IMF completes fifth review of Nepal's Extended Credit Facility

KATHMANDU, MARCH 16: The Executive Board of the International Monetary Fund (IMF) has recently completed the fifth review under Nepal’s four-year Extended Credit Facility (ECF), allowing authorities to withdraw the equivalent of SDR 31.4 million (about US$ 41.8 million). This brings total disbursements under the ECF for budget support to SDR 219.7 million (about US$ 289.1 million).

The ECF arrangement for Nepal, approved on January 12, 2022, amounts to SDR 282.4 million (180 percent of quota). "Nepal has made tangible progress in implementing reforms, supporting early economic recovery, maintaining macroeconomic and financial stability, and protecting vulnerable populations," states the IMF.

Economic outlook and key challenges

The economy continues to face subdued domestic demand, with moderate growth expected in FY2024/25 due to September 2024 flood-related disruptions. GDP growth is projected at 4.2 percent, driven by increased capital spending (including on post-flood reconstruction), an accommodative monetary policy, and additional hydropower generation.

Inflation is expected to remain close to the Nepal Rastra Bank’s 5 percent target. Efforts to mobilize revenue will support development spending and fiscal sustainability. However, key downside risks include under-execution of capital spending, financial sector vulnerabilities, and political instability.

IMF Executive Board’s Assessment

Following the discussion, the release quoted Mr. Bo Li, IMF Deputy Managing Director, as making the following statement:

• Macroeconomic Stability: Directors welcomed Nepal’s continued recovery but acknowledged political uncertainty and flood-related disruptions. While the outlook remains favorable, downside risks persist, requiring prudent policies and structural reforms.

• Fiscal Policy & Debt Management: Directors recommended gradual, growth-friendly fiscal consolidation to stabilize debt. They welcomed the new Domestic Revenue Mobilization Strategy and emphasized strengthening public investment management to improve capital spending execution.

• Social Protection: Directors highlighted the need to expand child grants and support vulnerable populations.

• Monetary & Financial Sector Stability: Monetary policy should remain cautious to maintain price and external stability. The Nepal Rastra Bank Act should be amended to strengthen its governance, independence, and accountability. Given the rising financial sector vulnerabilities, Directors urged Nepal to align financial sector regulations with international standards, conduct the planned Loan Portfolio Review, and develop a strategy to address the troubled savings and credit cooperatives.

• Anti-Money Laundering & Financial Integrity: With Nepal recently gray-listed by the FATF, Directors emphasized urgent reforms to enhance its AML/CFT framework.

• Structural & Investment Climate Reforms: Directors urged Nepal to lower the cost of doing business, enhance the investment climate, strengthen anti-corruption measures, and improve resilience to climate shocks, given Nepal’s high vulnerability to natural disasters.