## 1nplea2025001-print-pdf ## Source details **Canonical URL:** [1nplea2025001-print-pdf](https://www.imf.org/-/media/files/publications/cr/2025/english/1nplea2025001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1nplea2025001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1nplea2025001-print-pdf.pdf.json) --- ### EXECUTIVE SUMMARY — context and headline developments - Political uncertainty: another change of government in July 2024—the fifth since the start of the Fund-supported program. - September 2024 floods and landslides: - Death toll surpassed 250. - Preliminary damage assessment: USD $420 million (nearly 1 percent of GDP). - Disrupted roughly one-third of power generation capacity at peak; extensive damage to major highways, bridges, residential housing, crops, livestock, hydropower plants, and transmission lines. - Financial sector strains: - Rising NPLs, weakened bank profitability, deteriorating SACCO health. ### RECENT MACROECONOMIC OUTCOMES - Growth and inflation: - Real GDP growth: FY2023/24 = 3.1 percent; FY2024/25 projection = 4.2 percent. - Inflation: peak 8.2 percent y/y in September 2023; 3.9 percent y/y in September 2024; 6.1 percent y/y in December 2024. - Average inflation expected to remain close to authorities’ target of about 5 percent for FY2024/25. - External and reserve indicators: - Current account balance: 3.8 percent of GDP in FY2023/24 (turned positive). - Gross international reserves: USD15.9 billion as of December 2024 (9.8 months of prospective imports). - Fiscal and public spending: - Capital spending: 3.3 percent of GDP in FY2023/24. - Tax revenue growth: 9.1 percent in FY2023/24; tax revenues grew 14 percent y/y in the first four months of FY2024/25. - Excise duties: increased 22 percent y/y in the first five months of FY2024/25. - Financial sector metrics: - Credit growth to private sector: 6.1 percent y/y in FY2023/24; 6.8 percent y/y in December 2024. - NPL-to-loan ratio for commercial banks: 3.9 percent in July 2024 → 4.4 percent in October 2024. - Aggregate Tier-1 capital ratio of all commercial banks: 10 percent in October 2024. - Commercial banks aggregate provisioning: 65 percent in October 2024 (five percent decrease since July 2024). - NPLs as share of capitalization and provisioning: around 23 percent. ### OUTLOOK, RISKS, AND SCENARIOS - Growth outlook: - FY2024/25 growth projection revised down to 4.2 percent (from 4.9 percent at 4th review). - Recovery expected to accelerate in H2 FY2024/25, supported by accommodative monetary policy, remittances, and higher capital spending (including reconstruction). - External outlook: - Imports expected to revive in H2 FY2024/25 as capital expenditure execution increases. - Slower remittance growth and stronger imports expected to lead to gradual reserve decline and external position aligning with fundamentals over the medium term. - Principal risks: - Stronger-than-projected flood impacts; political volatility and weak policy execution interrupting reconstruction; intensification of financial sector vulnerabilities (rising NPLs, weak bank capitalization, SACCO failures, risk that forbearance masks vulnerabilities); continued large emigration; external shocks (high commodity prices, trade tensions, bilateral restrictions); vulnerability to natural disasters and climate shocks. ### PROGRAM PERFORMANCE, CONDITIONALITY, AND FINANCING - Performance: - All quantitative performance criteria (QPCs) on net international reserves and the primary fiscal deficit were met. - All continuous performance criteria met. - Indicative targets missed: tax revenues (floor) and child spending (floor), though all children who applied received payments. - Structural benchmarks (SBs): - Three SBs completed (two met on time); multiple SBs missed and proposed for reset (including LPR-related SBs and NRB Act SB). - Prior action for this review: issue LPR Request for Proposals (RFP); expected completion by early March (RFP issuance confirmed March 6, 2025). - New SB proposed to re-align ACR with BCBS standards; LPR to be done based on BCBS standards per RFP prior action. - Financing and capacity to repay: - Staff anticipate requesting a technical extension of the program by several months before the 7th review to assess completion of December 2025 SBs. - IMF credit outstanding projected to peak this fiscal year at 262.3 percent of quota (SDR 411.6 million) — represents 16.5 percent of exports and 1.1 percent of GDP. - Staff support disbursement of 6th tranche in amount of SDR 31.4 million and modification of a performance criterion on net international reserves. ### POLICY RECOMMENDATIONS — fiscal, monetary, financial, governance - Fiscal policy: - Execute planned increase in capital spending and modernize public investment management. - Mobilize domestic revenue to fund development spending and preserve medium-term fiscal sustainability. - Expand eligibility for the child grant to support the most vulnerable. - Monetary and financial sector: - Maintain a cautious, data-driven monetary policy to preserve price and external stability. - Align bank regulations on asset classification and lending with international (BCBS) standards. - Incentivize banks to accelerate NPL recovery to support balance sheet repair and sustainable credit creation. - Complete a high-quality loan portfolio review (LPR) of the ten largest banks. - Resolve problematic SACCOs in the near term while reforming regulatory and supervisory architecture; do not include SACCOs in deposit insurance until sector cleaned up. - Governance and structural reforms: - Advance NRB Act amendments promptly to better align NRB framework with international standards. - Continue improving AML/CFT framework and its effectiveness to meet international standards and peer evaluations. - Strengthen anticorruption framework and institutions; accelerate investment-climate reforms and climate-resilient infrastructure investments. ### BUDGET PLANS, REVENUE PROJECTIONS, AND TAX REFORMS - FY2024/25 budget targets: - Increase tax revenue by 3.9 ppts to 20.3 percent of GDP (driven by customs +1.6 ppts; VAT +1.2 ppts; income tax +1.1 ppt). - Expenditure planned to increase by 4.2 ppts to 26.1 percent of GDP (capital expenditure +2.2 ppt; current expenditure +2 ppt). - Under program definitions: federal primary deficit ~ Rs. 130 billion; revenues under the IT definition ~ Rs. 1.1 trillion — both within program parameters. - IMF staff view: targets optimistic; staff stands ready to help improve budget forecasts. - Staff revenue projections: - Staff projects revenue-to-GDP ratio increase of 0.6 percentage points in FY2024/25; expects 14 percent revenue growth for the year with acceleration in H2. - Compared to 4th review: FY2024/25 revenues 0.4 ppts of GDP lower; expenditures 0.2 ppts lower. - Medium term: staff expect tax revenues to increase by 3.2 percentage points of GDP as DRMS measures (totaling 4.6 percentage points) are implemented. - DRMS and tax-administration actions: - MoF established a tax revenue intelligence unit; increased taxpayer audits; incentives for e-invoicing for VAT. - DRMS published in 2024; measures include equalizing treatment of labor and capital income, phasing out tax holidays, eliminating VAT exemptions on jewelry and residential property, improving property tax collection, and clearing tax arrears. - Tax expenditure reporting: end-January 2025 SB missed and proposed reset to end-July 2025; new SBs require separate domestic and import-related tax expenditure reports by end-April 2025. - Customs Compliance Improvement Strategy (CIMS): new SB end-December 2025; IMF TA available. - Selected revenue table (Nepal: Total Revenue and Grants, percent of GDP): - Total revenue and grants: 2023/24 Est. = 19.2 / 2024/25 Proj. = 19.8 / Difference = 0.6 - Total revenue: 18.7 / 19.2 / 0.4 - Tax revenue: 16.4 / 17.0 / 0.6 - Income and profits tax: 4.9 / 4.8 / (0.1) - Customs: 2.7 / 3.3 / 0.5 - Excise duty: 2.5 / 2.6 / 0.1 - VAT: 5.4 / 5.5 / 0.1 - Domestic taxes: 9.8 / 10.0 / 0.2 - Import-related taxes: 6.5 / 6.9 / 0.4 ### FISCAL CONSOLIDATION, DEFICIT, AND DEBT OUTLOOK - Staff projection: - Primary deficit to reach 2.9 percent of GDP in FY2024/25. - Consolidation of 1.6 percentage points relative to FY2022/23, but expansion of 1.6 percentage points relative to FY2023/24. - Debt stabilization: public debt expected to stabilize at 50 percent of GDP by FY2028/29. - Program anchors: - Key fiscal anchor: stabilizing public debt at 50 percent of GDP by FY2028/29. - Operational fiscal anchors: primary deficit performance criterion and revenue indicative target. ### PUBLIC INVESTMENT, RECONSTRUCTION, AND SOCIAL PROTECTION - Capital spending and reconstruction: - Staff expects capital spending to increase in remainder of fiscal year, driven by reconstruction and higher capital allocation in FY2024/25. - Ordinance issued January 2025 to reallocate from stalled to ongoing projects and top-up external financing. - NPC drafted revised Operational Procedures and Unified Directives for National Project Bank (end-March 2025 SB). - Clarifying and clearing overdue amounts to construction sector would support project completion. - Social protection: - Child allowance IT equals 0.1 percent of GDP; child grant amount has declined 20 percent in real terms since January 2022. - Staff recommends expanding child grant eligibility (e.g., more districts) or increasing grant when resources permit. ### MONETARY POLICY, LIQUIDITY, AND IMPLEMENTATION - Monetary stance and liquidity: - Monetary policy judged appropriate; de facto policy rate (Deposit Collection Rate at bottom of 350 basis point IRC) is below inflation — stance appropriately accommodative. - Lending rates fell cumulatively 340 basis points through December 2024; de facto policy rate declined about 400 basis points. - Excess liquidity significant; average SDF balance ≈ 36 percent of GDP so far this fiscal year. - Recommended reforms: - Improve governance (separate monetary policy formulation from implementation). - Align open market operations with reserve maintenance period and improve IRC functioning. ### FINANCIAL SECTOR VULNERABILITIES, ACR, LPR, AND SACCOs - Asset classification and LPR: - July 2024: NRB partially revised ACR permitting a temporary “watchlist” reclassification; authorities agreed to realign ACR with BCBS continuous repayment period of three months by end-December 2025 (new SB). - LPR of ten largest banks delayed due to procurement termination; procurement restarted December 20, 2024; RFP issued to shortlisted firms March 6, 2025 (prior action met). - Revised timelines: - Launch LPR: reset to end-May 2025. - Complete LPR for all ten banks: end-December 2025. - Roadmap addressing LPR findings: develop by end-April 2025; banks with capital shortfalls to submit timebound capital plans. - Supervisory and regulatory reforms: - NRB reviewing Capital Adequacy Framework; published Expected Credit Loss guidelines under NFRS 9; introducing Basel III LCR pilot this fiscal year. - NRB to phase out regulatory forbearance; interventions should be timebound and limited. - SACCOs, deposit insurance, and resolution: - SACCO deposits about 1/12th that of banks; sector weak with failures, suspended registration of new SACCOs, ordinance to reregulate SACCOs issued. - Risks: including SACCOs in Deposit and Credit Guarantee Fund (DCGF) could drain limited funds; recommended separation of funds and strengthening DCGF before covering SACCOs. - Call for centralized strategy for failed SACCOs, improved interagency coordination, planned SACCO Credit Recovery Tribunals. ### AML/CFT, SAFEGUARDS, AND GOVERNANCE REFORMS - AML/CFT: - Amendments to AML/CFT laws passed April/July 2024; FATF added Nepal to increased monitoring (“grey list”) in February 2025. - Focus on implementing remaining legal, regulatory, supervisory, and operational upgrades to improve effectiveness. - Safeguards and NRB Act: - Progress on 2021 Safeguards Assessment: 12 of 16 recommendations completed; NRB Act amendments SB not met and reset to end-April 2025. - Audits: FY2023/24 NRB audit involved auditors with central banking and international auditing experience (end-July 2024 SB met); plan to continue similar practice for FY2024/25 audit (proposed end-July 2025 SB). - Structural and anticorruption reforms: - Bill on Facilitating Investment approved; High-Level Economic Reform Commission formed October 2024; 16th Development Plan approved guiding next five years. - Continue modernizing legal acts on corruption prevention, investigation, and prosecution; strengthen anticorruption institutions. ### FLOODS: IMPACT, RECOVERY REQUIREMENTS, AND POLICY PRIORITIES (Annex I summary) - Key impacts of September 27–28, 2024 rainfall: - Deaths reported: 268 (Annex I table); population affected: 2,590,178. - Sectoral losses (selected): - Agriculture area affected: 65,358 ha; livestock lost: 26,672 heads. - Housing damaged or destroyed: 19,045 homes. - Transport (roads, bridges): damage valued at 29.0 Rs billions. - Energy (hydro & transmission): 3.1 Rs billions. - Total preliminary damage: 56.2 billion Rs = 420 million USD = 1.0 percent of preceding year’s GDP. - Recovery prerequisites and policy instruments: - Scale up capital expenditure execution; raise public investment efficiency; mobilize concessional financing and international climate adaptation support. - Implement PIMA action plan and DRMS; leverage instruments such as World Bank Cat DDO (approved October 2024). - Strengthen disaster preparedness, risk management in public investment, building codes, and social safety nets. - Climate attribution: - Models suggest the September 2024 floods were about 10 percent more intense than in a climate 1.3°C cooler; probability of such extreme events rising by approximately 70 percent. ### SELECTED KEY STATISTICS AND PROJECTIONS (sample) - Real GDP (annual percent change): 2021/22 = 5.6; 2022/23 = 2.0; 2023/24 = 3.1; 2024/25 = 4.2; 2025/26 = 5.4. - Headline CPI (period average): 2021/22 = 6.4; 2022/23 = 7.7; 2023/24 = 5.4; 2024/25 = 5.2. - Public debt: increased to 49.9 percent of GDP in FY2023/24; projected to stabilize at 50 percent of GDP by FY2028/29. - Gross official reserves (millions USD): 2023/24 = 14,547; 2024/25 = 15,301. - Workers' remittances (millions USD): 2023/24 = 10,864; 2024/25 = 11,151. - Net international reserves program targets and outturns (selected test dates): - 13-Jan-25 program target = 9,076; adjusted target = 9,014; outturn = 12,144 (met). - 15-Jul-25 program target = 9,076; adjusted target = 8,851; outturn = 14,130 (met). ### PROGRAM MONITORING, DATA, AND PRIOR ACTIONS - Program exchange rate assumptions: - Program exchange rate: NPR 137.6 per USD (exchange rate on January 13, 2025). - Gold price: USD 2652.2 per troy ounce (November 2024). - Table of USD per currency unit provided for multiple currencies; SDR = 1.292 USD. - NIR and primary deficit definitions and adjustors specified in TMU (including adjustors for budget support and project loan disbursements). - Data reporting requirements: detailed monthly/quarterly/annual submission schedule for MOF, PDMA, NRB, and banks with specified lags. - Prior action met: NRB issued the RFP and transmitted it to shortlisted firms on March 6, 2025 for the LPR; RFP incorporates Terms of Reference including use of BCBS continuous repayment period for reclassification. *Source: EXECUTIVE SUMMARY and excerpts, 1nplea2025001-print-pdf (IMF staff report content unit).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context and key developments - Political uncertainty remains high with another change of government in July 2024—the fifth since the beginning of the Fund-supported program. - The heaviest rains in twenty years in September 2024 caused devastating floods and landslides: the death toll surpassed 250; extensive damage to infrastructure (major highways and bridges) and residential housing; agriculture was hit just before harvest with significant losses to crop and livestock; hydropower plants and transmission lines were damaged, disrupting roughly one-third of power generation capacity at the peak of impact. - The preliminary damage assessment estimates the economic cost from the floods and landslides at close to 1 percent of GDP, though realized losses could be higher. - Non-performing loans (NPLs) have risen, bank profitability has weakened, and the financial health of savings and credit cooperatives (SACCOs) has deteriorated. ### Recent macroeconomic outcomes - Real GDP growth is estimated at 3.1 percent in FY2023/24. - Growth is expected to pick up to 4.2 percent in FY2024/25, supported by further expansion in hydropower generation and a higher execution rate of public capital expenditure, including on post-flood reconstruction. - Inflation developments: - eased from a peak of 8.2 percent year-on-year (y/y) in September 2023 to 3.9 percent y/y in September 2024; - accelerated to 6.1 percent y/y in December 2024 due to a temporary spike in food prices and supply shortages caused by floods; - average inflation is expected to remain close to the authorities’ target of about 5 percent for FY2024/25. - Fiscal and external indicators: - Capital spending remained weak at 3.3 percent of GDP in FY2023/24. - The current account balance turned positive to 3.8 percent of GDP in FY2023/24. - Gross international reserves increased to USD15.9 billion as of December 2024 (9.8 months of prospective imports). - Financial sector indicators: - Credit growth to the private sector: 6.1 percent y/y in FY2023/24 and 6.8 percent y/y in December 2024. - NPL-to-loan ratio for commercial banks increased from 3.9 percent in July 2024 to 4.4 percent in October 2024. - Revenue and expenditure: - Tax revenue grew by 9.1 percent in FY2023/24 (broadly in line with nominal GDP growth). - Excise duties increased 22 percent y/y in the first five months of FY2024/25. - Tax revenues grew 14 percent y/y in the first four months of FY2024/25. ### Outlook and risks - Growth outlook: - Real GDP growth projection revised down to 4.2 percent in FY2024/25 from 4.9 percent in the 4th review. - Economic recovery expected to accelerate in the second half of the fiscal year, supported by accommodative monetary policy, continued remittance inflows, and increased capital spending (including reconstruction). - External outlook: - Over the second half of the fiscal year, imports are expected to revive as capital expenditure execution increases, particularly in construction and energy sectors. - Slower remittance growth and stronger imports are expected to result in a gradual decline in the level of reserves and align the external position with fundamentals over the medium term. - Principal risks (domestic and external): - Stronger-than-projected negative effects from the floods. - Political volatility and weak policy execution, which could interrupt reconstruction and capital project execution. - Intensification of financial sector vulnerabilities: further rise in NPLs, weak bank capitalization, more failures of cooperative lenders, and the risk that forbearance masks vulnerabilities. - Continued large emigration reducing the labor force. - External shocks: high commodity prices, global trade tensions, bilateral trade restrictions, and vulnerability to natural disasters and climate shocks. ### Program performance and conditionality - Program performance was broadly adequate: - All quantitative performance criteria (QPCs) on net international reserves and the primary fiscal deficit were met. - All continuous performance criteria were met. - Indicative targets (ITs): the IT on tax revenues (floor) was missed due to economic weakness; the IT on child spending (floor) was missed though all children that applied received payments. - Structural benchmarks (SBs) and reforms: - Three SBs were completed (two met on time). - Amendments to the AML/CFT law were passed in April 2024 (SB met). - The SB on the NRB audit was met. - The SB on completing financial statement audits of four key public enterprises was completed with delay. - Procurement of international advisors for the loan portfolio review (LPR) was terminated due to cost and re-initiated, causing two February 2025 SBs on LPR completion and the LPR roadmap to be missed; both are proposed to be reset. - A prior action is proposed for this review on issuing the LPR Request for Proposals (RFP) to ensure procurement proceeds apace; expected to be completed by early March. - A previously implemented SB on bank asset classification regulation (ACR) was partially reversed amid a regulatory relaxation; a new SB is proposed to re-align the ACR with BCBS standards and the RFP prior action specifies that the LPR will be done based on BCBS standards. - The SB on the NRB Act and publishing financial statements of other nonfinancial public enterprises were missed; the NRB Act SB is proposed to be reset. - The January 2025 SB on producing a tax expenditure report was missed and is proposed to be reset. - Information to assess the January 2025 SB to incorporate financial information of operational funds in the financial statements will become available only in late March 2025. - Staff position: - Staff support the authorities' request for modification of the quantitative performance criterion on net international reserves. ### Policy recommendations - Fiscal policy: - Execute the planned increase in capital spending and modernize public investment management to support domestic demand and medium-term growth. - Domestic revenue mobilization is needed for development spending and to preserve medium-term fiscal sustainability. - To support the most vulnerable, expand eligibility for the child grant. - Monetary and financial sector policies: - Monetary policy should maintain the current cautious, data-driven approach to preserving price and external stability. - Align bank regulations on asset classification and lending with international standards and incentivize banks to accelerate NPL recovery to support balance sheet repair and sustainable credit creation. - Complete a high-quality loan portfolio review to identify potential asset quality issues. - Resolve problematic SACCOs in the near term while reforming the regulatory framework and supervisory architecture as SACCO vulnerabilities deepen. - Governance and structural reforms: - Advance draft amendments to the NRB Act to Parliament promptly to better align the NRB operating framework with international standards. - Continue improving the AML/CFT framework and its effectiveness to meet international standards and peer evaluations. - Continue efforts to improve the anticorruption framework and enhance anticorruption institutions by amending corresponding legal acts. *Source: EXECUTIVE SUMMARY, 1nplea2025001-print-pdf (February 26, 2025).* ### 10. The authorities’ FY2024/25 budget plans are within the program targets. In the ### 10. The authorities’ FY2024/25 budget plans are within the program targets. In the budget, the authorities planned to increase tax revenue by 3.9 ppts to 20.3 percent of GDP, driven by increases in customs tax (1.6 ppts), value-added tax (VAT) (1.2 ppts), and income tax (1.1 ppt). ### Budget plans, composition, and program consistency - Budget targets: - Increase in tax revenue by 3.9 ppts to 20.3 percent of GDP. - Expenditure planned to increase by 4.2 ppts to 26.1 percent of GDP (2.2 ppt increase in capital expenditure and 2 ppt increase in current expenditure). - Implications under program definitions: - Federal primary deficit under the QPC definition of around Rs. 130 billion. - Revenues under the IT definition of around Rs. 1.1 trillion. - Both are within the program parameters. - IMF staff view: staff considers these targets as optimistic (¶11) and stands ready to support authorities to improve budget forecasts given macroeconomic projections. ### Revenue projections and drivers - Staff projections and expectations: - Staff projects an increase in the revenue-to-GDP ratio of 0.6 percentage points of GDP in FY2024/25, reflecting import recovery and gains from ongoing tax reforms. - Staff expects acceleration in H2 as economic recovery strengthens and imports pick up for reconstruction, resulting in a 14 percent growth rate for the year. - Compared to 4th review projections, revenues are expected to be lower in FY2024/25 by 0.4 ppts of GDP; expenditures expected to be lower by 0.2 ppts of GDP as reconstruction spending picks up in H2. - Over the medium term, staff expect tax revenues to increase by 3.2 percentage points of GDP as authorities implement reforms from the Domestic Revenue Mobilization Strategy (DRMS), which contains measures amounting to 4.6 percentage points (¶13). - Note on forecast composition (footnote 8): - The forecasted 0.6-percentage point of GDP rise in tax revenue for FY2024/25 mainly results from a rebound in imports (0.4 percentage points), and also reflects excise duty measures and tax administration improvements. - After the FY2024/25 budget, the Inland Revenue Department announced a 10 percent VAT rebate for electronic payments to hotels, restaurants, and bars. - Text Table 2 (Nepal: Total Revenue and Grants 1/, in percent of GDP): - 2023/24 Est. / 2024/25 Proj. / Difference - Total revenue and grants: 19.2 / 19.8 / 0.6 - Total revenue: 18.7 / 19.2 / 0.4 - Tax revenue: 16.4 / 17.0 / 0.6 - Of which: - Income and profits tax: 4.9 / 4.8 / (0.1) - Customs: 2.7 / 3.3 / 0.5 - Excise duty: 2.5 / 2.6 / 0.1 - VAT: 5.4 / 5.5 / 0.1 - By source: Domestic taxes: 9.8 / 10.0 / 0.2 - Import-related taxes: 6.5 / 6.9 / 0.4 - 1/ Fiscal year ends mid-July. Sources: Nepali authorities; and IMF staff estimates and projections. ### Fiscal consolidation, deficit, and public debt outlook - Staff projection: - Primary deficit to reach 2.9 percent of GDP in FY2024/25. - This entails a consolidation of 1.6 percentage points relative to FY2022/23, but an expansion of 1.6 percentage points relative to FY2023/24 given sharp fiscal consolidation last year (Table 2a). - Current consolidation path expected to stabilize public debt at 50 percent of GDP by FY2028/29. - Debt sustainability: - Key fiscal anchor for the program is stabilizing public debt at 50 percent of GDP by FY2028/29. - June 2024 Debt Sustainability Analysis: both public and external debts assessed at low risk of debt distress. - Operational fiscal anchors under the program: - Two operational fiscal anchors: the primary deficit PC and the revenue IT. - Authorities’ fiscal anchors: (i) legislative limit on external debt set by the Public Debt Management Act (at 33 percent of the previous year’s GDP); and (ii) annual limits on domestic borrowing set by the Natural Resource Commission. ### Domestic revenue mobilization and tax administration measures - Actions taken in FY2024/25: - MoF established a new tax revenue intelligence unit. - Increased frequency of taxpayer audits. - Offered incentives to encourage e-invoicing for VAT. - Published a DRMS in 2024 to broaden the tax base by rationalizing tax expenditures and improving compliance. - Staff recommendations and conditional reporting items: - Use DRMS initiatives to inform FY2025/26 budget; consider further revenue-raising measures promoting equality and efficiency (Annex III). - Improve collection of VAT and income tax arrears by developing a plan to manage arrears and an automated system to send reminders and administrative/legal notifications (as highlighted in DRMS). - Comprehensive tax expenditure report delayed (end-January 2025 SB, not met; proposed reset to end-July 2025). Interim requirement: separate reports on domestic and import-related tax expenditures (new SB, end-April 2025). - Develop a Customs Compliance Improvement Strategy (CIMS) to enhance customs revenue collection (new end-December SB). IMF TA available to assist; CIMS to inform next Customs Reform and Modernization Plan after current plan expires in 2026. - Examples of DRMS measures (footnote 10): - Equalizing treatment of labor and capital income within personal income tax. - Phasing out tax holidays and concessions for special industries. - Eliminating VAT exemptions on jewelry and residential property. - Collecting more of the property tax that is due. - Clearing tax arrears. ### Public investment, reconstruction spending, and social protection - Capital spending: - Staff expects increase in capital spending in remainder of fiscal year, largely due to reconstruction and supported by high capital allocation in FY2024/25 budget. - Ordinance issued in January 2025 to facilitate reallocation from stalled to ongoing capital projects and to top-up external financing for projects. - Authorities drafted revised Operational Procedures and Unified Directives related to the National Project Bank and are incorporating stakeholder comments (end-March 2025 SB). - Construction sector and project completion: - Clarifying, clearing, and avoiding further overdue amounts to the construction sector would support project completion. - Child allowance and protection of vulnerable: - IT on child allowance spending amounts to just 0.1 percent of GDP. - Staff recommendation: expand eligibility for the child grant (e.g., to more districts) or increase grant amount per beneficiary when fiscal and logistical resources permit. - Note: child grant amount has declined 20 percent in real terms since last increase in January 2022. ### Fiscal transparency and public entity (PE) reporting - Audit and reporting progress: - Audits of all four priority PEs completed (end-August 2024 SB, not met, completed with delay). - For other nonfinancial PEs: 16 of 20 wholly-owned and 19 of 20 majority-owned either published financial statements or are no longer operational (end-August 2024 SB, not met). - Remaining 5 PEs not published due to desire for audit and OAG approval. - Extra-budgetary units (EBUs) and reconciliation: - FCGO included 90 EBUs at federal level and 9 at provincial level in FY2023/24 annual financial statements (end-January 2025 SB). - Assessment requires reconciliation of EBU counts between FCGO and OAG, expected to be completed in March. - EBU financial information available after publication deadline should be published in a supplementary annex to FY2023/24 financial statements. - Cash flow management: - MoF issued and Cabinet approved Guidelines on Cash Flow Management last year. - Cash flow forecasting framework is functioning, but frequent staff turnover requires additional capacity development. - Recommendation: transfer special project funds at NRB and commercial bank accounts for autonomous bodies and EBUs to the Treasury Single Account. ### Monetary policy and liquidity - Monetary stance and liquidity: - Monetary policy remains appropriate as NRB balances price and financial stability. - Significant excess liquidity in system; de facto policy rate—the Deposit Collection Rate at bottom of 350 basis point-wide interest rate corridor (IRC)—is below the inflation rate; stance judged appropriately accommodative. - Lending rates have fallen steadily since July 2023, with cumulative decline through December 2024 of 340 basis points versus the de facto decline in policy rate by about 400 basis points. - Credit growth is slowly rising but well below nominal GDP growth, allowing a gradual deleveraging. - Excess liquidity largely absorbed by the Standing Deposit Facility (SDF), with average balance of about 36 percent of GDP so far this fiscal year. - NRB continues to improve IRC framework by increasing access to SDF and relaxing conditions for access. - Recommended further reforms: - Reforms to governance (e.g., separating monetary policy formulation from implementation). - Align regular open market operations with reserve maintenance period. ### Financial sector vulnerabilities, NPLs, and supervisory measures - Nonperforming loans and provisioning: - Commercial (Class A) banks, on aggregate, are provisioned at 65 percent in October 2024, a five percent decrease since July 2024. - NPLs as a share of capitalization and provisioning are elevated at around 23 percent. - Aggregate Tier-1 capital ratio of all commercial banks: 10 percent in October 2024 (meets minimum requirement), though several individual banks struggle to meet capital conservation buffer requirement. - NRB measures and guidance: - NRB’s commissioned study on deprived sector lending will assess implications and effectiveness. - Directed lending requirements should be applied narrowly and phased out eventually. - NRB introduced measures to increase available capital for lending, including: - reducing required provisioning for pass loans by 10 basis points; - adjusting risk-weights for residential housing; - allowing a partial reversal of the 3rd review reforms on the ACR (¶18). - NRB ended forbearance for construction-related NPLs; regulatory forbearance should be phased-out and avoided, with any intervention timebound and limited. - NRB recently intervened in a small development bank and is intensifying supervision of some microfinance institutions. ### Asset classification regulation (ACR), loan portfolio review (LPR), and remedial actions - ACR realignment: - Authorities agreed to realign the ACR with international standards. - July 2024: NRB partially revised the ACR, removing rules agreed as part of 3rd Review that allowed non-forborne NPLs to be reclassified as “watchlist” following clearance of arrears. - Authorities agreed to align the ACR with the ‘continuous repayment period of three months’ for reclassification of non-forborne NPLs as prescribed by the BCBS Guidelines by end-December 2025 (new end-December 2025 SB). - Until alignment is finalized, banks monitored by NRB should anticipate regulatory change and not prematurely release provisions. - Authorities should sustain and improve Working Capital Loan (WCL) guidelines to tackle evergreening and misuse of WCLs. - Loan Portfolio Review (LPR) timelines and actions: - LPR of ten largest banks delayed and rephased due to procurement termination in September 2024; procurement restarted December 2024. - Launch of LPR reset to end-May 2025 (end-August 2024 SB, not met and proposed reset to end-May 2025). - Prior action: authorities to issue RFP for procurement by early March specifying LPR to be conducted based on both existing and BCBS standards (prior action, pending). - Completion deadlines: - LPR of all ten banks to be completed by end-December 2025 (end-December 2024 SB, not met and proposed reset to end-December 2025). - Authorities will develop a roadmap by end-April 2025 to address LPR findings (end-February 2025 SB, not met and proposed reset to end-April 2025). - Roadmap requires banks with capital shortfalls to submit timebound capital plans to return to full regulatory compliance. - Roadmap will include December 2025 alignment of ACR with BCBS-standard. - Authorities will submit to Parliament amendments to the NRB Act addressing gaps identified in 2023 Financial Sector Stability Report by end-April 2025 (new end-April 2025 SB). - Supervisory and regulatory reforms: - NRB reviewing Capital Adequacy Framework to further align with international standards. - Public consultation on recast rules on blacklisting of non-performing borrowers expected to be issued this fiscal year. - NRB published Expected Credit Loss guidelines as part of NFRS 9 implementation begun July 2024. - NRB introducing a Basel III liquidity coverage ratio (LCR) this fiscal year. - NRB agreed to a TA workplan with IMF staff to address 2023 FSSR recommendations; implementation should be prioritized given delays in starting TA projects and regulatory changes. ### SACCOs, deposit insurance, and resolution arrangements - SACCO sector weaknesses and risks: - Weaknesses continued with further failures due to inadequate governance and lack of regulation, causing loss or freeze of client savings. - SACCO sector relatively small: SACCO deposits around 1/12th that of banks. - Continued failures undermine confidence and could lead to contagion to small regulated banks. - Authorities’ actions: - Suspended registration of new SACCOs. - Started project to improve collection of data. - Issued an ordinance to reregulate SACCOs. - Policy recommendations and risks: - Caps on SACCO deposit size require close monitoring of SACCO liquidity. - Including SACCOs in the Deposit and Credit Guarantee Fund (DCGF) risks unviable SACCOs draining limited funds for bank depositor payout, given limited capacity of DCGF. - Further legislation should strengthen DCGF and ensure funds protecting banks and funds protecting SACCO depositors are clearly separated. - Ensure SACCO sector is cleaned up and better supervised and regulated before institutions are covered by deposit insurance. - A comprehensive and centralized strategy for failed SACCOs is needed; slow progress due to decentralized responsibilities and large data gaps—improvement in interagency coordination required. - Planned establishment of SACCO Credit Recovery Tribunals should assist in recovery of problematic SACCO assets to repay depositors. _Italic: Source: IMF staff report excerpt provided in the content unit._ ### 22. The authorities have made progress on implementing the 2021 Safeguards ### 22. The authorities have made progress on implementing the 2021 Safeguards ### Progress on Safeguards and NRB Act amendments - Additional advancements toward 2021 Safeguards Assessment (SGA) recommendations have been made in the NRB Act amendments. - The end-September 2024 SB was not met and is proposed to be reset to end-April 2025 to allow time to finalize and prepare the bill for submission (end-September 2024 SB, not met, reset to end-April 2025). - Other than the three recommendations related to the NRB Act, all but one SGA recommendations have been implemented. - The end-July 2024 SB to involve auditors with central banking and international auditing experience in auditing the FY2023/24 financial statement of the NRB was met (end-July 2024 SB, met); the authorities agreed to continue the practice for the FY2024/25 audit (proposed end-July 2025 SB). - Four recommendations have been implemented since the 4th review (improving internal audit reports to the Audit Committee, certifying the training of the Chief Information Security Officer and two on creating staff capacity development plans). The remaining one not linked to the NRB Act amendments—revising the Foreign Exchange Investment Directive—is close to completion. ### AML/CFT legal framework and FATF status - The authorities amended the AML/CFT laws in line with Financial Action Task Force (FATF) standards (end-July 2024 SB, met). - The FATF added Nepal to the list of jurisdictions under the increased monitoring (“grey list”) in February 2025. - In the run-up to grey listing, progress was made upgrading the legal framework based on the Asia/Pacific Group on Money Laundering’s (APG) 2023 assessment, including: amendment of the AML/CFT laws; publication of the National Strategy; issuing new Targeted Financial Sanctions guidelines; and developing Fit and Proper Test guidelines. - Challenges remain in improving the effectiveness of the AML/CFT regime; focus should be on implementing remaining legal, regulatory, supervisory and operational upgrades, primarily focusing on effectiveness. ### Structural reforms, governance, and investment climate - The Bill on Facilitating Investment was recently approved and addresses long-standing investor challenges by amending nine legal acts (examples noted in the source). - The High-Level Economic Reform Commission was formed in October 2024 and submitted an interim report to the Ministry of Finance in January 2025, offering legal and institutional recommendations to restore economic dynamism and resilience. - Ongoing efforts include modernizing legal acts on corruption prevention, investigation, and prosecution and enhancing anticorruption institutions (MEFP ¶26). - The recently approved 16th Development Plan is the guiding policy agenda for the next five years and prioritizes agricultural productivity, food security, export-oriented sectors (hydropower, tourism, IT), climate adaptation, and expanded social safety nets. - Investing in climate adaptation, agricultural and food security, digitalizing public administration, and further bolstering legal recourse would reduce costs of doing business, promote competition, and improve the investment climate. ### Program financing, reserves, and repayment capacity (key statistics) - An upward modification is requested by the authorities to the QPC on net international reserves. The floor on net international reserves for July 15, 2025 is proposed to be revised up (Table 8). - Staff anticipate requesting a technical extension of the program by several months before the 7th review to accommodate assessment of completion of the December 2025 SBs. - Capacity to repay remains adequate: - IMF credit outstanding is projected to peak this fiscal year at 262.3 percent of quota (SDR 411.6 million). - This represents 16.5 percent of exports and 1.1 percent of GDP (Table 9). - Upcoming Fund obligations remain low relative to current and projected international reserves, fiscal revenues and GDP. ### Projected financing and external/fiscal numbers (Text Table 3; note current baseline forecast is as of January 29, 2025) - FY2024/25 FY2025/26 - External financing requirement: 1.1 3.8 - Total revenue and grants: 19.8 20.9 - of which: Expenditure: 24.3 25.0 - Current account deficit 1/: 1.9 4.7 - Fiscal deficit: 4.5 4.1 - Financing sources: 0.1 3.0 - Total financing: 3.5 3.2 - Foreign borrowing: 1.5 1.5 - Net acquisition of financial assets: 1.3 1.3 - Net incurrence of liabilities: 4.8 4.5 - FDI, net: 0.3 0.4 - Foreign borrowing (alternate line): 0.7 0.7 - Change in reserves (+ decrease): -2.6 -0.2 - Domestic borrowing: 4.1 3.9 - External financing gap: 1.0 0.9 - Fiscal financing gap: 1.0 0.9 - Financing commitments so far: 1.0 0.9 - IMF: ECF: 0.2 0.1 - Asian Development Bank: 0.2 0.4 - World Bank: 0.6 0.4 - 1/ Current account excludes official transfers. ### Macro outlook and program performance - Following flood disruptions, real GDP growth is projected to reach 4.2 percent in FY2024/25 as activity gathers momentum in H2 supported by stronger capital spending, including post-flood recovery and reconstruction. - Inflation is expected to be transitory and ease as transport networks are repaired and agricultural output recovers. - The external position is stronger than implied by medium-term fundamentals but is projected to weaken as import-intensive capital projects scale up and remittances normalize. - Program performance: all PCs were met, several critical SBs completed, corrective actions planned for missed SBs. - PCs on net international reserves and the primary fiscal deficit were met, together with all standard continuous PCs. - ITs on revenue and child allowance spending were missed. - Three SBs were completed (two met on time); all missed SBs except one have been reset; the one not reset (PEs publishing financial statements) is close to completion (pending 5 of 40 statements no longer macro-critical). ### Policy recommendations and reform priorities - Fiscal policy and public investment: - Boost public investment to support domestic demand and medium-term growth; legal amendments in January 2025 and the Public Investment Management Action Plan should help. - Mobilize revenues by accelerating implementation of the DRMS; priorities include completing assessments of tax expenditures and developing a CIMS. - Monetary policy: - Maintain a cautious, data-driven approach to preserve price and external stability. - Currently high liquidity levels are appropriate to support balance sheet repair unless credit growth picks up rapidly. - Improve the functioning of the IRC. - Financial sector stability: - Proactively address increasing vulnerabilities: align asset classification and lending practices with international standards; incentivize banks to accelerate NPL recovery. - The LPR will contribute to improving visibility on potential asset quality issues. - Continue scheduled reforms to improve capital and liquidity frameworks and adjust blacklisting practices. - Expedite a cohesive strategy for the SACCO sector: prioritize resolving problematic SACCOs in the near term, reform the regulatory framework and supervisory architecture. - When reregulating SACCOs, deposit insurance coverage is not advisable before the SACCO sector has been cleaned up and is better regulated and supervised. - Central bank governance and safeguards: - Amend the NRB Act to strengthen governance, independence and accountability. - Conduct the audit of the NRB assisted by experts with international experience in auditing central banks and implement final recommendations of the 2021 SGA. - AML/CFT: - Maintain strong drive to strengthen AML/CFT regime with focus on achieving concrete implementation results in line with the FATF action plan. - Staff will continue to support AML/CFT reforms through program commitments and ongoing CD. - Growth, investment climate, and resilience: - Continue reforms to reduce barriers to growth, improve investment climate, social safety nets, anticorruption institutions, climate-resilient infrastructure, climate-smart agriculture, human capital, and social protection. - Continue improving coverage of the child grant program, including extending it to all districts. ### Program risks and capacity development - Program risks remain important, but ample reserves provide a backstop; political uncertainty is mitigated by commitment across major political parties. - Fiscal measures and guardrails under the program will bolster fiscal buffers; the NRB has developed facilities to provide liquidity support to prevent potential systemic financial concerns. - Mobilization of capacity development has intensified to support reforms under the program, including fiscal risks management, tax reforms, cash flow forecasting, execution of capital expenditures, financial sector regulation and supervision, strengthening the central bank’s institutional framework, and enhancing AML/CFT legal framework (Annex V). *Source: Nepal: Fourth Review under the Extended Credit Facility Arrangement (excerpts).* ### 40. Staff supports completion of the 5th review of the ECF-supported program and ### Staff supports completion of the 5th review of the ECF-supported program and disbursement of 6th tranche in the amount of SDR 31.4 million and the request for modification of a performance criterion. ### Program decision - Staff supports completion of the 5th review of the ECF-supported program. - Staff supports disbursement of 6th tranche in the amount of SDR 31.4 million. - Staff supports the request for modification of a performance criterion. ### Recent macroeconomic developments - Domestic demand remained anemic, making for a frail recovery in FY2023/24. - Inflation accelerated due to transitory effects of flood-induced crop losses and supply disruptions. - Revenue collection dropped markedly in FY2022/23 and did not recover much in FY2023/24, constraining spending and reinforcing expenditure under-execution. - The trade deficit has recently started increasing again as imports begin to recover. - The NEER and REER have been broadly stable since 2023 as the Rupee slowly depreciates against the US dollar. - Key headline indicators (annual percent change and levels): - Real GDP: 2021/22 = 5.6; 2022/23 = 2.0; 2023/24 = 3.1; 2024/25 = 4.2; 2025/26 = 5.4; 2026/27 = 5.0; 2027/28 = 5.0; 2028/29 = 5.0; 2029/30 = 5.0 - Headline CPI (period average): 2021/22 = 6.4; 2022/23 = 7.7; 2023/24 = 5.4; 2024/25 = 5.2; 2025/26 = 5.4; 2026/27 = 5.4; 2027/28 = 5.4; 2028/29 = 5.4; 2029/30 = 5.4 - Total public debt: increased to 49.9 percent of GDP in FY2023/24. ### Monetary sector developments - Bank deposit growth has only weakly followed the recent dip in remittance growth. - Net foreign asset accumulation continues to dominate broad money growth. - Private sector credit growth recently outpaced overall credit growth as mid-year government borrowing was subdued. - Private sector credit/GDP remains among the highest in its peer group. - Liquidity absorption is the focus, especially through the Standing Deposit Facility, but amounts are not sufficient to lift interbank rates from the bottom of the interest rate corridor. - Money and credit (annual percent change): - Broad money: 2021/22 = 6.8; 2022/23 = 11.4; 2023/24 = 13.6; 2024/25 = 10.1; 2025/26 = 10.1; 2026/27 = 0.3; 2027/28 = 10.5; 2028/29 = 10.7; 2029/30 = 10.7 - Private sector credit: 2021/22 = 13.3; 2022/23 = 4.6; 2023/24 = 6.1; 2024/25 = 7.2; 2025/26 = 8.1; 2026/27 = 9.1; 2027/28 = 10.0; 2028/29 = 10.7; 2029/30 = 10.7 - Private sector credit (in percent of GDP): memorandum 94.2; 91.7; 90.1; 88.0; 85.6; 84.3; 83.8; 83.8; 83.9 ### External sector developments - In FY2023/24 the current account turned positive due to persistent import weakness and remittance strength. - Imports growth rebounded and turned positive in H1 FY2024/25, signaling improving domestic demand. - Lower energy prices have slowed the import recovery, but capital goods imports have picked up recently. - Foreign employment of Nepalis remains resilient, driving robust growth in remittances. - Exports have rebounded since 2021 but remain well below the 1990-2009 levels and below peers. - Tourism returned to pre-pandemic levels in H2 FY2023/24; airport closures starting in October in Kathmandu may have impacted H1 FY2024/25. - Balance of payments headline figures (in millions of U.S. dollars): - Current account: 2021/22 = -5,174; 2022/23 = -361; 2023/24 = 1,663; 2024/25 = -630; 2025/26 = -1,969; 2026/27 = -2,166; 2027/28 = -2,321; 2028/29 = -2,479; 2029/30 = -2,760 - Workers' remittances (millions USD): 2021/22 = 8,326; 2022/23 = 9,485; 2023/24 = 10,864; 2024/25 = 11,151; 2025/26 = 11,680; 2026/27 = 12,258; 2027/28 = 12,766; 2028/29 = 13,283; 2029/30 = 13,767 - Gross official reserves (millions USD): 2021/22 = 8,956; 2022/23 = 10,954; 2023/24 = 14,547; 2024/25 = 15,301; 2025/26 = 15,004; 2026/27 = 14,821; 2027/28 = 14,876; 2028/29 = 14,897; 2029/30 = 15,289 - Gross official reserves (in months of prospective imports): 2021/22 = 7.6; 2022/23 = 9.3; 2023/24 = 10.5; 2024/25 = 9.4; 2025/26 = 8.7; 2026/27 = 8.1; 2027/28 = 7.7; 2028/29 = 7.2; 2029/30 = 7.0 ### Fiscal developments - In FY2023/24, the fiscal deficit narrowed on restrained spending. - The reduction in expenditure in FY2023/24 was driven by fiscal transfers and capital expenditure. - Tax and non-tax revenues remained stable relative to GDP in FY2023/24. - Composition of tax revenues remained stable in FY2023/24 across tax types and between import vs. domestic activity. - Selected fiscal figures (central government, percent of GDP and levels): - Total revenue and grants (percent of GDP): 2021/22 = 22.9; 2022/23 = 19.3; 2023/24 = 19.2; 2024/25 = 19.8; 2025/26 = 23.2; 2026/27 = 20.2; 2027/28 = 19.8; 2028/29 = 20.9; 2029/30 = 21.5; 2030/31 = 22.1; 2031/32 = 22.6; 2032/33 = 22.6 (table extends to 2029/30) - Tax revenue (percent of GDP): 19.8; 16.2; 16.4; 17.0; 17.8; 18.4; 19.1; 19.6; 19.6 - Expenditure (percent of GDP): 26.1; 25.2; 21.9; 24.3; 25.0; 25.4; 25.8; 26.2; 26.2 - Net lending/borrowing (percent of GDP): -3.1; -5.8; -2.7; -4.5; -4.1; -3.8; -3.7; -3.6; -3.6 - Primary balance (billions of Nepali Rupees): -110; -239; -173; -76; -77; -158; -183; -179; -175; -180; -182; -204 (as presented) - Public debt (in percent of GDP): 42.7; 47.1; 48.2; 50.0; 50.4; 50.6; 50.6; 50.5; 50.5 ### Socio-economic and climate indicators - Nepal remains one of the lowest income countries in Asia and South Asia, but poverty fell significantly in the last decade. - Improvement in Nepal’s UNDP Human Development Index reflects the decline in poverty. - Human capital levels are similar to comparators, with scope for improvement. - Substantial need remains to improve living standards, including relating to hunger. - Remittances are one of Nepal’s most important safety nets. - Climate and pollution: - Average temperatures have risen in Nepal. - The country faces significant and growing climate-related shocks including landslides, floods, and storms. - Total GHG emissions are growing but represent a small percentage of global emissions. - Hydropower accounts for 90 percent of current electricity production and is set to become a major export good. - Pollution is trapped by Nepal’s mountainous geography; Nepal is the 9th most polluted country and Kathmandu is the 11th most polluted capital city. ### Key projections and memoranda - Table 1 projections highlight: - Nominal GDP (in billions of U.S. dollars): 2021/22 = 41.2; 2022/23 = 40.9; 2023/24 = 43.4; 2024/25 = 46.8; 2025/26 = 51.5; 2026/27 = 56.6; 2027/28 = 62.3; 2028/29 = 68.6; 2029/30 = 75.3 - Net International Reserves (in millions of U.S. dollars): 2021/22 = 8,821; 2022/23 = 10,507; 2023/24 = 14,064; 2024/25 = 14,744; 2025/26 = 14,451; 2026/27 = 14,321; 2027/28 = 14,440; 2028/29 = 14,541; 2029/30 = 15,027 - Table 3 balance of payments projections (selected items in percent of GDP): - Current account: 2021/22 = -12.6; 2022/23 = -0.9; 2023/24 = 3.8; 2024/25 = -1.3; 2025/26 = -3.8; 2026/27 = -3.8; 2027/28 = -3.7; 2028/29 = -3.6; 2029/30 = -3.7 - Workers' remittances (percent of GDP): 20.2; 23.2; 25.0; 23.8; 22.7; 21.6; 20.5; 19.4; 18.3 - Trade balance (percent of GDP): -33.4; -26.2; -24.0; -26.7; -29.2; -28.2; -27.0; -25.8; -24.8 *Source: IMF staff estimates and projections (current baseline forecast is as of January 29, 2025).* ### 2020. T he second tranche of C C RT debt relief covering the period October 14, 2020 to April 13, 2021 for SDR 3.6 m il ### 2020. T he second tranche of C C RT debt relief covering the period October 14, 2020 to April 13, 2021 for SDR 3.6 m illion was approved on October 2, 2020. ### Debt relief tranches under CCRT - Second tranche covering the period October 14, 2020 to April 13, 2021 for SDR 3.6 million was approved on October 2, 2020. - Third tranche covering the period April 14, 2021 to October 15, 2021 for SDR 3.6 million was approved on April 1, 2021. - Fourth and fifth (final) tranche covering the period October 16, 2021 to January 10, 2022 and January 11 to April 13, 2022 were approved on October 6, 2021 and December 15, 2021 respectively for SDR 3.6 million. *Note: (in millions of US dollars). Current baseline forecast is as of January 29, 2025. 3/ Net international reserves program definition, see Technical Memorandum of Understanding. Sources: Nepali authorities; and IMF staff estimates and projections. 1/ Fiscal year ends mid-July.* ### Monetary indicators and projections (Table 4: Nepal: Monetary Indicators, 2021/22-2025/26) - Reserve money (end-period, in billions of Nepalese rupees): 826, 912, 987, 1,136, 1,252 (for 2021/22–2025/26). - Net domestic assets: -319, -528, -970, -948, -805. - Claims on public sector: -175, 3, -78, -78, -78. - Claims on private sector: 779, 1,010. - Claims on banks & financial institutions: 270, 1,044. - Other items (net): -420, -539, -901, -884, -742. - Net foreign assets: 1,145, 1,440, 1,958, 2,085, 2,058. - Broad money (Monetary Survey, in billions of Nepalese rupees): 5,505, 6,130, 6,964, 7,668, 8,442. - Narrow money: 948, 947, 939, 1,514, 1,667. - Quasi-money: 4,557, 5,184, 6,025, 6,154, 6,775. - Net domestic assets (Monetary Survey): 4,285, 4,588, 4,884, 5,484, 6,273. - Domestic credit: 5,672, 6,169, 6,553, 7,091, 7,772. - Credit to public sector: 983, 1,266, 1,350, 1,516, 1,747. - Credit to central government: 744, 1,005, 1,052, 1,299, 1,559. - Credit to private sector: 4,689, 4,903, 5,202, 5,575, 6,025. - Other items (net): -1,386, -1,581, -1,669, -1,607, -1,499. - Net foreign assets (Monetary Survey): 1,220, 1,542, 2,080, 2,184, 2,169. - Growth rates (Twelve-month percent change, selected): - Reserve money: -11.4, 10.4, 8.3, 15.1, 10.2. - Broad money: 6.8, 11.4, 13.6, 10.1, 10.1. - Net domestic assets: 12.6, 7.1, 6.4, 12.3, 14.4. - Domestic credit: 17.9, 8.8, 6.2, 8.2, 9.6. - Credit to public sector: 46.4, 28.8, 6.7, 12.3, 15.3. - Credit to private sector: 13.3, 4.6, 6.1, 7.2, 8.1. - Net foreign assets: -9.7, 26.4, 34.9, 5.0, -0.7. - Memorandum items: - Private credit (in percent of GDP): 94.2, 91.7, 90.1, 88.0, 85.6. - Net international reserves (in mil. U.S. dollars) 2/: 8,821, 10,507, 14,064, 14,744, 14,451. - Net Foreign Assets, NRB (in percent of GDP): 23.0, 26.9, 33.9, 32.9, 29.2. - Nominal GDP (in billions of Nepalese Rupees) 3/: 4,977, 5,349, 5,776, 6,333, 7,040. *Sources: Nepali authorities; and IMF staff estimates and projections. 1/ Fiscal year ends mid-July. 2/ Net international reserves program definition. 3/ 2023/24 GDP is an estimate. Note: Current baseline forecast is as of January 29, 2025.* ### External financing requirements and sources (Table 5: FY2023/24-2026/27, In Millions of U.S. Dollars) - Gross external financing requirements: -2,547; 532; 1,977; 2,100 (for 2023/24–2026/27). - Current account excluding official transfers (+ = deficit): -1,575; 910; 2,426; 2,659. - Amortization of medium- and long-term debt: 294; 343; 409; 427. - Other net capital flows (- = outflow) 2/: 1,266; 721; 858; 987. - Available financing: -2,985; 691; 1,535; 2,100. - Current and capital grants: 131; 427; 686; 740. - Medium- and long-term borrowing excluding exceptional financing: 558; 679; 747; 1,247. - FDI, net: 631; 622; 302; 52. - Portfolio investment, net: 0; 0; 0; 0. - Change in reserves (+ = decrease) 3/: -3,738; -1,199; -127; -140. - Financing Gap: 438; 464; 442; 0. - Exceptional/additional financing 4/: 369; 464; 442; 0. - IMF: ECF arrangement: 94.1; 83.7; 41.8; 0. - Asian Development Bank: 150; 100; 200; 0. - World Bank: 125; 280; 200; 0. - Memorandum items: - Gross official reserves (in millions of U.S. dollars): 14,547; 15,301; 15,004; 14,821. - In months of prospective imports: 10.5; 9.4; 8.7; 8.1. *1/ Fiscal year ends mid-July. 3/ Net of valuation changes. Note: Current baseline forecast as of January 29, 2025. 4/ Includes exceptional financing with good prospects over the projection period. 2/ Other includes currency and deposits, trade credits and other financial flows, as well as net errors and omissions.* ### Financial soundness indicators (Table 6: FY2019/20-2023/24) - Capital adequacy: - Regulatory capital to risk weighted assets: 14.16, 14.19, 13.58, 13.42, 12.92 (2019/20–2023/24). - Tier 1 capital to risk weighted assets: 12.01, 11.12, 10.81, 10.59, 10.20. - Asset quality: - NPLs to total gross loans: 1.89, 1.48, 1.31, 3.02, 3.86. - Loan loss provisions to NPLs: 65.90, 70.24, 68.25, 62.17, 70.51. - Deposits and credits: - Credit to deposit ratio (from 2021/22): ......, 86.22, 81.63, 79.09. - Credit to core capital cum deposit 1/: 69.58, 76.32, ......... - Liquidity: - Cash & bank balance to total deposits: 12.21, 19.51, 8.03, 8.05, 7.43. - Total liquid assets to total deposits: 27.90, 26.18, 27.52, 27.10, 26.44. - Exposure to real estate: - Share of real estate and housing loans: 12.71, 11.54, 12.01, 12.27, 12.68. - Share of loans collateralized by fixed assets: 76.04, 74.71, 75.06, 76.87, 76.22. - Revolving loans: - Overdraft 2/: 14.93, 15.19, 15.25, 15.32, 14.96. - Demand & working capital loans: 21.45, 21.09, 21.51, 18.05, 14.04. *Sources: NRB; and IMF staff calculations. Note: Data reflects all banks and financial institutions and is presented at the end of the fiscal year (i.e. mid-July). 1/ Credit to core capital cum deposit was replaced by the Credit to deposit ratio in 2021/2022. 2/ As of April 2023, NRB has started to report separately on 'overdrafts' and 'cash credit'. For the purposes of compiling the FSIs, these have been added back together.* ### Access and phasing under the Extended Credit Facility (Table 7) - Nepal's quota is SDR 156.9 million. - Review and disbursement schedule (SDR Million / Percent of Quota): - January 12, 2022 (Board approval of the Arrangement): 78.50 SDR, 50%. - First Review June 12, 2022: 19.60 SDR, 13%. - Second Review January 12, 2023: 19.60 SDR, 13%. - Third Review November 1, 2023: 39.20 SDR, 25%. - Fourth Review May 1, 2024: 31.40 SDR, 20%. - Fifth Review November 1, 2024: 31.40 SDR, 20%. - Sixth Review May 1, 2025: 31.40 SDR, 20%. - Seventh Review November 1, 2025: 31.32 SDR, 20%. - Total: 282.42 SDR, 180%. *Source: IMF staff estimates.* ### Quantitative performance criteria and indicative targets (Table 8) - Program targets, adjusted targets, and outturns for primary deficit (ceiling; in NPR million) and stock of NRB's net international reserves (floor; in U.S. dollars million) for key test dates: - 13-Jan-25: Program target primary deficit 435,959; Adjusted target 440,278; Outturn 178,827 (Status: met). Stock of NRB's NIR program target 9,076; Adjusted target 9,014; Outturn 12,144 (Status: met). - 15-Jul-25: Program target primary deficit 315,628; Adjusted target 311,931; Outturn 122,918 (Status: met). Stock of NIR program target 9,076; Adjusted target 8,851; Outturn 14,130 (Status: met). - Accumulation of external payments arrears (ceiling): 0/0/0 met across tested dates. - Indicative targets not met: - Federal government spending on child allowance (floor; in NPR million): 3,092 adjusted/outturns show not met at some dates (e.g., outturn 1,674 not met). - Floor on tax revenue of the federal government: program target 845,938; outturn 818,657 not met for a listed test date. - Memorandum items (selected): - Revenues of the budgetary central government under the program (in NPR million): 341,044; 438,939; ..93; 32,999.... - Revenue targets of the budgetary central government (in NPR million): 563,983; 1,248,620; ..; 1,125,209. - Foreign-financed project loan disbursements (in NPR million): 13,977; 18,295; 83,832; 80,134; 9,191; 91,912. *Sources: Nepali authorities; and IMF staff estimates/projections based on the Nepali fiscal year and calendar. Notes and footnotes in table define program specifics and adjustors.* ### Indicators of capacity to repay the Fund (Table 9, FY2024/25–2037/38) - Fund obligations based on existing credit (millions of SDR): - Principal: 7.1; 3.4; 9.2; 7.1; 5.8; 6.8; 9.0; 7.7; 2.8; 2.0; 0.2; 0.0; 0.0; 0.0 (2024/25–2037/38). - Charges and interest: 3.1 repeated annually 2.9/2.9/2.9... through the period. - Total obligations based on existing and prospective credit (Millions of SDR): 10.2; 7.8; 4.2; 9.9; 6.1; 7.9; 6.2; 5.1; 3.6; 3.6; 1.9; 6.0; 2.9; 2.9. - Corresponding obligations in billions of Nepali Rupees: 1.8; 6.7; 7.5; 9.0; 11.2; 13.2; 10.3; 9.4; 8.0; 5.8; 4.0; 1.1; 0.5; 0.5. - Percent of exports of goods and services (selected years): 0.4; 1.3; 1.3; 1.4; 1.6; 1.7; 1.2; 1.0; 0.8; 0.5; 0.3; 0.1; 0.0; 0.0. - Outstanding IMF credit based on existing and prospective drawings (Millions of SDR): 411.6; 407.9; 368.7; 321.6; 262.8; 193.8; 140.4; 91.8; 51.0; 22.0; 3.1; 0.0; 0.0; 0.0. - Net use of IMF credit (millions of SDR): 55.7; -3.6; -39.2; -47.1; -58.8; -69.0; -53.4; -48.6; -40.8; -29.0; -18.8; -3.1; 0.0; 0.0. - Memorandum items (selected): - Exports of goods and services (millions of SDR): 2,489; 3,001; 3,243; 3,559; 3,899; 4,273; 4,686; 5,141; 5,639; 6,186; 6,785; 7,443; 8,165; 8,956. - Debt service (billions of NPR): 277.7; 316.9; 359.0; 400.9; 448.0; 496.4; 545.7; 602.4; 659.9; 726.5; 799.5; 882.5; 971.2; 1,063.9. - Nominal GDP (billions of NPR): 6,333; 7,040; 7,792; 8,623; 9,543; 10,562; 11,688; 12,935; 14,315; 15,843; 17,533; 19,404; 21,474; 23,765. - Government revenue (billions of NPR): 1,214; 1,406; 1,609; 1,838; 2,079; 2,299; 2,564; 2,861; 3,163; 3,498; 3,868; 4,277; 4,730; 5,231. - Quota (millions of SDR): 156.9 repeated annually. *Sources: IMF staff estimates and projections. 1/ Reporting Year: August to July.* ### Structural benchmarks status and modifications (Table 10: July 2024–December 2025) - Cross-cutting institutional reforms: - FCGO reports consolidated financial information of all operational funds in annual financial statements starting with FY2021/22. Original target End-January 2025 (note on prior resets). - MOF submits to Parliament amendments to modernize the NRB Law: Original target End-September 2024; Status: Not met; Reset to end-April 2025. - Audit of FY2023/24 NRB financial statement involving international auditing experts: End-July 2024; Met. - Audit of FY2024/25 NRB financial statement commissioned involving at least one member of the Institute of Chartered Accountants of Nepal belonging to a global auditing network: New End-July 2025. - Report that Amendments to Some Laws Relating to AML and Business Promotion bill enacted in line with FATF AML/CFT international standards: End-July 2024; Met. - Revenue mobilization: - MOF publishes comprehensive report on tax expenditures: End-January 2025; Not met; Reset to end-July 2025. - MOF approves report on domestic tax expenditures and report on import-related tax expenditures: New End-April 2025. - MOF adopts Customs Compliance Improvement Strategy: New End-December 2025. - Fiscal sustainability and fiscal risk management: - Comprehensive fiscal risk statement published with FY2025/26 Budget: End-August 2025. - All majority- and wholly-owned PEs publish FY2022/23 annual financial statements: End-August 2024; Not met. - Four priority nonfinancial PEs to have FY2022/23 financial statements audited (NEA, NOC, NAC, Nepal Telecom): End-August 2024; Not met, completed with delay. - Equitable and sustainable growth: - NPC approval of revised National Project Bank Operational Procedures and Unified Directives: End-March 2025. - Financial sector regulation & supervision (concluded and modified items): - NRB issues RFP for independent international third-party auditors including TO R aligned with BCBS Guidelines on reclassification timing: Pending Prior Action. - NRB re-issues regulation on asset classification aligned with continuous repayment period of three months for reclassification as per BCBS: New End-December 2025. - Launch for 10 largest Banks in-depth onsite inspections assisted by independent international third-party auditors: End-August 2024; Not met; Reset to end-May 2025. - NRB completes in-depth on-site inspections for the 10 largest Banks assisted by independent international third-party auditors: End-February 2025; Not met; Reset to end-December 2025. - MOF submits to Parliament amendments to the NRB Act to address gaps in bank resolution framework per 2023 FSSR: New End-April 2025. - NRB finalizes roadmap outlining its approach to outcome of in-depth on-site inspections: End-February 2025; Not met; Modified and reset End-April 2025 to reference alignment of ACR with continuous repayment period end-December 2025. *Footnotes indicate prior reset history and linkages to BCBS guidance and prior assessments.* ### Annex I: Analyzing the Effects of the September 2024 Floods — Background and implications - The September 2024 floods in Nepal caused by intense monsoon rains became a major disaster affecting lives, infrastructure and economic activities. - Key vulnerability points: - Geography and monsoon-dependent climate increase susceptibility to floods and landslides with adverse implications for economic stability and development. - Recurrent disasters displace communities and destroy critical infrastructure such as roads and bridges. - Agricultural sector (contributing a quarter of GDP and employing two-thirds of the workforce) is particularly exposed: - Flooding triggers livelihood losses, food insecurity, increased dependence on remittances and higher reliance on costly imports. - Housing sector faces widespread destruction of homes leading to displacement and compounding reconstruction demands. - Energy sector (reliant on hydropower) faces recurring damages to plants and transmission lines, hindering economic activity and disrupting electricity supply, healthcare, and education. - Policy implication emphasized: - Urgent need for resilient infrastructure and adaptive strategies to mitigate socio-economic impacts of recurrent natural disasters. *Sources: Nepali authorities; and IMF staff estimates and projections. Note: Current baseline forecast is as of January 29, 2025.* ### 2. Nepal’s vulnerability to floods is exacerbated by limited adaptive capacity and low ### 2. Nepal’s vulnerability to floods is exacerbated by limited adaptive capacity and low ### A. Vulnerability and governance - Nepal’s disaster response mechanisms are constrained by challenging topography and resource limitations. - Compared with regional peers: - India: proactive approach with advanced technologies, centralized institutional frameworks, and substantial structural investments. - Bangladesh: integrated flood management strategy combining infrastructure with community engagement. - Recent national reforms: - Strengthened disaster risk reduction and management legislation and governance architecture (including establishing in 2019 a National Disaster Risk Reduction and Management Authority (NDRRMA) and adopting related legislative acts and regulations). - Improved early warning dissemination (including launching a Bipad portal). - Mandated dedicated risk financing. - Critical gaps persist: - Insufficient investment in preparedness. - Weak intergovernmental coordination and capacity constraints within the civil service. - Chronic under-execution of capital budgets limits progress in structural resilience. - Climate attribution note: climate models suggest the September 2024 floods were about 10 percent more intense than they would have been in a climate 1.3°C cooler, with the probability of such extreme events rising by approximately 70 percent. ### B. Socio-economic and infrastructural impact of the September 2024 floods - Event summary: - Record-breaking rainfall on September 27-28 in central and eastern regions, including Kathmandu Valley. - Claimed over 250 lives and affected 2.6 million people—the largest social impact since the 2015 earthquake. - Key damages and losses (preliminary assessments and staff estimates): - Preliminary damage assessment estimates losses at USD $420 million, nearly 1 percent of GDP. - Table 1 (Annex I): 2024 Sep — Deaths: 268; Population Affected: 2,590,178; Total Damage: 420* million USD (staff estimate). - Table 2 (Annex I) comparisons (2017 vs 2024): - Deaths: 2017 = 134; 2024 = 250. - Affected population: 2017 = 1.7 mln; 2024 = 2.6 mln. - Housing (damaged): 2017 = 192,136 (19.5 Rs billions); 2024 = 19,045 (9.0 Rs billions). - Education facilities (damaged): 2017 = - (1.2 Rs billions); 2024 = 142 (0.1 Rs billions). - Health facilities (damaged): 2017 = 99 (0.6 Rs billions); 2024 = 39 (0.5 Rs billions). - Agriculture (area affected, ha): 2017 = 139,000 (7.2 Rs billions); 2024 = 65,358 (5.7 Rs billions). - Livestock (heads): 2017 = 820,000 (10.7 Rs billions); 2024 = 26,672 (0.6 Rs billions). - Water (supply, sanitation): 2017 = 0.9 Rs billions; 2024 = 5.9 Rs billions. - Irrigation: 2017 = 17.8 Rs billions; 2024 = 1.4 Rs billions. - Energy (hydro & transmission): 2017 = 0.2 Rs billions; 2024 = 3.1 Rs billions. - Transport (roads, bridges): 2017 = 2.9 Rs billions; 2024 = 29.0 Rs billions. - TOTAL (in billion Rs): 2017 = 61.0; 2024 = 56.2. - TOTAL (in million USD): 2017 = 590; 2024 = 420. - TOTAL (in % preceding year's GDP): 2017 = 2.0; 2024 = 1.0. - Sectoral impacts: - Energy: 20 percent of the installed 3000 MW hydropower capacity and multiple projects under construction were affected. - Agriculture: 65,000 hectares inundated (about 3 percent of the country’s total cultivated area); over 26,000 livestock lost. - Housing: over 19,000 homes either destroyed or badly damaged. - Transportation: landslides severed all major roads to Kathmandu at one point, impairing critical transportation networks. - Humanitarian and economic consequences: - Population displacement, income losses, disrupted supply chains, reduced productive capacity in affected areas. - Temporary surge in food prices and increased transportation costs. - Inflation rose from 3.9 percent just before the floods to 6.1 percent in December 2024. ### C. Macro effects and growth projections - Growth forecast adjustments: - Downward adjustment by 0.6 percentage points from the 4th review for FY 2024/25 to reflect flood-related demand and supply disruptions and weaker-than-anticipated capital expenditure execution in the first half of the fiscal year. - Channels of impact: - Demand: population displacement and income losses suppressed economic activity. - Supply: damages to farmlands, critical infrastructure, and productive assets; supply chain bottlenecks constrained output, particularly in agriculture and transport-dependent sectors. - Inflationary pressures from rising food prices and higher transportation costs eroded real incomes, dampening consumption and investment. - Medium-term outlook: - Anticipated rebound in growth in FY2025/26 driven by post-flood reconstruction efforts and enhanced productive capacity as repairs and recultivation proceed. - Reconstruction expected to boost employment and income opportunities in construction and related sectors. ### D. Recovery requirements and policy priorities - Critical prerequisites for recovery: - Significantly scale up capital expenditure execution. - Raise public investment efficiency. - Effectively mobilize financial resources. - Specific policy actions and instruments: - Implement the PIMA action plan to enhance the efficiency and impact of public investments. - Implement the DRMS to help mobilize fiscal resources and enable higher development spending. - Leverage concessional financing from development partners for disaster relief, preparedness, and prevention. - Use international climate adaptation support to build technical capacity and bridge financing gaps. - Example instrument: Nepal Disaster Resilience Development Policy Credit with Catastrophe Deferred Drawdown Option (Cat DDO) approved by the World Bank in October 2024—provides contingent concessional financing and supports policy and regulatory reforms to increase disaster resilience. - Additional recommendations from the Risk Assessment Matrix and staff: - Improve risk management and resilience in public investment and building codes. - Build and maintain fiscal and reserve buffers. - Maintain and strengthen social safety nets. - Accelerate enacting recommendations of the CCDR and implement climate module recommendations of the PIMA. ### E. Conclusion - The September 2024 floods underscore Nepal’s acute vulnerability due to Himalayan geography, monsoon-dependent climate, high reliance on agriculture, limited adaptive capacity, and weak infrastructure. - Deforestation and rapid urban expansion into flood-prone areas increase exposure. - Climate models indicate increasing flood intensity and frequency as global temperatures rise, amplifying socio-economic impacts and disproportionately affecting vulnerable populations and key sectors (agriculture, energy, transportation). - To build resilient recovery and safeguard long-term economic stability and growth, Nepal must: - Prioritize efficient execution of capital investments. - Mobilize fiscal and concessional financing effectively. - Strengthen disaster preparedness through improved information management, dissemination, and community engagement. - Invest in resilient infrastructure, particularly in agriculture, energy, and transportation. - Swiftly and effectively implement PIMA and DRMS reforms. *Prepared by Yaroslav Hul; content from IMF staff report (Annex I and Annex II).* ### Annex III. Mobilizing Fiscal Resources ### Annex III. Mobilizing Fiscal Resources ### A. Accounting for Tax Revenue Shortfalls in FY2023/24 - Tax revenue in FY2023/24 maintained a stable ratio of 16.3 percent of GDP. - Tax revenue net of revenue sharing with provincial and local governments reached Rs 819 billion in FY2023/24, falling short of the indicative target of Rs 846 billion (14.6 percent of GDP). - Key drivers of the shortfall: - Imports in FY2023/24 were 9 percent lower than projected at the time of the 3rd review under the ECF, reducing the import tax base and accounting for Rs 38 billion in lower import-related tax revenues relative to projections at the 3rd review. - Nominal GDP was 3 percent lower in FY2023/24 than at the 3rd review, reducing the tax base for income, domestic value added, and excise taxes, accounting for Rs 17 billion less in revenue. - An increase in tax revenue of Rs 13 billion is attributed to other factors, including tax policy changes such as: - a one-off collection from retroactively taxing gains made through follow-on public offers, mergers and acquisitions and the sale of shares (Rs 12 billion); - establishing a 39 percent top income tax rate for income above NPR 5 million; - increasing the tax rate for interest paid to bank depositors; and - removing VAT exemptions for 170 items. ### B. Policy Options to Mobilize Tax Revenue - Domestic Revenue Mobilization Strategy (DRMS) targets and scope: - The DRMS (published in 2024) targets a tax-to-GDP ratio of 20.9 percent in FY 2028/29, representing an increase of 4.6 percentage points over FY2023/24. - The DRMS envisages achieving this through an increase of approximately 1 percentage point in revenues from PIT, CIT, VAT, and customs tax, with a smaller contribution from excise tax. - This targeted increase aligns with IMF technical assistance estimates and mirrors a prior achievement in the five years to mid-2019. - Progressive PIT and property tax collection to reduce inequality: - Review tax rates on investment income, the standard tax-free allowance within PIT, and the top income bracket. - Equalizing tax rates on capital income (especially dividends) with labor income within the PIT system could generate 0.3 percent of GDP in additional revenue. - Nepal has a property tax but collections are negligible due to lack of local government capacity; under the DRMS the central government plans to share data with local governments to help them collect property taxes. - Further options: offer grants to local governments to build capacity, or assign the Inland Revenue Department (IRD) responsibility for collecting property taxes on behalf of local governments. - Rationalizing tax expenditures and exemptions: - IMF staff estimates tax expenditures in Nepal amount to 2.7 percent of GDP for VAT and 1.7 percent for excise taxes at current compliance rates. - VAT reforms: - Eliminate regressive VAT exemptions such as those on precious metal jewelry and the first sale of a residential property, which could raise 0.4 percent and 0.2 percent of GDP in additional revenue respectively (text discussion). - Reduce the number of exempt goods and refine exemptions on selected foodstuffs and educational services to generate substantial revenue while protecting the vulnerable. - Excise tax reforms: - DRMS aims to impose excises on petroleum products and coal to address unpriced climate externalities. - Review excise tax exemptions on alcoholic spirits, loose tobacco, and heavy vehicles like buses due to revenue potential and health/infrastructure externalities. - PIT and CIT: - Estimate tax expenditures for PIT and CIT (not yet available) with IMF technical assistance if necessary. - DRMS commits to rationalizing CIT incentives and recommends gradually phasing out tax holidays and concessions for special industries and for exporters. - Improving voluntary compliance and enforcement: - Reported compliance rates: - PIT: 33 percent - CIT: 47 percent - VAT: 67 percent - Excise tax: 61 percent - Collectible tax arrears amounted to 1.3 percent of GDP in FY2021/22. - Measures to improve compliance and arrears collection: - Increase number of risk-based taxpayer audits. - Improve data collection (especially transaction-level) and data sharing to develop non-compliance risk indicators. - Develop a compliance improvement plan with mitigation measures and evaluation steps. - Improve clearance of arrears by identifying largest debtors and using a graduated enforcement approach (calling, offering payment plans, using enforcement powers). - Send reminders and mandate electronic payment for large taxpayers. ### C. Policy Options to Enhance Spending Efficiency - Public investment and National Project Bank (NPB): - Public capital stock declined to around 36 percent of GDP in 2019, from 50 percent in 1993. - Public investment execution needs to increase from its current rate of around 60 percent. - The government's PIMA Action Plan of May 2024 aims to link the NPB to the Line Ministries’ Budget Information System (LMBIS) and Provincial Project Bank Management Information System (PPBMIS), and to include all multi-year projects in the project bank for monitoring and budgeting. - Additional recommended measures: - Revise operational procedures of the NPB related to project development, prioritization, and selection. - Fully document project proposals and develop a detailed methodology for project appraisal. - Cover all large, complex projects (e.g., PPPs, externally financed projects, and those exceeding a given threshold) in the NPB. ### D. Revenue Mobilization Options (selected estimates from Annex III. Table 1) - PIT - Equalizing the tax rates on capital income with labor income. 0.3 - Lower tax free allowance and top income bracket. 0.4 - PIT (listed separately in table). 0.5 - CIT - Phase out tax holidays and concessions for special industries. 0.5 - VAT - Eliminate exemptions on jewelry and residential property. 0.6 - Refining the exemptions on foodstuffs and educational services and rationalizing other tax expenditures. 2.1 - Excise tax - Eliminating exemptions for spirits. 0.6 - Eliminating exemptions for tobacco. 0.3 - Eliminating exemptions for heavy vehicles. 0.8 - Property tax - Increase property tax rates. Support local governments to collect property tax, or assigning responsibility for collection to the IRD. (percent of GDP not specified in table) - Tax administration - Increase compliance. unknown - Collect tax arrears. 1.3 *Prepared by Yongquan Cao and Galen Sher (lead).* ### Annex V. Figure 1. Nepal: Composition ### Annex V. Figure 1. Nepal: Composition of TA Activities (2022-24) ### Capacity development priorities and main TA activities (selected) - Improve Governance and Fiscal Transparency (Enhancing coverage of fiscal accounts) - SARTTAC TA mission (in person) to advice on the adoption of GFS 2014 standards, including consolidation of operational extra-budgetary funds into annual financial statements (July 2022). - SARTTAC TA mission (in person) to provide advice in expanding the coverage of EBUs (August 2023). - Objective/Conditionality: Enhance Fiscal Transparency and Governance and Reduce Vulnerability to Corruption. - Improve Governance (Enhancing AML/CFT legal framework) - Participation of two LEG Staff Members in the Asia Pacific Group SIP mission (February 2024). - Objective/Conditionality: Enhance Fiscal Transparency and Governance and Reduce Vulnerability to Corruption. - Strengthening the Nepal Rastra Bank (NRB) institutional framework, in support of NRB’s policy mandates and implementation of SAG recommendations - LEG mission on Central Bank Risk Management (virtual) (February 2022). - LEG-FIN TA several missions (in person and virtual) to assist in drafting of amendments to the NRB Act (May-August 2022). - FIN desk-based TA (virtual calls) to provide advice to the Office of the Auditor General in conducting the NRB audit through experienced international auditors (July, October 2022). - MCM Workshop with NRB Board on Governance and Risk Management (Hybrid) (April 2023). - SARTTAC mission (in person) on the improvement of the NRB’s Foreign Reserves Management Framework (September 2023). - Objective/Conditionality: Enhance Fiscal Transparency and Governance and Reduce Vulnerability to Corruption. - Domestic Revenue Mobilization, with an emphasis on Tax Policy Matters - FAD TA mission (in person) to assess Nepal’s tax systems, identify tax exemptions, and to support formulate mobilization plan (August-September 2022). - FAD follow-up mission (in person) on the preparation of Domestic Revenue Mobilization (February 2024). - FAD TA mission (in person) for developing tax expenditure policy for domestic revenue mobilization (September 2024). - Objective/Conditionality: Enhance Fiscal Transparency and lay the foundations for a Domestic Revenue Mobilization Strategy (DRMS). - Tax Administration Component of Revenue Mobilization - FAD TA mission (in person) to access Nepal’s revenue administrations for developing the DRMS (August--September 2022). - Pre-TADAT training conducted by SARTTAC (November 2022). - TADAT mission (in person) to assess in detail Nepal’s tax administrations (December 2022). - FAD TA mission (in person) on stocktaking progress of reforms to the Inland Revenue Department (August 2023). - SARTTAC mission (in person) to improve the risk-based audit in the Large Taxpayers Office (April 2023). - FAD Post TADAT Study Tour (virtual) (December 2023). - FAD Post-TADAT to developing a strategic response to TADAT Findings (December 2023). - FAD-SARTTAC mission (in person) to support the finalization of the Domestic Revenue Mobilization Strategy (DRMS) (April 2024). - FAD-SARTTAC TA mission (in person) for customs reforms roadmap for Domestic Revenue Mobilization (October 2024). - SARTTAC training workshop (in person) on Risk Based Audit Techniques in Nepal (December 2024). - Objective/Conditionality: Enhance Tax Administration and provide inputs for the DRMS. - Fiscal Sustainability and Fiscal Risks Management - FAD TA (virtual) on identification of fiscal risks (April 2022). - SARTTAC training mission (in person) to MOF officials for the setting of a fiscal risk register (September 2022). - SARTTAC training (in person) on the design of a full--fledged Medium-Term Fiscal Framework and Macro-Fiscal Forecasting (February 2023). - Follow up SARTTAC training mission (virtual) to finalize the establishment of a fiscal risk register (February 2023). - Objective/Conditionality: Enhance Fiscal Transparency and Strengthening Fiscal Risks Management. - Improve Public Debt and Cash Management - SARTTAC mission (in person) in June 2023, on the development of a cash-flow forecasting framework. - SARTTAC training (in person) to follow up on the implementation of the cash-flow forecasting framework (June 2024). - MCM-FAD TA mission (in person) to assist authorities in strengthening the public debt management functions (January 2024). - Objective/Conditionality: Fiscal Sustainability and Fiscal Risks Management. - Raise the Quality of Growth through more Efficient Capital Expenditures Execution that Support Climate Resilience - FAD TA mission (virtual) to conduct a Public Investment Management Assessment Climate Change Module (March-April 2021). - SARTTAC mission (in person) for the formulation of an Action Plan for implementation of PIMA recommendations (February 2024). - SARTTAC TA mission (in person) on addressing issues in capital budget execution (January 2025). - Objective/Conditionality: Equitable and Sustainable Growth. - Enhanced Financial Sector Regulations & Supervision - MCM desk-based TA (virtual) on draft amendments to regulations on asset classification and LOLR (May-November 2022). - Financial Sector Stability Review (FSSR) several missions (May-November 2022). - STA TA mission (in person) on developing a framework for compiling the Monetary and Financial Statistics and dissemination (March 2023). - SARTTAC follow-up mission on Banking Supervision (December 2023). - MCM follow--up TA mission (in person) to devise a medium-term TA road map to implement FSSR recommendations (March 2024). - STA TA mission (in-person) on the External Sector Statistics (June 2024). - SARTTAC training (in person) on strengthening supervisory framework for IFRS9 and ECL (September 2024). - MCM TA missions (in person and virtual) on the feasibility analysis of CBDC and its preparation (July-November 2024). - Objective/Conditionality: Preserve and Strengthen Financial Sector Stability. ### Letter of Intent and Memorandum: key macroeconomic developments, targets, and reform commitments - Recent macroeconomic and shock developments - Q1 growth of only 3.4 percent y/y. - Floods and landslides in September 2024 caused extensive damages to agriculture and infrastructure. - NPLs increased to 4.4 percent in October 2024. - Inflation decreased through FY2023/24 to 3.6 percent in July 2024, then accelerated to 6.1 percent in December 2024 following the floods. - Fiscal policy and revenue mobilization - Pursuing growth-friendly fiscal consolidation emphasizing acceleration of capital expenditure coupled with revenue mobilization. - Tax revenues improving in part due to new measures on alcohol, tobacco, petroleum products, and coal. - Assessment of tax expenditures with IMF TA will inform the FY2025/26 budget and be published in a tax expenditure report. - Adoption of the Public Investment Management Action Plan and drafting of revised guidelines for the National Project Bank. - Monetary and external sector stance - Continue a data-driven approach to monetary policy to maintain price and external sector stability while supporting growth. - Stand ready to react with monetary policy measures to address persistent second-round effects from a food price spike. - Aim to improve monetary policy implementation, including through proactive liquidity management aligned with the interest rate corridor. - Financial sector reforms and timelines (commitments) - Align Asset Classification Regulation (ACR) rules with a continuous repayment period of three months for reclassification for non-restructured/non-rescheduled loans, as prescribed by BCBS standards, by end-December 2025 and ensure the banking sector is provisioned accordingly. - Limit regulatory forbearance and ensure it is targeted, timebound and phased-out as soon as possible. - Restarted procurement process for independent international consultant to assist with the LPR; Request for Proposal Notice to be issued by early March (year implied by surrounding text). - Launch the LPR by end-May 2025 to verify loan classification, provisioning and compliance with the regulatory framework, and develop a roadmap to address outcomes, including referencing the December 2025 alignment of the ACR with BCBS guidelines. - Finalize the LPR of the ten largest banks by end-December 2025. - Amend the NRB Act to address issues identified in the 2023 Financial Sector Stability Review; submit amendments to the NRB Act to Parliament by end-April 2025. - Issued an ordinance to regulate SACCOs and will prioritize implementing measures to deal with problematic SACCOs. - AML/CFT and safeguards - Committed to implementing recommendations from the AML/CFT Mutual Evaluation by the Asia Pacific Group. - Amendments to the AML Law enacted; issuance of secondary regulations has begun. - OAG conducted the FY2023/24 audit with the assistance of a Nepal-based auditor with international experience in central bank auditing; intent to continue involving members of the Institute of Chartered Accountants of Nepal belonging to global auditing networks for the audit of the FY2024/25 NRB financial statements. - Progressing implementation of 2021 Safeguards Assessment recommendations. - Program financing request and policy assurances - Request SDR 31.4 million to be made available for the fifth review under the ECF. - Request an upward revision of the end-July 2025 quantitative performance criterion (QPC) on the floor of net international reserves. - Do not intend to introduce measures that could generate balance-of-payments difficulties or that are inconsistent with Article VIII of the IMF’s Articles of Agreement. - Do not intend to accumulate external or domestic arrears. - Consent to publication of the LOI, attached MEFP and TMU, staff report and other ECF-related documents on the IMF’s website. *Source: IMF.* ### 2. In this context, we remain committed to the ECF to support our efforts to maintain ### In this context, we remain committed to the ECF to support our efforts to maintain ### Program implementation and conditionality - Continued commitment to the ECF to maintain macroeconomic and financial stability and transition towards sustainable and inclusive growth. - The macroeconomic framework and reform agenda underpin the ECF and are critical to returning to stable long-term growth. - The fifth review quantitative performance criteria and continuous performance criteria were met. - Primary balance target was met, contained inter alia due to prudent spending in a context of revenue weakness and low absorption of external project financing. - Child grant spending as of July 2024 missed the program indicative target for the third time, although all eligible children received the grants. - Out of six structural benchmarks (SBs), three were completed, two met on time; the remaining three SBs were not completed and two are proposed to be reset for future reviews. - An SB from the 3rd review on the asset classification regulation (ACR) was revised; commitment to align the ACR with the Basel Committee on Banking Supervision (BCBS) Guidelines by end-December 2025. ### Recent macroeconomic developments and disaster impact - FY2023/24 recovery supported by tourism, hydropower, transportation, and agriculture, with improving tax and customs revenues and imports. - Severe floods and landslides in September 2024 interrupted the recovery: - Over 200 fatalities. - Over 19,000 homes destroyed or badly damaged. - Preliminary economic losses close to NPR 50 billion (0.9 percent of GDP). - Agricultural inundation and livestock losses, extensive damage to roads, bridges, and hydropower facilities. - Inflation trajectory: - 3.6 percent by July 2024. - 6.1 percent in December (food price spike driven by supply disruptions and agricultural losses). - Floods weighed on near-term growth prospects. ### Outlook and recovery scenario - Growth recovery expected to gather pace by end of FY2024/25, supported by post-flood recovery and reconstruction efforts; inflation expected to remain contained. - Activity rebound expected in second half of fiscal year as public spending on relief and reconstruction accelerates. - Policy and sector support expected to stimulate domestic demand: - Public infrastructure spending, targeted support for affected sectors, cautiously accommodative monetary stance. - Continued growth in tourist arrivals, rising imports, and additional hydropower capacity to support recovery. - Flood-driven food inflation expected to ease as transport networks are repaired and agricultural output recovers. - Monetary policy will adjust as necessary to keep inflation about 5 percent. - Current account balance expected to decline in FY2024/25 with rebound in imports and moderation in remittance inflows; international reserves to remain substantially above adequate level. - Medium-term outlook positive, supported by strategic investments into priority infrastructure projects including hydropower generation and transmission. ### Downside risks - Key risks identified: - Need to improve public expenditure execution for growth-enhancing capital projects. - Need to improve business and investment climate and create jobs competitive with overseas opportunities. - Potential further rise in bank NPLs and more failures among cooperatives. - Strategic deficiencies in the AML/CFT framework identified by FATF in the February 2025 plenary—critical to address to avoid hindering access to the global financial system. - Continued capital budget under-execution and overly optimistic budgeting creating fiscal policy uncertainty. - External risks: sharp growth slowdown in major partner economies; volatile and higher global commodity prices, especially fuel and food. - Vulnerability to climate change-induced natural disasters and weather variability with disproportionate impact on the poor and vulnerable. - Policy stance: take forward-looking, data-driven approaches to monetary and fiscal policies and stand ready to adjust policy. ### Fiscal policy and position - Fiscal position anchored by program targets despite a challenging environment. - Slow import growth in FY2023/24; tax revenues increased marginally faster than nominal GDP due to tax measures and import trends. - Strict spending discipline pursued, especially on fiscal transfers to subnational governments and capital spending; overall fiscal deficit declined to 2.7 percent of GDP. - Negative balance of the Treasury Single Account (TSA) increased to about 4.0 percent of GDP at end-FY2023/24—indicates need for enhanced monitoring and consolidation of extra-budgetary funds. - Commitment to gradual growth-friendly fiscal consolidation to stabilize public debt consistent with program framework. - FY2024/25 budget broadly consistent with program target to stabilize public debt at a moderate level; includes new tax measures on alcohol, tobacco, petroleum products, and coal, and seeks to improve tax compliance. - Budget allocates more to capital expenditure, curtails spending duplication with subnational governments, and increases social security expenditure (not the child grant program). - Aim to increase absorption of external concessional financing, in particular project loans. ### Revenue mobilization and tax reform - QPC on the primary deficit for July 2024 was met; the indicative target (IT) on revenue collection was not met due to weaker-than-expected activity. - Domestic Revenue Mobilization Strategy (DRMS) developed and adopted (end-April 2024 SB) to increase collections of PIT, CIT, VAT, and customs and excise taxes via tax policy and administration reforms. - Selection of DRMS reforms to be included in FY2025/26 budget. - Commitment to develop and adopt a Customs Compliance Improvement Strategy (new SB, end-December 2025). - Commitments on tax expenditure reporting and timelines: - Prepare and adopt a report on domestic tax expenditures and a report on import-related excise and VAT expenditures by end-April 2025 (new SB, end-April 2025). - Publish a consolidated report on all tax expenditures by end-July 2025 (end-January 2025 SB not met and proposed to be reset to end-July 2025). - Key tax policy reforms: rationalize tax expenditures, make PIT more progressive, review tax rates on investment income, reduce number of goods exempt from VAT (building on FY2023/24 and FY2024/25 budgets). - Tax administration improvements: - Expand e-invoicing and review VAT filing threshold. - Improve data collection and analysis to target non-compliance and enhance audit yields. - Impose sanctions, including suspension of licenses, on importers that do not file tax returns. - Improve data sharing with local governments to help property tax collection. ### Expenditure reforms and public investment management - Enhance efficiency of capital spending to support medium-term growth. - Capital spending grew 13 percent year-on-year in first five months of FY2024/25 following a large increase in capital budget. - National Planning Commission (NPC) approved a Public Investment Management Action Plan, drawing on PIMA recommendations (end-April 2024 SB). - Cabinet approved the 16th Plan reflecting steps from the Action Plan. - To be included in the budget, all projects must be entered into the National Project Bank and undergo planning and appraisal steps. - NPC drafted revised Operational Procedures and Unified Directives related to the National Project Bank (currently under review; end-March 2025 SB). - Aim to update and link the National Project Bank Management Information System (NPBMIS) with the Line Ministries Budget Information System (LMBIS) and incorporate Provincial Project Bank MIS with NPBMIS subsequently. ### Cash flow management and fiscal risk management - Guidelines on Cash Flow Management issued and Cabinet approved; regular cash flow forecasts (end-September 2023 SB, met) support short-term fund management and liquidity forecasting by Nepal Rastra Bank (NRB). - Ordinance amending the Financial Procedures and Fiscal Responsibility Act to facilitate consolidation/transfer of commercial bank accounts for autonomous bodies and extra-budgetary units to the TSA. - Fiscal risk registry introduced (end-August 2023 SB, met); coverage to be gradually expanded to cover PPPs. - Fiscal risk section published in the Fiscal Policy Statement of the FY2024/25 budget. - Commitment to prepare and publish with FY2025/26 budget a comprehensive fiscal risk statement in the Fiscal Policy Statement (end-August 2025 SB). - With IMF TA, intend to build an inventory of key risk indicators of all subnational entities. ### Public enterprises, extra-budgetary units, and oversight - Strengthen financial oversight of PEs, EBUs, and subnational governments to limit fiscal risks. - Four priority nonfinancial PEs (Nepal Electricity Authority, Nepal Oil Corporation, Nepal Airlines Corporation (NAC), and Nepal Telecom) had their FY2022/23 financial statements audited (end-August 2024 SB, not met, completed with delay). - Out of 20 wholly-owned PEs, 16 have either published FY2022/23 financial statements or discontinued operations; out of 20 majority-owned PEs, 19 have published or discontinued operations (end-August 2024 SB, not met). - Commitment to follow up with remaining 5 PEs and have their financial statements published by end-April 2025. - FCGO included 90 extra budgetary units at the federal level and 9 EBUs at the provincial level in the FY2023/24 annual financial statements (end-January 2025 SB). - Ordinance amending the Financial Procedures and Fiscal Responsibility Act will strengthen FCGO’s authority to request information on EBUs. - Commit to publishing a supplementary annex to the FY2023/24 financial statements that covers additional EBUs and to include all EBUs in the NPSAS-based financial statements for FY2024/25. - Coverage definitions for inclusion: - Federal non-budgetary entities with annual income or expenditure more than Rs. 5 crore. - Provincial non-budgetary entities with annual income or expenditure more than Rs. 2 crore. - Local non-budgetary bodies with annual income or expenditure more than 5 million. ### Social spending and safety nets - Commitment to enhance social safety nets for poverty alleviation. - Cabinet approved the 16th National Development Plan to guide medium-term strategy on governance, social justice, and prosperity. - Development of the National Social Registry (NSR), including a system of national identification cards, to facilitate identification of low-income households and more efficient targeting of social transfers. - Continued support to food security, poverty reduction, and human capital via child grants, the mid-day meal program, scholarship program, and the Prime Minister’s Employment Program. - Executed 94 percent of the budget for child grants in FY2023/24, covering all eligible children. - Consideration to expand child grant eligibility to more districts or increase amount per beneficiary in FY2025/26 and future budgets as resources allow. ### Monetary and exchange rate policy - Monetary policy stance cautiously accommodative in an environment of ample liquidity. - Maintained interbank rate at the bottom of the interest rate corridor (IRC) so far this fiscal year. - Accommodative stance led lending rates to come down by more than 300 basis points since July 2023. - Credit growth has not significantly picked up amid deleveraging following post-pandemic credit boom; expected to improve with economic recovery. - Commitment to data-driven monetary policy to achieve primary target of price stability while maintaining banking, financial sector, and external sector stability. ### Financial sector policies and bank soundness - Banks repairing balance sheets amid rising pressures and adjusting lending practices after post-pandemic credit surge and regulatory reforms. - Aggregate gross NPL levels of the banking sector rose to approximately 4.4 percent in October 2024 and are likely to rise further. - Aggregated bank core capital ratios continue to hover around 10 percent; some banks face difficulty meeting capital conservation buffers and improving capitalization. - Provision coverage for NPLs at commercial banks around 65 percent in October 2024. - Bank profitability impacted by weak domestic demand and declining bank income; increases in non-bank assets and accrued interest. - Recent intervention to resolve issues in one development bank; regular supervisory actions and close monitoring ongoing in other banks and financial institutions. - Commitment to bank regulation reforms aligned with international standards: - Reforms to asset classification regulation (Unified Directive 2, ACR) and Working Capital Loan (WCL) guidelines implemented in 2022/2023; ACR-related provisions amended in July 2024 creating a ‘watchlist’ classification with five percent provisioning for six months after repayment of overdue amounts. - Commitment to align ACR with continuous repayment period of three months for reclassification of non-restructured/non-rescheduled loans as prescribed by BCBS Guidelines on “Prudential Treatment of Problem Assets” by end-December 2025 (new end-December 2025 SB) and ensure banking sector provisioning accordingly. - Apply BCBS standards after results from loan portfolio review (LPR) of the ten largest banks. - Continue to enhance WCL guidelines to gradually reduce misuse, ensuring adjustments are targeted, time bound, and do not impact core purpose. - Ensure regulatory forbearance is phased-out and avoided; any intervention to be timebound and limited. - Continue prudent monitoring to ensure appropriate loan classification, restructuring, provisioning and capitalization. *International Monetary Fund — Nepal country report content unit* ### 19. The loan portfolio review of the 10 largest banks will be rephased. The aim of the LPR is ### 1nplea2025001-print-pdf - 19. The loan portfolio review of the 10 largest banks will be rephased. The aim of the LPR is ### Loan Portfolio Review (LPR) — objectives, status, and timeline - Aim: ensure that loans are classified and provisioned in line with the existing regulatory framework and international best practices; apply a continuous repayment period of three months for reclassification of non-restructured/non-rescheduled loans, as prescribed by the BCBS Guidelines on “Prudential Treatment of Problem Assets”. - Procurement and appointment: - Initial procurement process was canceled due to budgetary issues, delaying appointment of an international independent consultant and preventing launch by end-August 2024. - Procurement restarted on December 20, 2024 and the Request for Proposal will be issued by early March (Terms of Reference agreed with the Fund that includes both existing and BCBS standards) — classified as a prior action. - Revised launch and completion dates: - Proposed reset launch of the LPR to end-May 2025 (end-August 2024 SB, not met and proposed to be reset to end-May 2025). - Finalize the LPR of the ten largest banks by end-December 2025 (end-December 2024 SB, modified and proposed to be reset to end-December 2025). - Post-review actions: - Develop a roadmap by end-April 2025 (end-February 2025 SB, proposed to be reset to end-April 2025) to address review findings. - Roadmap will reference the December 2025 alignment of the ACR with BCBS Guidelines and require any bank with capital shortfalls to submit time bound capital plans setting out how they will return to full compliance with regulatory requirements. - Legal and resolution framework adjustments: - Introduce amendments to the NRB Act to address key gaps in the bank resolution framework in line with recommendations of the 2023 Financial Sector Stability Report by end-April 2025 (new end-April 2025 SB). - Identify topics in the NRB Act and Bank and Financial Institutions Act that require alignment going forward. ### Financial sector regulation, supervision, and macroprudential measures - Risk-based supervision: - Improving risk-based supervision with Fund support, taking into account recommendations in the 2023 Financial Sector Stability Report (FSSR). - Reviewing capital adequacy and blacklisting frameworks with a view to amending them. - Macroprudential and supervisory measures: - Countercyclical capital buffer set at 0 percentage points for this fiscal year. - Developing and enhancing credit risk modelling assessment capabilities with technical assistance from the Fund as banks implement NFRS-9 in FY2024/25. - Finalizing policies for implementation of the Liquidity Coverage Ratio and expect to start an implementation pilot in FY2024/25, while consulting with banks. - Stand ready to use other macro-prudential tools to mitigate buildup of financial vulnerabilities. - Prompt corrective action and remedial measures: - Streamline prompt corrective action framework with a clear escalation process across various states of distress and ensure consistency with the bank resolution framework. - For banks facing capital issues, NRB has taken remedial action including suspension of dividend payments and taking control. - NRB will remain vigilant and use relevant early intervention measures where necessary. ### SACCOs reregulation and related safeguards - Immediate measures: - Registration of new SACCOs suspended. - Improving data availability on SACCOs at federal and provincial levels. - Regulatory and institutional reforms: - Issued regulations to improve regulatory framework, establish a regulatory and supervisory agency, license SACCOs, improve governance, and ensure their membership of the Credit Information Center. - Arrangements to establish a SACCO Credit Recovery Tribunal to improve recovery of problematic SACCO assets to repay depositors. - Introduced a cap on the size of deposits and will closely monitor liquidity in the SACCO sector. - Deposit and Credit Guarantee Fund (DCGF): - Introduce necessary legal amendments to strengthen DCGF to ensure safeguards to prevent problematic and unviable SACCOs from joining and establish a separate Fund from that of the banking sector. - Strategic approach: - Acknowledge that resolving problematic SACCOs requires a strategic plan, a centralized approach and sufficient financial and human resources. - Incorporate SACCO sector reforms in the 2nd Financial Sector Development strategy and devise a strategy to deal with problematic SACCOs. ### Governance, audits, AML/CFT, and structural reforms - NRB autonomy and audit practices: - OAG conducted the audit of NRB’s FY2023/24 financial statements including a Nepali auditor belonging to a global auditing network (end-July 2024 SB, met). - For FY2024/25 audit: will request OAG to commission audit involving at least one member of the Institute of Chartered Accountants of Nepal belonging to a global accounting network (new, end-July 2025 SB). - Submit amendments to the NRB Act to Parliament by end-April 2025 to implement key recommendations of the 2021 Safeguards Assessment (end-September 2024 SB, not met and proposed to be reset to end-April 2025). - Safeguards Assessment (SGA) progress: - Completed seven additional recommendations since last review, bringing total completed to 12 of 16. - Remaining recommendation not dependent on passage of NRB Act: update the Foreign Exchange Investment Directive to reduce commercial bank placements and review optimal currency allocation, to be completed by mid-March 2025. - AML/CFT strengthening: - Amended Nepal’s AML Law and enacted secondary legislation in line with international standards (end-July 2024 SB, met). - FATF has placed Nepal on the list of jurisdictions under increased monitoring. - Work with Asia/Pacific Group on Money Laundering and International Cooperation Review Group to complete plan of action to address deficiencies. - Planned upgrades (with Fund and development partner assistance) include: - i) improving understanding of money laundering and terrorist financing (ML/TF) risks and setting policy priorities in line with such risks, - ii) upgrading market entry requirements for banks through robust licensing and “fit and proper” tests, - iii) strengthening AML/CFT supervision of financial and non-financial sectors (e.g., real estate, precious metals, and casinos), - iv) enhancing enforcement against ML/TF and confiscating illegal proceeds. ### Structural reforms to boost growth and climate agenda - Investment climate and legal reforms: - Adoption of the Bill on Facilitating Investment to address investor challenges; five ordinances issued to amend legal provisions related to information technology, land purchase, foreign investment, and service delivery. - Established a High-Level Economic Reform Commission to recommend structural, legal, and institutional reforms. - Priorities to reduce cost of doing business: - Strengthen governance and anticorruption frameworks. - Expand digitalization of public administration and services. - Foster greater coordination across government tiers to advance fiscal federalism. - Anticorruption: - Enhancing capacity in detection of fraud and corruption and modernizing legal acts related to corruption prevention, investigation, and prosecution. - Climate and development planning: - Continue advancing investments in climate-resilient and sustainable infrastructure, agricultural productivity, and financial resilience guided by the Nationally Determined Contribution (NDC) and National Adaptation Plan (NAP). - Devise a detailed implementation plan for the 16th Plan focusing on boosting productivity in agriculture, industry, and trade-related services (IT, tourism, and hydropower), supporting job creation, and enhancing social inclusion. ### Risks, contingencies, financing, and program monitoring - Risks and policy stance: - Downside risks and global uncertainty remain; monetary policy effectiveness is constrained by credit market disruptions. - Improved revenue mobilization would allow more fiscal space; any expenditure compression should prioritize protecting critical capital and social spending. - A major commodity price shock could require monetary policy tightening to maintain external stability and keep inflation in check. - Foreign exchange reserve buffers are currently adequate to cushion temporary shocks. - If shocks are too large, will seek assistance from development partners; ability aided by low risk of debt distress, strong repayment track record, and ECF-supported program commitments. - NRB prepared to provide systemic liquidity support in event of bank stress while triaging deeper solvency problems. - Will adopt policies to prevent spill-overs from difficulties in SACCOs. - Financing and partner support: - Continue mobilizing resources from international development partners (IMF, World Bank, Asian Development Bank, and others). - IMF disbursements will be made available to the budget during the program period. - Request that an amount of SDR 31.4 million is made available for the fifth review. - Program monitoring: - Program monitored through quantitative performance criteria, indicative targets, and structural benchmarks as listed in Tables 1 and 2. - Technical Memorandum of Understanding (TMU) describes definitions and data provision requirements. - ECF program monitored on a semi-annual basis by the IMF Executive Board. - Sixth and seventh reviews scheduled on or after May 1, 2025 and November 1, 2025; based on January 13, 2025 and July 15, 2025 test dates, respectively. - Government undertakes to adopt, in consultation with IMF staff, any new financial or structural measures necessary for program success. *Source: 1nplea2025001-print-pdf - excerpt* ### 1. Program exchange rates are used for formulating and monitoring quantitative ### Program exchange rates are used for formulating and monitoring quantitative performance criteria. ### Program exchange rates and valuation rules - All assets and liabilities denominated in U.S. dollars (USD) will be converted into Nepali Rupees (NPR) at a program exchange rate of NPR 137.6 per one USD, which corresponds to the exchange rate on January 13, 2025. - Gold holdings will be valued at USD 2652.2 per troy ounce, the price in November 2024 from the IMF website on primary commodity prices. - Assets and liabilities denominated in SDRs and in foreign currencies not in USD will be converted into USD at the January 13, 2025 exchange rates reported below. - The reference date for exchange rates is January 13, 2025. - Table 1. Nepal: Program Exchange Rates (U.S. dollars per unit) - U.S. dollars / Nepali rupee: 0.007 - U.S. dollars / U.K. pound: 1.212 - U.S. dollars / Indian rupee: 0.012 - U.S. dollars / Chinese yuan: 0.136 - U.S. dollars / Euro: 1.020 - U.S. dollars / Japanese yen: 0.006 - U.S. dollars / Brunei dollar: 0.728 - U.S. dollars / Korean won: 0.001 - U.S. dollars / Kuwaiti dinar: 3.238 - U.S. dollars / Malaysian ringgit: 0.222 - U.S. dollars / Australian dollar: 0.615 - U.S. dollars / Bahrain dinar: 2.660 - U.S. dollars / Canadian dollar: 0.694 - U.S. dollars / Danish krone: 0.137 - U.S. dollars / Hong Kong dollar: 0.128 - U.S. dollars / Swedish krona: 0.089 - U.S. dollars / Swiss franc: 1.091 - U.S. dollars / Omani rial: 2.601 - U.S. dollars / Qatari riyal: 0.275 - U.S. dollars / Russian ruble: 0.010 - U.S. dollars / Saudi Arabian riyal: 0.267 - U.S. dollars / Thai baht: 0.029 - U.S. dollars / U.A.E. dirham: 0.272 - U.S. dollars / Singapore dollar: 0.728 - U.S. dollars / SDR: 1.292 ### Residency-based definitions and monitoring framework - For purposes of this TMU, “external” and “domestic” shall be defined on a residency basis. - The quantitative performance criteria and indicative targets for relevant test dates are specified in Table 2 of the Memorandum of Economic and Financial Policies. - Performance under the program will be monitored using data supplied to the IMF by the Ministry of Finance (MOF) and the Nepal Rastra Bank (NRB) as specified in Table 5, consistent with program definitions and within the time frame specified. - Authorities will transmit promptly to IMF staff any data revisions within 14 days after being made and provide immediately any data indicating non-observance of continuous performance criteria. All reports and data should be transmitted electronically and in English. ### Net International Reserves (NIR) of the Nepal Rastra Bank — definition, measurement, and targets - NIR are defined as reserve assets minus reserve related liabilities of Nepal Rastra Bank (NRB) expressed in U.S. dollars. - Reserve assets (BPM6 definition) include: - NRB holdings of monetary gold, SDRs, Nepal’s reserve position in the IMF, foreign currency cash (including foreign exchange banknotes in NRB vaults), and readily available deposits abroad (including balances with overseas correspondent banks). - Excluded: assets that are pledged, collateralized, or otherwise encumbered; claims on residents; precious metals other than monetary gold; illiquid assets; and claims arising from derivatives in foreign currencies vis-à-vis domestic currency (futures, forwards, swaps, options). - Reserve related liabilities include: - Foreign exchange liabilities of the 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; and all arrears on principal or interest payments to commercial banks, suppliers, or official export credit agencies. - To measure program NIR, 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. ### NIR adjustor for budget support from development partners - The program NIR floor includes an adjustor for budget support from development partners. - If actual disbursements are below program projections, the NIR floor will be adjusted downward by the difference between actual and projected disbursements. - The projections of budget support from development partners for the next 12 months are: - January 13, 2025 (cumulative over the period from July 15, 2024 to July 15, 2025): 190 (USD million) - July 15, 2025 (cumulative over the period from July 15, 2024 to July 15, 2025): 411 (USD million) - A downward adjustment to the NIR floor for this condition will be capped at USD 743 million. ### Primary deficit of the budgetary central government — definition, targets, and adjustors - The budgetary central government consists of all entities listed in the Administrative Expenditure Estimate table of the budget (Table 3), including ministries, commissions, MOF items (Domestic Debt Service, External Debt Service (Multilateral), External Debt Service (Bilateral), Staff Benefits and Retirement Benefits, Miscellaneous), province (Equalization, Special and Complementary), and Local Level (Equalization, Special and Complementary). - The primary deficit is defined as primary expenditures minus revenues. - Primary expenditures include capital expenditures and recurrent expenditures except interest payments. - Financing expenditures (amortization of domestic and external borrowing, loan and share investment in public enterprises and other enterprises, foreign share investments) are excluded. - 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 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. - 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 for the primary deficit are set as a ceiling and for cumulative flows from the end of the previous fiscal year. - Adjustors for foreign-financed project loan disbursements on concessional terms: - If actual disbursements are above projections, the primary deficit ceiling will be adjusted upward by the difference (allowing a higher deficit). - If actual disbursements are below projections, the primary deficit ceiling will be adjusted downward by the difference. - Projections of foreign-financed project loan disbursements for the following 2 test dates: - January 13, 2025 (cumulative over the respective fiscal year): 9,191 (Million NPR) - July 15, 2025 (cumulative over the respective fiscal year): 91,912 (Million NPR) ### Indicative targets on social spending and tax revenues - Indicative target on social spending: - Focuses on child grant spending (activity codes 7.1.1.10 dalit children; 7.1.1.41 areas designated children; 7.1.1.43 areas designated children). - Set as a floor for cumulative flows from the end of the previous fiscal year. - Spending should be recognized on a cash basis and recorded when cash is paid. - Indicative target on tax revenues of the federal government (starting with the July 15, 2024 test date): - Defined as tax revenue of the federal government to be deposited in the Federal Treasury. Non-tax revenue and revenue sharing for provinces and local levels are excluded. Other receipts are excluded. - Import-related tax revenue includes import-related customs, VAT, and excise duty. - The monthly data from MoF will be used as the basis for program monitoring. - Indicative targets are set as a floor and for cumulative flows from the end of the previous fiscal year. ### Continuous performance criteria and debt definition - Continuous quantitative performance criterion: prohibition on accumulation of new external payments arrears on external debt contracted or guaranteed by the budgetary central government or NRB. - External payment arrears consist of total external debt service obligations (principal and interest)—deriving from loans arranged or guaranteed by the central government and the NRB, penalties, and interest charges—not paid at maturity, falling due to nonresidents after approval of this arrangement. - Excluded from the prohibition: (i) external arrears subject to debt rescheduling agreements or negotiations; (ii) disputed external debt service obligations. - Debt is defined per paragraph 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements (Decision No. 16919-(20/103) of the IMF Executive Board on October 28, 2020) as a current, not contingent, liability created under a contractual arrangement requiring payments of assets or services according to a specific schedule. Forms include: - (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements); - (ii) suppliers’ credits; - (iii) leases (debt equals the present value at inception of all lease payments expected during the agreement, excluding payments for operation, repair, or maintenance). - Under this definition, arrears, penalties, and judicially awarded damages from failure to pay contractual obligations that constitute debt are debt. Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. - Standard continuous performance criteria include prohibitions on: - (1) imposition or intensification of restrictions on making payments and transfers for current international transactions; - (2) introduction or modification of multiple currency practices; - (3) conclusion of bilateral payments agreements inconsistent with Article VIII; - (4) imposition or intensification of import restrictions for balance of payments reasons. *Source: 1nplea2025001-print-pdf - Program exchange rates are used for formulating and monitoring quantitative performance criteria.* ### 18. The authorities will inform IMF staff of the creation of any new extra-budgetary funds ### 18. The authorities will inform IMF staff of the creation of any new extra-budgetary funds ### Notification requirement - The authorities will inform IMF staff of the creation of any new extra-budgetary funds or programs immediately. - Coverage: any new funds, or other special budgetary and extra-budgetary programs created during the program period to carry out operations of a fiscal nature as defined in the IMF’s Manual on Government Finance Statistics 2014. ### Data reporting requirements (summary of key items, frequencies, and submission lags) - Ministry of Finance: - Summary of budgetary central government accounts, including revenues (broken down by economic classification) and grants, expenditures (broken down by economic classification), and net acquisition of financial assets (broken down by loan investment and share investment) on a cash basis — M; 30 calendar days. - Summary of budgetary central government’s net incurrence of liabilities (broken down by domestic borrowing disbursement and principal repayment, as well as external borrowing disbursement and principal repayment). Foreign-financed project loan disbursements and budget support disbursements — Q; 30 calendar days. - Domestic and external public debt stock (broken down by currency, maturities, creditors, and instruments), disbursements, and debt service costs of the budgetary central government, including interest payments and amortization schedules until full loan repayment — A; 60 calendar days. - Debt guarantees issued by budgetary central government and the NRB — Q; 45 calendar days. - Audited Financial statements of public enterprises — A; 210 calendar days. - Social spending data (amount budgeted, amount dispersed, number of recipients) for: old age pension, widows grant, indigenous allowance, disabled persons allowance and Prime Minister’s Employment program (PMEP) — H; 30 calendar days. - Child grant program data (amount budgeted, amount dispersed, number of recipients) — H; 30 calendar days. - The Annual Budget (Budget speech with annex and MOF budget reports) — A; 30 calendar days after delivery of the budget speech. - Mid-year budget review — A; 30 calendar days. - Annual budget execution report — A; 90 calendar days after January 15. - Public Debt Management Office: - Stock of outstanding external debt payment arrears of the general government (if any) by creditor — Q; 30 calendar days. - Nepal Rastra Bank (NRB): - Exchange rate data: - (i) Monthly official exchange rates NPR/$ (data to be submitted once a week for the previous week). - (ii) Monthly average buy and sell exchange rates NPR/$ as quoted by foreign exchange bureaus and banks — M; 5 working days after the end of the month. - Monthly consumer price indexes (CPIs) — M; 30 calendar days. - Program net international reserves and its components (foreign reserve assets, deposits from banks and financial institutions in foreign currency, and foreign reserve-related liabilities of the NRB) at program and current exchange rates — M; 7 working days. - Breakdown of gross foreign assets and liabilities (including foreign currency liabilities to residents) of the NRB by currency at actual and program exchange rates — M; 15 calendar days. - Balance of payments (BPM6) — M; 30 calendar days. - International investment position and private and public external debt data — Q; 90 calendar days. - Data on remittances including remittance flows in USD by country, and total approved Nepali migrant workers permit by new/renewed permits and if possible, by destination country — M; 30 days. - Tourist arrivals by nationality and country of residence — M; 30 days. - Imports and exports data by commodity at HS-2 classification level — M; 30 days. - Central bank balance sheet in NPR (Summary) — M; 30 calendar days. - Balance of government's accounts/funds at NRB, including treasury accounts, pre-funding accounts, VAT refund, custom fund, federal divisible fund, and other funds outside treasury operation — M; 30 calendar days. - Update on the progress on the implementation of the in-depth on-site loan portfolio review — M; 5 working days after the end of the month. - Central bank daily purchases and sales of foreign exchange by counterparts (commercial banks, government) — W; 2 working days after the end of the week. - Daily interbank turnover in the FX spot market — W; 15 working days. - Banking sector and financial institutions: - Commercial bank-by-bank data: i) balance sheet by currency (foreign exchange and Nepali Rupee); ii) income statements; iii) breakdown of loan classification and provisioning levels for borrower types, product type, economic sectors, and restructured loans; iv) breakdown of deposits and net open positions; vii) FSI indicators (capital, asset quality, liquidity, earnings) — M; 75 calendar days. - NPLs specifics (NPLs per category and sector; provisioning; NPL restructuring/rescheduling and type of restructuring; NPL reclassification; loan write-offs) — Q; 30 calendar days. - Data on foreign currency loans and deposits (breakdowns by borrower types, product types, economic sectors, and restructured loans; share of foreign currency deposits by deposit types) — M; 75 calendar days. - Other depository corporations survey data in NPR — M; 30 calendar days. - Condensed assets and liabilities of commercial banks and all BFIs in NPR — M; 30 calendar days. - Data specific to class A and B banks: (i) CAMEL rating; (ii) Ratio of Cash & Bank Balance/Total Deposit; (iii) Ratio of Investment in Government Securities/Total Deposit; (iv) Total Liquid Assets/Total Deposit ratios — M; 30 calendar days. - NRB's claims on the government with breakdown by type (debt types, loan type, including the gross amounts of overdrafts) — M; 30 calendar days. - Banks and financial institutions’ claims on the government with breakdown by type (debt types, loan types including the gross amount of overdrafts) — M; 30 calendar days. - Notes on periodicity abbreviations: - A = Annually; Q = Quarterly; H = Half-yearly; M = Monthly; W = Weekly. - Reports and data are provided in English. Data are provided in excel files. - Submission lags are counted after the end of the respective week, month, quarter, or fiscal year in Nepali calendar, unless otherwise indicated. ### Recent program implementation and monitoring updates - Prior action (PA) under the ECF: issuance of the Request for Proposals (RFP) to hire independent international third-party auditors to conduct a Loan Portfolio Review (LPR). - The PA on the issuance of the RFP was met: the Nepal Rastra Bank (NRB) issued the RFP and transmitted it to the shortlisted firms on March 6, 2025. - Staff confirmation: the RFP incorporates the Terms of Reference agreed with IMF staff, including a provision that the in-depth on-site inspections will be conducted on the basis of both the existing regulatory framework and a continuous repayment period of three months for reclassification of non-restructured/non-rescheduled loans, as prescribed by the Basel Committee on Banking Supervision (BCBS) Guidelines on “Prudential Treatment of Problem Assets.” - Supplement dates in the document: March 7, 2025; March 12, 2025. ### Macroeconomic and policy assessment by the authorities - Economic outlook and performance: - Economic growth expected to accelerate in FY2024/25 and strengthen further in FY2025/26. - Inflation averaged 4.97% in the first half of FY2024/25, within the target of containing inflation around 5.0%. - The current account recorded a surplus. - International reserve position has significantly improved, providing an ample buffer. - Monetary policy stance: - NRB will continue data-driven monetary policy to ensure price and external stability while supporting economic growth. - Prudent monetary policy stance will continue to contain inflation and foster sustainable growth. - Priority: strengthen monetary policy implementation, including proactive liquidity management within the interest rate corridor. - Fiscal policy and debt sustainability: - Authorities implement a growth-friendly fiscal consolidation strategy prioritizing accelerated capital expenditure and enhanced revenue mobilization. - Tax revenue improvement supported by new measures on alcohol, tobacco, petroleum products, and coal. - A comprehensive assessment of tax expenditures is underway to inform the FY2025/26 budget, culminating in a dedicated tax expenditure report. - Customs Compliance Improvement Strategy to strengthen tax compliance. - Development of the National Social Registry (NSR) integrated with a national identification card system to enable targeted social transfers. - Social programs cited: child grants, mid-day meal program, scholarship programs, Prime Minister’s Employment Program. - Fiscal transparency and risk management enhanced: fiscal risk registry established and planned expansion to include PPPs; attention to fiscal risks from public enterprises (PEs), extra-budgetary funds, and subnational governments. - Public Investment Management Action Plan approved by the National Planning Commission to improve public investment efficiency and climate resilience. - Financial sector policy and governance: - Prudent oversight of banking sector: appropriate loan classification, responsible restructuring, adequate provisioning, and robust capitalization. - Adoption of BCBS guidelines on “Prudential Treatment of Problem Assets” through an updated Asset Classification Regulation by December 2025. - Phase out and avoidance of regulatory forbearance; interventions to be time-bound and limited. - Loan Portfolio Review (LPR) of the ten largest banks to be completed by end-December 2025. - RFP for LPR issued in early March 2025 (prior action met) to ensure timely procurement. - SACCOs: registration of new SACCOs suspended; comprehensive restructuring of regulatory framework and improvements to reporting at federal and provincial levels. - Commitments to amend the NRB Act to close gaps in bank resolution framework and enhance NRB’s autonomy and governance; implement key recommendations of the 2021 Safeguards Assessment (SGA). - Anti-money laundering / Countering financing of terrorism (AML/CFT): - Following the July 2024 AML law amendment and secondary legislation enactment, authorities commit to strengthening implementation through collaboration with APG and ICRG, supported by technical assistance. - Remaining FATF action plan reforms include improved ML/TF risk assessment and policy prioritization; strengthened bank licensing and fit-and-proper tests; enhanced AML/CFT supervision of financial and non-financial sectors; rigorous ML/TF enforcement, including asset confiscation. - Structural reforms and longer-term priorities: - Enhance business and investment climate (Investment Facilitation Bill and regulatory streamlining). - Reduce business costs, strengthen governance, expand digitalization, advance fiscal federalism. - High-Level Economic Reform Commission driving legal and institutional reforms; preparation of a detailed 16th plan implementation strategy focusing on productivity, job creation, and social inclusion. - Climate-resilient growth via NDC and NAP implementation, with focus on climate-smart agriculture and disaster risk financing. ### Implementation status and requests - Authorities report the ECF program remains broadly on track despite disruptions from natural disasters in September 2024. - All performance criteria (PCs) have been met. - The indicative target (IT) for child grant spending was not fully achieved, but all eligible children who applied have received payments. - Three structural benchmarks (SBs) have been met; some SBs proposed for modification to address budgetary and capacity constraints. - Authorities request Board support for completion of the Fifth Review, disbursement of the sixth tranche, and associated proposed decisions. *Source: 1nplea2025001-print-pdf - 18. The authorities will inform IMF staff of the creation of any new extra-budgetary funds* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1nplea2025001-print-pdf.pdf_