Press Release No. 23/338

Nepal: IMF Reaches Staff-level Agreement on 3rd Review Under the Extended Credit Facility

October 5, 2023

• The Nepali authorities and the IMF team have reached staff-level agreement for a disbursement of about $51.3 million under the third review of the Extended Credit Facility (ECF) arrangement. The agreement is subject to approval by the IMF’s Executive Board.
• Nepal’s external position has strengthened, supported by prudent fiscal and monetary policies, buoyant remittances, and increasing tourism activity. Following a slowdown last year, growth is projected to recover in FY2023/24 to 3.5 percent, but to remain below potential, reflecting weak domestic demand. Inflation is declining but is still elevated.
• Necessary balance sheet repairs have been limiting credit growth in spite of monetary relaxation. Reforms under the ECF aim to generate more stable, pro-growth credit while maintaining price and external stability. Accelerating the planned increase in capital spending, as envisaged in the budget, will help boost demand.
• The Nepali authorities are diligently making progress to improve AML/CFT, including enacting amendments of AML laws to bring them in line with international standards.

Washington, DC: An International Monetary Fund (IMF) team led by Mr. Tidiane Kinda visited Kathmandu during September 21 to October 5 to hold discussions on the policies and reforms that could lead to the completion of the 3^rd review of the authorities’ economic program supported by the IMF’s Extended Credit Facility (ECF). At the end of the mission, Mr. Kinda issued the following statement:

“The Nepali authorities and IMF staff reached staff-level agreement on the policies and reforms needed to complete the 3 ^rd review under the ECF (see Press Release No. 22/6). [1] The agreement is subject to approval by the IMF’s Executive Board. Completion would make available SDR 39.20 million (about US$51.3 million), bringing total disbursements under the ECF thus far to SDR 156.9 million (about US$205.4 million), from a total of SDR 282.42 million (about US$369.8 million).

“Nepal continues to make progress with the implementation of the ECF-supported program. On the fiscal front, important achievements by the Ministry of Finance include the formulation of a fiscal risk register, the publication of the non-custom tax exemptions, and the implementation of a cash flow forecasting framework, all reforms aimed at strengthening transparency of public finances and further enhancing fiscal management. Regarding monetary and financial sector matters, major achievements by the Nepal Rastra Bank (NRB) include the full implementation of the Supervisory Information System (SIS) for Class A, B and C banks (excluding the onsite module) and the issuance of a new set of bank asset classification regulations, which appropriately aimed at strengthening monitoring capability and improving bank asset quality.

“Nepal’s external position has strengthened, supported by prudent fiscal and monetary policies, buoyant remittances, and post-pandemic rebound in tourism, despite spikes in regional food prices. However, on the domestic front, growth is estimated to have slowed in FY2022/23, reflecting last year’s import restrictions and regulatory uncertainty on land markets and construction licensing, lower credit flows, and weaker domestic demand in a context of large post-COVID emigration outflows. The ensuing shortfall in revenue pushed the FY2022/23 fiscal deficit upward, but to a level that remains consistent with a sustainable level of public debt, reflecting budget discipline.

“Growth is projected to recover to 3.5 percent in FY2023/24, which is below potential, due to weak domestic demand. Necessary balance sheet repairs after the credit boom and the sluggishness in the real estate market have been limiting credit growth in spite of monetary relaxation. Inflation remains high at 7.5 percent in August but is expected to recede. Nepal’s medium-term outlook remains favorable as strategic investments in infrastructure, especially in the energy sector, are expected to support potential growth.

“Against this background, the policies and reforms envisaged in the ECF remain well-placed to facilitate the needed transition to more stable, pro-growth credit while ensuring macroeconomic and financial stability. Pursuing the cautious and data-driven approach to monetary policy remains essential to maintain price and external stability. Accelerating the planned increase in capital spending, as envisaged in the FY2023/24 budget, will help boost aggregate demand. On reforms, the Nepali authorities and IMF staff agreed on giving priority to (i) the formulation of a Domestic Revenue Mobilization Strategy to improve tax collection, (ii) developing an action plan to improve the efficiency of public investment spending, (iii) launching a loan portfolio review of the banking system, (iv) continuing to strengthen the NRB’s SIS onsite module, and (v) amending the NRB Act.

“Nepal is committed to strengthening its AML/CFT, supported by the IMF technical assistance. The authorities are diligently making progress to implement recommendations from the AML/CFT Mutual Evaluation, including enacting amendments of AML laws to bring them in line with international standards. Other future important reforms include (i) publication of a comprehensive tax expenditure report, (ii) publication of annual financial statements by public enterprises, (iii) audit of the financial statements of the four-priority public enterprises, and (iv) reporting consolidated financial information of all extrabudgetary operational funds.

“The IMF team is grateful to the Nepali authorities for their hospitality and for open and constructive discussions. The team met with the Honorable Minister of Finance Dr. Prakash Sharan Mahat, 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 and banking community.”