IMF Reaches Staff-Level Agreement with Nepal on Sixth ECF Review, Unlocks $42.7M in Funding

KATHMANDU: An International Monetary Fund (IMF) team, led by Ms. Sarwat Jahan, concluded a visit to Kathmandu from May 26 to June 10, 2025, reaching a staff-level agreement with Nepali authorities on policies and reforms needed to complete the sixth review under the Extended Credit Facility (ECF). The agreement, pending approval by the IMF’s Executive Board, will grant Nepal access to SDR 31.4 million (approximately US$42.7 million), bringing total disbursements under the ECF to SDR 251.1 million (about US$331.8 million) out of SDR 282.4 million allocated.

Nepal’s performance under the ECF-supported program has been satisfactory, meeting all mid-January 2025 quantitative targets except for the indicative child welfare grants target. Key structural reforms, including a tax expenditure report, revised National Project Bank guidelines, and a post-Loan Portfolio Review (LPR) roadmap, are either completed or nearing completion. Progress on amending the Nepal Rastra Bank (NRB) Act, aligning with the IMF’s 2021 Safeguard Assessment and 2023 Financial Sector Stability Report, is advancing, with drafts prepared for parliamentary submission. The NRB is finalizing the selection of an independent international consultant for the LPR, a critical condition for the Executive Board’s review.

Nepal’s economy is recovering gradually, with FY2024/25 growth projected to exceed 4%, driven by rebounds in construction, manufacturing, hydropower expansion, and a strong harvest offsetting September 2024 flood impacts. Inflation eased to 3.4% year-on-year in April 2025, while robust exports, remittances, and tourism receipts bolstered the external position. However, financial sector vulnerabilities persist, with non-performing loans rising to 5.2% in April 2025, straining bank capital, and savings and credit cooperatives (SACCOs) facing ongoing challenges.

Looking ahead, FY2025/26 growth is expected to strengthen, with inflation remaining within the NRB’s tolerance range. Risks include under-execution of capital projects, rising financial sector issues, global trade tensions, and potential domestic policy disruptions. The ECF-supported program aims to maintain macroeconomic stability through fiscal sustainability, increased capital spending, private sector incentives, and an expanded school midday meal program. Monetary policy remains cautious, prioritizing price and external stability, while NRB Act amendments aim to enhance central bank independence and governance.

The IMF urged timely initiation of the LPR and cautious consideration of an Asset Management Company, contingent on strengthening the debt recovery framework and insolvency laws. Nepal is also advancing its anti-money laundering/countering terrorism financing (AML/CFT) framework, shifting focus to effective implementation.

The IMF team met with Deputy Prime Minister and Finance Minister Bishnu Prasad Paudel, National Planning Commission Vice-Chairman Dr. Shiva Raj Adhikari, NRB Governor Dr. Biswo Nath Poudel, and other officials, as well as private sector and development partners.

The ECF, designed to address protracted balance of payments issues, supports Nepal’s economic reforms to achieve sustainable growth and poverty reduction while catalyzing additional foreign aid.