The Executive Board of the International Monetary Fund (IMF) on Tuesday completed the fourth review under the four-year Extended Credit Facility (ECF) for Nepal, allowing the authorities to withdraw the equivalent of SDR 31.4 million (about $41.3 million), which is approximately Rs 5.51 billion.
This brings total disbursements under the ECF for budget support thus far to SDR 188.3 million (about $247.7 million).
The ECF arrangement for Nepal was approved by the Executive Board on January 12, 2022 for SDR 282.42 million (180 per cent of quota or about $371.6 million).
Nepal has made good progress with implementation of the programme, which has helped mitigate the impact of the pandemic and global shocks on economic activity, protect vulnerable groups, and preserve macroeconomic and financial stability, a press note issued by the IMF reads.
The programme is also helping to catalyse additional financing from Nepal’s development partners.
The economy continues to face challenges as growth, projected around 3 per cent in fiscal year 2023-24, remains below potential in the context of subdued domestic demand and post-pandemic balance sheet repairs, it reads, adding that economic activity is expected to pick up with growth reaching 4.9 per cent in the fiscal year 2024-25, supported by stronger domestic demand. "The cautiously accommodative monetary policy stance, planned increase in capital expenditure in the fiscal year 2024-25 budget, additional hydropower generation, and a continued increase in tourist arrivals are expected to boost domestic demand and growth."
Inflation is expected to remain within the Nepal Rastra Bank’s (NRB) target ceiling of 5.5 per cent, it adds.
However, the IMF warns of domestic risks dominating the outlook.
"Failure to raise the execution rate of capital projects would deprive the economy of much-needed stimulus and weigh on growth," it warns, adding that fragile political stability could disrupt policy continuity and reform implementation. "Intensification of financial sector vulnerabilities such as a further rise in NPLs or more failures of cooperative lenders could endanger banking system soundness."
Externally, high commodity prices could slow the recovery in energy-intensive sectors. Nepal remains vulnerable to natural disasters.
“Nepal has made important strides on its economic reform agenda," said deputy managing director and acting chair Bo Li, following the Executive Board discussion.
"Decisive actions in monetary policy, bank regulation and rolling off Covid support policies played a major role in overcoming urgent balance of payments pressure in fiscal year 2021-22," Li said, adding that reserves continue to rise without the need to use distortive import restrictions. "Fiscal discipline was maintained in fiscal year 2022-23 and so far in fiscal year 2023-24, despite revenue shortfalls. "Bank supervision and regulation have improved with the rolling out of new supervisory information systems, the Working Capital Loan Guidelines and Asset Classification Regulations."
Nepal’s medium-term outlook remains favourable as strategic investments in infrastructure, especially in the energy sector, are expected to support potential growth.
“With growth below potential, executing the planned increase in capital spending, as envisaged in the fiscal year 2024-25 budget, while maintaining fiscal discipline through domestic revenue mobilisation and rationalisation of current spending remains critical to boost growth and preserve medium-term fiscal sustainability," Li said, adding that strengthening public investment management will support the needed boost to capital spending. "Enhancing fiscal transparency will help contain fiscal risks and further strengthen medium-term fiscal sustainability."
“As monetary policy transmission is still weak in a context of balance sheet repair, a cautious and data dependent monetary policy remains appropriate to preserve price and external stability," he adds.
Saying that continuing to strengthen Nepal’s financial system remains a top priority, he said, financial policy should remain vigilant and focused on building regulatory frameworks that promote sustainable credit growth while proactively addressing emerging vulnerabilities in the savings and credit cooperatives sector. "Maintaining recent reforms regarding lending practices and asset classification is important as preparations for the loan portfolio review of the ten largest banks continue."
The IMF also welcomed Nepal’s commitment to strengthen its AML/CFT framework. "Amendments to a set of fifteen laws, including on money laundering, have been recently enacted—and secondary legislation is under preparation—to bring Nepal’s AML/CFT legal framework in line with international standards, Li said, "It remains critical to ensure the effectiveness of the new legal framework."
The IMF has also suggested reforms to implement the 2021 IMF Safeguards Assessment recommendations regarding the Nepal Rastra Bank (NRB) Act and NRB audit are a priority.
“Continued progress on the structural front remains needed to foster investment and more inclusive growth," Li said, adding that these include improving the business climate, building human capital, and continuing to improve social safety nets, in particular aiming for full execution of the child grant budget, followed by an expansion of the programme to all districts in Nepal.
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