lowering the real GDP growth to three per cent -- has cautiously warned against the rising risks in the domestic financial sector.
Though, the mission welcomed the central bank's recent directives on credit-to-deposit ratios, loan to value ratios, curb on real estate exposure, and reintroduction of Statutory Liquidity ratio (SLR), it also warned that risks in the financial sector have been building up and need to be addressed urgently.
"The financial system needs to adapt to an environment of slower growth and is likely to see deteriorating asset quality," suggested the mission concluding its Article IV Consultation discussion visit here today. "Appointing a new governor, who can provide strong and stable leadership for the central bank is urgent," said Laura Papi, the team leader of the IMF mission that blamed the accomodative monetary policy, weak supervision, and proliferation of financial institutions for rapidly increase in asset prices and overextension of banks.
"The macro-economic outlook is challenging," the mission said adding that after expanding by 4.7 per cent in the fiscal year 2008-09, the real GDP growth is expected to decelerate to three per cent in the current fiscal year due to poor monsoon, slowdown in remittance inflows and tighter monetary conditions.
Macroeconomic stability has been maintained in past years but the global crisis is having delayed impact on domestic economy and exposing its structural weakness, according to the mission. "However, Nepal wil recover from 2010-11," she added.
"High remittance has resulted in rising forex reserves despite lacklustre export performances, but the slowdown in the remittance inflow and rising imports have hit the forex reserve significantly in the recent months. Though the reserve has stabilised in recent weeks, the situation still remains fragile," the Fund warned.
It has also projected the current account deficit to about two per cent of GDP due to slowdown in remittance inflow and exports contraction.
"Revenue collection has been impressive in the past few years but expenditure should be oriented more towards investement that requires enhancing implementation capacity," it hsa suggested.
The interest rates needs to be maintained above those prevalling in India and the Nepal Rastra Bank (NRB) liquidity management needs to be be strenghtened, the Fund said. "When a general liquidity injection is not needed for the system, liquidity provision to sound individual banks with liquidity shortages should take place at present rates or at the bank rate under heightened supervision."
The team has, however, also suggested the government to tackle structural problems to achieve higher growth. "While Nepal's potential is high, progress is required in addressing the poor business climate, power shortage, infrastructural needs, weak governance and difficult labour relations apart from political stability and improved security."