December 8: The Government of Nepal has reached an understanding with the International Monetary Fund (IMF) to receive a loan of $400 million amid the current financial crisis. The International Monetary Fund (IMF) is providing the loan to Nepal under the Extended Credit Facility (ECF). The government is preparing to resolve the current financial crisis faced by the banking institutions of the country through this credit facility.

An agreement has already been reached between officials of the Ministry of Finance, Nepal Rastra Bank and the IMF to receive this credit facility. IMF said that the government officials of Nepal have repeatedly discussed this issue with the team including the head of the IMF's mission Robert Gregory and they are now in the final stage to release the loan amount.

The IMF team, including Gregory, visited Nepal in October 20-29, November 17-18, and November 30-December 2. The team also met Finance Minister Janardan Sharma last week and discussed about the loan facility. The loan is yet to be approved by the IMF's executive board meeting. The IMF is providing the loan for a time period of thirty eight months. Generally, IMF provides the ECF when the balance of payments is in deficit due to declining foreign exchange reserves. 

The loan will be utilized on various programs to uplift the economy affected by the Covid-19 pandemic, maintain macroeconomic and financial stability and reduce poverty. According to a statement released by IMF, the pandemic has had a major impact on Nepal's economy, adversely affecting people's health and livelihoods. Nepal experienced a slump in GDP in 2019/20, faced a devastating second wave of the pandemic in 2021, affecting the economic recovery.

The IMF has made it clear that the loan should be used to increase revenue and public spending, financial sector regulation, supervision and financial transparency, as well as various anti-corruption efforts and administrative capacity building. Due to declining remittances, foreign investment and increasing trade deficit, Nepal's foreign exchange reserves have been declining recently. The government is preparing to bring ECF as the balance of payments came under pressure.

Due to the pandemic, foreign exchange reserves is continuously declining and has created a foreign exchange crisis. Nepal has been borrowing mainly from the World Bank, Asian Development Bank and the International Monetary Fund. The interest on such foreign loans has to be paid in dollars and not in Nepali currency. This also affects reserves, says economist Bishwambhar Pyakurel. “Internal debt can be repaid in Nepali currency. However, external debt has to be paid in dollars which is difficult to handle,” said Pyakurel.