December 1: The Executive Board of the International Monetary Fund (IMF) completed the third review under the four‑year Extended Credit Facility (ECF) for Nepal on November 29, giving the authorities the Special Drawing Rights (SDR) equivalent to about US$ 52.25 million. This brings the total disbursements under the ECF for budget support so far to SDR 166.90 million (about US$ 222.5 million), reads a statement issued by the IMF on Thursday.

According to the IMF, the ECF arrangement for Nepal was approved by the IMF’s Executive Board on January 12, 2022 in an amount equivalent to SDR 282.42 million (180 percent of quota or about US$ 376.5 million).

The IMF noted that Nepal has made good progress with the implementation of the program, which has helped mitigate the impact of the pandemic and global shocks on economic activity, protect vulnerable groups, and preserve macroeconomic and financial stability. The program is also helping to catalyze additional financing from Nepal’s development partners, added the statement.

“Nepal’s post-pandemic rebound, fueled by a credit boom, ended last year as growth slowed markedly. Low domestic demand helped resolve external pressures but also deflated government revenue and led to a widening of the fiscal deficit despite expenditure control.”

The IMF stated that inflation is declining but remains high at 8.2 percent in September. Growth is expected to recover to 3.5 percent in FY2023/24, which is below potential, led by increased domestic demand, new hydroelectric capacity, and a continued recovery in tourism added the IMF.

According to the IMF, risks are skewed to the downside while external sector risks dominate Nepal’s outlook given its high remittance income and dependence on imported goods.

“Domestically, further deterioration in bank balance sheets or lack of progress in addressing the deficiencies identified by the Asia Pacific Group of the Financial Action Task Force (FATF) could create financial system stress,” reads the statement.

Following the Executive Board discussion, IMF’s Deputy Managing Director and Acting Chair Bo Li noted that Nepal has made important strides on its economic reform agenda.

“Decisive actions in monetary policy, bank regulation and rolling off COVID support policies played a major role in overcoming urgent balance of payments pressure in FY2021-22. Reserves continue to rise without the need to use distortive import restrictions. Fiscal discipline was maintained in FY2022-23 despite a large revenue shortfall,” the statement quoted Bo Li as saying.

“Bank supervision and regulation have improved with the rolling out of new supervisory information systems, the Working Capital Loan Guidelines and Asset Classification Regulations,” he added.

According to Li, Nepal’s medium-term outlook remains favorable as strategic investments in infrastructure, especially in the energy sector, are expected to support potential growth.

“With growth below potential, boosting the execution of capital spending while maintaining fiscal discipline —growth friendly consolidation—is critical to provide much-needed stimulus to near-term economic growth and achieve investments that will underpin medium-term growth. Maintaining momentum on governance reforms is critical to cementing recent gains in fiscal transparency.”

According to him, further structural reforms, such as mobilizing domestic revenue, strengthen public investment management and addressing fiscal risks, are needed to bolster medium term fiscal sustainability.

“As monetary policy transmission appears weak in a context of balance sheet repair and inflation is elevated —though declining—maintaining the current cautious and data dependent monetary policy is appropriate to preserving price and external stability,” he further said.

Li was of the view that financial policy should remain vigilant and focused on building regulatory frameworks to avoid further boom bust cycles and establish a more stable, pro-growth financial sector equilibrium.

“Reforms regarding lending practices and asset classification are encouraging and need to be continued as preparations for the loan portfolio review of the ten largest banks gather steam. Implementation of the financial sector reform agenda should continue with a view to align the local framework more closely to international standards.”

He further underscored the urgent need for improving the anti‑money laundering/combatting the financing of terrorism (AML/CFT) framework and its effectiveness in line with international standards and peer evaluations in order to maintain smooth access to the global financial system.

He suggested Nepal to prioritize reforms to implement the 2021 IMF Safeguards Assessment recommendations regarding the Nepal Rastra Bank (NRB) Act and NRB audit.

“Continued progress on the structural front is also needed to foster investment and more inclusive growth. These include improving the business climate, building human capital, and continuing to improve social safety nets, in particular the coverage of the child grant program.”