Mission Concluding Statement 

Nepal: IMF Reaches Staff-Level Agreement on the First and Second Reviews under the Extended Credit Facility and Concludes the 2023 Article IV Consultation

February 28, 2023

• IMF staff and the Nepal authorities have reached staff-level agreement on the policies needed to complete the combined first and second reviews of the ECF arrangement. Nepal would have access to about US$52 million in financing once the review is formally approved by the Executive Board.
• Following a strong post-pandemic recovery, real GDP growth is softening, reflecting the impact of external shocks and necessary policy adjustment.
• The much-needed monetary policy tightening last year helped stabilize the external position and is contributing to lower inflation, while the recent mid-year budget review is expected to address near-term fiscal risks stemming from lower-than-expected revenue growth.
• Sustainable medium-term growth will require fiscal reforms in line with debt sustainability, advancing reforms on banking regulations and supervision, reducing the cost of doing business and barriers to FDI and enhancing governance.

Washington, DC: An International Monetary Fund (IMF) team led by Jarkko Turunen visited Kathmandu during February 15-28 and held discussions with a broad range of stakeholders in the context of the 2023 Article IV consultation and the combined first and second reviews of the authorities’ economic program supported by the IMF’s Extended Credit Facility (ECF).

At the end of the mission, Mr. Turunen issued the following statement:

“The Nepali authorities and IMF staff conducted discussions for the 2023 Article IV consultations and reached staff-level agreement on the policies and reforms needed to complete the combined first and second reviews under the ECF (see Press Release No. 22/6 ). [1] The agreement is subject to approval by the Executive Board. Completion would make available SDR 39.20 million (about US$52.2million), bringing total disbursements under the ECF thus far to SDR 117.70 million (about US$156.6million), from a total of SDR 282.42 million (about US$375.8 million).

“Despite a challenging global and domestic environment last year, including the impact of Russia’s war in Ukraine, Nepal continued to make progress with the implementation of the ECF-supported program. Notable achievements include the external audit of the Nepal Rastra Bank with the assistance of international auditors – in line with international best practices, publication of reports on both COVID-related spending and custom exemptions to enhance transparency, drafting of amendments to bank asset classification regulations, and strengthening bank supervision by launching the donor-supported Supervision Information System. IMF staff welcomed the progress made towards implementing other structural reforms in the authorities’ policy agenda and discussed priorities looking forward.

“The Nepali authorities have taken decisive actions to maintain a stable macroeconomic environment. The much-needed monetary policy tightening last year, together with the gradual unwinding of COVID support measures, helped moderate credit growth and contributed to the moderation of inflation stemming from the global commodity price shock caused by the Ukraine war. As a result, and in a context of resilient remittances, external pressures eased, and international reserves stabilized in the first half of FY2022/23. The temporary import restrictions, mostly aimed at reducing the rapid post-pandemic growth of imports, were removed. The slowdown in imports nevertheless dampened tax collections during the first half of FY2022/2023, which has required expenditure rationalization in the mid-year budget review to preserve fiscal discipline and debt sustainability. Bank asset quality has deteriorated, reflecting a decline in the repayment capacity of borrowers due to higher lending rates and rising leverage, a concern that is moderated by banks’ capital-adequacy ratios that are above the regulatory minima.

“Real GDP growth is projected to soften to 4.4 percent in FY2022/23, but is supported by the ongoing recovery of tourism, strong agriculture sector performance in the first half of the year and resilient remittances. However, the global outlook remains subject to an unusually high level of uncertainty. Nepal remains vulnerable to shocks, from volatile and higher global commodity prices and from natural disasters and weather variability. Accordingly, cautious monetary policy remains appropriate to bring the still elevated inflation down towards the Nepal Rastra Bank’s 7 percent target and to allow the economy to grow without placing undue pressure on international reserves. The government further aims to address near-term fiscal pressure by rationalizing expenditure . Discussions recognized the need to protect high-quality infrastructure expenditure and social spending.

“Nepal remains committed to the policies and reforms envisaged in the ECF-supported program, in particular, (i) formulating a comprehensive revenue mobilization strategy, aimed at enhancing tax collection and making room for priority spending; (ii) strengthening the management of fiscal risks, especially those arising from public enterprises, by developing systems for their prompt identification and monitoring; (iii) improving efficiency and transparency of public investment spending; (iv) continuing to advance reforms on banking regulations and supervision and ensuring bank asset quality; and (v) further strengthening NRB’s governance by amending the NRB Act in line with best international practices. In addition, Nepal remains committed to implementing recommendations from the ongoing AML/CFT Mutual Evaluation conducted by the Asia/Pacific Group.

“The ECF-supported program will help Nepal’s economy to remain on a sustainable path over the medium term with the economy projected to grow at around 5 percent and inflation at around 6 percent, while maintaining adequate levels of international reserves and keeping public debt at a sustainable level. The authorities and IMF staff agreed that priority should be given to achieving a fiscal deficit that ensures debt sustainability, while securing additional concessional financing and enhancing debt management . Monetary policy should focus on maintaining a cautious and data-driven stance supported by macroprudential measures. This will help avoid large boom-bust credit cycles, which can create financial sector instability and are not supportive of sustainable growth. Discussions recognized the need for the Nepal Rastra Bank to ensure appropriate reclassification of loans and close monitoring of the impact of a potential deterioration in repayment capacity of borrowers.

“Discussions also covered the need for Nepal to adopt an ambitious structural reform agenda to help establish a sustainable and inclusive long-term growth path. Reducing the cost of doing business and barriers to FDI would support growth potential especially in sectors such as high-value agricultural products, information technology, energy, and tourism. Reforms to develop financial instruments tailored to migrant workers, promoting better access to finance and improving financial literacy can enhance financial inclusion. Further progress with digitalization and strengthening of anti-corruption institutions would improve provision of public goods. Better-targeted social assistance, investing in resilient infrastructure and boosting agricultural productivity are key to reducing poverty, and addressing Nepal’s vulnerability to food security risks related to climate change and natural disasters. Enhanced transparency and financial oversight of public enterprises can reduce fiscal risks while promoting their operational efficiency.

“The IMF team is grateful to the Nepali authorities for their hospitality and for open and constructive discussions. The team met with the Right Honorable Prime Minister Pushpa Kamal Dahal, Honorable Deputy Prime Minister and Minister of Finance Mr. Bishnu Prasad Paudel, Nepal Rastra Bank Governor Mr. Maha Prasad Adhikari, National Planning Commission Vice-Chairman Dr. Min Bahadur Shrestha, other senior government and NRB officials, development partners and representatives of the business community.”