Talking to pressmen at the end of two-week article IV consultations with the government, Laura Papi, Division Chief in the Asia and Pacific Department of IMF, blamed accommodative monetary policy, weak supervision and proliferation of financial institutions for the rapid rise of asset prices and overextension of banks for emerging risks. [break]
"Going forward, the financial system needs to adapt to an environment of slower growth and is likely to see deteriorating quality assets," stated a press release issued at the press conference organized on Monday.
The IMF delegation also welcomed recent measures taken by the central bank to deal with the overheated realty prices and check crucial financial disciplines, but urged concerned agencies to focus on enforcement of the directives.
Papi further stressed upon the need to appoint governor of the central bank without much delay and added that appointing a governor, who can provide strong and stable leadership for the NRB going forward, is urgent.
The release suggested that the central bank needs to encourage bank consolidation, refrain from issuing new licenses for the time being and proceed with the restructuring of the state-owned banks.
Pointing towards recent shortage of liquidity, the delegation said that lower reserves have been the main factor behind the squeeze in banks´ liquidity and that has exposed existing vulnerabilities in the financial system. "The liquidity crunch in turn has led to a sudden stop in credit disbursements after years of heady increase s and reduced transactions in the realty market,” said the statement.
The delegation further warned that the macroeconomic outlook of the country is challenging. The GDP growth is expected to decelerate to 3 percent in the current fiscal year due to poor monsoon, slow remittance growth and tight monetary policy, said the release. "With weaker remittances and exports contracting, the current account is projected to shift into a deficit of about 2 percent of GDP," according to the release.
Papi praised the macroeconomic stability that has been maintained in the past years but as the global crisis is having delayed impact on Nepal´s economy, exposing its structural weaknesses, and said, "Tackling structural problems remains essential to achieve high growth over the medium term."
She further said that though Nepal´s growth potential is high, it urgently needs to address the poor business climate, power shortage and infrastructure needs, weak governance and difficult labor relations.
"Political stability and improved security are necessary conditions for progress in several of these areas," she stressed.
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