20231205-IMF-Nepal_Third_Review_Under_the_Extended_Credit_Facility_Arrangement-Press_Release_Staff_Report_and_Statement_by_the_Executive_Director_for_Nepal_83页_5mb

IMF Country Report No. 23/384: Nepal – Third Review Under the Extended Credit Facility Arrangement

Core Content Overview

This document outlines the IMF's Third Review Under the Extended Credit Facility (ECF) Arrangement for Nepal, which was approved on January 12, 2022, with an initial disbursement of SDR 282.42 million (about US$ 376.5 million). The third review was completed on November 29, 2023, allowing Nepal to withdraw SDR 39.2 million (about US$ 52.25 million), bringing total disbursements to SDR 166.90 million (about US$ 222.5 million). The report includes a Staff Report, a Press Release, and a Statement by the Executive Director for Nepal.

Main Points and Key Information

Economic Context and Performance

• Post-pandemic rebound was fueled by a credit boom, but growth slowed in FY2022/23.
• Real GDP growth was 0.8% in FY2022/23, with inflation at 8.2% in September 2023.
• Growth is expected to recover to 3.5% in FY2023/24, driven by increased domestic demand, new hydroelectric capacity, and tourism recovery, though it remains below potential.
• Credit growth dropped to low single digits in FY2022/23, following a surge in FY2021/22 due to COVID-related stimulus.
• Non-performing loans (NPLs) increased to 3.0% in August 2023, reflecting tighter lending regulations and unwinding of previous forbearance measures.

Fiscal Indicators

• Total revenue and grants are projected to rise from 19.3% of GDP in FY2022/23 to 22.8% in FY2027/28.
• Tax revenue is expected to increase from 16.1% of GDP in FY2022/23 to 19.7% in FY2027/28.
• Fiscal deficit widened to 5.8% of GDP in FY2022/23, due to declining revenue despite expenditure control.
• Primary deficit is projected to decrease from 4.4% of GDP in FY2022/23 to 1.3% in FY2027/28.
• Net lending/borrowing is expected to decline from -5.3% of GDP in FY2023/24 to -3.1% in FY2027/28.

External Sector

• Remittances have remained a key source of external financing, with workers' remittances projected to reach SDR 11.891 million in FY2027/28.
• Current account deficit is expected to widen to 2.5% of GDP in FY2023/24, but foreign reserves are projected to remain above adequacy levels.
• Gross official reserves are expected to reach 16.125 million USD by FY2027/28, equivalent to 8.4 months of prospective imports.

Monetary and Financial Sector Developments

• The IMF's cautious and data-driven monetary policy has helped preserve price and external stability.
• Bank supervision and regulation have improved with the introduction of new supervisory information systems, Working Capital Loan Guidelines, and Asset Classification Regulations.
• Credit contraction has been managed without the need for distortive import restrictions, and reserves have increased.
• Financial sector reforms are ongoing, including lending practices and asset classification, to avoid boom-bust cycles and align with international standards.

Risks and Outlook

• Downside risks include higher commodity prices, slowdown in partner economies, lower capital project execution, reduced credit demand, and continued fiscal deficits.
• FATF deficiencies could lead to reputational costs, reduced access to global finance, and increased financial transaction costs.
• Natural disasters and climate shocks remain a risk to economic stability and growth.
• NPLs could raise concerns about bank capital adequacy ratios, further impacting financial stability.

Policy Recommendations

Fiscal Policy

• Gradual and growth-friendly fiscal consolidation is needed, with enhanced capital expenditure and support for vulnerable groups.
• Continued governance reforms are essential to cement fiscal transparency.
• Structural reforms should focus on mobilizing domestic revenue, strengthening public investment management, and addressing fiscal risks.

Monetary and Financial Sector Policies

• Maintain cautious, data-driven monetary policy to ensure price and external stability.
• Continue financial sector reforms to avoid boom-bust cycles and establish a pro-growth equilibrium.
• Implement reforms regarding lending practices and asset classification as part of the loan portfolio review for the ten largest banks.

Governance and Structural Reforms

• AML/CFT reforms must be implemented in line with international standards and peer evaluations to maintain access to the global financial system.
• Reforms to the Nepal Rastra Bank (NRB) Act and audit framework are a priority, based on the 2021 IMF Safeguards Assessment.
• Improving the business climate, building human capital, and enhancing social safety nets, particularly the child grant program, are crucial for inclusive growth.

Program Modality and Structural Benchmarks

• Seven structural benchmarks have been completed or reset, with five met and two reset.
• Fiscal transparency has improved, but budget credibility remains low, affecting fiscal outcomes.
• Strategic investments in infrastructure, especially the energy sector, are expected to support long-term growth.

Conclusion

The IMF's Third Review has confirmed Nepal's progress in economic reforms and program implementation, but sustained growth requires continued fiscal discipline, structural reforms, and improved governance. The ECF arrangement has contributed to external sustainability and financial stability, but risks remain, particularly external shocks and domestic financial vulnerabilities. The IMF emphasizes the need for policy continuity, reform momentum, and alignment with international standards to ensure long-term economic resilience and growth.