Washington DC: The government authorities of Nepal and the International Monetary Fund (IMF) reached a staff-level agreement on the policies and reforms needed to complete the 4th review under the extended credit facility (ECF).

IMF’s Deputy Division Chief for the Asia and Pacific Department and the IMF Mission Chief for Nepal Tidiane Kinda confirmed the agreement by issuing a statement on Thursday after completing a two-week long visit to Nepal on June 5.

An IMF delegation led by Kinda visited Kathmandu during May 22 to June 5 to hold discussions on the policies and reforms of economic program supported by the IMF’s Extended Credit Facility (ECF). The agreement, however, is subject to approval by the IMF’s Executive Board, the statement added.

Completion of the review would entitle Nepal to a Special Drawing Rights (SDR) of 31.4 million (about US$41.6 million), bringing total disbursements under the ECF thus far to SDR 188.3 million (about US$249.7 million), the statement added.

“Nepal continues to make progress with the implementation of the ECF-supported program. On the fiscal front, important achievements include approval of (i) a Domestic Revenue Mobilization Strategy by the Ministry of Finance aimed at strengthening tax collection, and (ii) an Action Plan by the National Planning Commission (NPC) aimed at improving execution of budgeted capital projects,” reads the statement, adding, “Other envisaged reforms to further enhance fiscal transparency are well advanced.”

These include incorporating most Extra Budgetary Funds accounts in the annual financial statements published by the Financial Comptroller General Office, and publishing audited financial statements for some key public enterprises.

The IMF noted that major achievements by the Nepal Rastra Bank (NRB) include the finalization and full implementation of the Supervisory Information System for all banks and progress on the procurement of an independent international consultant to assist NRB in the conduct of the Loan Portfolio Review (LPR) of the 10 largest banks.

Both reforms aim at strengthening NRB’s capability to assess bank asset quality and credit risk management, said the IMF.

The IMF delegation however said that Nepal’s economy continues to face challenges as growth, projected around 3 percent in FY2023/24, remains below potential in the context of subdued domestic demand and post-pandemic balance sheet repairs.

Reflecting timely policy actions, favorable commodity prices, and subdued domestic demand, inflation has decreased from a peak of 8.6 percent in September 2022 to 4.6 percent in April 2024, added the IMF.

“Despite some recovery, tax-to-GDP ratio remains below pre-pandemic levels, limiting fiscal space for development spending, including on infrastructure and targeted social benefits,” reads the statement.

According to the IMF, the non-performing loans of banks have doubled since August 2022 to 4.0 percent in April 2024 and profitability has declined, while the financial health of the savings and credit cooperatives (SACCO) sector has deteriorated.

On the bright side, Nepal’s external position continues to strengthen, reflecting prudent policies, buoyant remittances, and subdued imports.

“Looking ahead, economic activity is expected to pick up with growth reaching 4.9 percent in FY2024/25, supported by stronger domestic demand. The cautiously accommodative monetary policy stance, planned increase in capital expenditure in the FY2024/25 budget, additional hydropower generation, and continued increase in tourist arrivals are expected to boost domestic demand and growth,” the IMF statement added.

According to the IMF, inflation is expected to remain within the NRB’s target ceiling of 5.5 percent. Nepal’s medium-term outlook remains favorable as strategic investments in infrastructure, especially in the energy sector, are expected to support potential growth.

“Against this background, policies and reforms envisaged under the ECF-supported program remain well-placed to help preserve macroeconomic stability and strengthen Nepal’s policy making framework. Accelerating capital spending is key to boost domestic demand. In that regard, executing the planned increase in capital expenditure while limiting overall spending growth, as envisaged in the FY2024/25 budget, bode well for achieving a growth-friendly fiscal consolidation. Pursuing the cautious and data-driven approach to monetary policy and strengthening the monetary framework remains essential to maintain price and external stability.”

The IMF however cautioned that continuing to strengthen Nepal’s financial system remains a top priority. In this context, it is essential to launch the LPR of the banking system, submit to Parliament amendments of the NRB Act, and involve the service of experts with international experience in auditing and central bank auditing for an audit of NRB’s FY23/24 financial statements,  said the IMF.

According to the statement, the government authorities of Nepal and IMF staff also agreed on giving priority to the publication of annual financial statements by all majority and wholly owned public enterprises, the audit of the financial statements of four priority public enterprises, and the implementation of key reforms in the 2023 Financial Sector Stability Report.

Other important reforms envisaged for the near future include publication of a comprehensive tax expenditure report, publication of a fiscal risk statement, revising and approving the National Project Bank Operational Procedures and the Unified Directives related to project development, prioritization, and selection, and reporting consolidated financial information of all extra-budgetary operational funds.

In addition, the authorities are starting to develop a strategy to deal with issues in the cooperative sector, including to reform the supervisory framework and architecture, which is welcome, said IMF.

“Nepal is committed to strengthening its AML/CFT framework. Amendments to a set of 15 laws, including on money laundering, have been recently enacted—and secondary legislation is under preparation—to bring Nepal’s AML/CFT legal framework in line with international standards. Nepal remains determined to ensure the effectiveness of the new legal framework, with technical support from the IMF and other donors,” the statement further said.

The IMF team also expressed its gratitude to the Nepali authorities for their hospitality and for open and constructive discussions.

The statement added that the IMF team met with Minister for Finance Barsha Man Pun, Nepal Rastra Bank’s Governor Maha Prasad Adhikari, National Planning Commission’s Vice-Chairman Dr Min Bahadur Shrestha, other senior government and NRB officials, development partners and representatives of the business and banking community.