Press Release No. 04/218

Press Release: IMF Executive Board Completes First Review Under Nepal's Three-Year PRGF Arrangement and Approves US$10.6 million Disbursement

October 20, 2004

The Executive Board of the International Monetary Fund (IMF) has completed the first review of Nepal's economic performance under the three-year Poverty Reduction and Growth Facility (PRGF) Arrangement. In doing so, the Board approved a request for a waiver for the non-observance of the February 15, 2004 structural performance criterion on finalizing the audit of the Nepal Rastra Bank 2002/03 accounts by an international auditor, and the March 15, 2004 structural performance criterion on implementing a voluntary retirement scheme at Nepal Rastra Bank and phase II of the voluntary retirement scheme at Rastriya Banijya Bank.

Today's decision enables Nepal to draw an amount equivalent to SDR 7.1 million (about US$10.6 million) under the arrangement. The Executive Board approved the three-year arrangement on November 19, 2003 (see Press Release No. 03/202) for amount equivalent to SDR 49.9 million (about US$73.9 million). Completion of the first review will bring total disbursements under the program to SDR 14.3 million (about US$21.2 million).

Following the Executive Board's discussion of Nepal, Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

"Nepal's Poverty Reduction Strategy Paper (PRSP) continues to provide a sound basis for achieving higher growth and poverty alleviation. The main elements of the PRGF-supported program—sound macroeconomic management, better expenditure prioritization and enhanced efficiency, structural reform in major economic sectors, and improved governance—are geared to delivering conditions for sustained growth and enhancing the pro-poor focus of budget spending.

"Peace remains critical for achieving sustained, high economic growth in the medium term. With a durable peace, the nation's energies can be fully focused on its developmental and poverty-reduction objectives, including Millennium Development Goals.

"To maintain macroeconomic stability, the authorities' medium-term fiscal objectives are to raise the revenue-to-GDP ratio, improve the efficiency of public spending, and reduce domestic borrowing in order to put the government's finances on a sustainable basis. Achieving these objectives would require strengthening of tax and customs administration and determined implementation of tax policy changes to mobilize additional revenue. The prioritization of expenditures under the medium-term expenditure framework (MTEF) would help to raise allocations for priority sectors and increase poverty-related spending. At the same time, a strong effort is required to improve the government's implementation capacity to ensure that the budgeted development spending targets are achieved.

"Continued implementation of financial sector reforms is a key element for the success of the PRGF-supported program. These reforms include further restructuring of Nepal Rastra Bank to transform it into a modern and efficient central bank, with a stronger capacity for financial sector supervision. Determined implementation of reforms in the banking sector is also essential, including strong government support for the commercial banks' debt recovery, efforts, particularly from the largest defaulters, and additional efforts to restructure the two development banks.

"Further steps envisaged in public enterprise and governance reforms would also help create conditions for higher growth over the medium term. These steps should include further advances in the ongoing privatization or liquidation of selected public enterprises, and the preparation of audited accounts of enterprises, including the Nepal Oil Corporation (NOC) by an international audit firm. In addition, the shift to an automatic pricing mechanism for petroleum products would help address and contain NOC losses. Civil service reforms, including through amendments to the Civil Service Act, and decentralization are also needed to improve service delivery, and further steps need to be taken to curb corruption," Mr. Kato said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.