Monday, September 24, 2012

Macroeconomic outlook challenging: IMF


Nepal's macroeconomic performance has been good but the outlook is challenging, according to the International Monetary Fund (IMF).
The GDP growth rate is expected to decline, inflation is likely to remain in the eight to nine per cent range, reflecting rising prices in India and the balance of payments (BoP) surplus is also likely to decline as growth of remittances moderates and Nepali rupee being weak, said the Article IV mission led by deputy division chief at the Asia and Pacific Department of IMF Todd Schneider, who visited Kathmandu on September 10-24 to conduct the 2012 Article IV Consultation discussion.
Senior representative of the IMF to India and Nepal Thomas Richardson was also in the team.
“Delays in adopting a full-year budget for 2012-13 could further dampen investment and growth," the team said, adding that a full-year budget —limiting the deficit to about two percent of GDP, consistent with macroeconomic and debt sustainability — should be adopted as soon as possible. "A tighter focus on budget implementation is also needed to ensure appropriately high levels of capital spending to meet the country's pressing infrastructure needs and support medium-term growth."
Reaching the goal is however, challenging, Schneider said, adding that on the revenue side, further strengthening of tax administration and collection will be vital, as will a focus on collecting arrears. Tighter expenditure management and cash planning will also be key to ensuring that government and donor-supported investment projects are implemented.
At the same time, large losses that arose at the Nepal Oil Corporation (NOC) in 2010-11 and Nepal Electricity Authority (NEA) are unsustainable.
The IMF strongly recommended adoption of an automatic price adjustment mechanism that ensures that the NOC avoids future losses.
"Regarding monetary and exchange rate policy, the exchange rate peg to the Indian rupee should remain the key policy priority," the team said, suggesting that it requires that monetary policy be conducted in a manner that ensures interest rates remain within a certain margin of those in India. "In the current environment, excess liquidity generated by strong remittance growth in 2011-12 poses a risk to this objective, and monetary policy should be tightened to absorb the liquidity."
"The influx of remittances in the past year and the associated rise in bank deposits has alleviated some pressures, but risks in the financial sector remain a concern," according to the IMF that concluded that weak supervision and a liberal licensing policy in earlier years, combined with more recent excessive exposure to the real estate sector have brought many of these risks to the fore.
However, some steps have been taken to strengthen supervision and expand the framework for taking corrective action at problem banks, while moving ahead with recapitalisation of Rastriya Banijya Bank (RBB) and Nepal Bank Ltd (NBL), which could be of help. "Given the remaining risks and the uncertain outlook, however, these efforts need to be accelerated," it suggested. "But implementation of a revised NRB Act is key for swift intervention of problem banks, rigorous implementation of the prompt corrective action framework, and strengthened supervision and enforcement of prudential regulations."
The IMF team held wide-ranging discussions with central bank governor Dr Yuba Raj Khatiwada, caretaker finance minister Barsha Man Pun and finance secretary Krishna Hari Baskota apart from other senior officials, private sector representatives, and other stakeholders on Nepal’s macroeconomic situation and outlook, the financial sector, and policies to address priorities in these areas.
According to the mission’s preliminary findings the macroeconomic performance has been good but the outlook is challenging. Real GDP growth recovered to 4.6 per cent in 2011-12, up from 3.9 per cent the previous year. A strong agricultural harvest and robust growth in the services sector compensated for below-trend industrial output.
"Average headline inflation declined relative to last year but non-food inflation remained stubbornly high, reflecting the impact of exchange rate depreciation and increases in administered prices for fuels," it said, adding that the balance of payments and external current account recorded sizeable surpluses, as a surge in remittances outstripped the growth of imports.
The government fiscal accounts registered a smaller deficit than expected. However, on the positive side, it reflected improvements in revenue performance and helped to keep public debt on a stable trajectory. But the lower deficit also entailed under-spending on capital projects.
Looking ahead, GDP growth is expected to decline, reflecting the effects of the late monsoon, continued weakness in industrial output, and the dampening effects of slowing growth in India.

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