Sunday, February 17, 2019

Nepal’s economy to grow by 6.5 per cent: IMF

Nepal’s economy has expanded by 6.3 per cent and headline inflation averaged 4.2 per cent – in the last fiscal year – held down by subdued food-price inflation, according to the International Monetary Fund (IMF).
But the growth is expected to reach 6.5 per cent in the current fiscal year 2018-19, supported by ongoing reconstruction, investment in hydro-power projects, and strong tourism-related activity. However, fiscal and credit policies are very expansionary leading to rising non-food inflation, a widening current account deficit, falling foreign exchange reserves, and a buildup of financial sector vulnerabilities, the IMF press note reads, adding that risks are tilted to the downside, related to the financial sector and a possible slowdown in remittances. "Executive directors commended the authorities on the pick-up in economic activity in Nepal, supported by greater political stability, more reliable electricity supply, and reconstruction activity." The directors also considered that the improved near-term outlook provides an opportunity to address macroeconomic and financial vulnerabilities and deep-seated structural weaknesses and boost prospects for long-term inclusive growth and the attainment of the Sustainable Development Goals (SDGs).
The directors noted that expansionary fiscal and credit policies are putting pressure on the domestic economy, through higher non-food inflation and a buildup of financial sector risks, and a wider current account deficit. They recommended a policy tightening in the near term, including through fiscal consolidation, to avoid an abrupt slowdown, and promote a more durable economic expansion.
They welcomed the progress made in putting in place a fiscal federalism framework. They noted that public debt remains low and encouraged continued efforts to strengthen tax administration and increase domestic revenue mobilisation. The directors observed that more needs to be done to ensure fiscal sustainability, make budgets more realistic and spending more efficient, and build implementation capacity. They agreed that with the devolution of responsibilities and resources to local and provincial levels, efforts should be focused on building policy implementation capacity and instituting a sound public financial management framework at the subnational level.
Directors considered that monetary policy should be tightened, including to support the exchange rate peg to the Indian rupee. They noted that the recently initiated review of the central bank act provides an important opportunity to strengthen the central bank’s operational autonomy and accountability.
The directors, however, encouraged a strengthening of macro-prudential policies alongside an acceleration of financial sector reforms to temper excessive credit growth. They concurred that banks should be encouraged to build additional capital and provisioning buffers against potential losses, and financial sector oversight and regulations should be further strengthened. They also encouraged the authorities to continue implementing the 2014 FSAP recommendations, and strengthening the AML/CFT regime in line with international best practices.
The IMF directors welcomed the authorities’ efforts to strengthen competition, generate a more conducive environment for investment, and reduce corruption. They called for swift implementation of the structural reform agenda, including revising public procurement laws and easing obstacles to firm entry and operations. They emphasised that increasing foreign direct investment, strengthening governance and institutions, and enhancing access to finance, particularly for the underserved population outside major cities, remain top priorities.
The executive board of the IMF – on February 8 – concluded the Article IV consultation with Nepal. Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the executive board.
As of December 2018, gross official foreign exchange reserves held by the Nepal Rastra Bank (NRB) stood at $8.3 billion, having declined by approximately $1.2 billion from the record set in January 2018.

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