Rupa Duttagupta is the Deputy Director of the Asia and Pacific Department at the International Monetary Fund, with nearly two-and-a-half decades of experience at the IMF. She joined the organisation in June 2000 as an economist and has since served across various departments. Duttagupta earned her PhD in Economics from the University of Maryland in 2000. Recently, in late September of this year, she visited Nepal and met with the Deputy Prime Minister and Finance Minister, the Governor of Nepal Rastra Bank, and other senior government officials to discuss recent macroeconomic developments and the implementation of the Extended Credit Facility (ECF)-supported programme. In light of her visit to Nepal and the IMF’s annual meetings, The HRM Nepal caught up with Deputy Director Duttagupta to explore various aspects of the current economic situation and the IMF’s recommendations for achieving stability and sustainable economic growth. She was joined in the interview by Sarwat Jahan, head of the IMF Staff Team for the ECF programme review. Excerpts:
How do you assess the economic outlook for Asia and the Pacific, including Nepal, for FY 2025 and 2026?
Rupa: The Asia-Pacific region has continued to grow at a steady pace. We project growth to average 4.6% in 2024, and 4.4% in 2025. This projection entails slightly higher growth rates for both years compared to the IMF’s April 2024 forecast for the region, largely reflecting the robust performance in the first half of the year. And this means that the Asia and Pacific region is expected to contribute close to 60% to global growth. The IMF’s October 2024 Regional Economic Outlook for the Asia-Pacific Region, which was published on November 1, provides more detailed country-specific assessments.
Turning to Nepal, first let me convey my deepest condolences to the people in Nepal for the tragic loss of lives and livelihoods from the September floods and landslides. A modest recovery that started in FY 2023/24 will continue into FY 2024/25. The IMF’s latest forecast is for growth to pick from an estimated 3.1% last year to 4.9% both in this year and in FY 2025/26. That said, this forecast was finalised before the floods so we will need to assess their impact. More generally, there are a number of downside risks to growth, arising from the uncertainties in the external environment and global growth but also due to domestic factors. Overall, durably reviving domestic demand and accelerating the reform momentum is critical to put the economy on a path towards sustainable, strong, and inclusive economic growth. This will require enhancing public investment execution, further strengthening of domestic revenue mobilisation, and prompt disbursement on social safety nets. Equally important, is to maintain political and social stability and policy certainty.
Nepal is currently undergoing the fifth review of the IMF’s Extended Credit Facility (ECF) programme. Are the reform initiatives being implemented by Nepal on the right path?
Sarwat: We had very productive discussions with the authorities during the staff visit last September, which continued during the Annual Meetings in Washington DC. The fifth review mission will formally assess the progress with ongoing reform initiatives, and we are in discussion with the authorities regarding the timing of this review mission.
The IMF has expressed concerns regarding the asset quality of banks and financial institutions in Nepal, which still lacks the adoption of international best practices for loan classification. What recommendations do you have on this matter?
Rupa: The Nepali authorities have made good progress on banking sector reforms including through stronger reporting as well as better onsite and offsite supervision.
Building on these reforms, it is important to ensure that regulations continue to be strengthened and regulations on asset classification and lending practices continue to be aligned with international standards. A key reform is undertaking the loan portfolio review for the largest 10 banks to better gauge the health of the financial sector.
Cooperatives play a significant role in mobilising funds in Nepal’s financial market, yet they remain unregulated. Even with numerous cooperative scams reported, the government has not prioritised effective regulation. What advice would you give to the Nepali policymakers in this context?
Sarwat:The IMF team provided authorities with an approach to address the vulnerabilities of the savings and credit cooperatives (SACCOs), which are detailed in the staff report of the fourth review of the ECF programme. Recommendations include addressing data gaps, designing a cohesive strategy to deal with SACCOs, triaging and resolving problematic SACCOs, tightening regulatory requirements and supervision of SACCOs and licensing. It is particularly important that authorities proactively find a resolution for problematic SACCOs to ensure that customers regain access to their savings.
Nepal’s fiscal spending quality is relatively low, while the debt burden continues to rise. How can Nepal improve the quality of its fiscal spending?
Rupa: Raising capital expenditure is critical to boost economic growth in Nepal, and also strengthen potential growth further. In this context, it is critical to enhance the efficiency of capital spending. This includes robust project selection and prioritisation processes, as outlined in the National Planning Commission’s Public Investment Management Assessment (PIMA) Action Plan.
Given Nepal’s weak production base, poor infrastructure, and insufficient job creation, what recommendations do you have for ensuring its debt sustainability?
Sarwat:Both external and overall public debt in Nepal are assessed at low risk of debt distress. However, to build resilience to shocks and boost exports, efforts to improve productivity and competitiveness through stepping up investment in resilient and sustainable infrastructure, as well as streamlining regulations and administrative processes, accompanied also by sustained stronger domestic revenue mobilisation should continue.
As an import-driven economy, Nepal faces various challenges, especially with consumption declining after the Covid-19 pandemic and the rise in global commodity prices. What should policymakers, the private sector, and other economic actors focus on to regain momentum? Currently, Nepal’s economy is fragile, and the government has initiated an overhaul of structural issues by forming a high-level study committee. If you’re updated on Nepal’s situation, what would your advice be for its structural reform?
Sarwat: Nepal has significant potential for growth but will need to diversify the domestic economy to rely less on remittances and agriculture to reap its potential. Reducing the cost of doing business and improving the business climate will support broad-based growth. Measures include improving efficiency and execution of public investment by implementing PIMA Action Plan, modernising legal and regulatory frameworks to reduce bureaucratic red tape, enhancing governance, and strengthening anticorruption efforts. In this context, the Investment Facilitation Act will help bolster Nepal’s investment climate, and the recently adopted 16th Development Plan, if implemented effectively, should enhance Nepal’s resilience and economic potential.
Finally, what key insights should policymakers take away, and what message has the IMF conveyed regarding the global economy?
Rupa: The IMF’s October 2024 World Economic Outlook indicated that global growth is expected to remain stable yet much lower over the medium term compared to levels seen before the pandemic. Moreover, we’ve seen the global economy suffer through several consecutive shocks in recent years, which always hurt small economies such as Nepal more than others. In this environment, it is incumbent on the Nepali authorities to support the economic recovery by improving capital expenditure, especially on infrastructure damaged by the recent flooding, but also to strengthen growth prospects durably. At the same time, fiscal discipline should be maintained along with support for the most vulnerable. Strong reform momentum on structural reforms is necessary to lift medium-term growth prospects.
