The International Monetary Fund (IMF) Executive Board has successfully completed the fourth review of Nepal’s four-year Extended Credit Facility (ECF) programme, enabling the release of SDR 31.4 million (approximately US$ 41.3 million). This brings the total disbursements under the ECF for budget support to SDR 188.3 million (about US$ 247.7 million), according to the IMF.
The IMF Executive Board approved Nepal’s four-year Extended Credit Facility (ECF) on January 12, 2022, for a total of SDR 282.42 million (approximately US$ 371.6 million). Nepal has successfully implemented the programme, mitigating the pandemic’s impact, safeguarding vulnerable populations, and maintaining macroeconomic stability. The programme has also attracted additional financing from Nepal’s development partners.
Following the fourth review, the IMF Executive Board stated that Nepal’s economy continues to face challenges, with growth projected at around 3% in FY 2023/24, below potential due to weak domestic demand and ongoing post-pandemic balance sheet adjustments. Economic activity is expected to improve, with growth reaching 4.9% in FY 2024/25, supported by stronger domestic demand. The cautiously accommodative monetary policy, increased capital expenditure in the FY 2024/25 budget, additional hydropower generation, and rising tourist arrivals are expected to boost domestic demand and growth. Inflation is projected to remain within the Nepal Rastra Bank’s target ceiling of 5.5%.
The review emphasised that domestic risks could significantly impact the outlook. On the fiscal front, the failure to increase the execution rate of capital projects would hinder economic growth. Political instability could disrupt policy continuity and reform implementation. Rising NPLs or increased failures of cooperative lenders could threaten banking system stability. Externally, high commodity prices could impede the recovery of energy-intensive sectors. The IMF also highlighted Nepal’s vulnerability to natural disasters.
Following the Executive Board discussion, Bo Li, Deputy Managing Director and Acting Chair, commended Nepal’s progress on economic reforms. “Decisive actions in monetary policy, bank regulation, and the phasing out of Covid support policies were instrumental in addressing the urgent balance of payments crisis in FY 2021-22. Reserves continue to increase without resorting to restrictive import measures. Fiscal discipline has been maintained in FY 2022-23 and thus far in FY 2023-24, despite revenue shortfalls,” he stated. “Bank supervision and regulation have improved with the implementation of new supervisory information systems, Working Capital Loan Guidelines, and Asset Classification Regulations. Nepal’s medium-term outlook remains positive as strategic infrastructure investments, particularly in the energy sector, are expected to support potential growth.”
To stimulate growth and ensure long-term fiscal sustainability, it is crucial to execute the planned increase in capital spending outlined in the FY24/25 budget while maintaining fiscal discipline through domestic revenue generation and reducing non-essential expenditures. Strengthening public investment management will support the necessary increase in capital spending. Enhancing fiscal transparency will help mitigate fiscal risks and further solidify long-term fiscal sustainability, according to Li.
Given the ongoing balance sheet repair process and weak monetary policy transmission, a cautious and data-driven monetary policy approach remains essential to safeguard price and external stability. Strengthening Nepal’s financial system remains a paramount objective. Financial policy should maintain vigilance and focus on developing regulatory frameworks that foster sustainable credit growth while proactively addressing emerging vulnerabilities in the savings and credit cooperatives sector. Preserving recent reforms regarding lending practices and asset classification is crucial as preparations for the loan portfolio review of the 10 largest banks continue.
The IMF Executive Board welcomed Nepal’s commitment to strengthening its anti-money laundering and counter-terrorism financing (AML/CFT) framework. Recent amendments to 15 laws, including those related to money laundering, and the ongoing development of secondary legislation aim to align Nepal’s AML/CFT legal framework with international standards. Ensuring the effectiveness of this new legal framework is crucial. Implementing the recommendations of the 2021 IMF Safeguards Assessment regarding the Nepal Rastra Bank (NRB) Act and NRB audit is a priority.
“Continued progress on the structural front is essential for fostering investment and more inclusive growth. This includes improving the business climate, building human capital, and continuing to improve social safety nets, with a particular focus on fully implementing the child grant budget and expanding the programme to all districts in Nepal,” Li concluded the statement.