An International Monetary Fund (IMF) team, led by Geert Almekinders,
visited Nepal from January 11-23, to hold discussions for the 2017 Article
IV consultation. The team met Deputy Prime Minister and Minister of Finance
Krishna Bahadur Mahara, Central Bank Governor Chiranjibi Nepal, and other
high-level government officials. The team also met with representatives of
the private sector, labor unions, and the donor community.
At the conclusion of the visit, Mr. Almekinders made the following
statement:
“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. 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.
“The mission expects growth to reach 5.5 percent in FY 2016/17 (ending July
15). The normalization of economic activity is being supported by a good
monsoon, accommodative monetary policy, and rising government spending.
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 corporates 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.
“Nepal’s external position remains strong. International reserves of the
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.
“Against this background, the discussions focused on the policies needed to
create conditions for sustained high and inclusive growth in line with the
authorities’ long-term goal of becoming a middle-income country by 2030,
while safeguarding macroeconomic and financial sector stability.
“The team welcomes the authorities’ plans and efforts to scale up
government spending to rebuild after the earthquakes and address
infrastructure gaps. In view of the still limited implementation capacity,
it will be essential to have a realistic budget that effectively
prioritizes spending with the largest growth dividends, including in social
spending areas of highest importance to inclusive growth. In scaling up
public spending, care should also be taken not to exceed the economy’s
aggregate absorptive capacity.
“The mission welcomes the central bank’s adoption of an interest rate
corridor. Maintaining competitiveness and external balance will require
closing the inflation wedge with India on a sustained basis—through a
tightening of monetary policy, facilitated by a strengthening of the
monetary policy framework.
“Efforts are also needed to narrow the gap in productivity growth with
India and other trading partners and to improve the business environment.
This requires structural reforms to deregulate product and factor markets,
and high-quality investments, including to improve electricity supply and
expand transportation infrastructure. Strong policies and reform
implementation would boost growth well beyond levels seen in the recent
past.
“To mitigate macro-financial risks and increase access to finance,
financial sector supervision should be further strengthened and financial
sector reforms accelerated, building on the recent progress in
strengthening several aspects of the regulatory framework. This would
include enhancing loan classification and provisioning and upgrading banks’
risk management. The ceiling on the loan to deposit ratio should be
maintained as this will contribute to a welcome moderation of credit growth
and normalization of interest rates.”
