IMF estimates 4.5 per cent growth this fiscal year

The International Monetary Fund (IMF) has projected higher economic growth – at 4.5 per cent from earlier projection of four per cent in April in its flagship publication IMF’s World Economic Outlook 2013 – for the current fiscal year 2013-14 due to favourable monsoon and speedy implementation process of budgetary programmes.

In last fiscal year, growth decelerated due to weak agricultural activity and delayed approval of the budget, which impeded capital expenditure and, together with strong revenue growth, led to a fiscal surplus.
“The degree of economic growth depends on the progress in capital investment in infrastructure sector, especially on roads and hydropower sectors,” said senior resident representative of IMF for Nepal Thomas J Richardson, during a press conference here today.

On the back of minimum utilisation of remittance to boost economic activities, Richardson also suggested that the earning of Nepali migrant workers should be channelised to productive sectors.
The IMF mission led by its senior official Alexander Pitt also consulted with finance minister Shankar Prasad Koirala, governor of the central bank Dr Yubraj Khatiwada and other senior government officials, National Planning Commission (NPC) vice chair Rabindra Kumar Shakya, finance secretary Shanta Raj Subedi and other senior officials, apart from  private sector representatives and development partners during the visit that started on September 26 and ended yesterday.

Inflation to rise

“Inflationary pressures are rising due to the depreciation of Nepali rupee against US dollar and continued strong credit growth,” IMF said in its press note, estimating that weakening value of Nepali currency against US dollar has put pressure on price of food commodities.

However, Nepal should maintain existing peg of Nepali rupees with Indian rupees, it suggested, adding that the peg continues to benefit Nepal in view of its close economic relationship with India. “Moreover, the recent depreciation creates an opportunity to benefit from enhanced international competitiveness.”
Despite Nepal’s better prospects, the mission indicated that key risks to the economic outlook emanate from recent developments in India, the major trading partner and closest neighbour of Nepal.
But the measures to address the impact will be different from India as Nepal’s main problem is low production,” said chief of the research department at the central bank Min Bahadur Shrestha, on the occasion. “The central bank had been implementing policies that facilitate growth such as requiring banks to invest at least 12 per cent of their total lending in the farm and hydropower sectors and providing refinance facility at reduced interest rates for productive sector lending,” he added.

“The protracted slowdown in India is likely to bring adverse effects on the economic growth to Nepal,” the mission said.
 
Capital flight possible
Tighter monetary policy in India and excess liquidity in Nepal had widened the gap between banking interest rates in the two countries, which could increase financial sector vulnerabilities, the IMF Article IV consultation mission said, also recommending a tighter monetary condition to reduce the gap between the interest rates in the two countries as a tighter monetary policy in India has kept interest rates at a high level while excess liquidity in Nepal has forced banks here to bring down interest rates. “It has been observed that whenever interest rates on deposits fall in Nepal, capital flight to India takes place.”

Scrap petroleum subsidy
In near term, the rupee depreciation is raising price pressures and exacerbating the already high losses of the state-owned Nepal Oil Corporation,” Richardson said, as always suggesting that NOC should adopt the automatic price adjustment of the petroleum products as practiced in the southern neighbor and lift the subsidy that has failed to serve needy people or poor of the remote villages and highly benefiting the rich people in urban areas.

“The government should have spent the money on essential sectors like education, health and hydropower instead of subsidising the fossil fuels for the urbanites,” he added.
The mission meant to assess recent macroeconomic developments and progress on key reforms in the financial sector, public financial management and tax administration also voiced concern over the mounting financial risk due to practices of same person being banker and entrepreneur. “One cannot become both banker and entrepreneur, as it creates conflict of interest,” Richardson added.

IMF, World Bank to conduct Financial Sector Assessment 

Likewise, the IMF, in collaboration with World Bank, is conducting Financial Sector Assessment (FSA) in November for a comprehensive and in-depth analysis of financial sector. Richardson said that IMF is conducting first ever financial assessment in Nepal. “A team of experts will arrive Nepal in November for FSA,” he said adding that FSA is a key instrument of IMF’s surveillance and provides input for consultation. 
According to Richardson, the assessment will also include Financial System Stability Assessment that provides technical notes, including additional background information and analyses, and detailed assessments of standard of financial sector in Nepal. 
While the financial sector’s health has improved, the IMF mission considers that risks are still significant. “Asset quality remains a concern, while connected lending and conflicts of interest are widespread, and the fragmentation of the banking system makes supervision difficult,” it said.

“The regular Article IV consultation visit is expected to take place in April or May of 2014, following a joint World Bank – IMF financial sector assessment scheduled for November 2013–February 2014.”