Tighten credit, fiscal policies to prolong strength of economy, says IMF mission
KATHMANDU, Dec 14: The International Monetary Fund (IMF) has made an upward revision to its forecast of Nepal’s economic growth rate to 6.5 percent, from 5 percent that it projected in World Economic Outlook published earlier in October.
Organizing a press briefing on Thursday to release its preliminary findings, a team of the IMF as part of the 2018 Article IV mission said that the economic growth of Nepal is expected to reach 6.5 percent in the current fiscal year.
Article IV mission is sent by the IMF to its member country regularly to assess the country’s economic and financial developments as part of its surveillance of the economy.
“Following a prolonged period of subdued growth, economic activity in Nepal has picked up in recent years,” said Geert Almekinders, the mission chief. “Supported by greater political stability and a more reliable supply of electricity, growth is expected to reach 6.5 percent in FY2018/19, on expanding post-earthquake reconstruction activity, services, and manufacturing,” he added.
The IMF’s growth forecast is the highest among the projections made by various international institutions. Earlier in November, the World Bank projected the Nepali economy to grow by 5.9 percent. Similarly, Asian Development Bank (ADB), in its macroeconomic update in September, said that economic growth in the current fiscal year will likely be 5.5 percent.
Some economists consider the latest forecast by the IMF a shot in the arm to the government which is confronting various macroeconomic challenges in recent months including the worsening external sector condition of the country.
The government has set an ambitious growth target of 8 percent for the current fiscal year – FY2018/19.
Amid optimism over the positive outlook, the IMF mission was also quick to caution the authorities that the current economic expansion also comes with some challenges that need to be carefully managed.
“The fiscal deficit has risen substantially, reaching 6.5 percent of the GDP in the current fiscal year, and credit growth has been high, accelerating to 25 percent most recently in October,” said Almekinders. “The resulting expansion of domestic demand has contributed to a sharp increase in Nepal’s current account deficit, which reached 8.2 percent of GDP in last fiscal year – FY2017/18 and has led to some outflows of reserves,” he added.
The mission has also advised the authorities to tighten both the fiscal policy and the monetary policy to prevent the economy from overheating.
The growth above potential leads to strong demands that the economy itself cannot absorb, according to the Fund staff. That is also one of the factors that economists attribute to the widening trade deficit.
“When you have five-year government, growing for two years above potential through accommodative fiscal and monetary policies, and stimulate import demands, you will exceed the absorptive capacity of the economy,” he warned.
Nepal posted economic growth of an estimated 6.3 percent in FY2017/18 and 7.9 percent in FY2016/17 after observing the average economic growth of around 4.5 percent in the last one decade.
“Against this background, our policy advice is to go a little bit slower with stimulus both in the fiscal policy and credit policy,” he said. “If you make calibrated adjustment and tighten your policies, you would moderate your stimulus. Then, probably you can prolong the strength of the economy. While doing so, your growth will be a little bit less, but you will have less build-up of risk in fiscal sector. It will be slower growth, but more sustainable growth,” Almekinders added.