March 1: At a time when the private sector has been criticizing Nepal Rastra Bank (NRB) for issuing a tight monetary policy resulting in a hike in interest rate, the International Monetary Fund (IMF) has praised the policy adopted by the central bank of Nepal.

According to the IMF, Nepali authorities have taken decisive actions to maintain a stable macroeconomic environment.

Issuing a statement on Tuesday, the IMF said that the much-needed monetary policy tightening last year, together with the gradual unwinding of COVID support measures, helped moderate credit growth and contributed to the moderation of inflation stemming from the global commodity price shock caused by the Ukraine war.

“As a result, and in a context of resilient remittances, external pressures eased, and international reserves stabilized in the first half of FY 2022/23. The temporary import restrictions, mostly aimed at reducing the rapid post-pandemic growth of imports, were removed,” reads the statement, adding, “The slowdown in imports nevertheless dampened tax collections during the first half of FY 2022/2023, which has required expenditure rationalization in the mid-year budget review to preserve fiscal discipline and debt sustainability.”

The statement issued after a two-week long visit to Nepal by an IMF delegation also noted that bank asset quality has deteriorated, reflecting a decline in the repayment capacity of borrowers due to higher lending rates and rising leverage, a concern that is moderated by banks’ capital-adequacy ratios that are above the regulatory minima.

The IMF delegation led by Jarkko Turunen, which visited Kathmandu during February 15-28, made such remarks after holding discussions on a broad range of issues with stakeholders over the economic program supported by the IMF’s Extended Credit Facility (ECF).

The statement issued by Turunen on Tuesday at the end of the mission says that the Nepali authorities and IMF staff conducted discussions for the 2023 Article IV consultations and reached staff-level agreement on the policies and reforms needed to complete the combined first and second reviews under the ECF.

Upon completion of the review, IMF would avail Special Drawing Rights (SDR) of US$ 52.2 million, bringing total disbursements under the ECF thus far to SDR US$ 156.6 million, from a total of SDR US$ 375.8 million, reads the statement.

“Despite a challenging global and domestic environment last year, including the impact of Russia’s war in Ukraine, Nepal continued to make progress with the implementation of the ECF-supported program,” added the statement.

Notable achievements include the external audit of the Nepal Rastra Bank with the assistance of international auditors – in line with international best practices, publication of reports on both COVID-related spending and custom exemptions to enhance transparency, drafting of amendments to bank asset classification regulations, and strengthening bank supervision by launching the donor-supported Supervision Information System.

IMF staff also welcomed the progress made towards implementing other structural reforms in the authorities’ policy agenda and discussed priorities looking forward.

According to the IMF, Nepal’s real GDP growth is projected to soften to 4.4 percent in FY 2022/23, but is supported by the ongoing recovery of tourism, strong agriculture sector performance in the first half of the year and resilient remittances.

However, the global outlook remains subject to an unusually high level of uncertainty. Nepal remains vulnerable to shocks, from volatile and higher global commodity prices and from natural disasters and weather variability, the IMF further said.

Accordingly, cautious monetary policy remains appropriate to bring the still elevated inflation down towards the Nepal Rastra Bank’s 7 percent target and to allow the economy to grow without placing undue pressure on international reserves, the IMF concluded.