KATHMANDU, March 15: The International Monetary Fund (IMF) Executive Board completed the fifth review under the Extended Credit Facility (ECF) Arrangement for Nepal, providing Nepal with access to SDR 31.4 million (about US$ 41.8 million). This brings total disbursements under the ECF for budget support thus far to SDR 219.7 million (about US$ 289.1 million).
"Nepal has made tangible progress in implementing reforms under the program, which has supported early signs of economic recovery while preserving macroeconomic and financial stability and protecting the vulnerable," the IMF has stated in a press statement on Friday. The review was completed on March 12.
The economy continues to face challenges with subdued domestic demand. Economic activity is expected to pick up moderately in FY2024/25 on account of disruptions caused by the September 2024 floods. Growth is expected to reach 4.2 percent in FY2024/25, supported by a planned increase in capital spending including on reconstruction, an accommodative monetary policy stance and additional hydropower generation, the IMF said in the statement.
Post-flood supply-side pressures are expected to be short-lived, and average inflation is projected to remain close to the Nepal Rastra Bank’s target of about 5 percent, according to the IMF. Efforts to mobilize revenues will support development spending and fiscal sustainability. The outlook is subject to important downside risks including those related to possible under-execution of capital spending, financial-sector vulnerabilities, and political fragility.
The executive directors recommended continued gradual, growth-friendly fiscal consolidation to stabilize debt. Noting the need to mobilize revenue to support higher capital spending and protect the vulnerable, Directors welcomed the newly adopted Domestic Revenue Mobilization Strategy.
They also underscored the need to strengthen public investment management to enhance capital spending execution. Further advancing fiscal transparency would help to contain fiscal risks and strengthen fiscal sustainability. Directors emphasized the importance of supporting the most vulnerable including through expanding child grants, it is said.
Directors agreed that monetary policy should remain cautious and data-driven to preserve price and external stability. They highlighted the importance of amending the Nepal Rastra Bank Act to strengthen its governance, independence and accountability.
The discussion underscored that increasing financial sector vulnerabilities warrant a proactive approach. They encouraged steps to further align financial sector regulations with international standards, conduct the planned Loan Portfolio Review, and develop a comprehensive strategy to address problematic savings and credit cooperatives. Noting Nepal’s recent FATF grey listing, Directors stressed the urgency of strengthening the AML/CFT framework through reforms to enhance legal, regulatory, and supervisory frameworks.
“Directors called for ambitious structural reforms to support more sustainable and inclusive growth. They recommended efforts to reduce the high cost of doing business, enhance the investment climate, improve governance, and strengthen anticorruption institutions. Nepal’s high vulnerability to natural disasters underscores the importance of enhancing resilience to climate shocks,” according to the Press Statement.