## 1nplea2020003 ## Source details **Canonical URL:** [1nplea2020003](https://www.imf.org/-/media/files/publications/cr/2020/english/1nplea2020003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1nplea2020003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1nplea2020003.pdf.json) --- ### Executive summary and context - The COVID-19 pandemic is having a severe impact on Nepal’s economy. - Immediate financing gaps emerged: an external financing gap of 3.0 percent of GDP and a fiscal financing gap of 2.6 percent of GDP. - Gross official reserves: US$8.7 billion in February 2020, about 6.8 months of prospective imports. - Pre-pandemic growth: 7.1 percent in FY2018/19; FY2019/20 projected to ease to 6 percent (pre-pandemic). - Public debt assessed at low risk of distress: public debt at 30 percent of GDP in FY2018/19. ### Request for Fund support and staff assessment - Authorities request disbursement under the “exogenous shock” window of the Rapid Credit Facility (RCF): SDR156.9 million, equivalent to 100 percent of quota, with full amount to become available upon Board approval. - Authorities request RCF disbursed directly to the Federal Treasury for budget support for COVID-19 related spending. - Staff assesses Nepal meets RCF eligibility requirements and supports the request. - IMF disbursement expected to play a catalytic role in securing additional financing from development partners. - Public debt at low risk of distress and adequate capacity to repay the Fund. ### Immediate fiscal and social measures announced (selected) - Increase health spending, including incentive pay and insurance coverage to medical personnel; import additional medical supplies; set up quarantine centers and temporary hospitals. - Strengthen social assistance: daily food rations for the most vulnerable; subsidize utility bills for low-usage customers; measures to partially compensate those who suffer job loss. - Enact economic recovery support package for FY2020/21 including support to SMEs and additional support to those who suffer job loss. - Ensure liquidity in financial system: lowering reserve requirements and the interest rate on the standing liquidity facility. - Support borrowers: expand refinancing facility; NRB announced banks will defer loan repayments due in April until mid-July (staff recommends case-by-case restructuring and deferment only for loans performing prior to COVID-19). - Temporary regulatory forbearance: NRB no longer requiring 2 percent countercyclical capital buffer due in July 2020; temporarily relaxed reporting norms and no penalties for non-compliance in April. - Preserve credibility of the exchange rate peg by maintaining adequate reserves. ### COVID-19 fiscal policy response (percent of GDP) - Announced Policies (FY19/20) and Prospective Policies to Support Economic Recovery (FY20/21): - Health: 1.3 (FY19/20) - treatment of COVID-19 cases: 0.7 - medical equipment: 0.3 - incentive payments to healthcare workers: 0.3 - Social assistance: 0.8 (FY19/20); 0.4 (FY20/21) - food support (1.3 million households, covers 2 months): 0.5 (FY19/20) - utility-payment subsidies for low-usage customers: 0.1 (FY19/20) - income support for those losing formal-sector employment: 0.2 (FY19/20); 0.4 (FY20/21) (details still to be finalized) - Additional support: 0.3 (FY19/20); 1.2 (FY20/21) - support for SMEs: 1.2 (FY20/21) - deferral of tax deadlines and exemption in customs duties for medical supplies: 0.3 (FY19/20) - Total: 2.3 (FY19/20); 1.7 (FY20/21) - Note: table based on information provided by authorities as of April 15, 2020. ### Monetary and macro-financial measures (as of April 15, 2020) - Liquidity provision: - Reduce cash reserve ratio from 4 to 3 percent. - Reduce standing liquidity facility rate from 6 to 5 percent. - Increase Refinance Fund limit by Rs. 10 bn to provide subsidized funding to banks lending to priority sectors including SMEs. - Support to borrowers: - Allow banks to defer loan payments due in April until July without penalty and loan reclassification; request 10 percent waiver on interest payment if regular payment is made. - Request banks make loan approval decision within 5 days for tourism, transportation, imports and distribution of critical goods related to COVID-19. - Provide subsidized loans with a quick 7-day process to those approved for foreign employment but unable to migrate. - Temporary regulatory forbearance: - No longer require banks to build up the 2 percent countercyclical capital buffer due in July 2020. - Relax BFIs' reporting norm temporarily in April and not charge penalties for non-compliance in April. - Central bank policy stance: continue macroprudential measures, strengthen bank supervision, maintain transparency and accuracy of supervisory data, and improve monetary policy framework, autonomy, and accountability. ### Macroeconomic projections and key indicators (current baseline vs. 2020 Article IV baseline — selected) - Real GDP: - 2020 Article IV Baseline (FY2019/20): 6.0 - Current Baseline (FY2019/20): 1.0 - 2020 Article IV Baseline (FY2020/21): 5.7 - Current Baseline (FY2020/21): 3.5 - Headline CPI (period average): - 2020 Article IV Baseline (FY2019/20): 6.0 - Current Baseline (FY2019/20): 6.7 - 2020 Article IV Baseline (FY2020/21): 5.9 - Current Baseline (FY2020/21): 6.5 - Headline CPI (end of period): - Current Baseline (end-FY2019/2020): 7.5 - Current Baseline (FY2020/21): 6.0 - Fiscal stance (central government, percent of GDP): - Total revenue and grants: 2020 Article IV Baseline 25.8; Current Baseline 24.0 - Net lending/borrowing: 2020 Article IV Baseline -4.5; Current Baseline -7.2 (FY2019/20) - Net incurrence of liabilities: 2020 Article IV Baseline 6.1; Current Baseline 8.8 - Domestic borrowing: 2020 Article IV Baseline 3.7; Current Baseline 5.2 - Balance of payments and reserves: - Current account (percent of GDP): 2020 Article IV Baseline -5.2; Current Baseline -7.6 - Workers' remittances (millions of U.S. dollars): 2020 Article IV Baseline 8,402; Current Baseline 6,012 - Workers' remittances (percent of GDP): 2020 Article IV Baseline 24.7; Current Baseline 18.7 - Gross official reserves (millions of U.S. dollars): 2020 Article IV Baseline 8,536; Current Baseline 8,049 - Reserves in months of prospective imports: 2020 Article IV Baseline 6.6; Current Baseline 7.2 ### FY2019/20 outlook, fiscal/external impacts, and financing gaps - Growth falls to 1 percent in FY2019/20 (5 percentage points below pre-pandemic baseline) and 3.5 percent in FY2020/21 (compared to 5.7 percent pre-pandemic baseline). - Inflation expected to reach 7.5 percent by July 2020 (end-FY2019/2020) due to food price pressures. - Fiscal impacts: - Overall fiscal deficit widens by 2.7 percent of GDP to 7.2 percent of GDP in FY2019/20. - Revenue losses estimated at 1.8 percent of GDP, of which 0.3 percent of GDP is due to active COVID-response measures. - Higher health costs and economic support measures increase spending by 2.0 percent of GDP; delays and reprioritization of capital expenditures offset by about 1.2 percent of GDP. - Current account deficit expected at 7.6 percent of GDP (compared to 5.2 percent pre-pandemic baseline). - Urgent external financing need in FY2019/20: 3.0 percent of GDP. - Fiscal financing need in FY2019/20: 2.6 percent of GDP. - Identified financing (as of April 15): - IMF-RCF: US$214 million (discussed elsewhere as SDR156.9 million). - World Bank: US$29 million. - Asian Development Bank: US$250 million. - IMF RCF: will address 26 percent of the fiscal financing need and 22 percent of the external financing gap in FY2019/20 via direct Treasury disbursement. - IMF CCRT debt relief: SDR2.85 million (US$3.85 million). - Authorities intend to request debt service reprofiling from official bilateral creditors over May 1–December 31, 2020; potential resource freeing up to US$31 million. - In absence of additional budget support in 2020, remaining fiscal gap to be closed by additional domestic financing, rationalization of expenditures, or reserve drawdown. - Projected reserve coverage would remain at about 7 months of prospective imports despite projected import weakening. ### RCF access, safeguards, and repayment capacity - Staff recommends access of 100 percent of quota (SDR156.9 million; US$214 million) under the RCF “exogenous shock” window. - Rationale: large balance of payments need of about 3.0 percent of GDP; Fund assistance critical to cover significant share (22 percent of external financing gap, 26 percent of fiscal financing needs). - Outstanding credit would reach 122.7 percent of quota, below allowable limits. - Disbursement of 100 percent of quota would result in Fund exposure to Nepal of 0.8 percent of GDP. - Annual repayments should peak at 0.1 percent of GDP and 0.4 percent of government revenue in 2026. - Safeguards: - Authorities committed to a new safeguards assessment of the NRB; provide audit reports and authorize external auditors to discuss with Fund staff; assessment to be completed before Board approval of any subsequent arrangement. - RCF disbursed to Federal Treasury justified because of legal limits on central bank lending to government. - MOU commitments between NRB and Ministry of Finance to receive IMF resources and clarify responsibilities for servicing IMF obligations. ### Debt sustainability analysis (selected findings) - Composite indicator score: 3.28 (signals a strong debt-carrying capacity). - Mechanical risk rating under external DSA: Low. - Mechanical risk rating under public DSA: Low. - Risk of external debt distress: Low. - Overall risk of debt distress: Low. - DSA update reflects COVID-19 shock; authorities’ preliminary estimate of fiscal need to respond and support recovery: 3.9 percent of GDP (USD 1.3 billion) in this and the next fiscal year. - Public sector debt (percent of GDP): 30.1; 38.0; 42.4; 43.8; 45.3; 46.7; 47.8; 49.7; 50.2; average: 30.6; projection average: 46.3. - PV of PPG external debt-to-GDP ratio: 12.4; 13.8; 13.7; 13.5; 13.4; 13.3; 13.1; 11.9; 8.7 (selected years). - Gross external financing need (Million of U.S. dollars): 2427.8; 2570.2; 2532.3; 2264.6; 2228.0; 2215.0; 2111.7; 2745.7; 6809.1. - Stress tests and sensitivity analyses: under baseline and most extreme shocks presented, none of the debt and debt service indicators breach indicative thresholds; however elevated gross financing needs mean a deeper global slowdown could negatively affect debt distress risk. ### Risks and vulnerabilities - Downside risks are substantial and include: - Uncertainty over depth and duration of the external shock; containment measures could remain in place longer (for example, through early 2021). - If external and fiscal financing gaps cannot be filled, growth would be weaker than the baseline. - An abrupt slowdown in deposit growth from falling remittances could create liquidity strain in the banking system and expose loan portfolio weaknesses. - Other risks from the 2020 Article IV consultation remain relevant, notably natural disasters (flooding and landslides). ### Policy recommendations and medium-term commitments - Immediate priorities supported by staff: - Increase health spending. - Strengthen social assistance. - Ensure adequate liquidity to the banking system. - Support access to credit. - Medium-term priorities and reform commitments: - Protect fiscal sustainability while containing external and domestic pressures; enhanced commitment to fiscal consolidation once pandemic effects subside. - Continue improvements in public financial management and manage transition to fiscal federalism. - Enhance revenue collection by upgrades to the tax system and tax administration. - Strengthen investment climate to encourage high-quality public- and private-sector investment projects, in particular FDI. - Strengthen governance, increase transparency and accountability, tackle corruption and related money laundering. - Crisis-mitigation spending to be undertaken transparently with quarterly reporting and an ex-post audit of COVID-related external funding. - Publish large public procurement documentation and ex-post validation of delivery with name of awarded companies and their beneficial owner(s). - Continue to disclose all public sector financial commitments to IMF/World Bank and request technical assistance as needed for GFSM 2014 reporting. ### Use of IMF resources, transparency, and governance commitments - RCF disbursement intended to be made directly to the Federal Treasury to help fill fiscal financing gap. - Authorities commit to transparent and accountable reporting mechanisms for use of funds: - Quarterly reporting on spending of these funds. - Independent audit by the Office of Auditor General of Nepal of COVID-19 related spending in about a year’s time. - Publish quarterly reports, audit results, allocation details on Ministry of Finance website, and procurement documentation on implementing agency websites. - Commit to undergo new safeguards assessment of the NRB and to continue providing audit reports to Fund staff. ### Conclusion and authorities’ stance - Authorities reaffirm determination to meet the COVID-19 challenge and value international support. - Authorities committed to pursuing sound macroeconomic policies and reforms to promote high and inclusive growth, create fiscal space, build buffers, and strengthen financial sector stability and resilience. - Authorities reiterate that IMF funds will be used for public health management and economic recovery with commitments to proper reporting, auditing, and transparency. *Source: IMF staff report — EXECUTIVE SUMMARY (Nepal), April 27, 2020; 1nplea2020003 (as presented in the specified content unit).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - The COVID-19 pandemic is having a severe impact on Nepal’s economy. - Recent months have seen remittances fall considerably, tourist arrivals collapse, and domestic activity hit by social distancing measures. - Immediate financing gaps have emerged: an external financing gap of 3.0 percent of GDP and a fiscal financing gap of 2.6 percent of GDP. - Maintaining a strong level of foreign reserves is crucial given ongoing uncertainty and large downside risks. ### Request for Fund support - Authorities request financial assistance under the “exogenous shock” window of the Rapid Credit Facility (RCF). - In the Letter of Intent, the authorities request a disbursement of SDR156.9 million, equivalent to 100 percent of quota, with the full amount to become available upon Board approval. - The authorities request that the RCF be disbursed directly to the Federal Treasury for budget support for COVID-19 related spending. - Staff assesses that Nepal meets the RCF eligibility requirements and supports the request. - Public debt is at low risk of distress and there is adequate capacity to repay the Fund. - The IMF disbursement is expected to play a catalytic role in securing additional financing from development partners. ### Macroeconomic policies and priorities - Immediate priorities: increase health spending, strengthen social assistance, ensure adequate liquidity to the banking system, and support access to credit. - Pre-pandemic policy stance: modest fiscal deficit and macroprudential measures to rein in excessive credit growth contributed to macroeconomic stability. - Authorities remain committed to promoting inclusive growth while preserving financial-sector and external stability and fiscal sustainability. - Structural reform priority: strengthen the investment climate to encourage high-quality public- and private-sector investment projects, in particular FDI. ### Pre-COVID-19 economic developments (summary) - Strong growth in recent years supported by political stability, more reliable electricity supply, and earthquake reconstruction. - Growth: 7.1 percent in FY2018/19; FY2019/20 projected to ease to 6 percent pre-pandemic. - Gross official reserves: US$8.7 billion in February 2020, about 6.8 months of prospective imports. - Credit growth moderated from very high levels; credit as a share of GDP remained elevated relative to peers. - Central government deficit in FY2019/20 expected to be 4.5 percent of GDP (pre-pandemic). - Public debt at 30 percent of GDP in FY2018/19 assessed to be at low risk of external and overall debt distress. ### Impact of the COVID-19 pandemic — transmission channels - Remittances: - Represented 25 percent of GDP in FY 2018/19. - Expected to fall drastically in the last quarter of FY2019/20 and the first quarter of FY2020/21. - Tourism: - Severe contraction expected in the last quarter of FY2019/20 and the first quarter of FY2020/21 with significant employment impacts. - Construction: - Implementation delays from supply disruptions, mobility restrictions, and foreign labor shortages for some foreign commissioned projects. - Trade services: - International and domestic trade significantly disrupted by lockdowns and movement restrictions. ### Macroeconomic projections and key indicators (current baseline vs. 2020 Article IV baseline) - Real GDP: - 2020 Article IV Baseline: 6.0 (FY2019/20) - Current Baseline: 1.0 (FY2019/20) - 2020 Article IV Baseline: 5.7 (FY2020/21) - Current Baseline: 3.5 (FY2020/21) - Headline CPI (period average): - 2020 Article IV Baseline: 6.0 - Current Baseline: 6.7 (FY2019/20) - 2020 Article IV Baseline: 5.9 (FY2020/21) - Current Baseline: 6.5 (FY2020/21) - Headline CPI (end of period): - 2020 Article IV Baseline: 5.9 - Current Baseline: 7.5 (end-FY2019/2020) - 2020 Article IV Baseline: 5.8 (FY2020/21) - Current Baseline: 6.0 (FY2020/21) - Fiscal stance (central government, percent of GDP): - Total revenue and grants: 2020 Article IV Baseline 25.8; Current Baseline 24.0 - Net lending/borrowing: 2020 Article IV Baseline -4.5; Current Baseline -7.2 (FY2019/20) - Net incurrence of liabilities: 2020 Article IV Baseline 6.1; Current Baseline 8.8 - Domestic borrowing: 2020 Article IV Baseline 3.7; Current Baseline 5.2 - Balance of payments and reserves: - Current account (percent of GDP): 2020 Article IV Baseline -5.2; Current Baseline -7.6 - Workers' remittances (in millions of U.S. dollars): 2020 Article IV Baseline 8,402; Current Baseline 6,012 - Workers' remittances (percent of GDP): 2020 Article IV Baseline 24.7; Current Baseline 18.7 - Gross official reserves (in millions of U.S. dollars): 2020 Article IV Baseline 8,536; Current Baseline 8,049 - Reserves in months of prospective imports: 2020 Article IV Baseline 6.6; Current Baseline 7.2 ### FY2019/20 outlook and fiscal/external impacts - Growth falls to 1 percent in FY2019/20 (5 percentage points below pre-pandemic baseline) and 3.5 percent in FY2020/21 (compared to 5.7 percent pre-pandemic baseline). - Inflation expected to reach 7.5 percent by July 2020 (end-FY2019/2020) due to food price pressures from import and production disruptions. - Fiscal impacts: - Overall fiscal deficit widens by 2.7 percent of GDP to 7.2 percent of GDP in FY2019/20. - Revenue losses estimated at 1.8 percent of GDP, of which 0.3 percent of GDP is due to active COVID-response measures. - Higher health costs and economic support measures increase spending by 2.0 percent of GDP; delays and reprioritization of capital expenditures offset by about 1.2 percent of GDP. - Current account deficit expected at 7.6 percent of GDP (compared to 5.2 percent in pre-pandemic baseline) due to sharp drops in remittances and tourism receipts, even as imports decline. ### Financing gaps and composition - Urgent external financing need in FY2019/20: 3.0 percent of GDP. - Fiscal financing need in FY2019/20: 2.6 percent of GDP. - Breakdown (Text Table 2 highlights): - Overall balance of payments: 0.0 (2020 Article IV) vs. -3.0 (Current Projection) in percent of GDP. - Total financing: 4.5 (2020 Article IV) vs. 4.6 (Current Projection) in percent of GDP. - Net incurrence of liabilities: 6.1 (2020 Article IV) vs. 6.2 (Current Projection) in percent of GDP. - Identified financing includes IMF-RCF (US$214 million), WB (US$29 million), ADB (US$250 million). - IMF RCF and other support: - RCF disbursement will address 26 percent of the fiscal financing need and 22 percent of the external financing gap in FY2019/20 via direct Treasury disbursement. - IMF debt relief under the Catastrophe Containment and Relief Trust (CCRT): SDR2.85 million (US$3.85 million). - World Bank approved a US$29 million COVID-19 Emergency Response and Health Systems Preparedness Project. - Asian Development Bank processing a pandemic response loan under the Countercyclical Support Facility for up to US$250 million. - Authorities intend to request debt service reprofiling from official bilateral creditors over May 1–December 31, 2020; potential resource freeing up to US$31 million. - In the absence of additional budget support in 2020, remaining fiscal gap to be closed by additional domestic financing or rationalization of expenditures; any remaining external gap by reserve drawdown. - Projected reserve coverage would remain at about 7 months of prospective imports despite projected import weakening. ### Risks and vulnerabilities - Downside risks are substantial and include: - Uncertainty over the depth and duration of the external shock; containment measures could remain in place longer (for example, through early 2021), leading to larger and more protracted financing needs. - If external and fiscal financing gaps cannot be filled, growth would be weaker than the baseline. - An abrupt slowdown in deposit growth from falling remittances could create liquidity strain in the banking system and expose loan portfolio weaknesses. - Other risks from the 2020 Article IV consultation remain relevant, notably natural disasters (flooding and landslides). ### Policy discussions and medium-term stance - Authorities’ priority: limit the pandemic’s impact while preserving macroeconomic stability. - Over the medium term, the government remains committed to policies that promote inclusive growth while containing external pressures, protecting financial stability, and preserving fiscal sustainability. *Source: IMF staff report — EXECUTIVE SUMMARY (Nepal), April 27, 2020.* ### 9. In its effort to mitigate the human and economic impact of the pandemic on Nepal, ### 9. In its effort to mitigate the human and economic impact of the pandemic on Nepal ### Immediate fiscal and social measures announced - The government committed to temporarily enact the following measures: - Increasing health spending, including by providing additional incentive pay and insurance coverage to all medical personnel fighting the coronavirus, importing additional medical supplies, and setting up quarantine centers and temporary hospitals. - Strengthening social assistance by providing those most vulnerable with daily food rations, subsidizing utility bills for low-usage customers, and taking measures to partially compensate those who suffer job loss. - Enacting an economic recovery support package for FY2020/21, to include support to businesses most affected by the pandemic and related social distancing measures, in particular small- and medium-sized enterprises, as well as additional support to those who suffer job loss. - Ensuring adequate liquidity in the financial system, by lowering reserve requirements and the interest rate on the standing liquidity facility. - Supporting borrowers, by facilitating loans to areas with most needs. The size of the refinancing facility has been increased to provide subsidized interest rates to banks willing to lend to priority sectors, including small- and mid-size enterprises affected by the pandemic. The NRB announced that banks will defer loan repayments due in April until mid-July. Staff emphasized that the NRB should encourage prudent loan restructuring based on banks’ risk assessments rather than taking a blanket approach. If a case-by-case approach is difficult due to reduced capacity, a category of borrowers or banking products could be targeted. At a minimum, deferment should only be applicable to loans that were performing prior to COVID-19 to avoid moral hazard. - Supporting the continued supply of credit, by providing temporary regulatory forbearance. The NRB is no longer requiring banks to build up the 2 percent countercyclical capital buffer that was due in July 2020. In addition, the NRB temporarily relaxed reporting norms and announced that banks and financial institutions will not be charged or penalized for their non-compliance with regulatory and supervisory requirements in April. Staff encouraged the NRB to make best efforts to maintain transparency and accuracy of supervisory data. Staff also advised the NRB to clearly communicate that banks are expected to continue to comply with regulatory requirements and, in case of a breach, banks should restore compliance in a timely manner. - Preserving credibility of the exchange rate peg by maintaining an adequate level of reserves. ### COVID-19 fiscal policy response (Text Table 3) — percent of GDP - Announced Policies (FY19/20) | Prospective Policies to Support Economic Recovery (FY20/21) - Health 1.3 - of which - treatment of COVID-19 cases 0.7 - medical equipment 0.3 - incentive payments to healthcare workers 0.3 - Social assistance 0.8 0.4 - of which - food support (1.3 million households) 2/ 0.5 - utility-payment subsidies for low-usage customers 4/ 0.1 - social-security fund contributions 0.0 - income support for those losing formal-sector employment 3/ 0.2 0.4 - Additional support 0.3 1.2 - of which - support for SMEs 1.2 - deferral of tax deadlines and exemption in customs duties for medical supplies 0.3 - Total 2.3 1.7 - Notes included in table: - 1/ Based on information provided by authorities. Mix of announced and prospective policy measures. As of April 15, 2020. - 2/ Covers 2 months of food provision - 3/ Details regarding implementation and coverage still to be finalized - 4/ Applies to electricity, internet, and data services ### Monetary and macro-financial measures (Text Table 4 and narrative) - Objectives and measures announced as of April 15, 2020 (Source: The NRB): - Liquidity provision - Reduce cash reserve ratio from 4 to 3 percent - Reduce the standing liquidity facility rate from 6 to 5 percent and a corresponding shift down to the interest rate corridor - Increase the Refinance Fund limit by Rs. 10 bn to provide subsidized funding to banks willing to lend to priority sector, including SMEs affected by COVID-19 - Support to borrowers - Allow banks to defer loan payments due in April until July without penalty and loan reclassification; In case a regular payment is made, request banks to provide 10 percent waiver on the interest payment - Request banks to make a loan approval decision within 5 days from application for those loans to tourism and transportation sector, as well as for imports and distribution of critical goods and equipment related to COVID-19 - Provide subsidized loans with a quick 7-day process to those who were already approved for foreign employment but not able to migrate due to COVID-10 and are willing to establish a domestic enterprise - Temporary regulatory forbearance - No longer require banks to build up the 2 percent countercyclical capital buffer that was due in July 2020 - Relax the BFI's reporting norm temporarily in April - Not charge any penalties for non-compliance of regulatory requirements in April - Financial-sector policy stance: - The NRB will continue to implement macroprudential measures to limit the buildup of systemic risk, and further strengthen bank supervision and regulation, including close monitoring of the asset quality of banks. - Staff advised the NRB to maintain transparency and accuracy of supervisory data and to clearly communicate expectations on compliance and timely restoration of compliance where breached. - Institutional and structural actions: - The central bank will continue to strengthen the monetary policy framework to reduce volatility in short-term interest rates and improve policy signaling and transmission. - Steps will be taken to improve the autonomy and accountability of the central bank, including by updating human resource management to facilitate staff capacity development. ### Medium-term fiscal, governance, and structural reform commitments - Fiscal policy: - Priority to protect fiscal sustainability while containing external and domestic pressures. - Continue improvements in public financial management practices while carefully managing the transition to fiscal federalism. - Authorities committed to maintaining fiscal discipline by managing expenditure closely to keep the deficit in check. - Once pandemic effects subside, an enhanced commitment to fiscal consolidation will be needed, facilitated by expiry of temporary support programs. - Revenue collection to be enhanced by upgrades to the tax system, in particular tax administration. - Efforts underway to examine and eliminate duplication of responsibilities and spending across levels of government. - Further measures to strengthen capital-spending execution rates and smooth its annual profile. - Investment climate and governance: - Continue structural reforms to encourage high-quality public- and private-sector investment projects, in particular FDI, requiring adequate staffing and alignment of incentives across and within ministries. - Strengthen governance, increase transparency and accountability, and tackle corruption and related money laundering. - Crisis-mitigation spending to be undertaken transparently, with quarterly reporting and an ex-post audit of spending from COVID-related external funding. - Implementing agency to publish large public procurement documentation and ex-post validation of delivery with the name of awarded companies and the name of their beneficial owner(s). - All COVID-19 related expenditures to be allocated and executed using existing public financial management (PFM) processes and within legislated frameworks. The Ministry of Finance will publish the allocation details on its website. - Authorities committed to continue to disclose all public sector financial commitments on a timely basis to the IMF/World Bank Group, requesting technical assistance as needed to ensure adequate reporting according to GFSM 2014 definitions. ### Fund support under the Rapid Credit Facility (RCF) - Rationale: - Financial support under the RCF reflects Nepal’s urgent balance of payments need following the COVID-19 pandemic shock. Nepal faces an urgent BOP need, which, if not addressed, would result in immediate and severe economic disruption. - Staff recommendation on access: - Staff considers access of 100 percent of quota (SDR 156.9 million; US$214 million) under the “exogenous shock” window of the RCF to be appropriate. - The pandemic has created a large balance of payments need of about 3.0 percent of GDP, and Fund financial assistance is critical to cover a significant share of it (22 percent of the external financing gap and 26 percent of the fiscal financing needs). Disbursement as budget support will help to meet pressing fiscal financing needs. - Outstanding credit would reach 122.7 percent of quota, below allowable limits. - Nepal’s capacity to repay the Fund remains strong. A disbursement of 100 percent of quota would result in Fund exposure to Nepal of 0.8 percent of GDP. Annual repayments should peak at 0.1 percent of GDP and 0.4 percent of government revenue in 2026. - Safeguards and conditional arrangements: - Safeguards are deemed adequate. The authorities committed to undergoing a new safeguards assessment of the NRB, and to provide Fund staff with the NRB's audit reports and authorize its external auditors to hold discussions with staff. The assessment is to be completed before the Board approval of any subsequent arrangement to which the safeguards policy applies. - The RCF will be disbursed to the Federal Treasury to support the COVID-19 response. Direct budget support is justified because of legal limits on direct central bank lending to the government. - Authorities will include in their Letter of Intent their commitment to a Memorandum of Understanding (MOU) between the NRB and Ministry of Finance specifying: - (i) the maintenance of a specific government account at the central bank (as a sub-account of the Federal Treasury) to receive IMF resources; - (ii) the requirement that the government should hold foreign exchange balances only with the central bank; and - (iii) the establishment of a clear framework agreement between the NRB and the Ministry on the responsibilities for servicing financial obligations to the IMF. ### Macroeconomic impact and staff appraisal - Economic impact and outlook: - The COVID-19 pandemic is having a severe impact on Nepal’s economy. COVID-19 is impacting growth mainly through a decline in remittances, a contraction in tourism, a slowdown in construction, as well as the impact on domestic activities because of social distancing measures. - Real GDP growth for FY2019/20 is expected to decline to 1 percent, significantly below the pre-COVID-19 estimate of 6 percent. - The fiscal deficit is expected to deteriorate by 2.7 percent of GDP, on account of additional spending and a shortfall in tax revenue. - The depth and duration of the current external shock is highly uncertain, and downside risks to the already-weak baseline outlook are significant. - Financing needs: - Estimates point to balance of payments need of 3.0 percent of GDP, and a fiscal financing need of 2.6 percent of GDP. - Policy endorsement and priorities: - Staff supports the authorities’ immediate priorities to mitigate the impact of the pandemic and preserve macroeconomic stability. Immediate efforts appropriately focus on increasing health spending, strengthening social assistance, ensuring adequate liquidity to the banking system, and supporting access to credit. - Beyond the immediate response, authorities remain committed to promoting inclusive growth, while preserving financial-sector and external stability as well as fiscal sustainability. *Source: IMF staff report (as presented in the specified content unit).* ### 19. Against this background, staff supports the authorities’ request for a disbursement ### 1nplea2020003 - 19. Against this background, staff supports the authorities’ request for a disbursement ### IMF decision and rationale - Staff supports the authorities’ request for a disbursement under the Rapid Credit Facility in the amount of SDR156.9 million (US$214 million), equivalent to 100 percent of quota. - Support is based on: - urgent balance of payments needs arising from a sudden exogenous shock; - the authorities’ existing and prospective policies to address this external shock; - the authorities’ commitment to seek additional external budget financing from other development partners. - Assessment notes: - Nepal continues to be assessed at low risk of external and overall debt distress. - Nepal’s capacity to repay the Fund remains strong. - While risks to the outlook are substantial, staff nonetheless recommends the disbursement. ### Key macroeconomic projections and indicators (selected, as presented) - Real GDP (annual percent change): - historical and projections include: 6.7; 7.1; 6.0; 1.0; 5.7; 3.5; 6.5; 5.4; 5.2; 5.2. - Headline CPI (period average): 4.1; 4.6; 6.0; 6.7; 5.9; 6.5; 5.8; 5.6; 5.3; 5.3. - Central Government fiscal indicators (in percent of GDP): - Total revenue and grants: 25.3; 26.0; 25.8; 24.0; 26.0; 25.2; 25.2; 25.1; 25.2; 25.2. - Tax revenue: 21.1; 21.9; 21.9; 20.0; 21.8; 21.0; 21.0; 20.9; 21.1. - Expenditure: 31.9; 30.6; 30.4; 31.2; 30.4; 31.8; 29.9; 29.6; 29.5; 29.4. - Net lending/borrowing: -6.7; -4.6; -4.5; -7.2; -4.4; -6.6; -4.7; -4.5; -4.3; -4.2. - Balance of Payments (in millions of U.S. dollars and percent of GDP): - Current account (millions of U.S. dollars): -2,350; -2,369; -1,760; -2,426; -1,832; -2,452; -2,168; -2,101; -2,093; -2,001. - Current account (in percent of GDP): -8.1; -7.7; -5.2; -7.6; -4.9; -7.1; -5.7; -5.2; -4.8; -4.2. - Trade balance (in millions of U.S. dollars): -10,849; -11,373; -11,658; -9,691; -12,379; -10,455; -10,953; -11,457; -11,995; -12,497. - Workers' remittances (in millions of U.S. dollars): 7,224; 7,769; 8,402; 6,012; 8,825; 6,572; 6,975; 7,368; 7,746; 8,144. - In percent of GDP: 24.9; 25.3; 24.7; 18.7; 23.6; 19.1; 18.5; 18.1; 17.7; 17.3. - Gross official reserves (in millions of U.S. dollars): 9,304; 8,545; 8,536; 8,049; 8,419; 7,046; 6,469; 6,096; 5,800; 5,691. - In months of prospective imports: 7.9; 8.2; 6.6; 7.2; 6.1; 6.0; 5.2; 4.7; 4.2; 4.0. - Public debt (in percent of GDP, memorandum): 30.2; 30.1; 33.7; 38.0; 35.7; 42.4; 43.8; 45.3; 46.7; 47.8. - Nominal GDP (in billions of U.S. dollars, memorandum): 29.0; 30.7; 34.1; 32.1; 37.4; 34.5; 37.7; 40.7; 43.7; 47.1. ### Financial sector and monetary indicators - Broad money (twelve-month percent change): 19.4; 15.8; 13.3; 8.6; 11.9; 11.4; 12.7; 11.3; 10.8; 10.8. - Domestic credit (twelve-month percent change): 26.1; 21.7; 17.6; 16.0; 15.7; 17.5; 14.6; 13.5; 13.4; 13.2. - Private sector credit (twelve-month percent change): 22.3; 19.1; 15.0; 11.5; 13.8; 13.3; 12.8; 12.2; 12.3; 12.1. - Financial Soundness Indicators (selected, percent, A-class commercial banks): - Capital to risk weighted assets: 13.4; 12.6; 12.2; 12.9; 14.7; 14.1. - NPLs to total loans: 1.9; 2.5; 2.1; 1.5; 1.4; 1.3. - Return on equity (ROE): 28.2; 26.9; 28.0; 17.8; 18.8; 15.0. - Liquid assets to total assets: 25.3; 24.4; 24.7; 23.0; 19.3; 18.4. ### Central government operations and COVID-19 fiscal measures - Total revenue and grants (in billions of Nepalese Rupees): 766; 901; 1,170; 1,006; 895; 1,132; 1,037; 1,169; 1,297; 1,441; 1,598 (selected years). - Total expenditure (in billions of Nepalese Rupees): 968; 1,059; 1,496; 1,182; 1,165; 1,322; 1,307; 1,388; 1,528; 1,685; 1,863 (selected years). - Net incurrence of liabilities (in percent of GDP): 2.9; 6.3; 11.4; 6.1; 8.8; 5.3; 7.5; 5.6; 5.4; 5.2; 5.1. - Foreign (in percent of GDP): 2.4; 2.1; 2.4; 3.6; 1.9; 1.5; 1.6; 1.6; 1.4; 1.3. - Note: "The size of COVID-19-related measures is 2.3 percent in FY19/20, 1.7 percent in FY20/21." ### Balance of Payments table highlights (selected) - Exports, f.o.b. (millions of U.S. dollars): 894; 1,002; 1,016; 938; 1,117; 984; 1,086; 1,198; 1,322; 1,459. - Imports, f.o.b. (millions of U.S. dollars): -11,743; -12,375; -12,675; -10,629; -13,496; -11,439; -12,039; -12,655; -13,318; -13,956. - Services receipts (millions of U.S. dollars): 1,697; 1,654; 1,844; 1,532; 2,034; 1,678; 2,063; 2,249; 2,427; 2,633. - Of which: tourism receipts: 643; 651; 729; 483; 811; 551; 830; 908; 987; 1,079. - Financial account (millions of U.S. dollars): 1,344; 689; 1,584; 1,772; 1,533; 1,280; 1,407; 1,533; 1,589; 1,670. - Overall balance (millions of U.S. dollars): 249; -704; -5; -492; -107; -992; -567; -362; -286; -100. ### Indicators of capacity to repay the Fund (Table 6, selected) - Fund obligations based on existing and prospective credit (millions of SDRs, selected years): 2.9; 7.2; 7.2; 7.2; 7.2; 22.9; 31.4; 31.4; 31.4; 31.4; 15.7; 0.0; 0.0; 0.0; 0.0. - Total obligations based on existing and prospective credit (millions of SDRs): 2.9; 7.2; 7.2; 7.2; 7.2; 22.9; 31.4; 31.4; 31.4; 31.4; 15.7; 0.0; 0.0; 0.0; 0.0. - Disbursements (millions of SDRs): 156.9; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0. - Outstanding IMF credit based on existing and prospective drawings (millions of SDRs, selected): 192.6; 185.4; 178.3; 171.2; 164.0; 141.2; 109.8; 78.5; 47.1; 15.7; 0.0; 0.0; 0.0; 0.0; 0.0. - Quota (millions of SDRs): 156.9 repeated across projection years. ### Additional notes, definitions, and data vintage - Note: 2020 Article IV Baseline is based on data as of end-Jan 2020, while current baseline forecast is as of April 15, 2020. - Net incurrence of foreign liabilities and official loans reflect pre-COVID identified financing and new financing (identified as of April 15) to support the COVID-response, including the IMF-RCF (US$214 million), Asian Development Bank (US$250 million), and World Bank (US$29 million). - Fiscal year ends mid-July. *Source: 1nplea2020003 - 19. Against this background, staff supports the authorities’ request for a disbursement* ### 2. The pandemic is adversely affecting the main sources of Nepal’s foreign currency ### 1nplea2020003 - 2. The pandemic is adversely affecting the main sources of Nepal’s foreign currency ### Impact on foreign currency earnings and growth - Remittances are falling due to the slowdown of economic activity in destination countries (namely Gulf Cooperation Council countries, India, and Malaysia) and travel restrictions for Nepali workers. - Tourism is severely affected by the worldwide collapse in air travel and border closures. - Exports have been negatively affected. - Supply disruptions and labor shortages are causing delays in infrastructure projects. - Domestic activity has also taken a toll amidst social distancing measures. ### Balance of payments needs and growth projection - Real output growth in FY2019/20 is anticipated to fall short by about 5 percent compared to the pre-COVID outlook. - The deterioration in the balance of payments is giving rise to a balance of payments need projected to be in the order 3.0 percent of GDP. - The country is experiencing an exceptional balance of payments need, with high uncertainty regarding the duration and scale of the COVID-19 impact. ### Fiscal impact and financing needs - Fiscal deficit is estimated to widen by about 2.7 percent of GDP. - Emerging spending pressures include higher spending on health and social assistance. - Fiscal financing needs are estimated at about 2.6 percent of GDP. - Significant budget resources will be needed to address the health and social spending requirements. ### External financing requests and anticipated donor support - The Government of Nepal requests emergency financing from the IMF under the “exogenous shock” window of the Rapid Credit Facility (RCF) in the amount of SDR156.9 million (US$214 million), equivalent to 100 percent of quota. - IMF debt relief provided under the Catastrophe Containment and Relief Trust (CCRT) of SDR 2.85 million (US$ 3.85 million) will also help to close the financing gap. - The World Bank has approved a fast-track $29 million COVID-19 Emergency Response and Health Systems Preparedness Project. - The Asian Development Bank is processing a pandemic response loan under the Countercyclical Support Facility for up to US$250 million. - The government intends to request debt service reprofiling from official bilateral creditors (including export-import banks) over the period May 1 and December 31, 2020, which would free-up resources of up to US$31 million for social, health or economic spending to respond to the COVID-19 pandemic. ### Use of IMF resources and financial management arrangements - The RCF disbursement is intended to help fill the projected fiscal financing gap and is requested to be made directly to the Federal Treasury. - Commitment to a Memorandum of Understanding (MOU) between the NRB and Ministry of Finance specifying: - maintenance of a specific government account at the central bank (as a subaccount of the Federal Treasury) to receive IMF resources; - requirement that the government should hold foreign exchange balances only with the central bank; - establishment of a clear framework agreement between the NRB and the Ministry on the responsibilities for servicing financial obligations to the IMF. ### Governance, transparency, and accountability measures - Commitment to ensure IMF-provided funds will be effectively used to safeguard public health, save lives, support livelihoods, and support the economic recovery. - Will put in place transparent and accountable reporting mechanisms and controls for public purchases and contracting processes. - Commit to report quarterly on the spending of these funds. - Commit to commission an independent audit by the Office of Auditor General of Nepal of COVID-19 related spending in about a year’s time. - Commit to publish the quarterly reports and audit results on the website of the implementing agencies. - Commit to publish on the implementing agency website large public procurement documentation together with ex-post validation of delivery along with the name of awarded companies and the name of their beneficial owner(s). - All COVID-19 related expenditures will be allocated and executed using existing public financial management processes and within legislated frameworks. - Allocation details will be made public on the Ministry of Finance website. ### Policy commitments and reforms - Fiscal policy: priority to protect fiscal sustainability while containing external and domestic pressures; maintain fiscal discipline by strengthening the tax system and managing expenditure closely to keep the deficit in check; continue improvements to public financial management while managing transition to fiscal federalism. - Monetary policy: continue to strengthen the monetary policy framework to support financial market development and improve policy signaling and transmission. - Financial sector policy: continue to implement macroprudential measures to limit the buildup of systemic risk and take actions to further strengthen bank supervision and regulation. - Structural reforms: committed to strengthening the investment climate, including through reforms that encourage high-quality public- and private-sector investment projects, in particular FDI. ### Safeguards, IMF policy adherence, and transparency commitments - In line with IMF safeguards policy, commit to undergoing a new safeguards assessment of the NRB and to continue providing Fund staff with the NRB's audit reports and authorize its external auditors to hold discussions with staff. - Do not intend to introduce measures or policies that would exacerbate the current balance-of-payments difficulties. - Do not intend to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions, trade restrictions for balance of payments purposes, or multiple currency practices, or to enter into bilateral payments agreements which are inconsistent with Article VIII of the IMF’s Articles of Agreement. - Remain committed to continue to disclose all public sector financial commitments on a timely basis to the IMF/World Bank Group. - Will request technical assistance from the IMF as needed to ensure adequate reporting according to GFSM 2014 definitions. ### Closing commitments - The government reaffirms determination to meet the immense challenge posed by the COVID-19 pandemic and notes that support from the international community will be critical. - The government looks forward to an early approval of financial assistance by the IMF and reaffirms willingness to remain engaged with the IMF for policy advice and capacity development support. *Source: 1nplea2020003 - 2. The pandemic is adversely affecting the main sources of Nepal’s foreign currency* ### 13. We authorize the IMF to publish this letter and the staff report for the request for ### NEPAL — REQUEST FOR DISBURSEMENT UNDER THE RAPID CREDIT FACILITY—DEBT SUSTAINABILITY ANALYSIS ### Key Findings and Risk Assessment - Debt coverage has not changed from the February 2020 DSA. - Nepal’s composite indicator score is 3.28, which signals a strong debt-carrying capacity. - Mechanical risk rating under the external DSA: Low. - Mechanical risk rating under the public DSA: Low. - Risk of external debt distress: Low. - Overall risk of debt distress: Low. - Granularity in the risk rating: Not applicable. - Application of judgement: No. - Realism tools flagged: Yes — standard multiplier analysis (that does not consider COVID-19 impact) suggests pessimistic growth in 2020 despite large fiscal stimulus. - This DSA update does not incorporate the potential debt service reprofiling of official bilateral debt. ### Macroeconomic Impact of COVID-19 (projections and observed effects) - The DSA update reflects the COVID-19 shock, with a significant impact on growth in FY2019/20 and FY2020/21. - Remittances have fallen considerably; tourist arrivals collapsed; domestic activities have dropped due to containment measures including a nationwide lockdown. - The macroframework underlying this DSA update is the same as that included in the staff report of the 2020 RCF request. - The COVID-19 economic impact and policy response are rapidly evolving, and risks are heavily tilted to the downside. - The authorities’ preliminary estimate of fiscal need to respond to COVID-19 and support recovery: 3.9 percent of GDP (USD 1.3 billion) in this and the next fiscal year. - Fiscal deficit estimate for 2019/20: 7.2 percent of GDP, higher by 2.7 percentage points than the pre-COVID-19 projection. - Net fiscal financing need in the short term: around 2.6 percent of GDP. - Balance of payments financing need projected: 3.0 percent of GDP (compared to pre-crisis estimates of almost balanced external position). ### Financing Strategy and External Support - IMF Rapid Credit Facility (RCF) requested: US$214 million (disbursement under the RCF referenced elsewhere as SDR 156.9 million equivalent to 100 percent of quota). - World Bank approved: $29 million COVID-19 Emergency Response and Health Systems Preparedness Project. - Asian Development Bank processing: pandemic response loan under the Countercyclical Support Facility for up to US$250 million. - IMF provided debt relief under the Catastrophe Containment and Relief Trust (CCRT): US$ 3.9 million. - Authorities intend to request debt service reprofiling from official bilateral creditors (including export-import banks) over the period May 1 and December 31, 2020, which would free-up resources of up to US$31 million. - Remaining financing gap to be financed by support from development partners or reserve drawdowns. - Authorities plan to finance remaining financing needs through domestic borrowing and view temporary widening of the budget deficit as needed, noting public debt is assessed to be at low risk of debt distress. ### DSA Key Indicators (selected, presented exactly as in source) - External debt (nominal): 2019: 17.1; 2020: 20.8; 2021: 21.0; 2022: 20.8; 2023: 21.0; 2024: 21.0; 2025: 20.9; 2030: 14.9; 2040: 18.7; (units: percent of GDP). - of which: public and publicly guaranteed (PPG) external debt: 2019: 17.0; 2020: 20.6; 2021: 20.8; 2022: 20.6; 2023: 20.7; 2024: 20.7; 2025: 20.5; 2030: 13.9; 2040: 18.7. - Change in external debt: -0.2; 3.7; 0.2; -0.2; 0.2; 0.0; -0.1; -0.3; -0.8 (2019 onward rows). - Identified net debt-creating flows: 6.4; 7.1; 5.9; 4.0; 3.6; 3.2; 2.6; 2.0; 2.7; -2.6; 3.3. - Non-interest current account deficit: 7.6; 7.4; 6.9; 5.6; 5.0; 4.6; 4.1; 3.5; 4.1; -0.6; 4.7. - Net current transfers (negative = inflow): -28.7; -22.3; -22.8; -22.2; -21.8; -21.5; -21.1; -18.9; -15.8; -29.2; -20.9. - Endogenous debt dynamics: -0.8; 0.0; -0.5; -1.1; -0.9; -0.8; -0.8; -0.8; -0.6. - Residual: -6.6; -3.4; -5.7; -4.2; -3.5; -3.1; -2.7; -2.2; -3.6; 1.4; -3.1. - PV of PPG external debt-to-GDP ratio: 12.4; 13.8; 13.7; 13.5; 13.4; 13.3; 13.1; 11.9; 8.7. - PV of PPG external debt-to-exports ratio: 142.7; 179.2; 177.9; 161.3; 158.1; 154.6; 150.0; 131.0; 85.9. - PPG debt service-to-exports ratio: 8.0; 9.4; 9.4; 8.6; 8.7; 9.0; 8.5; 8.2; 5.3. - PPG debt service-to-revenue ratio: 2.8; 3.2; 3.1; 3.0; 3.1; 3.2; 3.1; 3.1; 2.2. - Gross external financing need (Million of U.S. dollars): 2427.8; 2570.2; 2532.3; 2264.6; 2228.0; 2215.0; 2111.7; 2745.7; 6809.1. - Key macroeconomic assumptions: - Real GDP growth (in percent): 7.1; 1.0; 3.5; 6.5; 5.4; 5.2; 5.2; 5.2; 5.2; 4.9; 4.8. - GDP deflator in US dollar terms (change in percent): -1.3; 3.5; 3.8; 2.8; 2.4; 2.0; 2.0; 2.3; 2.3; 4.3; 2.6. - Effective interest rate (percent): 0.8; 0.9; 0.9; 0.9; 1.0; 1.0; 1.0; 1.0; 1.2; 1.0; 1.0. - Growth of exports of G&S (US dollar terms, in percent): 2.5; -7.0; 7.8; 18.3; 9.5; 8.8; 9.1; 8.7; 8.8; 5.6; 8.1. - Growth of imports of G&S (US dollar terms, in percent): 5.6; -12.3; 7.6; 5.7; 5.4; 5.5; 5.2; 6.5; 6.7; 12.9; 4.4. - Government revenues (excluding grants, in percent of GDP): 24.8; 22.8; 23.7; 23.7; 23.7; 23.8; 23.8; 23.9; 24.1; 19.3; 23.7. - Aid flows (in Million of US dollars): 368.3; 977.1; 892.1; 970.0; 1053.1; 1078.9; 1108.5; 1411.9; 2143.1. - Grant-equivalent financing (in percent of GDP): 3.2; 2.6; 2.6; 2.6; 2.5; 2.4; 2.1; 1.5; 2.4. - Nominal GDP (Million of US dollars): 30690.3; 32084.0; 34460.5; 37719.9; 40697.9; 43685.5; 46876.7; 68099.5; 142125.8. - Memorandum items: - PV of external debt (in percent of GDP): 12.5; 14.0; 14.0; 13.7; 13.7; 13.6; 13.5; 12.5; 9.7. - Total external debt service-to-exports ratio: 8.0; 11.3; 11.8; 11.2; 11.8; 12.5; 12.5; 14.2; 14.7. - PV of PPG external debt (in Million of US dollars): 3790.4; 4425.3; 4737.0; 5078.7; 5450.7; 5795.5; 6137.4; 8111.3; 12314.4. ### Public Sector Debt Indicators (selected) - Public sector debt (percent of GDP): 30.1; 38.0; 42.4; 43.8; 45.3; 46.7; 47.8; 49.7; 50.2; average: 30.6; projection average: 46.3. - of which: external debt: 17.0; 20.6; 20.8; 20.6; 20.7; 20.7; 20.5; 19.5; 13.9; 18.7; 20.3. - Change in public sector debt: -0.2; 7.9; 4.5; 1.4; 1.5; 1.3; 1.1; 0.3; -0.2. - Identified debt-creating flows: 0.8; 5.3; 3.6; 0.5; 0.6; 0.4; 0.2; -0.5; -0.8; -2.0; 0.8. - Primary deficit: 4.0; 6.6; 5.8; 3.8; 3.5; 3.2; 3.1; 2.6; 2.4; 0.5; 3.6. - Revenue and grants: 26.0; 24.0; 25.2; 25.2; 25.1; 25.2; 25.2; 25.1; 25.3; 21.3; 25.1. - PV of public debt-to-GDP ratio: 25.1; 31.4; 35.6; 37.0; 38.3; 39.5; 40.6; 42.4; 45.1. - PV of public debt-to-revenue and grants ratio: 96.4; 130.8; 141.5; 146.7; 152.4; 156.8; 161.1; 168.8; 177.9. - Debt service-to-revenue and grants ratio: 24.4; 24.3; 24.2; 28.5; 30.6; 33.5; 36.8; 40.6; 46.8. - Gross financing need: 10.3; 12.4; 11.9; 11.0; 11.2; 11.7; 12.4; 12.8; 14.2. ### Policy Recommendations and Authorities’ Measures - Recommended continuations for authorities: - Improve domestic productivity. - Streamline bureaucratic processes. - Compile PPP projects and private sector external debt. - Implement a medium-term debt strategy and develop the government bond market. - Improve subnational governments’ public financial management and reporting, and implement a prudent framework for subnational borrowing. - Authorities’ immediate policy responses: - Health containment and emergency health facility upgrades; nationwide lockdown and restrictions on movement and international travel; rapid testing and basic supplies provision. - Formation of High-Level Coordination Committee for the Prevention and Control of COVID-19 and the Nepal Relief Resilience and Recovery Advisory Committee. - Fiscal measures: Relief Funds at local and provincial levels; salary payment mechanisms during lockdown; free medical insurance for medical personnel and emergency workers; waiving of custom duty for medical equipment; tax payment deadline deferment; targeted public construction wages for informal workers; contemplated financial support to tourism, SMEs, and households; reprioritization of FY2019/20 and FY2020/21 public spending toward public health and social programs. - Monetary and financial measures by the central bank: - Bank rate reduced by one percentage point. - Cash Reserve Ratio cut by 100 basis points. - Central Bank Refinance Fund increased to NPR 100 billion. - Directed BFIs to defer scheduled installment payments due mid-March 2020 to mid-July 2020. - Suspension of countercyclical buffer requirement. - Fast loan processing for import/distribution of medical equipment, critical goods and food supplies. - BFIs instructed to provide a 2 percent interest rate discount to tourism, export and transportation industries for the upcoming quarter interest payment. - Interest rate for micro credit lending from microcredit institutions to be reduced by 3 percentage point. - Preparing mechanism to provide subsidized loans to individuals with work permits unable to go for foreign employment. ### Stress Tests and Sensitivity Analyses (high-level) - Stress tests and sensitivity analyses were carried out across alternative scenarios, bound tests, and tailored tests (including combined contingent liabilities and natural disaster scenarios). - In the baseline and under most extreme shocks presented, none of the debt and debt service indicators breach the indicative threshold values. - Given elevated gross financing needs, a deeper global slowdown could negatively affect Nepal’s risk of debt distress. *Prepared by the staff of the International Monetary Fund and the International Development Association. April 29, 2020* ### Conclusion ### Conclusion ### Challenges from COVID-19 - "The COVID-19 pandemic has posed significant challenges to the authorities’ efforts towards building a prosperous country." - Authorities "look forward to working closely with the IMF and to receive tailored policy advice, particularly in managing the returning Nepali migrant workers and the declining remittances so that the authorities could better address high unemployment and promote sustained economic growth." ### Policy commitments and priorities - "Our authorities are fully committed to pursuing sound macroeconomic policies and reforms to promote high and inclusive growth, create fiscal space and build buffers against external shocks, as well as strengthen financial sector stability and resilience." - "In this regard, deploying smooth fiscal federalism and fiscal prudence will remain a top priority for our authorities." - "Furthermore, they express firm commitment to strengthen good governance, transparency and accountability, and tackling corruption and money laundering as envisaged in the RCF LOI." ### Use of IMF funds and transparency - "To this end, our authorities reiterate that the fund provided by the IMF will be effectively used on public health management and support the economic recovery." - "In this regard, they are committed to proper reporting, auditing and maintaining the transparency on the use of these funds." *Source: 1nplea2020003 - Conclusion* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1nplea2020003.pdf_