IMF review unlocks fresh funding of $ 43.2 million for Nepal amid banking risks and slow growth

KATHMANDU: The International Monetary Fund has reached a staff-level agreement with Nepal on the seventh review of its Extended Credit Facility (ECF) programme, signaling continued international confidence in the country’s macroeconomic management despite weak growth and rising financial sector risks.

The agreement follows a two-week IMF mission to Kathmandu from February 6–20 led by mission chief Sarwat Jahan, which also completed the 2026 Article IV consultation — the Fund’s regular health check of member economies.

Approval by the IMF Executive Board would unlock SDR 31.32 million (about $43.2 million) in additional support, bringing Nepal’s total disbursement under the programme to SDR 282.42 million (about $384.4 million).

Programme Performance Largely On Track

The IMF said Nepal’s reform programme remains broadly satisfactory despite domestic political tensions and economic uncertainty.

All quantitative performance targets set for mid-July 2025 were met, except for a small shortfall in child welfare grants. Authorities also completed several structural reforms tied to the seventh review, including:

Adoption of a customs compliance improvement strategy

Completion of an on-site loan portfolio review of banks

Alignment of asset classification rules with Basel Committee on Banking Supervision standards

The IMF also confirmed agreement on draft amendments to the Nepal Rastra Bank Act, which would strengthen central bank governance and incorporate recommendations from past IMF safeguard and financial stability assessments. Submission of the amendments to Parliament is considered a key reform milestone.

Growth Weak, Inflation Low

Despite progress on reforms, the IMF said Nepal’s economy remains subdued.

Economic growth in fiscal year 2025/26 is projected at 3–3.5 percent, well below potential, as political uncertainty, protest-related disruptions, and weak private-sector confidence delay investment decisions.

Inflation remains contained, falling to 2.4 percent year-on-year in January 2026, largely reflecting subdued domestic demand.

Fiscal revenue growth has been modest, and the government has already revised capital spending projections in its mid-year budget review, underscoring persistent implementation challenges.

External Position Strengthens

One of the strongest elements of Nepal’s economy remains the external sector.

The IMF noted that:

Remittances remain buoyant

Tourism receipts are resilient

Import growth is subdued

As a result, international reserves have continued to rise and remain comfortably above adequacy benchmarks, providing a key buffer against external shocks.

Financial Sector Risks Rising

However, the IMF warned that vulnerabilities in the financial system are intensifying.

Non-performing loans in Nepal’s financial sector climbed to 5.4 percent in January 2026 and could rise further once the recently completed loan portfolio review is fully incorporated into banking statistics.

The review is expected to lead to recommendations aimed at:

Strengthening bank balance sheets

Improving asset quality assessment

Enhancing supervisory and regulatory oversight

The Fund also highlighted ongoing stress in savings and credit cooperatives, which remain a persistent financial stability concern.

Outlook Hinges on Political Stability

Looking ahead, the IMF said a peaceful political transition could help restore business confidence and support a rebound in domestic demand, investment, and consumption.

Inflation is expected to stay within the central bank’s target ceiling, but risks to the outlook remain significant, including:

Political uncertainty

Continued under-execution of public investment

Rising financial sector vulnerabilities

Possible slowdown in remittance inflows

Reform Momentum Still Crucial

The IMF urged Nepal to continue pushing reforms to preserve macroeconomic stability and strengthen the policy framework.

It emphasized the need to:

Mobilize domestic revenues to finance development spending

Improve public investment efficiency

Maintain accommodative but disciplined monetary policy

Strengthen liquidity management tools

The Fund also stressed that addressing weaknesses identified in the loan portfolio review will be essential to ensure banks are adequately capitalized and provisioned.

Revisions to the NRB Act, it said, would strengthen central bank independence, governance, and the country’s bank-resolution framework.

FATF Exit and Governance Reforms Highlighted

The IMF underscored that improving anti-money-laundering enforcement is critical for Nepal to exit the Financial Action Task Force grey list.

It also welcomed the government’s plan to develop a governance reform blueprint and its willingness to work with IMF technical assistance on corruption diagnostics and institutional strengthening.

The IMF mission held meetings with Finance Minister Rameshwar Prasad Khanal, NPC Vice-Chair Prakash Kumar Shrestha, NRB Governor Biswo Nath Poudel, as well as private-sector representatives, development partners, and policy institutions.