IMF team in Kathmandu to discuss ECF, petro-price adjustment

A four-member International Monetary Fund (IMF) team led by deputy director John Nelems arrived here in Kathmandu today to discuss mainly Extended Credit Facility (ECF) that Nepal has been negotiating since some time.
The team is also expected to hold discussion with the finance ministry and central bank on Rapid Credit Facility (RCF) that it had provided Nepal recently, adjustment of petroleum prices and regular budget.
The adjustment of petroleum prices has always been a key issue that the IMF has been pushing.Similarly, Nepal has been negotiating with IMF for ECF to achieve long-term favourable Balance of Payment (BoP) that has been witnessing deficit since last fiscal year.IMF provides financial assistance to the member countries on affordable terms to meet their BoP needs, especially when they can not meet their international payment obligations.As per ECF, IMF will provide loans equivalent to 300 per cent to 450 per cent of the allocated quota for Nepal depending on negotiation.
In the last fiscal year, Nepal's BoP remained deficit forcing the country to take IMF assistance to meet the obligation.
The IMF board had discussed about Nepal on May 28, 2010 on the report presented by the team that visited Nepal last June for Article IV Consultation and request for disbursement under the Rapid Credit Facility (RCF).
The IMF has mentioned that Nepal is experiencing a significant decline in exports, a sharp slowdown in remittances and a worsening of economic confidence, which has contributed to a large deterioration in the current account balance and a decline in international reserves as well as a liquidity crunch in the banking sector. The RCF for Nepal was aimed at addressing external and financial risks and helping catalyse possible donor support.
The IMF board has opined that the arrangement under the RCF could be helpful in cushioning the shock from the global crisis and boosting confidence. It has also hoped that the RCF would serve as a bridge to a programme addressing Nepal’s structural challenges that could be supported by an arrangement under the Extended Credit Facility (ECF).
Though, financing under the RCF carries a zero interest rate, has a grace period of five-and-a-half years, and a final maturity of 10 years, ECF comes with conditions. "If the BoP deficit is structural, IMF will implement structural adjustment process in order to eliminate any chances of future deficit," according to the central bank.
Meanwhile, the IMF board has also approved Resolution of Quota and Reform doubling the quotas to approximately SDR 476.8 billion along with a major realignment of quota shares among members.
According to the decision, Nepal’s allocated quota has been increased to SDR 1.56 million from SDR 71.3 million. Each IMF member country is assigned a quota, based broadly on its relative position in the global economy.
During it lst review the IMF said that the Nepal Rastra Bank (NRB) has taken steps to tighten monetary policy through, inter alia, raising the Standing Liquidity Facility rate.
It had also praised the authorities move to introduce macro prudential measures to limit banks’ liquidity risk and exposure to the real estate sector, imposing a partial bank licensing moratorium.