Nepal, IMF agree on Fifth Economic Reform Review

KATHMANDU, JANUARY 23 : Nepal's government and a delegation from the International Monetary Fund (IMF) have lately reached a staff-level agreement on the fifth review of the country's economic reform program, supported by the IMF’s Extended Credit Facility (ECF).

The IMF clarified that the agreement is subject to approval by the IMF Executive Board, which would allow Nepal to access approximately $40.6 million in financing. However, the IMF has outlined conditions, including the need for progress in key areas like the loan portfolio review and sustaining reform momentum, before the Executive Board can complete the review.

This agreement follows a visit by an IMF team, led by Sarwat Jahan, from January 8 to 19. After productive discussions with Nepali authorities, Jahan confirmed the agreement, adding that further policy actions and reforms are required to complete the fifth review under the ECF.

Once the review is approved by the Executive Board, Nepal would gain access to Special Drawing Rights (SDR) amounting to 31.4 million (around US$40.6 million), raising the total IMF support under the ECF to SDR 219.7 million (about US$283.9 million) from a total of SDR 282.42 million.

The IMF delegation noted that Nepal has made progress in implementing the ECF-supported program. The performance under the program has been satisfactory, with all quantitative performance criteria and indicative targets for end-July 2024 met, except for those related to revenue collection and child welfare grants.

Key reforms completed as part of the fifth review include the amendment of Nepal's anti-money laundering (AML) law, improvements in financial oversight of public enterprises, and an audit of Nepal Rastra Bank's (NRB) FY2023/24 financial statements with the help of international auditing experts.

The IMF team also recognized NRB’s commitment to completing the Loan Portfolio Review (LPR) of the 10 largest banks, despite initial setbacks. The process has now resumed, with plans to bring in an independent international consultant.

However, the IMF noted that Nepal’s economic recovery, which began in FY2023/24, was disrupted by severe floods in September 2024, which caused widespread damage to key sectors and weakened domestic demand. Despite this, Nepal's external economic position remained strong, driven by robust remittances and subdued imports, which kept revenue growth modest.

The IMF raised concerns about growing vulnerabilities in the financial sector, with the banking sector’s non-performing loans reaching 4.4% in October 2024. It also highlighted the deteriorating financial health of the savings and credit cooperatives (SACCOs) sector.

Looking ahead, the IMF projects that Nepal’s economy will grow at more than 4% in FY2024/25, driven by increased public capital spending, particularly on post-flood recovery and reconstruction. Imports are expected to rebound in the second half of the year, while food inflation, caused by the floods, should ease as transport networks are repaired and agricultural output recovers.

Despite these positive expectations, the IMF cautioned that several risks could affect the outlook, including delays in capital project execution, further vulnerabilities in the financial sector, and potential disruptions to policy continuity and reform progress.

The IMF emphasized that the policies and reforms under the ECF-supported program remain essential for preserving macroeconomic stability and strengthening Nepal’s policy framework. It recommended a growth-friendly fiscal strategy focused on accelerating capital expenditure and improving revenue mobilization to foster inclusive and sustainable growth.

The IMF also called for continued data-driven monetary policy to maintain price stability, external stability, and support for growth. In terms of financial sector reforms, the IMF stressed the need to focus on the effective application of the recently amended AML law and to move forward with the Loan Portfolio Review (LPR) without further delay.

During their visit, the IMF delegation held meetings with key government officials, including Deputy Prime Minister and Finance Minister Bishnu Prasad Paudel, National Planning Commission Vice-Chairman Dr. Shiva Raj Adhikari, and Nepal Rastra Bank Governor Maha Prasad Adhikari, as well as representatives from the private sector and development partners.