IMF approves $41.3 mln disbursement to Nepal following fourth review of exetended credit facility

KATHMANDU: The Executive Board of the International Monetary Fund (IMF) has completed the fourth review under the four-year Extended Credit Facility (ECF) for Nepal, allowing the authorities to withdraw the equivalent of special drawing right (SDR) 31.4 million (approximately US$ 41.3 million). This latest approval brings total disbursements under the ECF for budget support to SDR 188.3 million (about US$ 247.7 million).

The ECF arrangement for Nepal, initially approved by the Executive Board on January 12, 2022, for SDR 282.42 million (180 percent of quota or about US$ 371.6 million), has been instrumental in helping the country navigate economic challenges. The program has mitigated the impact of the pandemic and global shocks on economic activity, protected vulnerable groups, and preserved macroeconomic and financial stability. Furthermore, it has catalyzed additional financing from Nepal’s development partners.

Nepal’s economy, however, continues to face significant challenges. Growth is projected at around 3 percent for FY2023/24, which remains below potential due to subdued domestic demand and post-pandemic balance sheet repairs. Nevertheless, economic activity is expected to accelerate, with growth projected to reach 4.9 percent in FY2024/25, driven by stronger domestic demand.

A cautiously accommodative monetary policy stance, a planned increase in capital expenditure in the FY2024/25 budget, additional hydropower generation, and a rise in tourist arrivals are expected to support this growth. Inflation is anticipated to remain within the Nepal Rastra Bank’s (NRB) target ceiling of 5.5 percent.

Domestic risks, however, dominate the outlook. The failure to increase the execution rate of capital projects could deprive the economy of much-needed stimulus and hamper growth. Fragile political stability could disrupt policy continuity and reform implementation.

Intensifying financial sector vulnerabilities, such as a further rise in non-performing loans (NPLs) or failures of cooperative lenders, could threaten banking system soundness. Externally, high commodity prices could slow recovery in energy-intensive sectors, and Nepal remains vulnerable to natural disasters.

Following the Executive Board discussion, Mr. Bo Li, Deputy Managing Director and Acting Chair, commended Nepal’s progress:

“Nepal has made significant strides on its economic reform agenda. Decisive actions in monetary policy, bank regulation, and the phasing out of COVID support policies have been crucial in overcoming urgent balance of payments pressures in FY2021-22. Reserves continue to rise without the need for distortive import restrictions. Fiscal discipline has been maintained in FY2022-23 and so far in FY2023-24, despite revenue shortfalls. Bank supervision and regulation have improved with the rollout of new supervisory information systems, the Working Capital Loan Guidelines, and Asset Classification Regulations. Nepal’s medium-term outlook remains favorable, with strategic investments in infrastructure, especially in the energy sector, expected to support potential growth.”

“With growth below potential, executing the planned increase in capital spending as envisaged in the FY24/25 budget, while maintaining fiscal discipline through domestic revenue mobilization and rationalization of current spending, remains critical to boost growth and preserve medium-term fiscal sustainability. Strengthening public investment management will support the needed boost to capital spending. Enhancing fiscal transparency will help contain fiscal risks and further strengthen medium-term fiscal sustainability.”

“As monetary policy transmission remains weak in the context of balance sheet repair, a cautious and data-dependent monetary policy is appropriate to preserve price and external stability. Strengthening Nepal’s financial system remains a top priority. Financial policy should focus on building regulatory frameworks that promote sustainable credit growth while proactively addressing emerging vulnerabilities in the savings and credit cooperatives sector. Maintaining recent reforms regarding lending practices and asset classification is crucial as preparations for the loan portfolio review of the ten largest banks continue.”

“Nepal’s commitment to strengthening its AML/CFT framework is commendable. Recent amendments to a set of fifteen laws, including on money laundering, and the preparation of secondary legislation aim to align Nepal’s AML/CFT legal framework with international standards. Ensuring the effectiveness of the new legal framework is critical. Implementing the 2021 IMF Safeguards Assessment recommendations regarding the Nepal Rastra Bank (NRB) Act and NRB audit remains a priority.”

“Continued structural progress is essential to foster investment and more inclusive growth. This includes improving the business climate, building human capital, and enhancing social safety nets, particularly aiming for full execution of the child grant budget and expanding the program to all districts in Nepal.”

Fiscal Nepal |
Thursday July 11, 2024, 10:42:21 AM |

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