## 1nplea2022001 ## Source details **Canonical URL:** [1nplea2022001](https://www.imf.org/-/media/files/publications/cr/2022/english/1nplea2022001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1nplea2022001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1nplea2022001.pdf.json) --- ### EXECUTIVE SUMMARY — Background and Program Modalities - COVID-19 impact: tourist arrivals collapsed; domestic activity plummeted; remittances volatile producing balance of payments and fiscal financing gaps. - Pre-pandemic buffers: modest fiscal deficit, relatively low public debt to GDP, comfortable gross official reserves. - Fiscal federalism: responsibilities devolved to 7 provincial and 753 local governments; concerns about weak subnational capacity (MEFP, ¶17). - Political context: Prime Minister Deuba vote of confidence on July 18, 2021; Status Paper August 2021; revised 2021/22 budget September 2021 prioritizing pandemic response, vaccine expenditures, and social protection. - ECF request and staff support: - 38-month ECF arrangement with semi-annual reviews. - Access at 180 percent of quota (SDR282.42 million, about US$398.8 million). - ECF to be used for budget support. - Public debt assessed at low risk of distress; adequate capacity to repay the Fund. ### RECENT DEVELOPMENTS — Health, Activity, and Policy Response - Health and activity indicators: - Over 800,000 confirmed COVID-19 cases and over 11,000 recorded COVID-19 deaths (majority during the second wave). - GDP contracted 2.1 percent in FY2019/20; staff estimate growth of 2.7 percent for FY2020/21. - Tourism fell 90 percent during the pandemic; partial recovery expected in FY2021/22; pre-pandemic levels not reached until later in FY2022/23. - Widespread vaccination not expected until well into calendar year 2022. - Policy response: - Rapid Credit Facility in FY2019/20 (100 percent of quota); support from World Bank, ADB and other partners; CCRT debt relief and DSSI reprofiling. - Cash transfers maintained/increased; expansion of Prime Minister’s Employment Program and skills training. - Tax relief: extended tax deadlines, VAT and customs duty exemptions for COVID-19 imports, income tax rebates for MSMEs and heavily affected industries. - Liquidity/credit measures, macroprudential easing, loan deferrals, enhanced refinance facility, concessional loans for entrepreneurs, MSMEs, and affected businesses including tourism. - Fiscal outcomes: - Overall fiscal deficit narrowed from 5.3 percent of GDP in FY2019/20 to 4.2 percent of GDP in FY2020/21 due to temporary factors. - Revenues rose by 2.2 percent of GDP from increases in import-related taxes and deferred tax receipts. - Budget execution constrained by second wave lockdowns. - Debt and creditors: - Public debt in FY2020/21: 47.2 percent of GDP; low risk of debt distress. - External and domestic debt roughly equal; external creditors mainly multilateral (88 percent of external debt); Japan largest bilateral creditor, followed by China, India, and Korea. - Banking and financial indicators (as of October 2021 unless noted): - Deposits increased year-on-year by 17.2 percent. - Total loans increased by 29.7 percent. - NPL ratio reported at 1.4 percent (from 1.8 percent in January 2021 and 1.5 percent as of August 2021), reflecting masking effects of COVID-related forbearance. - NRB has no concrete unwinding plan for COVID measures; exit likely to raise overdue loans and NPLs. - External sector and reserves: - Current account deficit of 8.3 percent of GDP in FY2020/21 after import rebound. - Import growth of 25.7 percent year-on-year in FY2020/21; goods exports grew 30.0 percent year-on-year but remain much smaller than imports. - Gross official reserves: US$10.22 billion (7.9 months of prospective imports) in October 2021, down from $10.56 billion in July 2020. - Reserves benefited from temporary factors including trade credit, official COVID loans, SDR allocation of SDR 150.4 million (US$214 million, 0.18 months of imports), and limited expenditure capacity during lockdowns. - Reserve coverage projected to decline through the program period, implying need for external and fiscal financing. - Structural external vulnerability: high import and remittance dependence and narrow export base create protracted BoP needs unrelated to the pandemic. ### OUTLOOK AND RISKS — Baseline Projections - Pandemic baseline: acute phase assumed over by mid-2022/23 but large uncertainty; vulnerability to further waves/variants (including omicron). - Baseline macro projections: - Growth: 4.4 percent in FY2021/22, driven by tepid recovery in construction, manufacturing, and services; longer-term support from public infrastructure and hydropower expansion. - Inflation: expected to rise to 5.7 percent during-FY2021/22, influenced by developments in India, oil and food prices. - Fiscal accounts: overall fiscal deficit expected to widen to 6.3 percent of GDP in FY2021/22 due to resumption of capital projects and pandemic response spending. - Current account: deficit expected at -9.1 percent in FY2021/22 as imports remain high and temporary factors unwind; remittances expected to begin recovery. - Main risks: - Pandemic depth and duration (principal risks). - Banking-sector vulnerabilities as forbearance is unwound. - Implementation capacity constraints and fiscal pressures from fiscal federalism. - Global risks: rising inflation and commodity prices. - Domestic risks: social/political instability and climate-related shocks (flooding, landslides, earthquakes). ### PROGRAM OBJECTIVES, DESIGN, AND ACCESS RATIONALE - Program objectives (3R plan alignment): - Mitigate COVID-19 impact on health/economic activity; protect vulnerable groups; enhance fiscal transparency and governance. - Preserve macroeconomic and financial stability: prudent fiscal stance, reserve adequacy, strengthen financial regulation/supervision. - Support medium-term reforms for sustained growth and poverty reduction: upgrade tax system; strengthen public spending efficiency; advance fiscal federalism; improve fiscal risk and public debt management; strengthen NRB institutional framework. - Access and financing rationale: - Staff considers access of 180 percent of quota (SDR 282.42 million; US$398.8 million) appropriate. - Immediate BoP gap estimated at 4.9 percent of GDP in FY2021/22 to be financed by ECF and partners (1.2 percent of GDP in firm commitments so far) and drawdown of reserves (3.1 percent of GDP). - Program fully financed with firm commitments for next 12 months and good prospects thereafter. - Phasing: - Combined access of 100 percent of quota available within first 12 months (50 percent at Board approval; 25 percent at first and second reviews); remaining 80 percent distributed in subsequent reviews. - Semi-annual reviews; quantitative performance criteria (QPCs) and structural benchmarks (SBs) specified. ### PROGRAM FINANCING TABLE (FY2021/22 — Text Table 2, percent of GDP) - External financing requirement: 9.2 - Total revenue and grants: 24.7 - of which: Expenditure: 31.0 - Current account balance 1/: 10.0 - Fiscal deficit: 6.3 - Available Financing: 4.4 - Total financing: 4.6 - of which: Net acquisition of financial assets: 1.3 - Foreign borrowing: 2.8 - Net incurrence of liabilities: 5.8 - Current and capital grants 2/: 1.3 - Foreign borrowing: 2.1 - FDI, net: 0.3 - Domestic borrowing: 3.7 - External financing gap 3/: 4.8 - Fiscal financing gap 3/: 1.7 - Financing commitments so far: - Total financing commitments so far: 4.8 - Fiscal financing commitments so far: 1.7 - IMF: Prospective arrangement: 0.4 - Asian Development Bank: 0.3 - World Bank: 0.9 - Drawdown of foreign reserves: 3.1 - Of which: SDR allocation: 0.6 - Notes: - 1/ Current account excludes official transfers. - 2/ IMF-CCRT debt relief (US$4.9 mil) is included. - 3/ IMF-ECF (US$166.2 mil), WB (US$350 mil), and ADB (US$100 mil). - Current baseline forecast as of December 7, 2021. ### FISCAL POLICY — Near-term Support and Medium-term Consolidation - FY2021/22 budget actions and social measures: - Kept many FY2020/21 COVID-19 measures. - Increased all types of social security allowance and Child Protection Grants by one third. - Expanded grants and free lunch program to poor families. - Increased COVID-19 vaccine purchases. - Tax relief and strengthened invoice monitoring; introduced digital service taxes. - Fiscal trajectory: - Overall fiscal deficit: 4.2 percent of GDP for FY2020/21; widen to 6.3 percent of GDP in FY2021/22. - Fiscal deficits expected to decline to 3.5 percent of GDP by FY2024/25. - Federal government primary deficit calibrated to stabilize debt by end of program while preserving priority expenditures (indicative target). - Revenue mobilization: - Revenues to improve with rebound and tax system upgrades; revenue mobilization strategy to be developed (MEFP ¶15). - Authorities to estimate tax expenditures related to international trade and report comprehensive tax expenditures after domestic component estimated (SB, 2nd review, MEFP ¶15). - Spending rationalization: - Spending expected to fall over time due to roll-off of temporary support measures and reduced duplication across government levels. - Indicative target to be introduced in second review focusing on child grant spending (MEFP ¶20). ### PUBLIC DEBT AND SUSTAINABILITY - Debt risk: Nepal assessed at low risk of distress. - Public debt projections: - Public debt projected to peak at 55.3 percent of GDP in FY2024/25, declining thereafter. - Stabilization occurs as primary deficit moves below debt-stabilizing level of 2.1 percent of GDP (similar to five-year average prior to COVID-19). - NAFA: - NAFA has averaged 1.3 percent of GDP per year and includes SOE financing; debt-to-GDP would stabilize earlier if NAFA were smaller or zero. - DSA highlights (selected): - PV of PPG external debt-to-GDP ratio: 12.5 (2020); 13.8 (2021); 14.9 (2022) ... (series provided in DSA tables). - Public sector debt: 42.2 (2020); 47.2 (2021); 51.6 (2022); projected to peak at 55.3 (2025). - Debt-stabilizing primary deficit estimates: around 3.3 percent of GDP (existing stock); about 2.1 percent if NAFA continues. ### FISCAL TRANSPARENCY, GOVERNANCE, AND ANTI-CORRUPTION - Transparency and reporting commitments: - OAG audits government accounts annually; OAG report for FY2019/20 published August 2021. - COVID-19 Fund spending published monthly; OAG expected to audit in 2022. - Quarterly federal government report on COVID-19 spending published; further report by March 2022 (SB, 1st Review). - Public Information Notice (PIN) issued on collection/publication of beneficial ownership; prior action requires publishing procurement documentation and beneficial owners for large COVID-19 contracts. ### MONETARY POLICY, INFLATION, AND NRB ACTIONS - Inflation: - Year-on-year consumer price inflation: 4.2 percent as of October 2021. - Wholesale price inflation: 3.8 percent as of October 2021. - Heightened inflation risks: Indian rupee appreciation, petroleum price increases, climate-related agricultural disruptions. - NRB stance and measures: - Commit to price and external stability and preserve exchange rate peg by maintaining adequate reserves (MEFP ¶22). - NRB moved from accommodative to more neutral for FY2021/22: - Increased deposit collection rate from 1 percent to 2 percent. - Increased policy rate from 3 percent to 3.5 percent. - Kept SLF constant at 5 percent. - NRB committed to restrict annual credit growth to 19 percent while expected deposit growth around 15 percent in FY2021/22. - NRB ready to provide liquidity via SLF and repo and to scale back refinancing facility gradually. ### FINANCIAL SECTOR — Liquidity, Credit Growth, Risks, and Supervision - Key financial indicators (selected): - Capital adequacy ratio (banking system): 13.5 percent (October 2021). - NPL ratio: 1.4 percent (October 2021). - Deposits growth: 17.2 percent y/y (October 2021). - Loans growth: 29.7 percent y/y (October 2021). - Cash balances of BFIs at NRB marginally above CRR and around 7 percent of previous year level. - Supervisory concerns: - High share of revolving loans, evergreening, difficulty monitoring consolidated exposures, unavailability of bank-level forbearance data; NPLs may be understated, provisioning inadequate, capital adequacy overstated. - Approximately 32 percent of profits stem from provision reversals as of July 2021 (one-off source). - NRB to enhance reporting templates to capture forbearance, provisioning, asset classification and payback capacity (SB, 1st review). - Sequenced supervisory strategy (four steps): 1. Ensure adequate/timely supervisory data (including COVID-19 measures). 2. Update regulatory framework to assess asset quality accurately. 3. Auditor-assisted on-site inspections to assess asset quality under new rules. 4. Continue to enhance supervision quality supported by upgraded data/regulation. - Specific commitments and timeline (selected): - SIS: full implementation for class A banks (SB, 2nd review) then classes B and C. - Draft amendments to asset classification/regulatory framework (SB, 1st and 2nd reviews). - Launch (SB, 3rd review) and complete (SB, 4th review) in-depth on-site inspections for 10 largest banks with third-party auditors; undercapitalized banks required to present recapitalization plans. - Enforcement and contingency: - NRB to take timely enforcement actions; early intervention measures available (Article 86C of NRB Act), including suspension of dividends, limits on loans/deposits/investments, changes in business structure, removal of management. - Covid-related forbearance to be gradually withdrawn; remaining measures targeted and time-bound. - Macroprudential measures (as of November 2021 selections): - Single obligor limit: Rs. 40 million from one institution and Rs. 120 million in total for margin nature loans. - Credit to deposit ratio (CD): currently 90%. - Debt service to income ratio: currently 50%. - LTV: 70% for margin loans and 60 percent for business housing projects licensed by government. ### NRB AUTONOMY, SAFEGUARDS, AND INSTITUTIONAL REFORMS - Safeguards assessment (2021): limited progress on previous recommendations; shortcomings in external audit and financial reporting; need to modernize central bank framework for greater autonomy and accountability. - Commitments: - Submit to Parliament amendments to modernize NRB Act addressing safeguards recommendations (SB, 2nd review). - Auditor General to appoint reputable international auditors to audit NRB financial statements starting with FY2021/22 (SB, 1st review, MEFP ¶25). ### STRUCTURAL BENCHMARKS, CONDITIONALITY, AND MONITORING (selected 12-month SBs) - Governance/transparency prior action: - Implementing agency publishes on government website large public procurement documentation, ex-post validation of delivery, name of awarded companies and beneficial owners for new, large, COVID-19 related contracts — Prior Action (as of December 9, 2021). - 1st Review (end-April/May 2022) examples: - MOF publishes federal COVID-19 related budget expenditures (end-April 2022). - FCGO reports consolidated financial information of all operational funds in annual financial statements starting with FY2020/21 (end-May 2022). - NRB commissions external audit of FY2021/22 financial statements (end-April 2022). - NRB enhances/customizes reporting templates and approves SIS action plan for class A banks (end-April 2022). - MOF publishes report on tax exemptions related to customs (end-April 2022). - 2nd Review (end-October 2022) examples: - MOF publishes report on tax exemptions for non-custom taxes; implements fiscal risk register; develops cash flow forecasting shared with PDMO and NRB. - NRB issues updated regulation on asset classification and completes full SIS implementation among class A banks. - Cabinet approves PIMA-based public investment efficiency action plan; NPC issues Poverty Reduction and Growth Strategy Paper. - Monitoring and data reporting: - Quantitative performance criteria (primary deficit of federal government, net international reserves) and continuous QPCs (no external arrears, no exchange restrictions). - Technical Memorandum of Understanding specifies data requirements and reporting timelines (monthly/quarterly/weekly provisions). ### FINANCING, ACCESS PHASING, AND CAPACITY TO REPAY - Proposed ECF disbursement schedule (SDR Million; Percent of Quota): - Board approval: 78.50 — 50% - First Review: 39.20 — 25% - Second Review: 39.20 — 25% - Third to Sixth Reviews: remaining tranches totaling 282.42 — 180% - Nepal quota: SDR 156.9 million. - Capacity to repay: - IMF credit outstanding projected to peak at 282.3 percent of quota in FY2024/25 (SDR 442.9 million), within PRGT cumulative normal access limit. - Corresponds to 7.9 percent of official reserves and 1.3 percent of GDP in FY2024/25. - Contingency planning: - Program includes 0.8 percent of GDP to support the financial sector; significantly larger fiscal allocation would be needed in a downside scenario. - Nepal’s buffers are first line of defense; additional fiscal/monetary measures and partner financing may be required if BoP pressures persist. ### EXTERNAL SECTOR, RESERVES ADEQUACY, AND CAPITAL FLOWS - Reserve adequacy (ARA methodology): - Nepal classified as credit constrained; baseline ARA estimate: 4.1 months of prospective imports. - Adjustment for natural disaster vulnerability raises optimal reserves to 4.8 months; additional buffer for remittances/tourism vulnerability adds 0.7 month — overall optimal: 5.5 months of prospective imports. - Capital flows: - Capital account moved to 6.5 percent of GDP in FY2019/20 from 2.6 percent in FY2018/19, driven by higher official loans and trade credits. - Official loans expected to remain strong; capital account mostly closed and inflows mostly long-term concessional loans — limited capital flow vulnerabilities. - External financing requirements and sources presented in program tables (detailed multi-year US$ and NPR series included in source). ### HEALTH RESPONSE — Annex II (selected) - First confirmed case: January 23, 2020. - As of December 1, 2021: - 821,651 cases and 11,529 deaths reported. - 2.3 million vaccine doses administered; 28 percent of eligible population fully vaccinated. - Government objective: vaccinate eligible population by April 2022. - Public-health measures: mask/vaccine campaigns, tailored mobility restrictions, expanded testing (RT-PCR labs increased to 102 in December 2021 from 63 in September 2020). - Capacity strengthening: increased hospital beds, quarantine centers, temporary hospitals; eliminated duties on medical imports; WHO partnership for training. - External financing and support mobilized: IMF RCF (May 2020); development partners: ADB, WB, WHO, UN. ### STAFF VIEWS, ASSESSMENT, AND KEY TAKEAWAYS - Staff supports 38-month ECF with access equivalent to 180 percent of quota (SDR 282.42 million). - Key assessment points: - COVID-19 severely impacted Nepal; authorities implemented wide-ranging fiscal, monetary, financial sector, and health measures. - Recovery led to higher growth and improved fiscal outturns in 2020/21, but important fiscal and external financing needs remain and risks are high. - External and overall debt assessed at low risk of distress; external position in FY2020/21 moderately weaker than fundamentals and desirable policies. - Main program risks: pandemic depth/duration; sustained ownership, capacity development, and partner support critical for success. - Program emphasis: prioritize urgent pandemic needs and critical reforms first; sequence reforms carefully; IMF technical assistance and SARTTAC support foreseen. *Source: EXECUTIVE SUMMARY and program sections, 1nplea2022001 — IMF staff report (December 22, 2021).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Background - The COVID-19 pandemic severely impacted Nepal’s economy: tourist arrivals collapsed, domestic activity plummeted, and remittances have been volatile, producing balance of payments and fiscal financing gaps. - Pre-pandemic buffers included a modest fiscal deficit, relatively low public debt to GDP, and a comfortable level of gross official reserves. - Transition to fiscal federalism: responsibility for many public services devolved to 7 provincial and 753 local governments, raising concerns about weak subnational government capacity (MEFP, ¶17). - Political context: Prime Minister Deuba obtained a vote of confidence on July 18, 2021; a Status Paper issued in August 2021 and a revised 2021/22 budget approved in September 2021 prioritized pandemic response, vaccine expenditures, and social protection. ### Program Objectives and Modalities - Authorities requested an Extended Credit Facility (ECF) arrangement to: - mitigate the pandemic’s impact on health and economic activity and protect vulnerable groups; - preserve macroeconomic and financial stability; - implement reforms to support sustained growth and poverty reduction; - catalyze additional external financing. - Staff supports a 38-month ECF arrangement with semi-annual reviews and access at 180 percent of quota (SDR282.42 million, about US$398.8 million). - The authorities would use the ECF for budget support. - Public debt remains at low risk of distress and there is adequate capacity to repay the Fund. ### Program Policies - Fiscal policy: early program stance accommodates spending to address health needs, support the economy, and protect the most vulnerable. Fiscal deficits would gradually decline once the health crisis wanes, helping stabilize public debt, while accommodating the authorities’ commitment to further enhance social safety nets. - Structural reforms: program supports a comprehensive fiscal structural reform agenda. - Financial sector: program sequences measures to strengthen financial sector regulation and supervision and to enhance the autonomy and accountability framework of the Nepal Rastra Bank (NRB). - Modalities: program ownership demonstrated by the Letter of Intent and Memorandum of Economic and Financial Policies. ### Recent Developments (Key findings and indicators) - Health and activity: - Over 800,000 confirmed COVID-19 cases and over 11,000 recorded COVID-19 deaths (majority during the second wave). - GDP contracted 2.1 percent in FY2019/20; staff estimate growth of 2.7 percent for FY2020/21. - Tourism fell 90 percent during the pandemic; forecast to partially recover in FY2021/22 and not reach pre-pandemic levels until later in FY2022/23. - Widespread vaccination not expected until well into calendar year 2022. - Policy response and relief measures: - Rapid Credit Facility in FY2019/20 (100 percent of quota), support from World Bank, ADB and other partners; debt relief under CCRT and reprofiling under DSSI. - Cash transfer programs maintained or increased; daily food rations and utility bill subsidies provided; expansion of Prime Minister’s Employment Program and skills training. - Tax relief: extension of tax deadlines, VAT and customs duty exemptions for COVID-19 related imports, income tax rebates for MSMEs and highly affected industries. - Liquidity and credit measures, macroprudential easing, loan deferral programs, enhanced refinance facility and concessional loans for entrepreneurs, MSMEs, and affected businesses including tourism. - Fiscal outcomes: - Overall fiscal deficit narrowed from 5.3 percent of GDP in FY2019/20 to 4.2 percent of GDP in FY2020/21 due to temporary factors. - Revenues rose by 2.2 percent of GDP from increases in import-related taxes and deferred tax receipts. - Budget execution constrained by second wave lockdowns. - Debt and creditors: - Public debt in FY2020/21 was 47.2 percent of GDP; Nepal remains at low risk of debt distress. - External and domestic debt roughly equal (Annex V); external creditors mainly multilateral (88 percent of all external debt), with Japan the largest bilateral creditor, followed by China, India, and Korea. - Banking sector and financial indicators: - Deposits increased year-on-year by 17.2 percent as of October 2021. - Total loans increased by 29.7 percent by October 2021. - NPL ratio reported at 1.4 percent (from 1.8 percent in January 2021 and 1.5 percent as of August 2021), reflecting masking effects of COVID-related forbearance measures. - NRB has no concrete plans yet for unwinding temporary COVID-mitigating measures; exit and loan recognition likely to raise overdue loans and NPL ratios. - External sector and reserves: - After initial 2020 collapse, imports rapidly grew, fueling a large current account deficit of 8.3 percent of GDP in FY2020/21. - Import growth of 25.7 percent year-on-year in FY2020/21; goods exports grew 30.0 percent year-on-year but remain an order of magnitude smaller than imports. - Reserves: gross official reserves were US$10.22 billion (7.9 months of prospective imports) in October 2021, down from $10.56 billion in July 2020. - Reserves benefited from temporary factors including strong trade credit, COVID-19 related official loans, the 2021 SDR allocation of SDR 150.4 million (US$214 million, 0.18 months of imports), and limited expenditure capacity during lockdowns. - Reserve coverage has begun to fall and is projected to continue declining through the program period, implying need for external and fiscal financing. - Structural external vulnerability: high import and remittance dependence and a narrow export base give rise to protracted BoP needs unrelated to the pandemic. ### Outlook and Risks - Pandemic trajectory is highly uncertain; baseline assumes acute phase over by mid-2022/23 as local transmission reduces to low levels, but Nepal remains vulnerable to further waves and new variants (including omicron). - Baseline projections: - Growth: forecast at 4.4 percent in FY2021/22, driven by tepid recovery in construction, manufacturing, and services; longer-term support from public infrastructure and hydropower expansion. - Inflation: expected to rise to 5.7 percent during-FY2021/22, broadly following developments in India and influenced by higher oil and food prices. - Fiscal accounts: overall fiscal deficit expected to widen to 6.3 percent of GDP in FY2021/22 due to resumption of capital projects and pandemic response spending. - Current account: deficit expected to remain wide at -9.1 percent in FY2021/22 as imports stay high and temporary factors unwind; remittances expected to begin recovery as migrant worker numbers increase. - External position in FY2020/21 was moderately weaker than implied by fundamentals and desirable policies. - Main risks: - Depth and duration of the pandemic are the principal risks; a worse-than-expected pandemic would weaken external demand, remittances, tourism, and domestic activity, creating larger and more protracted BoP and fiscal needs. - Banking-sector vulnerabilities as temporary forbearance is unwound. - Implementation capacity constraints and fiscal pressures from fiscal federalism. - Global risks: rising inflation and commodity prices, and the global response to inflation. - Domestic risks: social and political instability, and climate-related shocks and natural disasters (flooding, landslides, earthquakes). ### Staff Views and Program Assessment - The Letter of Intent and Memorandum of Economic and Financial Policies demonstrate program ownership and appropriate policies to reach authorities’ goals. - Main program risks: depth and duration of the pandemic; continued ownership, capacity development, and sustained support from development partners are key for success. *Source: EXECUTIVE SUMMARY, 1nplea2022001 — IMF staff report (December 22, 2021).* ### 14. The ECF program has three main objectives, aligned with the government’s Relief, ### 14. The ECF program has three main objectives, aligned with the government’s Relief, Restructuring, and Resilience (3R) plan ### Program objectives - Mitigate the COVID-19 impact on health and economic activity, and protect vulnerable groups, including by making room in the budget for health, social assistance, and job support, while enhancing fiscal transparency and governance. - Preserve macroeconomic and financial stability, including by maintaining a prudent fiscal stance, preserving reserve adequacy, and strengthening financial sector regulation and supervision. - Support a reform agenda that leads to sustained growth and poverty reduction over the medium-term, including by implementing cross-cutting institutional reforms that improve governance and reduce corruption vulnerability. Specifically: - Upgrading the tax system. - Strengthening public spending efficiency. - Advancing fiscal federalism. - Improving fiscal risk and public debt management. - Strengthening the NRB institutional framework. *Strong ownership, sustained support from development partners, and appropriate prioritization and sequencing of reforms are critical. The program emphasizes careful prioritization and parsimony: first attend the most urgent needs and critical reforms to tackle the pandemic shock, then gradually step up the pace of reforms. Implementation will be supported by IMF technical assistance, including through HQ and SARTTAC.* ### Fiscal policy: near-term support and medium-term consolidation - FY2021/22 budget actions: - Kept many COVID-19 response measures of FY2020/21. - Increased all types of social security allowance and Child Protection Grants by one third. - Expanded grants and free lunch program to poor families. - Increased COVID-19 vaccine purchases. - Provided tax relief to sectors adversely impacted by COVID-19. - Strengthened invoice monitoring and control to reduce tax leakage. - Introduced digital service taxes to expand tax bases. - Fiscal impact and trajectory: - Overall fiscal deficit will widen to 6.3 percent of GDP in FY2021/22 (though still less than the budgeted deficit in part due to underspending of the capital budget). - Fiscal deficits are expected to decline to 3.5 percent of GDP by FY2024/25. - Federal government primary deficit in the program period (indicative target (IT)) calibrated to stabilize debt by the end of the program period while preserving priority expenditures. - Revenue mobilization and spending: - Revenues will improve with rebound in economic activity and upgrades to the tax system, including reduction of ineffective tax exemptions, improving revenue administration efficiencies, and modernizing tax policy framework. - A revenue mobilization strategy (MEFP ¶15) will be developed. - Authorities have taken steps to estimate tax expenditures related to international trade and will report tax expenditures comprehensively after the domestic component is also estimated (SB, 2nd review, MEFP ¶15). - Spending will be lower over time due to roll-off of temporary support measures and reduced duplication across levels of government. - An indicative target will be introduced in the second review focusing initially on child grant spending (MEFP ¶20). - Staff will continue active engagement with development partners (including World Bank, UNICEF, FCDO) on social spending. ### Public debt and fiscal sustainability - Nepal assessed at low risk of distress. - Public debt projections: - Public debt is projected to peak at 55.3 percent of GDP in FY2024/25, declining thereafter. - Stabilization occurs as the primary deficit moves below the debt-stabilizing level of 2.1 percent of GDP (similar to the five-year average prior to the COVID-19 pandemic). - Net Acquisition of Financial Assets (NAFA) considerations: - NAFA has averaged 1.3 percent of GDP per year and includes financing of SOEs to implement the authorities’ development program (see DSA). - Debt-to-GDP would stabilize much earlier if NAFA incorporated in the baseline forecast were smaller or went to zero. ### Fiscal structural reforms supported by the program - Key measures (MEFP ¶14-18): - Action plan to address public investment efficiency gap (SB, 2nd review), drawing on PIMA and PIMA CC recommendations. - Development of a fiscal risk register (SB, 2nd review) followed by a comprehensive fiscal risk statement to be published with the budget speech (SB, 4th review). - Establishment of a fiscal risk monitoring system for subnational governments, supported by Fund TA (SB, 3rd review). - All operational funds to be reported to the Financial Comptroller General Office (FCGO) for inclusion in consolidated financial statements (SB, 1st review). - Cash flow forecasting to be prepared and shared with the PDMO and the NRB regularly (SB, 2nd review). - Transfer of debt management function from NRB to the PDMO (SB, 6th review). ### Fiscal transparency, governance, and anti-corruption measures - Program supports fiscal transparency and governance enhancements (MEFP ¶33-34) and cross-cutting institutional reforms to reduce corruption vulnerability. - Audit and reporting commitments: - Office of the Auditor General (OAG) audits government accounts annually and publishes results; the latest OAG report for FY2019/20 was published in August 2021. - Spending from the COVID-19 Fund is published monthly; OAG expected to audit this Fund in 2022. - Authorities have published a quarterly report on federal government spending on the COVID-19 response with a further report to be published by March 2022 (SB, 1st Review). - A Public Information Notice (PIN) on collection and publication of beneficial ownership information has been issued; implementation agencies will publish large public procurement documentation, ex-post validation of delivery, the name of awarded companies, and the name of their beneficial owner(s) for all new, large, COVID-19 related procurement contracts (Prior Action). ### Monetary policy and inflation - Inflation developments: - Year-on-year consumer price inflation stood at 4.2 percent as of October 2021. - Wholesale price inflation stood at 3.8 percent as of October 2021. - Heightened inflation risks include appreciation of the Indian rupee, increases in petroleum product prices, and agricultural production disruptions from climate-related factors such as monsoons and floods. - Monetary policy stance: - Authorities committed to price and external sector stability and preserving credibility of the exchange rate peg by maintaining adequate reserves (MEFP ¶22). - NRB moved from accommodative to more neutral monetary policy for FY2021/22: - Increased deposit collection rate from 1 percent to 2 percent. - Increased policy rate from 3 percent to 3.5 percent. - Kept Standing Liquidity Facility (SLF) constant at 5 percent. ### Banking system liquidity, credit growth, and risks - Credit and deposit developments (as of October 2021): - Deposits increased by 17.2 percent year-on-year. - Loans increased by 29.7 percent as of October 2021. - Cash balances of BFIs at the NRB are only marginally above the cash reserve requirement and around 7 percent of its level in the previous year. - Liquidity operations: - In the first three months of the current fiscal year, the NRB injected over Rs. 1 billion of liquidity. - Interbank transactions across commercial banks have increased with interbank interest rates approaching the SLF rate. - NRB objectives and limits: - NRB committed to restrict annual credit growth to 19 percent while expected deposit growth is around 15 percent in FY2021/22. - NRB stands ready to provide liquidity through SLF and repo facilities and to scale back refinancing facility gradually. - Staff reiterated that the interest rate corridor framework should be strengthened in the medium term. ### Banking system health and supervisory concerns - Reported indicators (as of October 2021): - Capital adequacy ratio of the banking system: 13.5 percent. - NPL ratio: 1.4 percent. - Supervisory concerns: - High share of revolving loans, evergreening practices, difficulty in monitoring consolidated borrower exposures, unavailability of bank-level forbearance data, and insufficient COVID-19 related monitoring raise concerns that NPLs are understated, provisioning is inadequate, and capital adequacy is overstated. - Ongoing COVID-19 related borrower support and regulatory forbearance measures may hide vulnerabilities; authorities intend to gradually phase these out. - As of July 2021, approximately 32 percent of profits stem from the written off provisions (reversals), a one-off source. - Staff will work with authorities ahead of the first review to analyze the banking system using bank level forbearance data. ### Macroprudential policy and monitoring - NRB readiness: - NRB stands ready to tighten macroprudential policies to curb credit growth and mitigate buildup of financial vulnerabilities (MEFP ¶24). - COVID-19 related support measures should be gradually unwound; remaining ones should be targeted and time-bound (MEFP ¶32). - Current macroprudential measures: - Single obligor limit: Rs. 40 million from one institution and Rs. 120 million in total for margin nature loans. - Credit to deposit ratio (CD): currently 90%. - Debt service to income ratio: currently 50%. - Loan to value ratio (LTV): 70% for margin loans and 60 percent for the business housing projects licensed by the government. ### Sequenced strategy to strengthen regulation and supervision - Four-step supervisory strategy: 1. Prioritize actions to ensure provision of adequate and timely supervisory data, including COVID-19 response measures. 2. Update regulatory framework to enable more accurate assessment of banks’ asset quality and better capture existing risks. 3. Provide accurate assessment of banks’ asset quality based on new regulation through auditor-assisted on-site inspections. 4. Continue to enhance quality of supervision, supported by upgraded data and regulation. - Specific commitments (MEFP ¶28-31): - NRB will enhance and customize reporting templates to collect information on forbearance, provisioning levels, asset classifications, and payback capacity of borrowers (SB, 1st review). - NRB will approve an action plan (SB, 1st Review) and complete full implementation of the Supervisory Information System (SIS) for class A banks (SB, 2nd review), then proceed with SIS for Class B and C banks. - NRB will draft amendments to the regulatory framework to address shortcomings in asset classification, including definitions of forborne loans and NPLs, and allow an adequate transition period for banks (SB, 1st review; SB, 2nd review). - NRB will launch (SB, 3rd review) and complete (SB, 4th review)—for the 10 largest banks— in-depth on-site inspections assisted by independent third-party auditors, with attention to loan and collateral valuation, evergreening, group borrowing, concentration risks, and COVID-19 impacts. Banks found undercapitalized will be required to present recapitalization plans. ### Enforcement, contingency measures, and NRB institutional reforms - Enforcement and corrective actions: - NRB committed to take relevant and timely enforcement actions where necessary. - If a bank becomes undercapitalized, NRB will use early intervention measures, including suspension of dividend payments and other corrective measures such as limitations in loans, deposits, and investments, requiring changes in business structure, and removal of management (Article 86C of the NRB Act). - NRB will ensure loan classification reflects true asset quality and regulatory forbearance measures will be gradually withdrawn. - Longer-term strategy: - Once the acute phase of the pandemic is over, authorities will develop a strategy to continue strengthening financial sector regulation and supervision, with IMF technical assistance and a potential Financial Sector Stability Review (FSSR) (MEFP ¶32). - AML/CFT and financial access: - Strengthening the AML/CFT framework remains a priority (MEFP ¶35). - Authorities committed to progress on AML/CFT implementation, remain vigilant to new risks, increase access to financial services, and develop financial markets while maintaining financial stability (MEFP ¶36). ### NRB autonomy and safeguards - Safeguards assessment (2021) findings: - Limited progress implementing previous safeguards recommendations. - Shortcomings in external audit of NRB’s accounts and financial reporting processes not meeting international standards. - Need to modernize central bank framework to strengthen NRB autonomy and accountability. - Commitments: - Authorities will submit to Parliament amendments to modernize the NRB Act addressing key safeguards recommendations (SB, 2nd review). - Auditor General will appoint reputable international auditors with experience in applying International Standards on Auditing and auditing central banks to audit NRB financial statements starting with FY2021/22 (SB, 1st review, MEFP ¶25). _Italic: IMF staff presentation of Nepal ECF program objectives, fiscal and monetary policy framework, debt projections, fiscal structural reforms, transparency and governance measures, and financial sector reform sequencing._ ### 29. Staff considers access of 180 percent of quota (SDR 282.42 million; US$398.8 million) ### 29. Staff considers access of 180 percent of quota (SDR 282.42 million; US$398.8 million) ### Rationale for access and financing - Staff considers access of 180 percent of quota (SDR 282.42 million; US$398.8 million) under the 38-month ECF to be appropriate. - The ECF would help Nepal address immediate BOP and fiscal financing needs related to the pandemic compounded by a pre-existing protracted balance of payments need from high import-dependency, a narrow export base, and a heavy reliance on remittances. - The pandemic response (including urgent procurement of vaccines and continued economic support measures) created an immediate balance of payments gap estimated at 4.9 percent of GDP in FY2021/22, to be financed with: - the ECF and budget support from development partners (1.2 percent of GDP in firm commitments so far), and - a drawdown of reserves (3.1 percent of GDP). ### Program design and phasing - The program is fully financed, with firm commitments in place for the next 12 months and good prospects for the remainder of the program. - Phasing will be somewhat frontloaded to match timing of acute COVID-related needs: - Combined access of 100 percent of quota available within the first 12 months (50 percent at Board approval, and 25 percent at the first and second reviews). - The remaining 80 percent distributed in subsequent reviews. - Program monitoring: - Semi-annual reviews. - Indicative targets (ITs) set on the primary deficit of the federal government (deficit ceiling, converting to QPCs in the 3rd review) and tax revenues (a floor, to be incorporated in the second year). - Quantitative performance criteria (QPCs) on net international reserves and continuous QPCs on non-accumulation of external arrears and non-introduction of exchange restrictions and multiple currency practices. - Structural benchmarks (SBs) for the first year tightly focused on urgent pandemic-related actions; a Poverty Reduction and Strategy Paper (PRSP) to be prepared (SB, 2nd review). ### Projected financing gap and financing composition (FY2021/22) — Text Table 2 (percent of GDP) - External financing requirement: 9.2 - Total revenue and grants: 24.7 - of which: Expenditure: 31.0 - Current account balance 1/: 10.0 - Fiscal deficit: 6.3 - Available Financing: 4.4 - Total financing: 4.6 - of which: Net acquisition of financial assets: 1.3 - Foreign borrowing: 2.8 - Net incurrence of liabilities: 5.8 - Current and capital grants 2/: 1.3 - Foreign borrowing: 2.1 - FDI, net: 0.3 - Domestic borrowing: 3.7 - External financing gap 3/: 4.8 - Fiscal financing gap 3/: 1.7 Financing commitments so far: - Total financing commitments so far: 4.8 - Fiscal financing commitments so far: 1.7 - IMF: Prospective arrangement: 0.4 - Asian Development Bank: 0.3 - World Bank: 0.9 - Drawdown of foreign reserves: 3.1 - Of which: SDR allocation: 0.6 Notes in table: - 1/ Current account excludes official transfers. - 2/ IMF-CCRT debt relief (US$4.9 mil) is included. - 3/ IMF-ECF (US$166.2 mil), WB (US$350 mil), and ADB (US$100 mil). - Current baseline forecast is as of December 7, 2021. ### Macroeconomic outlook, risks, and contingency planning - Fiscal and external financing needs will decline over the medium term supported by economic recovery, gradual dissipation of pandemic uncertainty, and authorities’ implementation of policies promoting macroeconomic stability and inclusive growth. - Development partners’ support for Nepal’s reform commitments under the ECF could catalyze additional medium-term support. - Capacity to repay: - IMF credit outstanding projected to peak at 282.3 percent of quota in FY2024/25 (SDR 442.9 million), within the cumulative normal access limit of the PRGT. - This corresponds to 7.9 percent of official reserves and 1.3 percent of GDP in FY2024/25. - Contingency planning: - Outlook subject to considerable uncertainty from depth and duration of the pandemic. - Nepal’s buffers provide an important first line of defense; additional fiscal and monetary measures could be needed if BoP pressures persist. - Current fiscal framework includes 0.8 percent of GDP to support the financial sector; a significantly larger fiscal allocation would be needed in a downside scenario. ### Policy priorities, conditionality, and capacity development - Program objectives include mitigating the Covid-19 impact on health and economic activity, preserving macroeconomic and financial stability, supporting recovery and poverty reduction, and catalyzing additional external financing. - Fiscal policy early in the ECF will accommodate spending for health, economic support, and protection of vulnerable groups; deficits to decline as health crisis wanes. - Fiscal structural reforms to be supported: domestic revenue mobilization, public investment, fiscal risk management, public debt and cash management, and advancing fiscal federalism prudently. - Governance and transparency: fiscal transparency, measures to enhance governance and combat corruption, and continued implementation of spending transparency commitments. - Financial sector reforms and technical assistance: - Strengthen supervisory framework, update regulatory framework, improve bank asset quality assessment and supervisory data, and sequence reforms to preserve financial stability while supporting growth. - NRB to monitor liquidity prudently, stand ready to provide liquidity, gradually scale down refinance facility, and unwinding accommodative monetary policy while remaining vigilant. - Measures to improve autonomy and accountability framework of the NRB. - Financial Sector Stability Review envisaged. - Safeguards and institutional reforms: - New safeguards assessment of the central bank completed; findings form basis for structural conditionality related to institutional reforms. - Agreement between NRB and MOF clarifying responsibilities for servicing obligations to the Fund to be put in place. ### Staff appraisal: key takeaways - COVID-19 severely impacted Nepal: tourist arrivals collapsed, domestic activity plummeted, remittances volatile, and growth lower than expected in 2019/20. - Authorities implemented a wide-ranging set of fiscal, monetary, financial sector, and health measures. - Recovery led to higher growth and improved fiscal outturns in 2020/21, but important fiscal and external financing needs remain and risks are high. - Both external and overall debt assessed at low risk of debt distress; external position in FY2020/21 moderately weaker than implied by fundamentals and desirable policies. - Based on protracted BOP need and policy commitments, staff supports a 38-month ECF arrangement with access equivalent to 180 percent of quota (SDR 282.42 million). *NEPAL INTERNATIONAL MONETARY FUND* ### 30.7 percent (y/y). ### 1nplea2022001 - 30.7 percent (y/y). ### Monetary and Financial Sector - Broad money (M2) growth contributions shown by: Net claims on government; Other net domestic assets; Net foreign assets; Private sector credit. - Nepal’s private sector credit-to-GDP ratio remains among the highest in its peer group. - The NRB is gradually unwinding its accommodative monetary policy stance. - Interest rate series (weighted averages and market rates) shown for: - Weighted Average Deposit Rate - Weighted Average Lending Rate - T-Bill Rate (91 days) - Interbank Rate of Commercial Banks - Monetary indicators (selected, as reported): - Private credit (in percent of GDP): 75.48, 83.79, 99.4, 104.3, 101.9, 100.6, 100.3, 101.2 - Broad money (end-period, in billions of Nepalese rupees): 3,582; 4,231; 5,155; 5,537; 5,941; 6,394; 7,087; 7,848 - Narrow money (end-period, in billions of Nepalese rupees): 727; 856; 1,049; 1,023; 1,098; 1,181; 1,309; 1,450 - Quasi-money (end-period, in billions of Nepalese rupees): 2,855; 3,375; 4,105; 4,514; 4,843; 5,213; 5,777; 6,398 - Net international reserves (in mil. U.S. dollars, memorandum): 8,536; 10,687; 10,844; 9,725; 8,944; 8,432; 8,229; 8,734 - Net foreign assets, NRB (in percent of GDP): 24.3; 32.5; 31.2; 26.7; 22.5; 19.7; 17.9; 17.2 ### Stock Market and Credit Growth - Stock market performance slowed in recent months (NEPSE Index compared with SENSEX Index shown). - Deposits and credit growth (year-on-year) and domestic credit to private sector series are presented; private sector credit shows strong year-on-year increases contributing to broad money growth. - Domestic credit to private sector (percent of GDP, 2020) comparative values shown: 30.17; 41.99; 51.21; 87.85; 121.58; 166.84 (country groups listed: Least developed countries 1/; Lower middle income; South Asia; Nepal; Middle income; High income). ### External Sector Developments - The FY2020/21 current account deficit was -8.3 percent of GDP, driven by a large rise in imports. - Following a collapse in trade during the first wave, imports and exports have rebounded strongly. - Imports increase driven by machinery, transport and equipment, followed by manufactured goods. - Remittances: - Volatile during the pandemic; were at $706 million in October 2021. - Monthly remittance flows and year-on-year change in 12mma presented in chart form. - Total number of foreign workers (new and renewals of Nepali workers abroad) increased significantly after coming to a near halt during the second wave. - Prior to the crisis, Nepal had a comparatively low, and falling, export to GDP ratio, limiting the contribution of exports to growth. - Balance of payments and external sector (selected figures, annual, in millions of U.S. dollars unless indicated): - Current account (levels, 2018/19–2025/26 excerpt): -2,369; -339; -2,844; -3,377; -2,520; -2,153; -1,946; -1,790 - Trade balance (levels): -11,373; -9,186; -11,510; -12,803; -12,820; -13,132; -13,528; -13,914 - Exports, f.o.b.: 1,002; 938; 1,219; 1,314; 1,429; 1,591; 1,786; 2,007 - Imports, f.o.b.: -12,375; -10,124; -12,729; -14,117; -14,249; -14,723; -15,314; -15,921 - Services (net) (levels): -147; -10; -618; -167; 103; 267; 351; 483 - Current transfers, credit (including remittances): 8,889; 8,506; 9,137; 9,391; 9,909; 10,401; 10,911; 11,196 - Workers' remittances (levels): 7,769; 7,533; 8,150; 8,231; 8,609; 9,004; 9,418; 9,850 - Gross official reserves (in mil U.S. dollars, memorandum): 8,545; 10,559; 10,884; 9,727; 8,946; 8,434; 8,230; 8,503 - Net international reserves (in mil. U.S. dollars, memorandum): 8,536; 10,687; 10,844; 9,725; 8,944; 8,432; 8,229; 8,734 - Current account (in percent of GDP): -6.9; -1.0; -8.2; -9.1; -6.2; -4.9; -4.1; -3.6 - Exports of G&S (in percent of GDP): 7.8; 6.7; 5.4; 7.1; 8.0; 8.4; 8.7; 9.0 - Imports of G&S (in percent of GDP): 41.5; 33.8; 40.4; 41.9; 39.4; 37.8; 36.8; 35.7 ### Fiscal Developments - Increase in import-related taxes and other temporary factors led to a narrowing of the fiscal deficit in FY2020/21. - Total public debt increased to 46.7 percent of GDP in FY2020/21 (reported as lower than previously envisaged). - Revenue increased in FY2020/21 contributed by import surge and deferred tax receipts. - Customs, VAT and excise duty overperformed in FY2020/21, mainly driven by import recovery. - The jump of import-related tax revenue was the main driver of the tax revenue recovery while domestic tax only marginally increased. - Capital expenditure continued being impacted; social benefits and grants (including transfers) were maintained as part of the COVID-19 response. - Central government fiscal aggregates (selected, fiscal year / percent of GDP or levels as presented): - Total revenue and grants (levels, 2022/23–2025/26 excerpt): 907; 863; 865; 1,072; 1,010; 1,241; 1,134; 1,323; 1,518; 1,725; 1,917 (table layout indicates multi-year series) - Total revenue (levels): 860; 840; 841; 1,012; 979; 1,181; 1,094; 1,273; 1,462; 1,664; 1,851 - Tax revenue (levels): 777; 737; 700; 913; 870; 1,068; 974; 1,143; 1,324; 1,511; 1,681 - Tax revenue (in percent of GDP): 20.1; 19.1; 17.9; 21.9; 20.9; 23.3; 21.2; 22.1; 23.0; 23.7; 23.8 - Total expenditure (levels): 1,158; 1,055; 1,074; 1,424; 1,186; 1,573; 1,424; 1,607; 1,777; 1,950; 2,134 - Net lending/borrowing (levels): -251; -192; -209; -352; -176; -333; -290; -284; -259; -225; -217 - Net incurrence of liabilities (levels): 324; 166; 254; 456; 316; 439; 348; 349; 331; 305; 305 - Public debt (in percent of GDP, memorandum): 33.1; 42.2; ...; 47.2; ...; 51.6; 53.6; 54.9; 55.3; 55.0 - Primary balance (in percent of GDP, memorandum): 0.0; -4.5; -4.7; 21.7; -3.4; 22.0; -5.4; -4.5; -3.5; -2.5; -1.9 - Notes and fiscal specifics: - Fiscal year ends mid-July. - 30 percent of VAT and domestic excise revenues are shared with sub-national governments. - Current baseline forecast is as of December 7, 2021. FY2020/21 budget is as of May 28, 2020; FY2021/22 budget is as of September 10, 2021. - CCRT debt relief tranches and approvals are listed for specific SDR amounts and dates in the fiscal notes. ### Socio-Economic Indicators - Nepal is among the lowest income countries in South Asia. - Poverty has fallen significantly in the last decade, partially due to high remittance flows. - Improvement in Nepal’s UNDP Human Development Index is noted. - Expected human capital development is somewhat hampered by incomplete education and health factors. - There is substantial scope and need to improve poverty metrics, including relating to hunger. - Substantial gains have been made in sanitation, though there is scope for further improvement. - Comparative indicators (selected from charts): - Per Capita GDP (PPP) comparisons for 2000 and 2019 include Nepal among lower values versus regional peers. - Poverty Headcount Ratio at $1.90 a day (Percent of population, 2011 PPP) shown for multiple countries with Nepal referenced (data points and years specified in chart notes). - Human Development Index (HDI, 2018) and Human Capital Index (as of 2018) plotted with Nepal among lower-scoring countries in the sample. - People Using At Least Basic Sanitation Services (Percentage of total population): charts show improvement for Nepal between 2000's and 2017. *Sources: Nepali authorities; IMF staff estimates and projections.* ### 2020. The second tranche of CCRT debt relief covering the period October 14, 2020 to April 13, 2021 for SDR 3.6 million ### 1nplea2022001 - 2020. The second tranche of CCRT debt relief covering the period October 14, 2020 to April 13, 2021 for SDR 3.6 million ### CCRT debt relief tranches and approvals - The first tranche of CCRT debt relief covering the period April 14, 2020 to October 13, 2020 for SDR 2.9 million in FY 2019/20 was approved on April 13, 2020. - The second tranche of CCRT debt relief covering the period October 14, 2020 to April 13, 2021 for SDR 3.6 million was approved on October 2, 2020. - The third tranche of CCRT debt relief covering the period April 14, 2021 to October 15, 2021 for SDR 3.6 million was approved on April 1, 2021. - The fourth and fifth (final) tranche of CCRT debt service relief covering the period from October 16, 2021 to January 10, 2022 and January 11 to April 13, 2022 was approved on October 6, 2021 and December 15, 2021 respectively for SDR 3.6 million. ### External financing requirements and available financing (Table 5: Nepal: External Financing Requirements and Sources, FY2021/22–2024/25) - Projections (In millions of U.S. dollars) as presented in source table: - Gross external financing requirements: 3424289826172371 - Current account excluding official transfers (+ = deficit): 3706291625732389 - Amortization of medium- and long-term debt: 243267285304 - Of which: Asian Development Bank: 85858585 - Of which: World Bank: 56565656 - Of which: Paris Club: 23232323 - Other net capital flows (- = outflow)/1: 525285241322 - Available financing: 1625174218161973 - Current and capital grants/2: 476582625674 - Medium- and long-term borrowing excluding exceptional financing: 1032998967938 - Of which: Vaccine support (World Bank and ADB): 165000 - FDI, net: 117162223361 - Portfolio investment, net: 0000 - Financing gap: 17981156801398 - Exceptional/additional financing/3: 17981156801398 - IMF: Prospective arrangement: 166.299.788.744.3 - Asian Development Bank /3: 1257510050 - World Bank /3: 350200100100 - Other development partners /4: 0000 - Vaccine support (World Bank and ADB) /5: 165000 - Gross reserves accumulation (+ = decrease): 1157781512204 - Memorandum items: - Gross official reserves (in millions of U.S. dollars): 9727894684348230 - Of which, Aug 2021 SDR allocation (in millions of U.S. dollars): 214 - In months of prospective imports: 7.36.55.95.5 - Notes and annotations provided in table: - 1/ Other includes currency and deposits, trade credits and other financial flows. - 2/ CCRT debt relief is included in grants and net incurrence of liabilities (foreign). (Detailed chronology of tranches repeated.) - 3/ Exceptional financing includes firm financing assurances for the first year of the program and good prospects of financing over the program and projection period. - 4/ Debt Service Suspension Initiative (DSSI) of US$32.5 million in FY2020/21. In line with the Revised Paris Club MOU, repayments are projected to start in FY2022/23 for a period of five years with a one-year grace period. - 5/ Vaccine support is project financing and is therefore included in the medium and long term borrowing of the authorities. The World Bank disbursed US$75 million in FY2020/21 and the ADB is expected to disburse US$165 million in FY2021/22. - Note: Current baseline forecast as of December 7, 2021. ### Financial soundness indicators (Table 6: Nepal: Financial Soundness Indicators, 2014/15–2020/21) - Capital adequacy: - Total Capital to risk weighted assets: 12.912.9 15.4 15.214.3 14.214.2 - Core capital to risk weighted assets: 11.4 11.5 14.113.9 12.812.0 11.1 - Asset quality: - NPLs to total loans: 3.32.21.81.61.51.91.5 - Loan loss provision to total loans: 3.82.92.62.32.2 3.62.5 - Deposits and credits: - Credit to deposit ratio: 76.879.883.685.486.983.288.1 - Credit to core captial cum deposit: 71.975.679.276.875.2 69.676.3 - Liquidity: - Cash & bank balance to total deposits: 16.2 15.215.513.2 11.612.29.5 - Total liquid assets to total deposits: 30.227.626.725.925.127.926.2 - Exposure to real estate and related indicators are presented in the table (values preserved as in source). - Note: Data reflect all banks and financial institutions. Data presented as at the end of the fiscal year (i.e. in mid-July for the year indicated). ### Proposed access and phasing under the Extended Credit Facility (Table 7) - Disbursement schedule (SDR Million; Percent of Quota): - Board approval of the Arrangement (January 12, 2022): 78.5050% - First Review (June 12, 2022): 39.2025% - Second Review (January 12, 2023): 39.2025% - Third Review (July 12, 2023): 31.4020% - Fourth Review (January 12, 2024): 31.4020% - Fifth Review (July 12, 2024): 31.4020% - Sixth Review (January 12, 2025): 31.3220% - Total: 282.42180% - Memorandum: Nepal's quota is SDR 156.9 million. ### Projected Fund obligations and capacity to repay (Table 9: Projected Payments and Indicators of Capacity to Repay the Fund, 2022–2035) - Fund obligations based on existing credit (millions of SDRs): - Principal: 3.67.17.17.135.0 31.431.4 31.431.40.0 0.00.00.00.0 - Charges and interest: 0.0 0.10.10.1 0.1 0.10.1 0.10.10.10.10.10.10.1 - Fund obligations based on existing and prospective credit (millions of SDRs): - Principal: 3.67.1 7.17.135.039.258.872.284.7 56.5 48.629.015.73.1 - Charges and interest: 0.00.10.1 0.10.10.10.10.1 0.10.10.10.1 0.10.1 - Total obligations based on existing and prospective credit: - Millions of SDRs: 3.6 7.27.27.2 35.039.358.972.284.8 56.548.729.115.73.2 - Billions of Nepali Rupees: 0.61.31.31.47.08.212.7 16.119.413.4 11.97.34.10.9 - Percent of exports of goods and services: 0.20.3 0.30.31.11.21.61.8 2.01.20.90.50.30.0 - Percent of debt service: 0.5 0.90.80.83.3 3.54.8 5.45.83.73.01.70.80.2 - Percent of GDP: 0.0 0.00.00.0 0.1 0.10.1 0.20.20.10.1 0.00.00.0 - Percent of government revenue: 0.1 0.10.10.10.40.40.60.6 0.70.4 0.30.20.10.0 - Percent of quota: 2.34.6 4.64.622.325.037.546.0 54.036.031.018.510.02.0 - Outstanding IMF credit based on existing and prospective drawings: - Millions of SDRs: 299.6363.0 418.7442.9407.9368.7309.9237.7 153.096.547.818.83.10.0 - Billions of Nepali Rupees: 51.464.778.085.882.2 77.166.852.935.122.811.74.70.80.0 - Percent of exports of goods and services: 16.216.1 16.615.813.210.98.35.93.5 2.0 0.90.30.10.0 - Percent of debt service: 44.147.549.3 47.638.532.925.517.910.5 6.42.91.10.2 0.0 - Percent of GDP: 1.11.31.4 1.31.21.00.80.50.3 0.20.10.00.0 0.0 - Percent of government revenue: 4.75.15.3 5.24.43.72.92.11.2 0.70.30.10.0 0.0 - Percent of quota: 190.9231.4266.9 282.3260.0235.0197.5151.597.561.530.5 12.02.00.0 - Net use of IMF credit (millions of SDRs): 114.163.555.724.2-35.0 -39.2-58.8-72.2-84.7-56.5-48.6-29.0-15.7-2.1 - Disbursements: 117.770.662.831.30.00.00.00.0 0.00.00.00.00.01.0 - Repayments and repurchases: 3.67.17.17.135.039.258.872.2 84.756.548.629.015.73.1 - Memorandum items (selected): - Exports of goods and services (millions of SDRs): 1,8502,2502,5222,8093,0903,3943,7284,0104,3184,7535,1275,6516,2316,635 - Debt service (billions of NPR): 116.7136.3158.4180.1213.5233.9261.8296.1333.2358.3398.4436.7480.9528.3 - Nominal GDP (at market prices, billions of NPR): 4,5965,1685,7556,3787,0637,8928,7739,75310,84212,05213,39714,89316,55618,404 - Government revenue (billions of NPR): 1,0941,2731,4621,6641,8512,0772,3062,5622,8503,1653,5183,9154,3494,833 - Quota (millions of SDRs): 156.9 (repeated across projection years) - Note: Nepal received debt relief of SDR2.9 million in FY2019/20 and SDR3.6 million in FY2020/21 covered by grants from the CCRT. (Chronology of tranches repeated in table notes.) - 1/ Reporting Year: August to July ### Proposed structural benchmarks (Table 10: Proposed Structural Benchmarks: 12-Months After Board Approval) - Cross-Cutting Institutional Reforms to enhance Fiscal Transparency, Governance, and Reduce Vulnerability to Corruption: - Implementing agency publishes on a government website large public procurement documentation, ex-post validation of delivery, name of awarded companies, and name of beneficial owner(s) for all new, large, COVID-19 related procurement contracts consistent with the December 2021 public information notice (as of December 9, 2021). — Prior Action. Macro-criticality: Enhance fiscal transparency and governance and reduce vulnerability to corruption. - The MOF publishes the federal government budget expenditures related to COVID-19 on a government website. — 1st Review (end-April 2022). Macro-criticality: Enhance fiscal transparency and governance and reduce vulnerability to corruption. - The FCGO reports the consolidated financial information of all operational funds in annual financial statements, starting with FY 2020/21 — 1st Review (end-May 2022). Macro-criticality: Improve cash management and fiscal transparency. - An external audit of the NRB financial statements for FY 2021/22 is commissioned, consistent with the recommendation in the 2021 Safeguards Assessment — 1st Review (end-April 2022). Macro-criticality: Strengthen NRB institutional framework, in support of NRB's policy mandates. - The MOF submits to Parliament amendments to modernize the NRB Law, addressing key recommendations of the 2021 Safeguards Assessments Report — 2nd Review (end-October 2022). Macro-criticality: Strengthen NRB institutional framework, in support of NRB's policy mandates. - Revenue mobilization and fiscal risk management: - The MOF publishes a report on tax exemptions related to customs — 1st Review (end-April 2022). Macro-criticality: Enhance fiscal transparency and lay the foundation for revenue mobilization. - The MOF publishes a report on tax exemptions for all other non-customs related taxes — 2nd Review (end-October 2022). Macro-criticality: Enhance fiscal transparency and lay the foundation for revenue mobilization. - The MOF implements a fiscal risk register to capture various dimensions of major fiscal risks — 2nd Review (end-October 2022). Macro-criticality: Enhance fiscal sustainability by strengthening fiscal risk management. - The MOF develops cash flow forecasting to be shared with the PDMO and NRB on a regular basis — 2nd Review (end-October 2022). Macro-criticality: Improve public debt and cash management, to improve debt transparency and risk management. - Equitable and sustainable growth and public investment: - Cabinet approves an action plan to improve the efficiency of public investment spending and strengthen climate resilience, drawing on PIMA recommendations — 2nd Review (end-October 2022). Macro-criticality: Raise the quality of growth. - The National Planning Commission issues a Poverty Reduction and Growth Strategy Paper — 2nd Review (end-October 2022). Macro-criticality: Promote equitable and sustainable growth. - Financial sector regulation & supervision: - The NRB enhances and customizes its current bank reporting template to enhance timely monitoring of the impact of COVID-19 on the financial sector — 1st Review (end-April 2022). Macro-criticality: Preserve financial stability. - The NRB Board approves an action plan for full implementation of the Supervisory Information System (SIS) for class A banks — 1st Review (end-April 2022). Macro-criticality: Strengthen financial sector supervision. - The NRB drafts amendments to regulations to strengthen identification criteria of non-performing loans, clarify rules of asset classification and reclassification, and provide guidance on restructuring and rescheduling — 1st Review (end-April 2022). Macro-criticality: Strengthen financial sector regulation. - The NRB issues the updated regulation on asset classification — 2nd Review (end-October 2022). Macro-criticality: Strengthen financial sector regulation. - The NRB completes the full implementation of the SIS among the class A banks — 2nd Review (end-October 2022). Macro-criticality: Strengthen financial sector supervision. ### Key COVID-19 financial sector relief measures (Annex I) - Liquidity provision: - Keep the cash reserve ratio at 3 percent.1/ - Keep the standing liquidity facility rate at 5 percent, increase the deposit collection rate from 1 to 2 percent and policy rate from 3 to 3.5 percent.2/ - Support to borrowers (selected measures): - NRB to provide Refinance Facility as subsidized funding to banks willing to lend COVID-19 affected businesses, widening coverage and prioritizing MSMEs and increasing fund size.3/ - Government to provide a concessional loan facility, with subsidies for interest and insurance premium, to selected commercial agricultural and livestock businesses, women enterprises, and other sectors.4/ - Government to provide business continuity loans to COVID-19 affected tourism, cottage, small and medium industries for payment of salaries to workers and employees in line with 'Business Continuity Loan Procedure, 2077.'5/ - Allow banks to provide additional amount on working capital loans by 20 percent above the limit as of April 2020, based on borrowers' needs and viability. - Allow banks to extend payment of loans to hard-hit sectors by one year after evaluation. - Due to prohibitory orders, allow banks to defer payments due by July 2021 to January 2022. - Allow banks to separately record interest amount for tourism businesses depending on international tourists separately till July 2022 and prohibit banks from charging interest penalties or late fees on such loans. - Allow banks to restructure/reschedule loans that were performing in January 2020 after collecting 10 percent of accrued interest; for borrowers unable to restructure/reschedule by January 2021 after paying 10 percent, allow restructuring/rescheduling by taking 5 percent of due interest by January 2022. - Allow borrowers to change business model once by April 2022 without counting it as loan misuse, restructuring or rescheduling, provided affected by COVID-19.7/ - Require banks to provide at least 12 percent of their total loans to MSME sector (loans up to Rs. 10 million) by July 2022.8/ - Temporary regulatory forbearance: - Allow loans that were in pass category in January 2020 and not met in July 2020 to remain in pass category with increased provisioning at 5 percent. - Allow banks to extend repayments of working capital loan and term loans up to 1 year. - Allow banks to defer provisioning for priority sector lending on a quarterly basis until January 2022. - Allow banks to classify firms having a net loss of three years in the watch list category (vs. two years previously). - Allow banks to capitalize interest of loans provided to long-term agricultural projects. - Relaxation of macroprudential policies: - Suspend build up of the 2 percent countercyclical capital buffer due in July 2020 until July 2022. - Increase loan-to-value ratio (LTV) to 60 percent for housing projects licensed by the government. - Keep LTV ratio on margin nature loans at 70 percent.9/ - Waive debt-equity ratio and single obligor limits for vehicle operation and maintenance loans to public transport services till July 2022.10/11/ - Revisions to dividend policy: - Allow banks to distribute cash dividend only when profit is higher than 5 percent of total paid-up capital, while limiting dividend amount to 30 percent of the FY 2019/20 profit. - Source notes and clarifications (selected): - 1/ CRR was reduced from 4 to 3 percent as of July 2020. Remained unchanged in the Monetary Policy 2021/22 First-Term Review. - 2/ SLF rate was kept at 5 percent, deposit collection rate was reduced from 2 to 1 percent and policy rate was reduced from 3.5 to 3 percent as of July 2020. Remained unchanged in the Monetary Policy 2021/22 First-Term Review. - 3/ Outstanding amount of refinance provided by NRB remained Rs.119.35 billion in mid-October 2021. Banks, not the NRB, bear the related credit risks. - 4/ Government subsidizes interest rates by 2 percent and 50 percent of insurance premium. As of mid-October 2021, the outstanding concessional loan is Rs.198.92 billion extended to 148,750 borrowers. - 5/ Under this provision, Rs. 1 billion loan has been approved as of mid-October 2021. - 6/ Such loans should be recovered in four installments after the end of relaxation period. - 7/ Interest is not allowed to be capitalized in such cases. - 8/ Deprived sector credit will be redirected to MSMEs gradually. Currently, loans up Rs. 1.5 million provided to self-employed businesses who lost their employment in tourism sector due to COVID; loans up to Rs. 2.5 million to purchase a vehicle for self-employment purpose; project loans up to Rs. 2 million provided to female entrepreneur and project loans up to Rs. 2 million provided to agricultural businesses are accepted as deprived sector loans. - 9/ Increased the limit on a bank's lending to 90 percent of the sum of its deposits and core capital from 85 percent until July 2022 (while removing carveouts), but any bank exceeding such limit was required to bring it down to 90 percent by mid-July 2022. As of August 2021, credit to deposit ratio (CD) was restricted to 90%. - 10/ It was increased from 65 percent to 70 percent in July 2020. - 11/ Debt-equity ratio for other loans is kept at 50%. The single obligor limit of the margin nature loan is fixed at Rs. 40 million from one institution and Rs. 120 million in total. - Note: Measures as of November, 2021. *Source: 1nplea2022001 - 2020. The second tranche of CCRT debt relief covering the period October 14, 2020 to April 13, 2021 for SDR 3.6 million (PDF).* ### Annex II. Nepal’s Pandemic Health Response ### Annex II. Nepal’s Pandemic Health Response ### Overview and timeline - Nepal’s first confirmed COVID-19 case: January 23, 2020. - As of December 1, 2021: 821,651 cases and 11,529 deaths have been reported. - Nepal has seen intermittent surges of rising infections ever since its first confirmed case. - Government objective: vaccinate its eligible population by April 2022. ### Public-health measures to address transmission - Measures taken include: - public sensitization campaign for mask wearing social distancing and vaccine acceptance; - tailored mobility restrictions particularly during surges; - expanded COVID-19 testing facilities. - RT-PCR testing laboratories: increased to 102 in December 2021 compared to 63 in September 2020. ### Improving access and strengthening healthcare capacity - The government of Nepal provides free basic healthcare for all. - With the onset of the pandemic, the government covered the cost of testing and treatment for the poor and vulnerable, frontline health, and other essential workers. - Capacity-strengthening actions: - increased hospital beds; - set up quarantine centers and temporary hospitals; - eliminated duties on the importation of medical supplies, which helped expand availability of equipment’s such as oxygen cylinders and generators; - partnership with the WHO to invest in training healthcare workers to address capacity constraints especially at the subnational level. ### Vaccination and international support - As of December 1, 2021: - 2.3 million vaccine doses have been administered; - 28 percent of the eligible population have been fully vaccinated. - Vaccine procurement and logistics: proactive efforts to obtain vaccines and ultra-cold storage facilities through grants, bilateral procurement and GAVI’s COVAX multilateral vaccine sharing facility. - Financing and external support mobilized: - IMF’s RCF financing in May 2020; - development partners: ADB, WB, WHO, UN. *Source: Annex II. Nepal’s Pandemic Health Response* ### 6.5 percent of GDP in FY2019/20 from 2.6 percent of GDP in FY2018/19, driven mostly by higher official loans a ### 6.5 percent of GDP in FY2019/20 from 2.6 percent of GDP in FY2018/19, driven mostly by higher official loans and trade credits ### Capital flows, FDI, and assessment - Capital account developments: - Capital account balance moved to "6.5 percent of GDP in FY2019/20 from 2.6 percent of GDP in FY2018/19", driven mostly by higher official loans and trade credits. - Official loans: 1.9 percent of GDP in FY2019/20. - Trade credits: 0.6 percent of GDP in FY2019/20. - FDI: 0.5 percent of GDP in FY2019/20. - Outlook for official financing: - "Official loans are expected to remain strong in the coming years, as support from multilateral and bilateral sources helps Nepal fight against and recover from the COVID-19 pandemic." - Assessment: - "As Nepal’s capital account remains mostly closed and financial inflows consist of mostly long-term concessional loans from multilateral and bilateral development partners, vulnerabilities related to capital flows are limited for Nepal." ### FX intervention and reserves level - Reserve stock levels and movements: - Reserves reached "US$11.7 billion (11.5 months of prospective imports of goods and services) in mid-January 2021", supported by a sharp drop in imports, resilient remittance performance, and continued financing inflows from development partners including the IMF. - Reserves declined to "US$10.9 billion (10.0 months of prospective imports) by July 2021", driven primarily by rising imports as the economy recovers. - Reserves remain "well above the reserve adequacy metric for Nepal" and "will be supported by the policies under the ECF", but "will likely remain under some pressure in the coming years as the current account deficit is projected to remain large." ### Reserve adequacy assessment (ARA methodology application) - Classification and methodology inputs: - Nepal is assessed to be “credit constrained” for the purpose of Assessing Reserve Adequacy (ARA), given that it rarely borrows from international capital markets. - Under the methodology, Nepal‘s economy is classified as non-resource rich, with a fixed exchange rate regime. - Costs of holding reserves are assumed at "6.2 percent" in the methodology. - ARA-derived optimal reserve levels: - Baseline ARA estimate: "4.1 months of prospective imports of goods and services." - Modification for natural disaster vulnerability (lowering external demand by 2 percentage points) raises optimal reserves to "4.8 months." - Additional buffer for remittances and tourism vulnerability: an increase of "another 0.7 month". - Overall optimal level of reserves: "5.5 months of prospective imports of goods and services." ### Macroeconomic impacts, recent developments, and outlook - COVID-19 impact on growth and activity: - GDP contracted "2.1 percent in FY2019/20." - Partial recovery in FY2020/21 with growth of "2.7 percent". - FY2019/20 downturn driven by declines in tourism, construction, and economic activity, and volatility in remittances. - Inflation and trade: - Inflation slowed to "4.2 percent in July 2021 from 4.8 percent in July 2020." - Imports grew rapidly, "import growth of 25.7% year on year in FY2020/21." - Fiscal and public debt: - Overall fiscal deficit narrowed from "5.3 percent of GDP in FY2019/20 to 4.2 percent of GDP in FY2020/21" due to temporary factors including increases in import related taxes and deferred tax receipts that raised revenues by "2.2 percent of GDP." - Public debt is estimated at "47.2 percent of GDP in FY2020/21" as defined in the Joint Bank-Fund Debt Sustainability Analysis. - Banking sector indicators: - Non-performing loan (NPL) ratio remains at "1.4 percent." - Reported capital adequacy ratios of all banks remain above regulatory minima in October 2021. - Near-term outlook and projections: - For FY2021/22, assuming vaccines widely available in the first half of FY2022/23 and continued pandemic impact in FY2021/22, growth is projected at "4.4 percent in FY2021/22." - Inflation expected to rise to "about 5.9 percent toward the end-FY2021/22." - Current account deficit projected at "-9.1 percent of GDP in FY2021/22." - Growth is expected to accelerate in FY2022/23 as the economy recovers from COVID-19. - Risks: - Downside risks include uneven global vaccination, new COVID-19 variants, subdued remittances and tourism, and volatility in external financing. ### Fiscal and policy measures (summary of government commitments and ECF support) - ECF request and purpose: - Government requested a "38-month ECF arrangement in the amount of SDR282.42 million (about US$398.8 million, 180 percent of Nepal quota)" to support COVID-19 response, protect vulnerable groups, preserve macroeconomic and financial stability, and catalyze additional financing. - Pandemic response and social support measures: - Vaccine and health commitments: vaccinate "all eligible citizens by Mid-April 2022"; continue free COVID testing and treatment in government facilities; purchased additional medical equipment including ICUs, ventilators, oxygen cylinders; mobilized additional health workers. - Social assistance measures: FY2021/22 replacement budget includes a "33 percent increase in all social security allowances including the child protection grant"; expanded scope of Social Security Fund to informal sector workers; expansion of Prime Minister’s Employment Program (PMEP) offering "100 days" of subsistence wage work. - Fiscal-financing use of ECF: request that "the ECF disbursement SDR282.42 million be made directly to the Federal Consolidated Fund" to fill projected fiscal financing gap from higher health and social assistance spending. - Financial sector and liquidity support: - Nepal Rastra Bank actions: lowered the policy rate and cash reserve ratio; increased size of the Refinance Facility Fund to provide subsidized interest rates to banks; eased macroprudential measures (no longer requiring banks to build a counter cyclical capital buffer and increasing the limit on loan to value ratios); provided temporary relief to affected borrowers through loan moratoria and regulatory forbearance. - Governance and safeguards: - Commitments to update the Memorandum of Understanding (MOU) between Nepal Rastra Bank and the Ministry of Finance regarding use of IMF resources for budget support (signed May 08, 2020). The MOU will specify (i) maintenance of a specific government account at the central bank to receive IMF resources under the ECF; and (ii) establishment of a clear framework agreement between the NRB and the Ministry on responsibilities for timely servicing financial obligations to the IMF. - Government commitment: "We do not intend to introduce measures or policies that would exacerbate the current balance-of-payments difficulties, or which are inconsistent with Article VIII of the IMF’s Articles of Agreement. We do not intend to accumulate external or domestic arrears." - Policy objectives under the MEFP: - Three main objectives: (1) mitigate the COVID-19 impact on health and economic activity and protect vulnerable groups; (2) preserve macroeconomic and financial stability; (3) implement a reform agenda to support sustained growth and poverty reduction. - Reform focus: boost revenues and public spending efficiency, strengthen financial sector regulation and supervision, improve institutional capacity, promote fiscal federalism and intergovernmental fiscal management, improve public investment efficiency, and enhance delivery of public services. *Source: NEPAL, INTERNATIONAL MONETARY FUND.* ### 4.2 percent of GDP for FY2020/21 and 6.3 percent of GDP for FY2021/22. On the expenditure side, ### 1nplea2022001 ### Fiscal stance and budgeting - Deficits: "4.2 percent of GDP for FY2020/21 and 6.3 percent of GDP for FY2021/22." - COVID-related expenditures: spending on "COVID-19 related healthcare, social assistance, and labor support, and concessional loans to businesses." - Social spending increases: "Budgeted social spending (including health, education and social protection) has been significantly increased by 24 percent in FY2020/21 and 52 percent in FY2021/22." - Administrative savings: measures to reduce office operation, fuel, low priority workshops, consultancy, purchase of furniture and vehicles, and allowances. - Operational grants: "operational grants to public entities other than those providing basic services have been stopped." - Revenue projection: "Revenues are expected to recover to 23.8 percent of GDP in FY2021/22." - Financing sources: support from development partners—including the prospective "IMF-ECF arrangement, World Bank and Asian Development Bank’s project loans and policy-based loans, and financing from official bilateral creditors, including the DSSI—as well as domestic debt issuance." ### Vaccine procurement and budget pressure - COVAX coverage: "COVAX facility, which would provide coverage for 20 percent of the population." - Bilateral grants: "Countries including India and China have provided vaccines as direct bilateral grants to Nepal." - Additional purchases: "We are also purchasing additional vaccines to extend coverage." - Constraints: "limited supply of vaccines and infrastructure constraints has impeded a more rapid rollout." - Resource mobilization: "We are mobilizing additional resources, including from development partners, to accommodate the additional spending needs on vaccines." ### Fiscal consolidation plan and safeguards - Phase-out: "We plan to phase-out temporary support measures as the recovery takes hold." - Revenue mobilization: "We will develop a domestic revenue mobilization action plan (further discussed below) to enhance revenue collection and make room for priority spending." - Expenditure rationalization: reduce redundant federal expenditures as responsibilities transfer to local and provincial governments. - Primary deficit objective: "The path for primary deficits will be consistent with maintaining medium-term fiscal sustainability while preserving priority expenditures, including social spending and other expenditures critical to support economic recovery." - Public enterprises: "We will also strengthen the financial oversight of public enterprises, with support of IMF technical assistance, and take steps to reduce associated fiscal risks as soon as feasible after the pandemic." ### Revenue mobilization (near and medium term) - Near-term measures: deferred tax deadlines in FY2019/20 and FY2020/21 during lockdowns; exemptions on customs duties for medical supplies; "VAT exemptions on Covid-19 related medical supplies and equipment"; tax rebates for micro, cottage and small businesses and industries highly affected by COVID-19 (air service, transport service, hotel, travel, and trekking businesses). - Historical revenue rise: "tax revenue had increased from less than 10 percent of GDP in FY2006/2007 to over 19 percent before COVID-19 (FY2018/19)." - Structural and policy contributors: Inland Revenue Management Strategic Plans, Customs Reforms and Modernization Strategies and Action Plan; growth in imports fueled by remittances and capital expenditures. - Structural benchmarks and transparency: - "develop a domestic revenue mobilization action plan (structural benchmark, 3rd review)." - "publish...estimated the related cost of tax exemption at the Department of Customs by March 2022 (structural benchmark, 1st review)." - "estimate the costs of other tax exemptions and publish their costs where feasible by September 2022 (structural benchmark, 2nd review)." - IMF technical assistance: support for DRM plan and cost estimates. ### Expenditure and public investment management reforms - PIMA findings: "significant room to improve the efficiency of our public investment management system"; weaknesses in resource allocation and project implementation; climate change module highlights opportunities to integrate climate considerations. - Action plan: "We will develop an action plan to improve the efficiency of public investment spending and strengthen climate resilience (by September 2022, structural benchmark, 2nd review)." ### Fiscal federalism and subnational fiscal framework - Devolution status: responsibility devolved to "7 provincial and 753 local governments." - Legal framework: enacted Intergovernmental Fiscal Arrangement Act, Local Government Operation Acts, and the Federal, Provincial and Local Level (Coordination and Interrelation) Act 2020. - Systems implemented: "All 7 provincial governments have implemented the Provincial Line Ministry Budget Information System (PLMBIS), and all 753 local governments have implemented the Subnational Treasury Regulatory Application (SuTRA)." - Subnational borrowing: authorized but "subject to pre-approval by the federal government and subject to certain limits that are set by the National Natural Resources and Fiscal Commission every year." - Monitoring framework: commit to implement a framework to monitor and contain fiscal risks from subnational governments based on IMF TA recommendations "by March 2023, structural benchmark, 3rd review." ### Fiscal risk management and debt transparency - PPP risks: recognition of explicit and contingent liabilities from PPPs; some public enterprises suffer losses and have defaulted on loans to the government. - COVID-19 loan programs: "various loan and loan guarantee programs... may also increase fiscal risks." - Climate and disaster risks: noted as significant. - Fiscal risk register and statement: - "take stock of these risks and develop a fiscal risk register by September 2022 (structural benchmark, 2nd review)." - "by September 2023, a comprehensive fiscal risk statement will be prepared and published (structural benchmark, 4th review)." - PDMO and debt management: - "established the Public Debt Management Office (PDMO) to consolidate the public debt management functions." - prepare "medium-term debt management strategy" and publish comprehensive debt bulletins in the PDMO portal with World Bank TA. - transfer domestic debt management from NRB to PDMO under the ECF program. - Cash management transparency: - "reporting all operational funds in the consolidated financial statements, starting with FY2020/21 (by May 2022, structural benchmark, 1st review)." - "develop cash flow forecasting by the Ministry of Finance... by September 2022 (structural benchmark, 2nd review)." ### Social spending and safety nets - Role of social spending: key in response to COVID-19 due to job and income losses, higher poverty risks. - Social program expansions: - increased coverage of the child grant to "an additional 11 districts (25 in total, selected based on human development index)." - expanded PMEP and skills training. - Healthcare spending projection: "Healthcare spending is expected to increase to 2 percent of GDP in FY2021/22 from 1 percent of GDP in FY2018/19," reflecting containment measures, strengthening basic healthcare, extending health insurance coverage, and building new hospital facilities. - Poverty strategy and registries: - "NPC will issue a Poverty Reduction and Growth Strategy Paper... by September 2022 (structural benchmark, 2nd review)." - developing a "National Social Registry (NSR), including a system of national identification cards, supported by the World Bank" and rolling out the "Poverty Identification Program (PIR) registry." - commitment to "preserve social spending, in particular the child grant." ### Monetary and exchange rate policy - Objectives: "price and external sector stability." - Exchange rate peg: commitment to "preserve the credibility of the exchange rate peg by maintaining an adequate level of reserves." - Interest rate corridor and liquidity: committed to improving effectiveness of the interest rate corridor and provide liquidity via SLF and repo facilities. - Policy moves for FY2021/22: - "increased the deposit collection rate (lower boundary for the interest rate corridor) from 1 to 2 percent and policy rate from 3 to 3.5 percent while keeping the standing loan facility rate (SLF) constant." - "refinancing facility will be gradually scaled back." - credit and deposit growth targets: "restricting the annual credit growth to 19 percent while the expected deposit growth is around 15 percent in FY2021/22." - Reserves and QPC: maintain adequate level of reserves (QPC) to preserve peg and prepare for weakening remittances or other risks. ### Macroprudential and financial sector policies - Existing macroprudential measures: - single obligor limit: "the single obligor limit of the margin nature loan is fixed at Rs. 40 million from one institution and Rs. 120 million in total;" - credit to deposit ratio (CD): "currently 90%;" - debt service to income ratio: "currently 50%;" - loan to value ratio (LTV): "currently 60%." - Prudential stance: ready to tighten macroprudential policies to curb credit growth and mitigate vulnerabilities. - NRB autonomy and safeguards: - submit amendments to modernize NRB Act "by September 2022 (structural benchmark, 2nd review)," to clarify price stability primacy, strengthen institutional and financial autonomy, clarify governance roles, and establish independence of the Board’s Audit Committee. - "Limits on the government’s borrowing from the NRB as defined in the NRB Act will be maintained." - "The external audit of Nepal Rastra Bank for FY2021/22 will be commissioned... (structural benchmark, 1st review)." - Supervisory enhancements and SIS: - enhance credit risk management capacities, including IRB approach, expected credit loss under IFRS 9, and simplified standardized approach with IMF TA. - implement Supervisory Information System (SIS): "approve an action plan by March 2022 (Structural benchmark, 1st Review) and complete the full implementation of the SIS for class A banks... by September 2022 (Structural benchmark, 2nd review)." - capacity needs for class B, C, D banks. - Asset quality and reporting: - "introduce, by March 2022, customized bank reporting templates to collect information on forbearance, provisioning levels and asset classifications on an ongoing basis (structural benchmark, 1st review)." - "prepare an assessment of the financial stability implications of COVID-19 based on the collected information." - Loan restructuring and regulations: - encourage restructuring for viable firms with temporary liquidity shortages. - draft amendments to regulations to: 1. "strengthen the identification criteria of non-performing loans (e.g., unlikeliness to repay in full, debt servicing with another loan);" 2. "clarify the rules of asset classification and reclassification, including for revolving loans;" 3. "provide a clear guidance on restructuring and rescheduling." - timeline: "draft the amendments and publish for a public consultation by March 2022 (structural benchmark, 1st review). By September 2022, we will issue the new regulation (structural benchmark, 2nd review), while allowing an adequate phase-in period for the banks to implement." *International Monetary Fund — Nepal: program and policy measures as presented in the provided content.* ### 30. We will continue to ensure banks’ compliance with prudential requirements. By March ### 1nplea2022001 - 30. We will continue to ensure banks’ compliance with prudential requirements. By March ### Banking supervision and prudential measures - Launch in-depth on-site inspections for the largest 10 banks by March 2023, assisted by a third-party international audit firm (structural benchmark, 3rd review) to review loan portfolios in line with the new regulatory framework with special attention to: - loan and collateral valuation - evergreening - group borrowing - concentration risks - Seek IMF support for preparation of terms of reference for hiring the third-party international audit firm and for the design of the loan portfolio reviews. - Complete the reviews and have the review results endorsed by the NRB Board by September 2023 (structural benchmark, 4rth review). - Develop a plan to address the review’s findings; any bank with capital shortfalls will be required to submit capital management plans describing how they will return to full compliance with regulatory requirements. - Prudently monitor relevant reclassification of loans and proactively provide guidance on the prudential treatment of moratoria and NPL management strategies. ### Supervisory Information System (SIS) implementation - Commitments and timeline: - NRB Board to approve a strategic plan for full implementation of the SIS among class A banks by June 2022 (structural benchmark, 1st review) ensuring sufficient data quality. - Complete full implementation of the SIS among class A banks and allow supervisors to fully rely on SIS reporting by November 2022 (structural benchmark, 2nd review). - Objectives: - Use SIS to enhance efficiency of the supervisory framework while protecting supervisory judgement. - Improve off-site surveillance using information and analyses from SIS to provide better feedback to on-site inspections. - Second stage aim: full implementation for class B and class C banks. ### Financial stability, enforcement, and pandemic-related measures - Commit to ensuring a stable and well-capitalized banking system to support recovery through effective monitoring and supervision. - Ready to take relevant and timely enforcement actions, including early intervention measures (e.g., further suspension of dividend payments) if any bank becomes undercapitalized. - Covid-related support measures in the financial sector will be gradually unwound; remaining measures will be targeted and time-bound. - Ensure banks’ loan classification correctly reflects asset quality; regulatory forbearance measures will be gradually withdrawn. - Once the acute phase of the pandemic is over, develop a strategy to continue strengthening financial sector regulation and supervision, with support from IMF technical assistance and a potential Financial Sector Stability Review (FSSR). ### Governance, transparency, and anti-corruption commitments - Steps taken: - Ratified the United Nations Convention Against Corruption (UNCAC). - Established several anti-corruption bodies and enacted anti-corruption related legislation. - Prevention of Corruption Act (PCA) is the main anti-corruption law. - Commission for the Investigation of Abuse of Authority (CIAA) is the constitutional body for corruption control. - Ongoing actions: - Ensure PCA is fully in line with UNCAC and its implementation and enforcement are adequate. - Strengthen the AML/CFT framework in advance of the Asia/Pacific Group on Money Laundering (APG) mutual evaluation in 2022. - Remain vigilant against the risk of being listed by the FATF as a country with strategic AML/CFT deficiencies. ### Transparency of COVID-related expenditures and public financial management - Achievements: - Implemented cash basis International Public Sector Accounting Standards; all expenditures are available online daily. - Monthly aggregate expenditures of the COVID-19 Fund continue to be published on the FCGO website. - Published a comprehensive report on government spending related to the COVID-19 response on the MOFs website with ADB support, focusing on: health systems; social protection for the poor and vulnerable; economic recovery for affected sectors. - Commitments: - Publish a further report by March 2022 (structural benchmark). - Expect government expenditure on COVID to decline in FY2022/23. - Continue to monitor and publish a streamlined set of information on remaining budgetary expenditures related to COVID on a semi-annual basis. - Annual comprehensive audit of the Office of the Auditor General for FY2020/21 to be published in 2022 covering all government spending. - Issued a Public Information Notice (PIN) on collection and publication of beneficial ownership information; implementation agencies will publish, on a government website, large public procurement documentation, ex-post validation of delivery, the name of awarded companies, and the name of their beneficial owner(s) for all new, large, Covid-19 related procurement contracts (as of December 9 2021, prior action). ### Payments, financial inclusion, and capital market development - Monitor cooperatives as growing financial services providers and their linkages to banks and financial institutions. - Continue development of safe and efficient payment system infrastructure and practices with emphasis on retail payments. - Implementing the Retail Payment Strategy (with World Bank support) to: - deepen digital retail payment system - promote channeling of government and remittance payment to transaction accounts - increase financial literacy with targeted interventions towards women - strengthen legal and regulatory framework - For capital markets: - Adopt a medium-term debt management strategy to build and maintain a functioning yield curve. - Upgrade the securities depository system. ### Risks and contingencies - Main risk: trajectory of the COVID-19 pandemic in Nepal and globally is extremely uncertain and will continue to weigh on the economic outlook. - If Covid-19 developments deteriorate compared to baseline, economic outcomes would worsen; potential upside risks exist if developments are more benign. - Nepal’s buffers: strong levels of foreign exchange reserves and low risk of debt distress provide policy space near term with financing from development partners. - If the pandemic intensifies or tail risks lead to a financing shortfall, commit to: - close the gap with additional expenditure compression of lower priority recurrent and capital expenditures - seek additional financing from development partners. ### Financing and program monitoring - Government estimates financing needs for the FY2021/22-FY2024/25 program will be covered by assistance from the IMF, the World Bank, the Asia Development Bank, and official bilateral creditors. - IMF disbursements will be made available to the budget during the program period. - Program monitoring: - Closely monitored through quantitative performance criteria, indicative targets, and structural benchmarks as listed in Tables 1 and 2. - Technical Memorandum of Understanding specifies definitions and data provision requirements. - First two program reviews scheduled for completion in June 2022 and January 2023 (based on mid-January and mid-July 2022 test dates, respectively). - Thereafter, monitoring continues on a semi-annual basis by the IMF Executive Board. ### Program technical details — Program exchange rates and gold valuation (Attachment II) - Program exchange rate for converting USD to Nepali Rupees: NPR 119.19 per one USD (corresponds to exchange rate on November 3, 2021). - Gold valuation: USD 1,777 per troy ounce (price in September 2021). - Assets and liabilities denominated in SDRs and in foreign currencies not in USD will be converted into USD at the September 30, 2021 exchange rates reported in Table 1. - Table 1. Nepal: Program Exchange Rates (reference date for Nepali Rupee is November 3, 2021) - U.S. dollars / Nepali rupee 0.008 - U.S. dollars / U.K. pound 0.744 - U.S. dollars / Indian rupee 0.013 - U.S. dollars / Chinese Yuan 0.155 - U.S. dollars / Euro 0.864 - U.S. dollars / Japanese yen 0.009 - U.S. dollars / Brunei dollar 0.735 - U.S. dollars / Korean won 0.001 - U.S. dollars / Kuwaiti dinar 3.315 - U.S. dollars / Malaysian ringgit 0.239 - U.S. dollars / Omani rial 2.601 - U.S. dollars / Qatari riyal 0.275 - U.S. dollars / Russian ruble 0.014 - U.S. dollars / Saudi Arabian riyal 0.267 - U.S. dollars / Thai baht 0.030 - U.S. dollars / U.A.E. dirham 0.272 - U.S. dollars / Singapore dollar 0.735 - U.S. dollars / SDR 0.694 ### Net International Reserves (NIR) definition and program targets - NIR defined as reserve assets minus reserve related liabilities of Nepal Rastra Bank (NRB) expressed in U.S. dollars. - Reserve assets (per BPM6) include: - NRB holdings of monetary gold, SDRs, Nepal’s reserve position in the IMF, foreign currency cash (including foreign exchange banknotes in the vaults of NRB), and readily available deposits abroad (including balances on accounts maintained with overseas correspondent banks). - Excluded from reserve assets: assets pledged/collateralized/encumbered; claims on residents; precious metals other than monetary gold; illiquid assets; claims arising from derivatives in foreign currencies vis-à-vis domestic currency. - Reserve related liabilities include: - foreign exchange liabilities of NRB to nonresidents - Nepal’s outstanding credit to the IMF - foreign currency reserves and deposits of commercial banks and other financial institutions held at the NRB - commitments to sell foreign exchange arising from derivatives - all arrears on principal or interest payments to commercial banks, suppliers, or official export credit agencies. - All foreign-currency related assets and liabilities will be converted into USD at the exchange rates specified in paragraph 1, Table 1. - Targets for the program NIR are set as a floor. - Program NIR includes adjustors for: - budget support from development partners - downward adjustment to the NIR floor if actual disbursement is below projections; projection for first 2 test dates in Table 2. - revenue collection - if revenue collection is below projected level, NIR target adjusted by the equivalent USD amount of the revenue adjustor to the primary deficit ceiling. - Cap on downward adjustment: any downward adjustment to the NIR floor for the described conditions capped at USD 1040 million for FY2021/22. - Table 2. Nepal: Budget Support from Development Partners Projected under the Program (Cumulative over the Respective Fiscal Year, USD million) - January 15, 2022 150 - July 15, 2022 641 *Italic: Excerpted from 1nplea2022001 - 30. We will continue to ensure banks’ compliance with prudential requirements. By March (PDF chapter).* ### 6. The budgetary central government, for the purpose of the program, consists of all ### 6. The budgetary central government, for the purpose of the program, consists of all ### Institution coverage (budgetary central government) - The budgetary central government consists of all the entities listed in the Administrative Expenditure Estimate table of the budget (Table 3). - Institutions included (as listed in Table 3) include: - President; Deputy President; Chief of Provinces; Federal Parliament; Courts - Commission for Investigation of Abuse of Authority; Office of the Auditor General; Public Service Commission; Election Commission; National Human Rights Commission; Council of Justice; National Natural Resources and Fiscal Commission - National Women Commission; National Dalit Commission; National Inclusion Commission; Indigenous Nationalities Commission; Madhesi Commission; Tharu Commission; Muslim Commission - Office of Prime Minister and Council of Ministers - Line ministries: Ministry of Finance; Ministry of Industry, Commerce and Supply; Ministry of Energy, Water Resources and Irrigation; Ministry of Law, Justice and Parliamentary Affairs; Ministry of Agriculture and Livestock Development; Ministry of Water Supply; Ministry of Home Affairs; Ministry of Culture, Tourism and Civil Aviation; Ministry of Foreign Affairs; Ministry of Forest and Environment; Ministry of Land Management, Cooperative and Poverty Alleviation; Ministry of Physical Infrastructure and Transport; Ministry of Women, Children and Senior Citizen; Ministry of Youth and Sports; Ministry of Defense; Ministry of Urban Development; Ministry of Education, Science and Technology; Ministry of Communications and Information Technology; Ministry of Federal Affairs and General Administration; Ministry of Health and Population; Ministry of Labour, Employment and Social Security - Planning and reconstruction bodies: National Planning Commission; National Reconstruction Authority - MOF items: MOF- Financing; MOF- Domestic Debt Service; MOF- External Debt Service (Multilateral); MOF- External Debt Service (Bilateral); MOF Staff Benefits and Retirement Benefits; MOF Miscellaneous - Province (Equalization, Special and Complementary); Local Level (Equalization, Special and Complementary) ### Definition and measurement of the primary deficit - Primary deficit of the budgetary central government = primary expenditures minus revenues minus grants. - Primary expenditures: - Include capital expenditures and recurrent expenditures except interest payments. - Exclude financing expenditures (amortization of domestic and external borrowing, loan and share investment in public enterprises and other enterprises, and foreign share investments). - Capital expenditures are as defined in the budget. - Recurrent expenditures (excluding interest) include: compensation of employees; use of goods and services; subsidies; grants; social security; other current expenditure. - Revenue sharing for province and local levels is excluded. - Revenues: - Revenues of the budgetary central government are those to be deposited in the Federal Treasury and include all taxes and non-tax revenue as defined in the budget. - Revenue sharing for province and local levels is excluded. Other receipts are excluded. - Recognition and reporting: - Revenues and primary expenditures should be recognized on a cash basis. - The Financial Comptroller General Office monthly reports will be used as the basis for program monitoring. - Targets: - Targets for the primary deficit are set as a ceiling for cumulative flows from the end of the previous fiscal year. - Adjustors are included for revenue collection outcomes and foreign-financed project loan disbursements on concessional terms. ### Revenue adjustors (primary deficit ceilings) - Adjustor for revenue shortfalls: - If revenue outturn < program projection, the primary deficit ceiling will be adjusted upward by the difference. - The upward adjustment to the ceiling is capped at NPR 124,003 million for FY2021/22. - Adjustor for revenue windfalls: - If revenue outturn > program projection but < MOF revenue collection target, there is no adjustment to the primary deficit target. - If revenue outturn > MOF revenue collection target, the primary deficit ceiling will be adjusted downward by the difference between revenue outturn and MOF revenue collection target. - Revenues projected under the program and MOF targets (Table 4, cumulative over respective fiscal year, NPR million): - January 15, 2022 — Revenues Projected under the Program: 278,030; MOF Revenue Collection Targets: 475,757 - July 15, 2022 — Revenues Projected under the Program: 926,767; MOF Revenue Collection Targets: 1,050,821 ### Adjustors for foreign-financed project loan disbursements (concessional terms) - Adjustor for higher-than-projected disbursements: - If actual disbursements > projected, the primary deficit ceiling will be adjusted upward by the difference. - The upward adjustment is capped at the difference between the budget amount and the projected level of disbursement. - Adjustor for lower-than-projected disbursements: - If actual disbursements < projected, the primary deficit ceiling will be adjusted downward by the difference. - Projected disbursements (Table 5, cumulative over respective fiscal year, Million NPR): - January 15, 2022 — 19,482 - July 15, 2022 — 129,883 ### Indicative target on social spending - Initial focus: child grant spending (reaches vulnerable households, implemented by the federal government, monitorable in a timely way). - Indicative target set as a floor for cumulative flows from the end of the previous fiscal year. - Spending recognized on a cash basis and recorded when cash is paid. - Health and education spending are being devolved to local and provincial governments and are not fully under federal control for monitoring. ### Continuous quantitative performance criteria and standard proscriptions - Continuous criterion: non-accumulation of new external payments arrears on external debt contracted or guaranteed by the budgetary central government or NRB. - External payment arrears defined as external debt service obligations (principal and interest) falling due to nonresidents after approval of this arrangement and not paid when due in accordance with contractual agreements (including any contractual grace period). - Excluded: external arrears subject to debt rescheduling agreements or negotiations. - Standard continuous performance criteria include prohibitions on: - Imposition or intensification of restrictions on payments and transfers for current international transactions. - Introduction or modification of multiple currency practices. - Conclusion of bilateral payments agreements inconsistent with Article VIII. - Imposition or intensification of import restrictions for balance of payments reasons. ### Provision of information to the IMF and reporting - The MOF and NRB will supply data to the IMF as specified in Table 6 and transmit promptly any data revisions within 14 days after being made. - Any data/information indicating non-observance of continuous performance criteria will be provided immediately. - MOF and NRB will send quarterly reports documenting progress with implementing structural benchmarks; reports to include draft legislation, implementation plans, deviations and remedial measures, expected revised completion dates, and major economic and social measures affecting program sequencing. - Authorities will inform IMF staff immediately of the creation of any new extra-budgetary funds or programs (including special budgetary and extra-budgetary programs as defined in the IMF’s Manual on Government Finance Statistics 2014). ### Key data reporting requirements (selected highlights from Table 6) - Ministry of Finance: - Summary of budgetary central government accounts (cash basis): M, 30 calendar days - Summary of net incurrence of liabilities (PDMO monthly reports basis): Q, 30 calendar days - Debt stock (by currency, maturities, creditors, instruments), disbursements and debt service: Q, 45 calendar days - Balance of government's accounts/funds at NRB (after reconciliation): Q, 30 calendar days - Data on the child grant program (amount budgeted, amount dispersed, number of recipients): M, 30 calendar days - Public Debt Management Office: - Stock of outstanding external debt payment arrears by creditor: Q, 30 calendar days - Amortization schedule for external debt payments, interest and amortization: Q, 30 calendar days - Nepal Rastra Bank (NRB): - Program net international reserves and components at program and current exchange rates: M, 7 working days - Exchange rate data (NPR/$ official and monthly average buy/sell): M, 5 working days after the end of the month (official weekly submission for prior week) - Monthly consumer price indexes (CPIs): M, 30 calendar days - Balance of payments (BPM6): M, 30 calendar days - Central bank daily purchases and sales of foreign exchange by counterparts: W, 2 working days after the end of the week - Daily interbank turnover in the FX spot market: W, 15 working days - Commercial banks and BFIs: - Commercial bank-by-bank data including balance sheets by currency, income statements, loan classifications and provisioning, loan write-offs, forborne loans details, deposits and net open positions, FSI indicators: M, 75 calendar days - Data on foreign currency loans and deposits by borrower type, product type, sectors, restructured loans: M, 75 calendar days - Submission modalities and timing notes: - A = Annually; Q = Quarterly; M = Monthly; W = Weekly. - Reports and data are provided in English and in excel files. - Submission lags measured after the end of the respective week, month, quarter, or fiscal year in Nepali calendar unless otherwise indicated. ### Debt sustainability (summary of DSA findings) - Both external and overall debt in Nepal are assessed at low risk of debt distress. - Two external debt indicators (PV of PPG external debt-to-exports ratio and debt service-to-exports ratio) breach indicative thresholds under three shock scenarios, implying a mechanical rating of moderate risk of debt distress; staff judgment results in a low risk assessment. - Staff judgment rationale includes: - Low ratios of PV of PPG external debt-to-GDP and PPG external debt service-to-revenue. - Unusually high remittance levels; remittances are the major source of foreign exchange to balance the current account and service external debt. - Projections: - Both external debt and public debt are projected to peak in FY2024/25, reflecting declining fiscal deficits and increasing reliance on domestic borrowing as financing markets gradually deepen. - Debt carrying capacity: - Nepal’s composite indicator (CI) score is calculated at 3.18, based on the October 2021 World Economic Outlook (WEO) and the 2020 World Bank Country Policy and Institutional Assessment (CPIA) index. - Policy implication: - Findings stress the importance of reforms to increase resilience to external shocks, e.g., encouraging diversification, improving productivity and competitiveness, and enhancing monitoring of risks related to contingent liabilities. *Source: Excerpt from program Technical Memorandum of Understanding and Debt Sustainability Analysis materials in the provided IMF PDF content.* ### 1. The coverage of public debt in this analysis is broad. Public debt includes general ### 1nplea2022001 - 1. The coverage of public debt in this analysis is broad. Public debt includes general ### Coverage of public debt - Public debt definition used is broad: includes general government debt, government guarantees, and central bank borrowing on behalf of the government, domestic and external. - Nepal’s provincial and local governments have no debt; their borrowing framework is under consideration and should be monitored. - The social security fund and extra budgetary funds currently are not allowed to borrow and thus do not have any outstanding debt. - Nepal Rastra Bank (NRB) on-lent IMF Rapid Credit Facility funds (about US$50 million) to the government in 2015. - Bond issuances by the central bank are only for monetary policy operations. - Government guarantees for SOE debts total NPR 24 billion (0.6 percent of GDP) and are included in the debt stock. - SOEs cannot borrow externally; most medium- and long-term SOE domestic loans are from the central government and covered under central government debt. - SOE liabilities not covered by public debt appear limited; authorities are working to improve debt statistics, including SOEs. ### Contingent liabilities and stress testing - Contingent liability stress test default setting includes: - SOE debt: 2 percent of GDP - PPP projects: 2.9 percent of GDP - Financial market: 5 percent of GDP (default minimum) - Total contingency shock (2+2.9+5) = 9.9 (in percent of GDP) - PPP projects have not been formally compiled by the government; World Bank PPI database estimates Nepal’s PPP contracts at 8.4 percent of GDP as of 2020. - Net Acquisition of Financial Assets (NAFA), representing loans and capital injections to SOEs from the government, is already incorporated in baseline debt figures. - NAFA has averaged around 1.3 percent of GDP annually in recent years and the program baseline assumes NAFA will continue at this size. - The stress test on contingent liabilities from SOE debt is in addition to the NAFA assumed in the baseline. ### Background on public debt trends - Public debt trajectory: - Declined from 35 percent of GDP in FY2011/12 to 25 percent in FY2016/17. - Rose to 42.2 percent of GDP in FY2019/20, with a substantial increase driven by COVID-19 impacts and responses. - Debt service: - Total public debt service represented around 31 percent of fiscal revenues in FY20. - Debt-stabilizing primary deficit estimates: - Debt-stabilizing primary deficit of around 3.3 percent of GDP (existing debt stock and fiscal path). - If NAFA continues, debt-stabilizing primary deficit would be about 2.1 percent of GDP. - Treasury Single Account (TSA) negative balance: - Negative TSA balance is included in public gross debt per Government Finance Statistics Manual and Public Sector Debt Statistics Guide. - Negative TSA balance estimated at 5.5 percent of GDP by end of FY2019/20. - NAFA use examples: financing to Nepal Electricity Authority and airport construction to support tourism. ### External public debt - External public debt levels and composition at end FY2019/20: - Total external: US$6,723 million — 20.5% of GDP — 100% of external debt - Multilateral: US$5,930 million — 18.1% of GDP — 88% of external debt - ADB: US$2,243 million — 6.8% of GDP — 33% of external debt - IDA: US$3,341 million — 10.2% of GDP — 50% of external debt - Bilateral: US$793 million — 2.4% of GDP — 12% of external debt - Paris Club: US$358 million — 1.1% of GDP — 5% of external debt - Non-Paris Club: US$435 million — 1.3% of GDP — 6% of external debt - Net present value (PV) of external debt estimated at 12.5 percent of GDP in FY2019/20 due to high concessionality. - Creditor profile: 88 percent multilateral; bilateral creditors include Japan (largest), followed by China, India, and Korea. - Average interest rate and maturity of multilateral loans: 1 percent on average and around 25 years on average. ### Domestic public debt - Domestic public debt at end FY2019/20: - Total domestic: NPR 849 billion — 21.7% of GDP — 100% of domestic debt - Treasury bills: NPR 210 billion — 5.4% of GDP — 25% of domestic debt - Treasury bonds: NPR 398 billion — 10.2% of GDP — 47% of domestic debt - Development bonds: NPR 390 billion — 10.0% of GDP — 46% of domestic debt - Others: NPR 8 billion — 0.2% of GDP — 1% of domestic debt - TSA negative balance: NPR 217 billion — 5.5% of GDP — 26% of domestic debt - Government guarantees: NPR 24 billion — 0.6% of GDP — 3% of domestic debt - Maturity and holders: - About one-quarter of domestic debt is short-term treasury bills (up to 1 year) held mainly by domestic financial institutions. - Close to half of domestic debt is medium- to long-term development bonds with maturities of 3-15 years and interest rates of 3-6.5 percent per annum. - All domestic public debt was held by residents; analysis is currency-based. ### Private external debt and assumptions - Stock of private external debt not published but estimated to be very small. - Private external borrowings were estimated at about 0.1 percent of GDP at mid-July 2019. - Given regulations and constraints, private external debt is assumed to increase to 1 percent of GDP in the long term. ### Macroeconomic outlook and risks - Growth: - Real GDP growth reached 6.7 percent in FY2018/19. - Growth fell to -2.1 percent in FY2019/20 due to COVID-19. - Expected recovery: 2.7 percent in FY2020/21 and eventually stabilize around 5 percent over the mid- to long-term. - FY2020/21 growth forecast assumes modest rebound; vaccines expected widely available only in the first half of FY2022/23. - Inflation: - CPI rose from 4.6 percent y/y in FY2018/19 to 6.1 percent in FY2019/20. - Inflation estimated at 3.6 percent in 2020/21; expected to rise to 5.7 percent in FY2021/22 and peak at 5.8 percent in 2022/23; gradually moderate to around 5.3 percent in FY2025/26. - Fiscal balances and projections (selected): - Overall fiscal deficit of central government: 5.3 percent of GDP in FY2019/20. - Deficit in 2020/21 estimated at 4.2 percent of GDP. - Projected widening to 6.3 percent of GDP in FY2021/22 as spending increases. - Primary deficit decreasing from 5.4 percent of GDP in FY2021/22 to 3.5 percent of GDP (overall deficit of 4.5 percent) in FY2023/24 and stabilize at around 2 percent of GDP from FY2025/26 onwards. - Net acquisition of non-financial assets: 6.1 percent of GDP in 2019/20; 4.8 percent in FY2020/21; program assumes NAFA around 5.5 percent in medium term (Text Table 4 baseline figures). - External sector: - Current account deficit: 6.9 percent of GDP in FY2018/19; narrowed to around 1 percent of GDP in FY2019/20. - FY2020/21 current account deficit estimated at -8.2 percent of GDP (text states "deteriorated to 8.2 percent of GDP in FY2020/21"). - Gross official reserves increased from US$8.5 billion at end FY2018/19 to US$10.6 billion at end FY2019/20; reserves at US$10.9 billion for FY2020/21. - Exports expected to recover to pre-COVID level by FY2022/23 (around 8 percent of GDP). - Remittances expected to remain sizeable at about 20 percent of GDP over the medium- and long-term. - Uncertainty and risks: - Main risks: depth and duration of the pandemic, supply chain disruptions, weaker recovery in partner countries affecting remittances and tourism, banking sector vulnerabilities, and global inflation responses. ### Policy and program context - Proposed Extended Credit Facility (ECF) aims to support COVID responses, recovery, and medium-term growth and poverty reduction. - ECF and financing from development partners (World Bank and ADB) to fill external and fiscal financing gaps. - Early ECF period supports health spending, economic support, and protection of vulnerable groups. - Program supports comprehensive fiscal structural reforms: revenue mobilization and public financial management. - Program includes a sequence to strengthen financial sector regulation and supervision. - Structural reforms and fiscal risk management recommendations: - Strengthen fiscal risk management through structural reforms, including development of a fiscal register to identify, disclose, and manage fiscal risks from SOEs and guarantees, drawing on Fund TA. - Establishment of the PDMO to consolidate public debt management functions, prepare a medium-term debt management strategy, and develop comprehensive debt bulletins. *Source: IMF staff analysis as contained in the provided content.* ### 14. Financing: In the near term, the large BOP and fiscal financing needs are expected to be ### 14. Financing: In the near term, the large BOP and fiscal financing needs are expected to be ### Financing near term and medium term - In the near term, large BOP and fiscal financing needs are expected to be filled by concessional loans from development partners, mainly multilateral development banks, as well as from debt service relief through the Catastrophe Containment and Relief Trust (CCRT) and the G20 Debt Service Suspension Initiative (DSSI). - Over the longer term, as Nepal gradually deepens its financial markets, it is assumed that a larger share of its fiscal financing needs will be met by domestic borrowings (Table 2). - Nepal received CCRT debt relief of SDR2.9 million in FY2019/20 and SDR7.13 million in FY2020/21. - The debt service suspension under the DSSI is projected at around US$32.5 million in FY2020/21. ### Realism of baseline - The overall fiscal deficit is estimated to be 4.2 percent of GDP in FY2020/21 and is projected to then widen to 6.3 percent of GDP by FY2021/22. - Under various assumptions on fiscal multipliers, growth would be lower than in the baseline scenario. - The deviation of the growth projection from what is implied by the fiscal multipliers can be explained by: - growth in FY2020/21 and FY2021/22 reflecting the gradual normalization of economic activities from COVID-19 and a large base effect from the sharp contraction in FY2019/20; - differences in contribution of public capital to GDP growth reflecting GDP rebasing and revised investment classifications in the national account. ### Country classification and determination of scenario stress tests - Nepal’s debt carrying capacity is strong. - A composite indicator (CI) captures factors affecting debt carrying capacity via a weighted average of: World Bank CPIA score, real GDP growth, remittances, foreign exchange reserves, and world growth. - The CI calculation is based on 10-year averages of the variables, across 5 years of historical data and 5 years of projections. - Nepal’s CI score is calculated at 3.18, based on the October 2021 World Economic Outlook and the 2020 World Bank CPIA index, which lies in a range of a strong rating (Text Table 5). - Tailored stress tests: - The revised LIC-DSF includes stress tests kept at default settings (historical average minus one standard deviation, or the baseline projection minus one standard deviation, whichever is lower). - To reflect vulnerability to natural disasters, a natural disaster shock was applied: a one-off shock of 10 percentage points of GDP to the debt-to-GDP ratio in the second year of the projection period (FY2021/22). - For that stress test, real GDP growth and exports were lowered by 1.5 and 3.5 percentage points, respectively, in the year of the shock. ### External debt sustainability (baseline and projections) - All external debt indicators point to low risk of debt distress under the baseline. - Under the baseline scenario: - The PV of PPG external debt-to-exports ratio is projected at 254 percent in the first year—LIC-DSF allows discounting this one-off breach of 240 percent—and declines to 122 percent in FY2039/2040. - Other indicators (PV of external debt-to-GDP ratio, debt service-to-exports ratio, and debt service-to-revenue ratio) are all well below the respective thresholds. ### Vulnerabilities and shock sensitivity for external debt - External debt is most vulnerable to shocks to exports. - The PV of PPG external debt-to-exports ratio breaches the threshold in two shock scenarios: the shock to exports and the combined shock (to real GDP growth, primary balance, export, other flows, and depreciation). ### Overall risk of public debt distress - Under the baseline scenario, public debt in PV terms as a share of GDP remains firmly below the 70 percent benchmark during the projection period. - Public debt projections: - Public debt is projected to gradually increase from 42.2 percent of GDP at the end of FY2019/20, to peak at 55.3 percent in FY2024/25 under the baseline scenario. - The PV of the debt-to-GDP ratio is expected to increase from 34.6 percent of GDP in FY2019/20 to peak at 44.6 percent in FY2025/26, well below the 70 percent benchmark. - Public debt is most vulnerable to a growth shock: - Growth shock is defined as a temporary shock to real GDP growth in the second and third year of the projection period and is set to either 10-year historical average growth minus one standard deviation or projected growth minus one standard deviation, whichever is lower. - The shock would raise PV of debt-to-GDP ratio close to the threshold of 70 percent over a number of years. - The PV of debt-to-revenue ratio and debt service-to-revenue ratio also rise significantly under such a shock. - Under all other shock scenarios, the PV of debt-to-GDP ratio remains well below the indicative thresholds. ### Risk ratings and vulnerabilities (staff assessment) - The risk of both public external debt distress and overall debt distress are assessed as low. - Observations supporting the low risk judgement: - All debt indicators remain below thresholds/benchmarks under the baseline except for the PV of external debt-to-exports, which shows a short-lived breach that is discounted. - The PV of public debt remains below its benchmark under all stress tests. - Two external debt indicators (PV of external debt-to-exports ratio and debt service-to-exports ratio) breach indicative thresholds under three shock scenarios. - Remittances, rather than exports, are the major source of foreign exchange to balance the current account and service external debt: - Remittances averaged 22.2 percent of GDP during 2016-2025. - Exports averaged 7.6 percent of GDP during 2016-2025. - The PV of PPG external debt is 13.6 percent of GDP in FY2020/21, well below the indicative threshold. - External debt is well below thresholds in baseline and shock scenarios across other metrics (e.g., external debt service/revenues, external debt service/exports). - Risks to the assessment: - Uncertainty in unwinding pandemic-related forbearance measures. - Climate-related shocks. ### Policy recommendations and reforms to mitigate risks - To build resilience, authorities should: - Continue efforts to improve productivity and competitiveness through stepping up quality investment in infrastructure, and streamlining regulations and administrative processes. - Pursue rigorous analysis of risks related to contingent liabilities, for example, related to non-guaranteed commercial SOE debt, PPP projects, and budget support for the financial sector. - Close data gaps by compiling PPP projects and private sector external debt to improve debt sustainability analysis and monitor related risks. - Make significant progress in implementing a medium-term debt strategy and developing the government bond market to facilitate greater domestic financing. - Improve subnational governments’ public financial management and reporting. - Implement a prudent framework for subnational borrowing. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 24. The authorities broadly agreed with the assessment of the DSA. They underscored that ### 1nplea2022001 - 24. The authorities broadly agreed with the assessment of the DSA. They underscored that ### Authorities' response and institutional improvements - The authorities broadly agreed with the assessment of the DSA. - They underscored that the government’s effective management of public finances in past years reduced public debt risk, providing fiscal room to maneuver when the COVID shock hit. - With the establishment of Public Debt Management Office (PDMO) in FY 2018/19, significant progress has been made in: - public debt statistics, - public debt management, and - fiscal risk management. - The authorities argued against the inclusion of the negative TSA balance as part of domestic public debt, on the grounds that the government also has offsetting positive balances in its many other accounts with the NRB and the net balance across all government accounts is positive. - A working group with representatives of the MOF, PDMO and NRB has been formed to look at the issue. ### External Debt Sustainability Framework — Baseline Scenario (Table 1): key figures (2020–2040) - External debt (nominal) 1/: 20.7 (2020); 22.5 (2021); 25.4 (2022); 26.1 (2023); 26.7 (2024); 26.8 (2025); 26.2 (2026); 23.4 (2031); 22.1 (2040); 16.4; 25.1 - of which: public and publicly guaranteed (PPG): 20.5 (2020); 22.3 (2021); 25.2 (2022); 25.8 (2023); 26.3 (2024); 26.4 (2025); 25.7 (2026); 22.8 (2031); 21.1 (2040); 16.3; 24.6 - Change in external debt: 5.3 (2020); 1.8 (2021); 2.9 (2022); 0.7 (2023); 0.6 (2024); 0.1 (2025); -0.6 (2026); -0.4 (2031); 0.0 (2040) - Identified net debt-creating flows: 0.6 (2020); 7.2 (2021); 7.8 (2022); 4.3 (2023); 3.1 (2024); 2.1 (2025); 1.5 (2026); -1.9 (2031); -2.8 (2040); -1.7; 1.7 - Non-interest current account deficit: 0.9 (2020); 8.0 (2021); 8.9 (2022); 6.0 (2023); 4.7 (2024); 3.9 (2025); 3.4 (2026); -0.1 (2031); -1.1 (2040); -0.6; 3.4 - Deficit in balance of goods and services: 27.1 (2020); 35.0 (2021); 34.9 (2022); 31.4 (2023); 29.5 (2024); 28.1 (2025); 26.7 (2026); 23.2 (2031); 18.2 (2040); 26.5; 27.7 - Exports: 6.7 (2020); 5.4 (2021); 7.1 (2022); 8.0 (2023); 8.4 (2024); 8.7 (2025); 9.0 (2026); 9.5 (2031); 9.8 (2040) - Imports: 33.8 (2020); 40.4 (2021); 41.9 (2022); 39.4 (2023); 37.8 (2024); 36.8 (2025); 35.7 (2026); 32.7 (2031); 28.0 (2040) - Net current transfers (negative = inflow): -24.9 (2020); -26.2 (2021); -25.1 (2022); -24.4 (2023); -23.7 (2024); -23.1 (2025); -22.1 (2026); -22.1 (2031); -22.0 (2040); -26.0; -23.2 - of which: official: -0.6 (2020); -0.6 (2021); -0.9 (2022); -1.0 (2023); -1.0 (2024); -0.9 (2025); -0.7 (2026); -0.6 (2031); -0.7 (2040) - Other current account flows (negative = net inflow): -1.3 (2020); -0.8 (2021); -0.9 (2022); -1.1 (2023); -1.1 (2024); -1.0 (2025); -1.2 (2026); -1.2 (2031); 2.7 (2040); -1.1; -1.1 - Net FDI (negative = inflow): -0.5 (2020); -0.5 (2021); -0.3 (2022); -0.4 (2023); -0.5 (2024); -0.8 (2025); -0.8 (2026); -0.9 (2031); -0.9 (2040); -0.4; -0.7 - Endogenous debt dynamics: 0.2 (2020); -0.3 (2021); -0.7 (2022); -1.3 (2023); -1.1 (2024); -1.0 (2025); -1.1 (2026); -0.9 (2031); -0.8 (2040) - Contribution from nominal interest rate: 0.1 (2020); 0.2 (2021); 0.2 (2022); 0.2 (2023); 0.2 (2024); 0.2 (2025); 0.1 (2026); 0.2 (2031); 0.2 (2040) - Contribution from real GDP growth: 0.3 (2020); -0.5 (2021); -0.9 (2022); -1.5 (2023); -1.3 (2024); -1.3 (2025); -1.3 (2026); -1.1 (2031); -1.0 (2040) - Contribution from price and exchange rate changes: -0.2 (2020) - Residual 3/: 4.7 (2020); -5.3 (2021); -4.9 (2022); -3.6 (2023); -2.5 (2024); -2.0 (2025); -2.1 (2026); 1.5 (2031); 2.8 (2040); 2.0; -1.5 - of which: exceptional financing: -2.2 (2020); -0.6 (2021); -1.7 (2022); -0.9 (2023); -0.6 (2024); -0.4 (2025); 0.0 (2026); 0.0 (2031); 0.0 (2040) - Sustainability indicators: - PV of PPG external debt-to-GDP ratio: 12.5 (2020); 13.8 (2021); 14.9 (2022); 15.1 (2023); 15.3 (2024); 15.3 (2025); 15.0 (2026); 13.1 (2031); 12.0 (2040) - PV of PPG external debt-to-exports ratio: 185.6 (2020); 254.1 (2021); 210.7 (2022); 189.4 (2023); 183.5 (2024); 175.5 (2025); 166.9 (2026); 138.5 (2031); 122.4 (2040) - PPG debt service-to-exports ratio: 10.0 (2020); 15.0 (2021); 11.8 (2022); 10.8 (2023); 10.3 (2024); 9.8 (2025); 9.4 (2026); 8.9 (2031); 6.3 (2040) - PPG debt service-to-revenue ratio: 3.1 (2020); 3.5 (2021); 3.5 (2022); 3.5 (2023); 3.4 (2024); 3.3 (2025); 3.2 (2026); 3.2 (2031); 2.3 (2040) - Gross external financing need (Million of U.S. dollars): 402.5 (2020); 2959.1 (2021); 3582.4 (2022); 2724.1 (2023); 2339.9 (2024); 2041.0 (2025); 1949.9 (2026); 340.3 (2031); -615.9 (2040) - Key macroeconomic assumptions: - Real GDP growth (in percent): -2.1 (2020); 2.7 (2021); 4.4 (2022); 6.3 (2023); 5.4 (2024); 5.1 (2025); 5.1 (2026); 5.1 (2031); 4.4 (2040); 5.0 - GDP deflator in US dollar terms (change in percent): 1.5 (2020); -0.6 (2021); 2.7 (2022); 2.3 (2023); 2.4 (2024); 2.2 (2025); 2.1 (2026); 2.5 (2031); 2.5 (2040); 0.8; 2.2 - Effective interest rate (percent) 4/: 0.8 (2020); 1.0 (2021); 0.9 (2022); 0.9 (2023); 0.9 (2024); 0.9 (2025); 0.6 (2026); 1.0 (2031); 1.1 (2040); 0.9; 0.9 - Growth of exports of G&S (US dollar terms, in percent): -13.7 (2020); -17.5 (2021); 39.1 (2022); 22.9 (2023); 12.9 (2024); 12.2 (2025); 10.7 (2026); 10.1 (2031); 8.6 (2040); 4.7; 11.4 - Growth of imports of G&S (US dollar terms, in percent): -19.0 (2020); 22.0 (2021); 11.3 (2022); 2.2 (2023); 3.5 (2024); 4.6 (2025); 4.0 (2026); 7.5 (2031); 7.4 (2040); 7.9; 7.1 - Grant element of new public sector borrowing (in percent): 51.1; 50.7; 51.2; 51.3; 51.9; 52.5; 52.7; 52.9; 52.0 - Government revenues (excluding grants, in percent of GDP): 21.5 (2020); 23.5 (2021); 23.8 (2022); 24.6 (2023); 25.4 (2024); 26.1 (2025); 26.2 (2026); 26.3 (2031); 26.5 (2040); 17.7; 25.6 - Aid flows (in Million of US dollars) 5/: 205.9 (2020); 903.1 (2021); 1109.6 (2022); 1056.7 (2023); 1072.9 (2024); 1032.3 (2025); 966.3 (2026); 1270.7 (2031); 2492.9 (2040) - Grant-equivalent financing (in percent of GDP) 6/: 2.6; 3.1; 2.7; 2.5; 2.2; 1.9; 1.7; 1.7; 2.2 - Grant-equivalent financing (in percent of external financing) 6/: 59.3; 59.0; 62.3; 63.1; 65.2; 68.3; 66.1; 66.3; 64.4 - Nominal GDP (Million of US dollars): 33,983.4 (2020); 34,692.2 (2021); 37,207.9 (2022); 40,466.8 (2023); 43,678.4 (2024); 46,922.3 (2025); 50,376.2 (2026); 73,607.9 (2031); 144,326.2 (2040) - Nominal dollar GDP growth: -0.6; 2.1; 7.3; 8.8; 7.9; 7.4; 7.4; 7.8; 7.8; 5.3; 7.3 - Memorandum items: - PV of external debt 7/: 12.7; 14.1; 15.2; 15.4; 15.7; 15.7; 15.5; 13.8; 13.0 - In percent of exports: 188.3; 258.2; 214.4; 193.3; 187.6; 180.0; 171.7; 145.1; 132.6 - Total external debt service-to-exports ratio: 12.1; 18.6; 15.0; 14.1; 13.9; 13.7; 13.7; 15.1; 15.9 - PV of PPG external debt (in Million of US dollars): 4,252.9; 4,803.7; 5,541.1; 6,126.0; 6,699.7; 7,189.6; 7,567.2; 9,678.5; 17,352.4 - (PVt-PVt-1)/GDPt-1 (in percent): 1.6; 2.1; 1.6; 1.4; 1.1; 0.8; 0.7; 0.9 - Non-interest current account deficit that stabilizes debt ratio: -4.4; 6.1; 6.0; 5.3; 4.2; 3.9; 4.0; 0.3; -1.1 ### Public Sector Debt Sustainability Framework — Baseline Scenario (Table 2): key figures (2020–2040) - Public sector debt 1/: 42.2 (2020); 47.2 (2021); 51.6 (2022); 53.6 (2023); 54.9 (2024); 55.3 (2025); 55.0 (2026); 53.8 (2031); 53.2 (2040); 31.1; 53.4 - of which: external debt: 20.5 (2020); 22.3 (2021); 25.2 (2022); 25.8 (2023); 26.3 (2024); 26.4 (2025); 25.7 (2026); 22.8 (2031); 21.1 (2040); 16.3; 24.6 - Change in public sector debt: 9.2 (2020); 5.0 (2021); 4.4 (2022); 2.0 (2023); 1.3 (2024); 0.4 (2025); -0.2 (2026); -0.1 (2031); -0.3 (2040) - Identified debt-creating flows: 8.0 (2020); 5.3 (2021); 3.9 (2022); 2.0 (2023); 1.3 (2024); 0.4 (2025); -0.2 (2026); 0.0 (2031); -0.2 (2040) - Primary deficit: 4.7 (2020); 3.4 (2021); 5.4 (2022); 4.5 (2023); 3.5 (2024); 2.5 (2025); 1.9 (2026); 2.0 (2031); 1.7 (2040); 1.0; 2.8 - Revenue and grants: 22.1 (2020); 24.2 (2021); 24.7 (2022); 25.6 (2023); 26.4 (2024); 27.0 (2025); 27.1 (2026); 27.0 (2031); 27.3 (2040); 19.2; 26.4 - of which: grants: 0.6 (2020); 0.7 (2021); 0.9 (2022); 1.0 (2023); 1.0 (2024); 0.9 (2025); 0.9 (2026); 0.7 (2031); 0.7 (2040) - Primary (noninterest) expenditure: 26.8 (2020); 27.6 (2021); 30.1 (2022); 30.1 (2023); 29.9 (2024); 29.5 (2025); 29.0 (2026); 29.0 (2031); 29.0 (2040); 20.3; 29.2 - Automatic debt dynamics: 1.5 (2020); -1.4 (2021); -2.8 (2022); -3.8 (2023); -3.4 (2024); -3.3 (2025); -3.4 (2026); -3.3 (2031); -3.2 (2040) - Contribution from interest rate/growth differential: 0.4 (2020); -1.4 (2021); -2.8 (2022); -3.8 (2023); -3.4 (2024); -3.3 (2025); -3.4 (2026); -3.3 (2031); -3.2 (2040) - of which: contribution from average real interest rate: -0.3 (2020); -0.3 (2021); -0.8 (2022); -0.7 (2023); -0.7 (2024); -0.6 (2025); -0.7 (2026); -0.6 (2031); -0.6 (2040) - of which: contribution from real GDP growth: 0.7 (2020); -1.1 (2021); -2.0 (2022); -3.1 (2023); -2.8 (2024); -2.7 (2025); -2.7 (2026); -2.6 (2031); -2.6 (2040) - Contribution from real exchange rate depreciation: 1.0 (2020) - Other identified debt-creating flows: 1.9 (2020); 3.3 (2021); 1.3 (2022); 1.3 (2023); 1.3 (2024); 1.3 (2025); 1.3 (2026); 1.3 (2031); 1.3 (2040); 1.3; 1.4 - Privatization receipts (negative): 0.0 (all years) - Recognition of contingent liabilities: 0.0 (all years) - Debt relief (HIPC and other) 2/: 0.0 (all years) - Residual: 1.1 (2020); -0.3 (2021); 0.5 (2022); 0.0 (2023); 0.0 (2024); 0.0 (2025); 0.0 (2026); -0.1 (2031); -0.1 (2040); -0.2; 0.0 - Sustainability indicators: - PV of public debt-to-GDP ratio 3/: 34.6 (2020); 38.7 (2021); 41.6 (2022); 43.2 (2023); 44.1 (2024); 44.5 (2025); 44.6 (2026); 44.4 (2031); 44.4 (2040) - PV of public debt-to-revenue and grants ratio: 156.7 (2020); 159.4 (2021); 168.6 (2022); 168.6 (2023); 167.4 (2024); 164.6 (2025); 164.4 (2026); 164.4 (2031); 162.8 (2040) - Debt service-to-revenue and grants ratio 4/: 31.2 (2020); 27.9 (2021); 23.2 (2022); 24.0 (2023); 30.0 (2024); 33.2 (2025); 32.4 (2026); 37.2 (2031); 39.7 (2040) - Gross financing need 5/: 13.5 (2020); 13.5 (2021); 12.4 (2022); 12.0 (2023); 12.7 (2024); 12.7 (2025); 12.0 (2026); 13.3 (2031); 13.8 (2040) - Key macroeconomic and fiscal assumptions: - Real GDP growth (in percent): -2.1 (2020); 2.7 (2021); 4.4 (2022); 6.3 (2023); 5.4 (2024); 5.1 (2025); 5.1 (2026); 5.1 (2031); 5.1 (2040); 4.4; 5.0 - Average nominal interest rate on external debt (in percent): 0.8 (2020); 1.0 (2021); 0.9 (2022); 0.9 (2023); 0.9 (2024); 0.9 (2025); 0.5 (2026); 0.9 (2031); 0.9 (2040); 0.9; 0.8 - Average real interest rate on domestic debt (in percent): -0.7 (2020); -0.5 (2021); -2.3 (2022); -1.8 (2023); -1.5 (2024); -1.3 (2025); -1.2 (2026); -1.3 (2031); -1.1 (2040); -2.8; -1.5 - Real exchange rate depreciation (in percent, + indicates depreciation): 6.8 (2020); 1.8 (2031) - Inflation rate (GDP deflator, in percent): 3.6 (2020); 3.6 (2021); 5.7 (2022); 5.8 (2023); 5.6 (2024); 5.5 (2025); 5.3 (2026); 5.8 (2031); 5.8 (2040); 6.1; 5.5 - Growth of real primary spending (deflated by GDP deflator, in percent): -2.2 (2020); 6.1 (2021); 13.6 (2022); 6.5 (2023); 4.4 (2024); 3.9 (2025); 3.4 (2026); 5.1 (2031); 5.1 (2040); 11.6; 5.8 - Primary deficit that stabilizes the debt-to-GDP ratio 6/: -4.5 (2020); -1.6 (2021); 1.0 (2022); 2.5 (2023); 2.2 (2024); 2.0 (2025); 2.1 (2026); 2.1 (2031); 2.0 (2040); -0.9; 1.7 - PV of contingent liabilities (not included in public sector debt): 0.0 (all years) ### Stress tests, scenarios, and figures (summary) - Figure 1: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2021-2031 — presents threshold and most extreme shocks, notes on stress test selection and borrowings assumptions (PPG external MLT debt used to cover additional financing needs). - Figure 2: Indicators of Public Debt under Alternative Scenarios, 2021-2031 — shows baseline and most extreme shock outcomes across debt composition (external PPG MLT, domestic MLT, domestic short-term) and terms of marginal debt. - Figure 3: Drivers of Debt Dynamics – Baseline Scenario — displays contributions to change in PPG external debt and gross nominal public debt from primary deficit, real interest rate, real GDP growth, real exchange rate depreciation, other debt-creating flows, and unexpected changes (residuals). - Figure 4: Realism Tools — presents public and private investment rates (current vs previous DSA), contribution to real GDP growth, and distribution of projected fiscal adjustments and possible growth paths given fiscal multipliers. *Sources: Country authorities; and staff estimates and projections.* ### 2.5 percentage points of GDP in ### 2.5 percentage points of GDP in ### Debt sensitivity and public debt indicators - Table 3 and Table 4 present sensitivity analyses for key indicators of public and publicly guaranteed external debt and public debt for Nepal, 2021-2031 (in percent). - Selected baseline and scenario figures (as reported): - Baseline PV of debt-to-GDP ratio (Table 3 / Table 4 context): series include values such as 25, 42, 11, 18, 9, 18, 3, 17, 6, 7, 4, 2, 2, 3 (presented in tabular sequences). - Total public debt benchmark: 70 (for years shown). - Baseline public debt projections (selected years): 39 (2021), 42 (2022), 43 (2023), 44 (2024), 45 (2025), 45 (2026), 44 (2027), 44 (2028), 44 (2029), 44 (2030), 44 (2031). - PV of public debt (selected baseline series): 159 (2021) and repeated series entries up to 164 (various years). - PV of Debt-to-Revenue Ratio (baseline series): 28 (2021), 23 (2022), 24 (2023), 30 (2024), 33 (2025), 32 (2026), 33 (2027), 34 (2028), 36 (2029), 36 (2030), 37 (2031). - Alternative scenarios, bound tests, and tailored tests are reported with detailed year-by-year numeric sequences for indicators including: - Real GDP growth (B1) - Primary balance (B2) - Exports (B3) - Other flows (B4; includes official and private transfers and FDI) - Depreciation (B5) - Combination of B1-B5 (B6) - Combined contingent liabilities (C1) - Natural disaster (C2) - Commodity price and market financing tests indicated as "n.a." where not applicable. - Thresholds and breach indicators: - A bold value in the source indicates a breach of the threshold. - Threshold values shown (in tables) include sequences like 55, 24, 21, 23 (presented per respective indicator rows). ### Procurement, governance, and program conditionality - Prior action on procurement: authorities committed to publish on a government website large public procurement documentation, ex-post validation of delivery, name of awarded companies, and name of beneficial owner(s) for all new, large, COVID-19 related procurement contracts consistent with the December 2021 public information notice (PIN) (as of December 9, 2021). - Authorities reported that the Ministry of Health and Population had not awarded any COVID-19 related procurement contracts since December 9, 2021, relying on existing stocks and donated inventories. - In response to Omicron risks, a new round of procurement began: - First tender for syringes was issued on December 24th, closed on December 31st, 2021, and will be awarded in the next few weeks. - Authorities confirmed contract information will be published within two weeks of award on the Ministry of Health and Population’s website and will include the name of the ultimate beneficial owner, in line with the December PIN. - Procurement publication thresholds: - All public procurement contract information for contracts above NPR 2million is currently published as per the Public Procurement Act (for consultancy services, other services, and goods). - For public construction the threshold is NPR 20 million. - Fund program monitoring: - Staff considers the prior action met given the authorities’ commitments. - Staff will continue monitoring governance reforms and emphasize the continued, frequent, timely and easily accessible publication of COVID-19 related procurement contracts; this will be assessed at the time of the first review. - The December 8th PIN covers COVID-19 related health procurement but can be a basis for gradual expansion into other procurement areas. ### COVID-19 developments and public health indicators - COVID-19 cases and vaccination: - 326 new COVID-19 cases reported on January 3, 2022 (Ministry of Health and Population). - 34.9 percent of the total population are fully vaccinated. - Program-related actions and documentation: - The supplement updates completion of the prior action on procurement contracts and presents new information since the staff report; it does not alter the thrust of the staff appraisal. - Staff report prepared by the Asia and Pacific Department in consultation with other departments; date: January 6, 2022. - Statement by Executive Directors / Alternate and Senior Advisor dated January 12, 2022. ### Macroeconomic developments and program context - External sector and reserves: - Foreign exchange reserves declined to US$10 billion (7.6 months of imports) from US$10.2billion (7.9 months of imports) in October, and remain described as adequate. - Inflation: - Consumer price inflation rose to 5.32 percent in November (y-o-y); the NRB target is 6.5 percent. - Current account and imports: - November data shows continued deterioration of the current account as imports remained strong. - Drivers of import surge include rebuilding of inventories, stockpiling against pandemic-related trade disruption, and transition to more normal consumption patterns after mobility restrictions in FY2020/21. - Program design: - The program is designed to recognize considerable uncertainties in the pandemic’s magnitude, duration, and impact. *Sources: Country authorities; and staff estimates and projections. Prepared by the Asia and Pacific Department. January 6, 2022. Statement dated January 12, 2022.* ### Introduction ### Introduction ### Program objectives and engagement - Nepali authorities requested an arrangement under the Extended Credit Facility (ECF) to meet four broad objectives: - Mitigate the pandemic’s impact on health and economic activity and protect vulnerable groups. - Preserve macroeconomic and financial stability. - Implement reforms to support sustained growth and poverty reduction. - Catalyze additional external financing to support Nepal’s pandemic response and facilitate recovery. - These objectives align with: - Government’s Relief, Restructuring and Resilience (3R) plan. - August 2021 Status Paper on the current economic situation of Nepal. - 15th National Development Plan (2019-2023) with a long-term vision of ‘Prosperous Nepal, Happy Nepali’. - Given pre-existing institutional and capacity challenges, the program prioritizes urgent needs and critical reforms first, with a gradual stepping up of reform pace during the program period. - Authorities deem a 38-month engagement to be appropriate. - The program will be supported by a robust suite of IMF technical assistance, including through HQ and SARTTAC. ### Recent developments and outlook - COVID-19 impact and health system: - Over 800,000 confirmed COVID-19 cases and more than 11,000 recorded COVID-19 deaths to date. - Current daily COVID-19 cases remain low but are starting to rise; authorities are preparing to mitigate risks of a third wave from the Omicron variant. - Growth and poverty: - GDP contracted by 2.1 percent in FY2019/20. - Authorities expect a partial recovery of 2.7% for the current fiscal year. - Spillover impact on unemployment has resulted in a significant setback to poverty alleviation gains and threatened attainment of goals in the 15th National Development Plan. - Financing and external position: - Pre-existing buffers (relatively low fiscal deficit and public debt to GDP, and adequate gross official reserves) helped dampen the immediate impact. - External support received: Fund’s Rapid Credit Facility disbursement (100 percent of quota), debt relief under Catastrophe Containment and Relief Trust (CCRT), and debt service suspension under the G20 Debt Service Suspension Initiative (DSSI) (DSSI does not cover loans from multilateral banks that account for a major share of Nepal’s public debt). - Recent sustained deterioration in the current account due to a surge in imports (rebuilding inventories, stockpiling, return to normal consumption patterns after mobility restrictions). - Gross international reserves declined to US$10 billion (7.6 months of imports) in November 2021, from a peak of just under US$12 billion in October 2020. - Nepal is at a low risk of debt distress, although its external position is moderately weaker than the level implied by fundamentals and desirable policies because of high import dependency, a narrow export base, and heavy reliance on remittances. - Pandemic and climate-related shocks: - Moderate pace of vaccination constraining widespread vaccination until well into 2022. - October 2021 extreme rainfall: catastrophic landslides, floods and inundation in 20 districts, killing over 100 people, blocking many roads, and submerging settlements. - Rice paddy production in the fiscal year is estimated to be 8.74% lower compared to a year ago, representing a total loss of USD 72.2 million to Nepali farmers. - Repeated landslides and flooding in Melamchi areas have impeded progress on the Melamchi Hydropower Project. ### Fiscal policy - Short-term stance: - Authorities emphasize ongoing fiscal discipline to ensure policy space to deal with risks (including natural disasters). - In the short term, it is imperative to accommodate spending for health needs, economic support, and protection of vulnerable groups; program financing should be somewhat front-loaded to match acute COVID-related needs. - Revenue and public investment: - Authorities committed to develop a revenue mobilization strategy and advance an action plan to address the public investment efficiency gap. - The revenue mobilization strategy would benefit from Fund technical assistance, including upgrades to the tax system and modernization of the tax policy framework. - Program will support public financial management reforms including development of a fiscal risk register and establishment of a fiscal risk monitoring system for subnational governments, aligning with Nepal’s shift towards fiscal federalism. - Authorities will leverage recommendations from the Fund’s Public Investment Management Assessment (PIMA) and PIMA CC to develop an action plan to address public investment efficiency and strengthen climate resilience. ### Monetary policy - Nepal Rastra Bank (NRB) stance: - NRB’s accommodative monetary policy stance has helped alleviate the macroeconomic impact of the pandemic. - NRB remains fully committed to maintaining price and external sector stability and preserving credibility of the exchange rate peg by keeping adequate reserves. - NRB has commenced a gradual unwinding of its accommodative stance amidst heightened inflationary risks triggered by: - Depreciation of the Indian rupee against the US dollar. - Increases in commodity prices. - Disruptions to agricultural production owing to climate change-related factors. ### Financial sector - Supervision and regulation: - Authorities recognize the need to closely monitor the enduring impact of COVID-19 on the financial sector. - The program proposes a carefully sequenced strategy to enhance financial sector regulation and supervisory capabilities, including: - Collecting adequate and timely supervisory data. - Updating the regulatory framework to enable more accurate assessments of bank asset quality. - Improving the quality of supervision. - NRB requested and received a favorable response from the Fund’s Monetary and Capital Markets Department for a Financial Sector Stability Review program to establish a prioritized technical assistance roadmap. - Macroprudential policy and unwinding: - Authorities are prepared to employ macro-prudential policy to secure financial stability and stand ready to tighten macro-prudential policies to curb excessive credit growth and mitigate buildup of vulnerabilities. - Authorities seek Fund advice on calibration of macro-prudential measures and on appropriately unwinding COVID-19-related support measures to become more targeted. - NRB governance and safeguards: - Authorities committed to reforms to improve the autonomy and accountability framework of the NRB, drawing from the 2021 safeguards assessment and in collaboration with the Auditor General of Nepal and based on the Constitution and prevailing laws. - Authorities will submit to Parliament legislative amendments to modernize the NRB Act and address safeguards recommendations, including the OAG’s appointment of reputable international auditors with relevant experience to audit the NRB’s financial statements for FY 2021/22. ### Governance and transparency - Anti-corruption and oversight: - Nepal has ratified the United Nations’ Convention Against Corruption (UNCAC), established several anti-corruption bodies, and enacted anti-corruption legislation including the Prevention of Corruption Act and establishment of the Commission for the Investigation of Abuse of Authority (CIAA). - Transparency measures: - Office of the Auditor General (OAG) will audit government accounts annually and publish results on its website. - Fiscal authorities created a dedicated sub-heading in the federal budget to capture all COVID-19-related expenses for easier tracking. - Nepal established a standalone COVID-19 Fund (an extra-budgetary fund with financing from government, development partners and the private sector). Spending information under the COVID-19 Fund is published regularly. - OAG conducted a special audit of COVID-19 Fund spending; the report was submitted to the Hon’ble Right President on August 20, 2021, and forwarded to parliament. - In line with commitments made at the time of the Rapid Credit Facility disbursed in May 2020, authorities have published a quarterly report on federal government spending on the COVID-19 response. - A Public Information Notice (PIN) was issued in December 2021 regarding collection and publication of beneficial ownership information. - The Ministry of Health and Population will publish on its website for all new, large, COVID-19 related procurement contracts within two weeks of being awarded: - Large public procurement documentation. - Ex-post validation of delivery. - Name of awarded companies. - Name of their beneficial owner(s). ### Conclusion and anticipated program benefits - Authorities reiterate commitment to the proposed program’s objectives. - Nepal has a strong track record in servicing IMF debt (including a three-year arrangement under the Poverty Reduction and Growth Facility that concluded in 2007 and disbursements from the Rapid Credit Facility in 2010 and 2015) and adherence to policy prudence to create loss absorption capacity. - The proposed program is expected to: - Help catalyze external financing to secure buffers for reserve levels and fiscal policy space. - Support structural reforms aligned with domestic policy priorities. - Provide greater Fund support for technical assistance and capacity development to address institutional and capacity constraints. *IMF staff and Nepali authorities — Introduction (1nplea2022001)* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1nplea2022001.pdf_