January 27: Nepal’s economy is rebounding following a slowdown caused by the 2015 earthquakes and trade disruptions, supported by the government’s efforts to revitalize the reform agenda according to IMF 'Article IV' Report  prepared by IMF Staff after visiting Nepal on January 11-23. The key challenge now is to put policies in place that will extend the cyclical recovery into a sustained period of high and inclusive growth.

According to the report, the mission expects growth to reach 5.5 per cent in the current FY with the normalization of economic activities which is also being supported by a good monsoon, accommodative monetary policy and rising government spending.  

However, India’s sudden withdrawal of high-denomination banknotes is expected to have a limited impact on activity overall; bank holdings of Indian rupee currency are small but some corporate and households who hold such notes have seen their purchasing power affected. The main risk to the outlook pertains to failure of capital budget implementation to improve.

The normalization of prices in the aftermath of last year’s trade disruption is pushing down inflation which is expected to undershoot the authorities’ mid-2017 inflation target of 7.5 percent.

As per the report, Nepal’s external position remains strong. International reserves of Nepal Rastra Bank reached a record high of US$8.7 billion in December 2016, equivalent to about 10 months of prospective imports and goods and services. However, following large surpluses in recent years, the external current account is now broadly in balance. This reflects recovering imports and moderating growth of remittances.

The medium-term outlook critically depends on efforts to sustain and deepen reform momentum. Strong policies are needed to enhance confidence amid ongoing political uncertainty. They are also needed to strengthen key institutions and administrative capacity which are critical for overcoming the chronic under-implementation of the budget and boosting private investment and growth. Accordingly, in the absence of strong policies, growth would likely revert to the average of the past decade and fall short of substantially improving living standards and social indicators.