An IMF team led by Mr. Hisanobu Shishido visited Kathmandu between April 24 - May 13 to conduct the 2003 Article IV Consultation and resume negotiations on an arrangement to be supported by the IMF's Poverty Reduction and Growth Facility (PRGF). The Article IV consultation is an annual review of economic policies and prospects that IMF staff undertake with the country authorities. The mission met with officials of the Ministry of Finance, the Nepal Rastra Bank, the National Planning Commission, and other ministries as well as representatives of the business community, financial sector, labor unions, and political parties.

With respect to developments in the current fiscal year, the mission notes that the ceasefire has helped support the modest recovery that appears to be underway. Monetary indicators such as private sector credit and deposit growth are also reflecting signs of the economic pickup. This recovery is fragile and will depend on the security environment and political developments as well as the pace of global recovery. Moreover, inflationary pressures may be on the rise. Fiscal developments are on track to meet the revised targets set by the government at the time of the mid-term budget review. On the external front, a widening trade deficit has been offset by increasing remittance inflows that has allowed some build up in the banking system's foreign reserves.

The recovery could gain strength in 2003/4 if there is progress in peace talks and in resolving the current political difficulties, along with effective implementation of structural reforms and an improvement in the external environment. The mission estimates real GDP could grow by 3½-4½ percent in 2003/4. Next year's budget will need to contain regular spending and strengthen revenue performance so as to allow for higher development spending, while avoiding excessive government borrowing. Further tax reforms are needed to streamline the tax system and reduce evasion. Monetary policy will need to strike a balance between supporting this recovery and remaining alert to inflationary pressures.

The mission believes the draft 10th Plan/Poverty Reduction Strategy Paper (PRSP) presents a sound strategy for enhancing growth and reducing poverty in Nepal. It places appropriate emphasis on a robust private sector, agricultural development, improved public sector management and governance, and strengthened social service delivery, while maintaining prudent macroeconomic policies.

The mission also discussed areas of structural reform that are relevant for macroeconomic stability. Financial sector reforms are proceeding well, with the management teams at Rastriya Banijya Bank and Nepal Bank Limited making progress in strengthening these banks. For these efforts to succeed, action against willful defaulters is essential; in this regard the mission looks forward to the introduction of effective debt recovery mechanisms. Moreover, supervision over the financial system would be strengthened by the early adoption of the Banking and Financial Institutions Ordinance. Public sector reforms are also critical for future growth, and in this regard the mission looks forward to further civil service reform, liquidation or privatization of loss making public enterprises, and decentralization in line with local administrative capacity and accompanied by accountability. The mission lauds the government's efforts to tackle corruption through the Commission for the Investigation of Abuse of Authority, while urging greater attention to ways of securing successful prosecutions, especially of the largest offenders.

The mission notes that considerable progress has been made in discussions on a program to be supported by the PRGF. An IMF team is expected to return to Kathmandu to finalize these negotiations after the coming budget. In the meanwhile, the mission hopes that the government will continue to maintain its prudent macroeconomic policies, and perseveres with key structural reforms. The mission also looks forward to progress both in the peace talks and in resolving the current political difficulties.