## 1nplea2025002-source-pdf ## Source details **Canonical URL:** [1nplea2025002-source-pdf](https://www.imf.org/-/media/files/publications/cr/2025/english/1nplea2025002-source-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1nplea2025002-source-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1nplea2025002-source-pdf.pdf.json) --- ### Context - Goods exports were 3.2 percent of GDP in FY2023/24, two-thirds of which go to India; U.S.-bound exports represent 11 percent of the total. - Remittances account for about 25 percent of GDP and originate mainly from India, the Gulf countries, and Malaysia. - Cancellation of a large number of U.S.-financed projects introduced near-term uncertainty in social sectors; the MCC exemption for MCC-Nepal compact projects will support completion of critical energy and transport projects. - Political situation remains challenging and is a risk to reform implementation. ### Recent developments and macroeconomic outcomes - Real GDP growth: - FY2023/24: 3.7 percent. - FY2024/25 (estimate): 4.3 percent. - Growth drivers in FY2024/25: rebound in construction and manufacturing, continued hydropower expansion, and a favorable harvest that helped offset the impact of the September 2024 floods. - Inflation: - Post-flood peak: 6.1 percent y/y in December 2024. - June 2025: 2.7 percent y/y. - Expected to remain within NRB’s target of about 5 percent. - External and external-sector indicators: - Imports growth: 13.1 percent y/y in June 2025. - Current account balance projected to reach 3.9 percent of GDP in FY2024/25. - Gross international reserves: USD 17.6 billion as of June 2025 (10.9 months of prospective imports). - Financial sector: - NPLs rose 1.3 percentage points y/y to 5.2 percent in April 2025. - Average NPL provisioning coverage for commercial (Class A) banks decreased by 5 ppts to 65 percent between July 2024-April 2025. - Core capital of commercial banks decreased 50 basis points to 9.5 percent between October 2024-April 2025. - NRB increased scrutiny of development banks and finance companies after the failure of a small development bank; NRB reintroduced forbearance for NPLs in the construction sector in April 2025. - Fiscal developments: - Tax revenue grew 10.7 percent y/y in the first 11 months of FY2024/25. - Capital expenditure grew 6.2 percent y/y in the first 11 months of FY2024/25. - Staff estimate the primary deficit reached 1.3 percent of GDP in FY2024/25. - Fiscal outcome excerpts (percent of GDP): - Total revenue and grants: 19.3 (2022/23); 19.4 (2023/24); 19.2 (2024/25 estimate); 19.6 (5th review). - Tax revenue: 16.1; 16.5; 16.4; 16.9. - Capital expenditure: 4.4; 3.4; 3.3; 3.4. - Overall balance: -5.8; -2.8; -2.7; -2.9. - Primary balance: -4.5; -1.3; -1.3; -1.3. - GDP (in NPR billions): 5,367; 5,709; 5,776.2; 6,203; 7.4%. ### Program performance and conditionality - Overall assessment: broadly adequate. - Quantitative performance criteria: - PCs on net international reserves (floor) and the primary fiscal deficit (ceiling) were met (January 2025 PCs). - All continuous PCs were met. - IT floor on tax revenue was met overall; IT on child allowance spending (floor) was missed again (all children who applied received payment). - Structural benchmarks (SBs) and status: - Six SBs completed (four met on time), including LPR roadmap (end-April 2025), commissioning audit of NRB’s FY2024/25 financial statements (end-July 2025), publication of a comprehensive tax expenditure report (end-July 2025), and publication of a comprehensive fiscal risk statement (end-August 2025). - Two SBs completed with delay (approval of tax expenditure reports; publishing revised project bank guidelines). - SB on launching the LPR of the 10 largest banks was missed (end-May 2025); a prior action is proposed on signing the contract with the international independent consultant—expected to be completed by end-August. - Two SBs on amending the NRB Act (implementing 2021 Safeguards Assessment recommendations and addressing gaps in the bank resolution framework) are not met; bank resolution SB proposed reset to end-October 2025. - SB on consolidating all EBUs in government’s annual financial statements was missed (end-January 2025), partially due to FCGO’s weak legal authority; addressed with a new law. ### Outlook and key projections - Baseline growth and inflation: - Growth projected to rebound to 5.2 percent in FY2025/26. - Inflation projected to remain around NRB’s five-percent target for FY2025/26. - Fiscal projections and assumptions: - Tax revenues expected to increase by 1.0 ppt of GDP in FY2025/26, driven by import recovery; impact of new tax measures is negligible. - Staff project a countercyclical, investment-driven fiscal expansion in FY2025/26 with the primary deficit increasing by 0.7 ppts of GDP and capital expenditure increasing by 1.2 ppts. - Over the medium term, tax revenues expected to increase by about 3 ppts of GDP; authorities’ DRMS contains measures amounting to 4.6 ppts. - External sector and reserves: - Gross official reserves (millions of U.S. dollars): FY2024/25: 17,438; FY2025/26: 18,395; FY2026/27: 18,507. - Net International Reserves (millions of U.S. dollars): FY2024/25: 16,881; FY2025/26: 17,842; FY2026/27: 18,008. - IMF staff projection highlights (selected): - Real GDP (annual percent change): FY2024/25: 4.3; FY2025/26: 5.2; FY2026/27: 5.0. - Headline CPI (period average): FY2024/25: 4.2; FY2025/26: 4.3; FY2026/27: 5.0. - Total revenue and grants (percent of GDP): FY2024/25: 19.6; FY2025/26: 20.8. - Expenditure (percent of GDP): FY2024/25: 22.5; FY2025/26: 24.4. - Gross official reserves (millions USD): FY2024/25: 17,438; FY2025/26: 18,395; FY2026/27: 18,507. ### Risks and mitigating options - Key risks (skewed to the downside, predominantly domestic): - Political volatility and weak policy execution; muted growth if capital project execution does not accelerate. - Lower domestic demand could reduce import growth and revenues, prompting procyclical spending cuts. - Intensification of financial sector vulnerabilities: further rise in NPLs, weak bank capitalization, or more failures of cooperative lenders; continued forbearance could mask vulnerabilities. - Large emigration reducing labor force and weighing on medium-term growth. - External risks: slower growth in trading partners or remittance-source countries, higher commodity prices, prolonged delays in foreign aid, and natural disasters. - Mitigating options: - Mobilize alternative concessional financing. - Strengthen donor coordination. - Enhance domestic revenue mobilization. - Targeted investment in adaptation measures. ### Fiscal policy findings and recommendations - Findings: - FY2025/26 budget aims to increase tax revenue to 19.5 percent of GDP and capital expenditure to 6 percent of GDP; allows a primary deficit of 1.6 percent of GDP (budget). - Staff project the budget’s overall deficit is 3.2 percent of GDP; staff’s projected overall deficit is around 0.4 ppts higher than the budget due to lower projected tax revenue and capital expenditure. - Public debt expected to peak at 49.5 percent of GDP in FY2025/26 and decline thereafter. - DSA: public and external debts assessed at low risk of debt distress. - Recommendations: - Execute planned increase in capital spending and implement reforms to relieve bottlenecks to public investment as envisaged in the FY2025/26 budget. - Mobilize domestic revenue to support capital spending and preserve medium-term fiscal sustainability; accelerate implementation of the DRMS. - Use the comprehensive tax expenditure report to guide rationalization of tax exemptions (end-July 2025 SB, met). - Develop a Customs Compliance Improvement Strategy (CIMS) (end-December 2025 SB), assisted by IMF TA. - Make revenue forecasts in the budget more realistic. - Increase the per-beneficiary allowance and expand coverage for the child grant. - Target fertilizer subsidies more effectively (fertilizer subsidies estimated at 0.7 percent of GDP in FY2022/23) and lift restrictions on private sector provision. ### Financial sector vulnerabilities, supervision, and AMC guidance - Financial sector status: - Aggregate NPLs of the banking sector rose to 5.2 percent in April 2025; NPLs decreased to 4.62 percent in July 2025 (authorities’ update). - Loan portfolio review (LPR) of the 10 largest banks prioritized; procurement delays postponed launch—contract signing with consultant is a prior action. - NRB to require banks with capital shortfalls to submit time-bound plans. - NRB reviewing capital adequacy framework and preparing Liquidity Coverage and Net Stable Funding Ratios. - Risks of forbearance and regulatory changes: - Forbearance on construction NPLs was reintroduced in April 2025; recommendation that forbearance be time-bound and phased out. - Changes to WCL guidelines in June 2025 remove interim repayment requirements agreed prior to October 2022 while keeping the mid-July 2027 deadline for repayment; risk of non-compliance with the deadline. - Announced increase of loan-to-value ratios for private residential loans to 70 percent combined with a debt service-to-income ratio of 70 percent could significantly increase household debt. - Asset Management Company (AMC) guidance and safeguards: - Preconditions for an AMC: focused mandate, defined lifespan, supportive legal and regulatory framework, political commitment, commercial focus. - Design elements: target eligible banks/assets (prefer larger, homogenous, collateralized loans), clear valuation and transfer pricing, robust funding and capital structure, avoid central bank financing. - Operations and governance: separate legal entity, board oversight, skilled management, transparent audited reporting, realistic asset disposal strategy. - Key cautions: AMC could create significant fiscal burden and moral hazard; exhaust supervisory measures, reform debt enforcement and insolvency systems, develop distressed debt markets, and conduct thorough business-case analysis before establishing an AMC. ### Social protection, public investment, and governance reforms - Social spending and human capital: - Child grants: budget executed at 94 percent in FY2023/24; current coverage limited to 25 districts out of 77. - FY2025/26 budget expands midday meal program nationwide and raises meal rate from Rs. 15 to Rs. 20. - Recommendation: increase per-beneficiary allowance and expand child grant coverage. - Public investment management: - Budget reforms to relieve bottlenecks: allow procurement and hiring to start before fiscal year, sanction agencies for delays, require subnational MTFFs. - National Project Bank reforms: unique project identifiers, NPBMIS integration, minimum project size of Rs. 30 million for federal projects. - Planned alternative investment financing vehicle: around 2 percent of GDP in total size; one-quarter paid-up capital; government majority shareholder; subject to disclosure and auditing requirements. - Governance and AML/CFT: - FATF grey-listing in February 2025; authorities adopted ALMP amendments in April 2024 and committed to an Action Plan through January 2027. - Priorities: finalize and publish NRA, adopt fit and proper tests, strengthen supervision for high-risk sectors, develop beneficial ownership guidelines and central BO registry. - IMF CD supporting AML/CFT, tax administration, fiscal transparency, public investment management, and financial sector stability. ### External financing, reserves, and IMF program financing - Program financing and commitments: - Program is fully financed with firm commitments for the remainder of the program; authorities intend to use the ECF arrangement for budget support. - Projected budget support by development partners mainly due to increased ADB and World Bank support. - Projected financing gap (selected lines, percent of GDP): - External financing requirement: -4.2 (FY2024/25 Est.), 1.1 (FY2025/26 Proj.). - Current account deficit 1/: -3.5, 2.0. - Fiscal deficit: 2.9, 3.6. - External financing gap: 0.9, 1.2. - Note: Current baseline forecast is as of July 28, 2025. 1/ Current account excludes official transfers. - IMF ECF access and phasing: - Total available from Board approval and reviews: SDR 282.42 million, 180% of quota. - Sixth Review disbursement requested: SDR 31.4 million (staff support the disbursement of the seventh tranche in the amount of SDR 31.4 million). - Outstanding IMF credit based on existing and prospective drawings: Millions of SDR: 380.2 (2024/25), 407.9 (2025/26), 368.7 (2026/27), and onward as projected. ### Debt sustainability and stress tests - Public debt trajectory: - Public debt rose from 25 percent of GDP in FY2015/16 to 48.3 percent in FY2023/24. - Public debt projected to peak at 49.5 percent of GDP in FY2025/26 and steadily decline thereafter. - DSA findings: - Risk of External Debt Distress: Low. - Overall Risk of Debt Distress: Low. - PV of external debt estimated at 17.5 percent of GDP in FY2023/24. - Debt-stabilizing primary deficit estimated at approximately 3.5 percent of GDP; with NAFA considerations, deficit is about 2.2 percent of GDP. - Stress tests and vulnerabilities: - PV of external debt-to-exports ratio can breach thresholds under an export shock; staff judgement applied because remittances are the primary foreign exchange source. - Natural disaster shock scenarios applied (one-off 10 percentage points of GDP and 20 percentage points of GDP to debt-to-GDP). - Policy implications: - Lengthen debt maturities, increase concessional external borrowing for infrastructure, strengthen fiscal buffers, and rigorously analyze contingent liabilities. ### Program monitoring, data, and reporting requirements - Program TMU (reference date June 3, 2025): - Program exchange rate USD/NPR: NPR 136.6 per one USD. - Gold valuation: USD 3351.9 per troy ounce (June 2025). - NIR defined as reserve assets minus reserve related liabilities of NRB (BPM6 definition). - Reporting requirements (selected): - Summary of budgetary central government accounts: Monthly, submission lag 30 calendar days. - Program NIR and components: Monthly, submission lag 7 working days. - Commercial bank-by-bank data (loan classification and provisioning etc.): Monthly, submission lag 75 calendar days. - NPL-specific data: Quarterly, submission lag 30 calendar days. - Authorities to inform IMF immediately of creation of any new extra-budgetary funds. ### Mission, implementation and recent political developments - Prior action proposed for this review: signing contract with the international independent consultant selected by NRB to advance the LPR procurement—expected completion by end-August (prior action status updated in successive text). - IMF staff mission discussions took place in Kathmandu during May 26-June 10, 2025; staff team composition listed in report. - Political developments (supplementary): youth-led protests on September 9 triggered government change; interim Prime Minister sworn in September 12; Parliament dissolved with elections set for March 5, 2026; authorities committed to preserving macroeconomic stability while supporting recovery. - Authorities requested completion of the sixth review under the ECF-supported program and SDR 31.4 million to be made available. _Italic: Source — Content unit: 1nplea2025002-source-pdf (PDF chapter/section)._ ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - Nepal has limited direct exposure to global trade tensions: goods exports were 3.2 percent of GDP in FY2023/24, two-thirds of which go to India. U.S.-bound exports represent 11 percent of the total. - Remittances account for about 25 percent of GDP and originate mainly from India, the Gulf countries, and Malaysia. - Cancellation of a large number of U.S.-financed projects has introduced near-term uncertainty in social sectors; the Millennium Challenge Corporation (MCC) exemption for MCC-Nepal compact projects will support completion of critical energy and transport projects. - The political situation remains challenging and is a risk to reform implementation. ### Recent developments - Real GDP growth: - FY2023/24: 3.7 percent. - FY2024/25 (estimate): 4.3 percent. - Growth drivers in FY2024/25: rebound in construction and manufacturing, continued hydropower expansion, and a favorable harvest that helped offset the impact of the September 2024 floods. - Inflation: - Post-flood peak: 6.1 percent year-on-year (y/y) in December 2024. - June 2025: 2.7 percent y/y. - Expected to remain within Nepal Rastra Bank’s target of about 5 percent. - External and external-sector indicators: - Imports growth: 13.1 percent y/y in June 2025. - Current account balance projected to reach 3.9 percent of GDP in FY2024/25. - Gross international reserves: USD 17.6 billion as of June 2025 (10.9 months of prospective imports). - Financial sector: - Non-performing loans (NPLs): rose 1.3 percentage points y/y to 5.2 percent in April 2025. - Average NPL provisioning coverage for commercial (Class A) banks decreased by 5 ppts to 65 percent between July 2024-April 2025. - Core capital of commercial banks decreased 50 basis points to 9.5 percent between October 2024-April 2025. - NRB increased scrutiny of development banks and finance companies after the failure of a small development bank. - NRB reintroduced forbearance for NPLs in the construction sector in April 2025. - Fiscal developments: - Tax revenue grew 10.7 percent y/y in the first 11 months of FY2024/25, supported by new excise taxes on alcohol, tobacco, petroleum products, and coal, but below budget projections. - Capital expenditure grew 6.2 percent y/y in the first 11 months of FY2024/25. - Staff estimate the primary deficit reached 1.3 percent of GDP in FY2024/25. - Fiscal outcome text table (selected lines, in percent of GDP unless otherwise indicated): - Total revenue and grants: 19.3 (2022/23); 19.4 (2023/24); 19.2 (2024/25 estimate); 19.6 (5th review); difference 0.5. - Total revenue: 18.8; 19.0; 18.7; 19.2; difference 0.5. - Tax revenue: 16.1; 16.5; 16.4; 16.9; difference 0.5. - Capital expenditure: 4.4; 3.4; 3.3; 3.4; difference 0.1. - Overall balance: -5.8; -2.8; -2.7; -2.9; difference -0.2. - Primary balance: -4.5; -1.3; -1.3; -1.3; difference 0.0. - GDP (in NPR billions): 5,367; 5,709; 5,776.2; 6,203; 7.4%. ### Program performance - Overall assessment: broadly adequate. - Performance criteria and targets: - Quantitative performance criteria (PCs) on net international reserves (floor) and the primary fiscal deficit (ceiling) were met (January 2025 PCs). - All continuous PCs were met. - Indicative target (IT) floor on tax revenue was met. - IT on child allowance spending (floor) was missed again; all children who applied received payment. Meeting the target would require increasing per-beneficiary allowance and expanding coverage (increasing number of districts covered and/or expanding eligibility criteria within districts). - Structural benchmarks (SBs): - Six SBs completed (four met on time). Completed SBs included: loan portfolio review (LPR) roadmap (end-April 2025); commissioning audit of NRB’s FY2024/25 financial statements (end-July 2025); publication of a comprehensive tax expenditure report (end-July 2025); publication of a comprehensive fiscal risk statement (end-August 2025). - Two SBs completed with delay: approval of the tax expenditure reports and publishing revised project bank guidelines. - SB on launching the LPR of the 10 largest banks was missed (end-May 2025); a prior action is proposed on signing the contract with the international independent consultant selected by the NRB to ensure the loan portfolio review procurement proceeds apace—expected to be completed by end-August. - Two SBs on amending the NRB Act (implementing 2021 Safeguards Assessment recommendations and addressing gaps in the bank resolution framework) are not met. Further progress made on strengthening NRB’s institutional, financial, and personal autonomy; additional revisions and time required for the bank resolution framework SB (proposed reset to end-October 2025). - SB on consolidating all EBUs in the government’s annual financial statements was missed (end-January 2025), partially due to FCGO’s weak legal authority; addressed with a new law. ### Outlook and risks - Baseline projections: - Growth projected to rebound to 5.2 percent in FY2025/26, temporarily above potential, as domestic demand normalizes and capital spending picks up. - Inflation projected to remain around NRB’s five-percent target for FY2025/26. - Imports expected to recover with higher execution of capital expenditure; current account balance projected to weaken in FY2025/26. - Medium-term outlook anchored by strategic infrastructure investments (including hydropower) and ongoing structural reforms aimed at boosting productivity and private sector-led growth. - Fiscal projections and assumptions: - Tax revenues expected to increase by 1.0 ppt of GDP in FY2025/26, driven by import recovery; impact of new tax measures is negligible. - Staff project a countercyclical, investment-driven fiscal expansion in FY2025/26 with the primary deficit increasing by 0.7 ppts of GDP and capital expenditure increasing by 1.2 ppts. - Over the medium term, tax revenues expected to increase by about 3 ppts of GDP; authorities’ Domestic Revenue Mobilization Strategy (DRMS) contains measures amounting to 4.6 ppts. - Key risks (skewed to the downside, predominantly domestic): - Political volatility and weak policy execution; muted growth if capital project execution does not accelerate. - Lower domestic demand could reduce import growth and revenues, prompting procyclical spending cuts. - Intensification of financial sector vulnerabilities: further rise in NPLs, weak bank capitalization, or more failures of cooperative lenders could endanger banking system soundness; continued forbearance could mask vulnerabilities. - Large emigration reducing labor force and weighing on medium-term growth. - External risks: slower growth in trading partners or remittance-source countries, higher commodity prices, prolonged delays in foreign aid, and natural disasters. - Mitigating options: mobilizing alternative concessional financing, strengthening donor coordination, enhancing domestic revenue mobilization, and targeted investment in adaptation measures. ### Policy recommendations - Fiscal policy: - Execute planned increase in capital spending and implement reforms to relieve bottlenecks to public investment as envisaged in the new FY2025/26 budget to support domestic demand and raise medium-term growth. - Mobilize domestic revenue to support capital spending and preserve medium-term fiscal sustainability. - Support the most vulnerable through full execution of the child grant budget by increasing per-beneficiary allowance and expanding coverage (increasing number of districts covered and/or expanding eligibility criteria within districts). - Monetary and financial sector policies: - Annual Monetary Policy Review in July is consistent with maintaining the current, appropriately accommodative stance. - NRB should begin operating the interest rate corridor framework as intended—with the interbank rate actively maintained inside the corridor—without tightening the stance. - Rising financial sector vulnerabilities warrant increased vigilance and launching the LPR in a timely manner. - Prioritize measures to deal with problematic Savings and Credit Cooperatives (SACCOs). - Approach creation of an Asset Management Company (AMC) with extra caution given the risks involved. - Governance and structural reforms: - Amend the NRB Act to incorporate recommendations from the 2021 IMF Safeguards Assessment and the 2023 Financial Sector Stability Report and send amendments to Parliament promptly to better align NRB operating framework with international standards. - Continue bringing the AML/CFT framework and its effectiveness in line with international standards and peer evaluations. - Advance efforts to modernize the anticorruption framework and institutions and strengthen intergovernmental coordination to bolster transparency and accountability. ### Implementation and mission - A prior action is proposed for this review on signing of the contract with the international independent consultant selected by the NRB to advance the loan portfolio review procurement—expected to be completed by end-August. - The challenging political situation remains a risk for reform implementation. - Discussions took place in Kathmandu, Nepal, during May 26-June 10, 2025. The staff team comprised S. Jahan (Head), A. Bykere, R. Green, Y. Hul (all APD), G. Sher (FAD), M. Gort (MCM), M. Firat (SPR), P. Gupta (Resident Representative for Nepal), R. Ghimire and S. Sharma (local office). K. Sumawong and W. Mahraddika (OED) also participated in key policy meetings. Y. Xu, A. Sinjar and J. Flinner (APD) supported the preparation of the report. *Source: IMF Executive Summary (1nplea2025002-source-pdf - EXECUTIVE SUMMARY).* ### 10. The projected deficit level based ### 10. The projected deficit level based ### Fiscal stance and program objectives - The projected deficit level based on measures in the FY2025/26 budget is consistent with program objectives of gradual fiscal consolidation to stabilize public debt at a low risk of distress. - The FY2025/26 budget intends to promote economic growth through structural reforms. ### Budget measures and reforms - Allowing outward investment. - Increasing the budget for PPPs. - Tax exemptions for capital goods imports for selected industries. - Tax incentives for startups and investment in special economic zones (SEZs) and industrial parks. ### Fiscal projections and targets - The budget factors in an ambitious increase of tax revenue to 19.5 percent of GDP and capital expenditure to 6 percent of GDP (Table 2b). - It allows a primary deficit of 1.6 percent of GDP, which is smaller than staff’s projection of *Source: 1nplea2025002-source-pdf - 10. The projected deficit level based* ### 2.0 percent. The overall deficit in the budget ### 2.0 percent. The overall deficit in the budget ### Fiscal outcomes and projections - The overall deficit in the budget is 3.2 percent of GDP. - Staff’s projected overall deficit is around 0.4 ppts higher, due to 1.6 ppts lower projected tax revenue and 1.4 ppts lower projected capital expenditure. - Public debt is expected to peak at 49.5 percent of GDP in FY2025/26 and steadily decline afterwards, underpinned by gradual fiscal consolidation, preserving debt sustainability over the medium term. - The Debt Sustainability Analysis shows that both public and external debts are assessed to be at a low risk of debt distress. - Capacity to repay: IMF credit outstanding is projected to peak this fiscal year at 242.3 percent of quota (SDR 380.2 million). This represents 11.9 percent of exports. ### Fiscal table highlights (Text Table 2. Nepal: Fiscal Outcome 1/) - 2024/25 Budget Projection - Total revenue and grants 19.6 22.5 20.8 - Total revenue 19.2 21.7 20.2 - Tax revenue 16.9 19.5 17.9 - Of which: Income and profits tax 5.0 5.8 5.0 - Customs 2.9 3.7 3.3 - Excise duty 2.8 3.1 2.9 - VAT 5.5 5.8 5.9 - By source: Domestic taxes 10.1 11.6 10.1 - Import-related taxes 6.8 7.8 7.8 - Non-tax revenue & other receipts 2.3 2.3 2.3 - Grants 0.4 0.8 0.6 - Expenditure 22.5 25.8 24.4 - Recurrent expenditure 19.1 19.8 19.8 - Of which: Interest payments 1.6 1.6 1.6 - Capital expenditure 3.4 6.0 4.6 - Memorandum items - Overall balance -2.9 -3.2 -3.6 - Primary balance -1.3 -1.6 -2.0 - GDP (in NPR billions) 6,203 .. 6,806 - (In percent of GDP, unless otherwise indicated) - 1/ Fiscal year ends mid-July. ### Revenue mobilization and tax policy recommendations - Nepal has one of the highest tax revenue-to-GDP ratios among regional countries. - Authorities adopted a DRMS in 2024 to increase revenue and broaden the tax base by rationalizing tax expenditures and improving compliance in the medium-term. - FY2025/26 budget measures: - Eliminates VAT exemptions on precious stones. - Reduces the exemption threshold for tax on luxury goods. - Expands the digital service tax. - Raises customs duties on alcohol and tobacco products. - Introduces new tax exemptions on industrial parks and SEZs (staff note: these should be costed as they could erode the tax base). - Staff recommendations: - Welcome removal of VAT exemptions on precious stones and recommend removing remaining VAT exemptions and phasing out corporate income tax holidays and concessions for special industries. - Phase out higher customs duties on alcohol and tobacco products and replace them with higher domestic excise taxes on the same products. - Use the comprehensive tax expenditure report to guide rationalization of tax exemptions (end-July 2025 SB, met). - Improve collection of VAT and income tax payable, as well as arrears, including by developing a plan to manage arrears. - Enhance customs revenue collection by developing a Customs Compliance Improvement Strategy (CIMS) (end-December 2025 SB), assisted by IMF TA. - Note: The budget offers reduced penalties and interest for overdue payments, which could weaken enforcement. ### Public investment, social spending, and support to vulnerable groups - Staff expect an increase in capital spending due to legal amendments allowing reallocation of budgeted funds from stalled projects to other viable projects. - FY2025/26 budget reforms to relieve bottlenecks to public investment: - Allow budgeted projects to begin procurement and hiring processes before the next fiscal year starts. - Sanction government agencies that do not take timely decisions. - Require subnational governments to adopt Medium-Term Expenditure Frameworks. - Staff recommendations: - Clarify, clear, and avoid further overdue amounts to the construction sector to support project completion. - Increase the per-beneficiary allowance and expand coverage for the child grant (the child welfare grant currently covers the 25 districts with the lowest human development index, out of 77; the budget allocation for the child welfare grant has declined by 20 percent in real terms since January 2022). - Target fertilizer subsidies more effectively (fertilizer subsidies estimated at 0.7 percent of GDP in FY2022/23) and lift restrictions on private sector provision. - Text Table 3. Nepal: Social Spending in FY2023/24 (percent of GDP) - Senior citizens 1.4 - Disability 0.2 - Widows 0.2 - Children 0.1 - Other 0.0 ### Fiscal transparency and fiscal risks - FCGO included 90 extra budgetary units (EBUs) at the federal level and 9 at the provincial level in the FY2023/24 annual financial statements (end-January 2025 SB, not met). - Lack of legal mandate for line ministries and subnational governments to report financial information to the FCGO made it challenging to cover every EBU. - Amendments in early 2025 to the Financial Procedures and Fiscal Responsibility Act will strengthen the FCGO’s authority to request such information, starting with the FY2024/25 financial statements. - Staff recommendations: - Publish a supplement to the FY2023/24 financial statements with financial information on late-reporting EBUs. - Reconcile FCGO and OAG lists of EBUs. - Subject the planned off-budget alternative financing vehicle for private sector infrastructure investment to the same disclosure and auditing requirements as on-budget projects and include its fiscal risks in future fiscal risk statements. - Note on the planned investment fund: would be around 2 percent of GDP in total size, of which one-quarter would be paid-up capital; government would be majority shareholder; fund would have a profit-making objective and finance projects that can generate a financial return. ### Monetary policy stance and liquidity management - The monetary policy stance remains appropriate and should remain accommodative until signs of a pickup in inflation emerge. - FY2025/26 Annual Monetary Policy Review adjustments: - Bank rate reduced by 50 basis points (bps) to 6 percent. - Standing Deposit Facility (SDF) rate reduced by 25 bps to 2.75 percent. - Middle “policy rate” lowered 50 bps to 4.5 percent. - NRB should use open market operations (OMOs) to change the interbank rate and target it around the three-percent level of the past 19 months. - With inflation declining, domestic demand weak and reserves rising, neither the primary nor the secondary mandates of monetary policy support tightening. - Excess liquidity has facilitated a slow but steady decline in effective lending rates; credit growth has picked up slowly, allowing gradual deleveraging. ### Financial sector vulnerabilities and NPLs - Bottlenecks in NPL recovery prolong bank vulnerabilities; restructuring and rescheduling of NPLs are considered unattractive. - Evidence of difficulties: 64 percent y/y increase in non-bank assets in April 2025. - Banks avoid selling collateral at a loss despite relatively low loan-to-value ratios and provisioning. - NRB plans to allow banks to raise capital to tackle potential post-LPR capital shortfalls and bring in new investors; this should be prioritized over regulatory interventions that temporarily relieve capital pressures. - Directed lending requirements in vulnerable sectors (agriculture and MSMEs) compound NPL rise; recommendation to recalibrate directed lending policy and eventually phase it out. ### Asset Management Company (AMC) guidance - Authorities should exercise extreme caution when establishing an AMC to address NPLs and ensure supportive pre-conditions. - Legislation related to the AMC needs strict conditions on governance, eligible exposures, valuation, transfer pricing, financing, and lifespan. - An AMC could create significant fiscal burden and moral hazard; before establishing an AMC, exhaust supervisory measures, reform debt enforcement and insolvency systems, develop distressed debt markets, and conduct a thorough review of the business case. ### Supervisory actions and milestones (SBs) - NRB committed to finalizing an LPR of the ten largest banks to assess loan portfolio quality (end-December 2025 SB). Delay in procurement postponed the launch (end-May 2025 SB, not met); a prior action requires NRB signing the contract with the selected international consultant to allow LPR start in September. - Authorities finalized a post-LPR roadmap requiring banks with capital shortfalls to submit time-bound plans (end-April 2025 SB, met). - Roadmap confirms planned realignment of the probation period in the ACR for non-forborne NPLs with BCBS-guidelines (end-December 2025 SB). - Authorities drafting amendments to the NRB Act to address gaps in the bank resolution framework identified in the 2023 FSSR; SB reset to end-October 2025 (end-April 2025 SB, not met, reset to October 2025). ### Regulatory changes and risks of forbearance - NRB is reviewing its capital adequacy framework and preparing to implement Liquidity Coverage and Net Stable Funding Ratio to align with Basel Standards. - Changes to WCL guidelines in June 2025 remove interim repayment requirements agreed prior to October 2022 while keeping the mid-July 2027 deadline for repayment; this increases flexibility but risks non-compliance with the deadline. - Announced increase of loan-to-value ratios for private residential loans to 70 percent combined with a debt service-to-income ratio of 70 percent could significantly increase household debt and be destabilizing. - NRB introduced forbearance on construction NPLs impacted by delay in government payouts in April 2025; this should be time-bound and phased out. - Further forbearance, particularly on asset classification and provisioning, should be avoided, especially in the transition to the expected credit loss framework. ### Related party lending (RPL) and SACCOs - Proposed amendments to BAFIA to align RPL provisions with international standards need careful calibration and phased implementation; NRB should prepare implementing regulations to avoid abrupt loss of access to financing for related parties. - National Cooperatives Regulatory Authority (NCRA) established January 2025 to regulate and register SACCOs; NRB published a new regulatory regime for SACCOs to be incorporated by NCRA. - Recommendation: expand NCRA’s mandate to license SACCOs in the medium term. - Slow progress with resolving failed SACCOs requires establishment of Problematic Cooperative Management Committees at provincial and local levels. - Plans for qualifying SACCOs to become members of the Deposit and Credit Guarantee Fund (DCGF) should be conditional on registration with NCRA and meeting DCGF-set criteria; plans for a separate SACCO fund within DCGF are being developed. - Federal PCMC resolved three SACCOs, returning around NPR 3 billion of funds to depositors and plans to resolve a further five this fiscal year; no SACCOs resolved at provincial and local levels. ### Governance, AML/CFT, and structural reform priorities - Further progress on implementing the 2021 SGA recommendations, notably in draft NRB Act amendments, though still short of best practices; draft not yet submitted to Parliament (end-April 2025 SB, not met), intended submission by end-October along with bank resolution amendments. - FATF added Nepal to the list of jurisdictions under increased monitoring (“grey list”) in February 2025. Authorities have upgraded the legal framework and are focusing on improving implementation of AML/CFT framework; IMF staff committed to supporting reforms through capacity development. - Government announced a 3-year action plan in May 2025 encompassing 408 reforms based on High-Level Economic Reform Suggestion Commission recommendations; key priorities include bolstering macroeconomic fundamentals, improving business environment, and strengthening institutional capacity. - Priorities for boosting growth and investor confidence: - Enhance anticorruption institutions and modernize anticorruption framework. - Reduce high cost of doing business by streamlining procurement, digitalizing public administration and services, and enhancing intergovernmental coordination. - Targeted investments in adaptation to natural disaster risk, including food security, early warning systems, and infrastructure resilience. *Source: Nepali authorities; and IMF staff estimates and projections.* ### 1.1 percent of GDP (Table 9). Upcoming Fund obligations remain low relative to current and ### 1nplea2025002-source-pdf - 1.1 percent of GDP (Table 9). Upcoming Fund obligations remain low relative to current and ### Financing needs, reserves, and external position - Upcoming Fund obligations are described as low relative to current and projected international reserves, fiscal revenues and GDP; the authorities’ track record of servicing IMF debt is strong. - Prospective balance of payments needs have not meaningfully changed from the 5th review. - Following favorable external sector developments, gross external financing requirements declined, and GIR remained above Nepal’s pre-pandemic norm in FY2024/25. - As public investment execution is scaled up, the recovery accelerates and imports recover, reserves are expected to return to levels seen at the program request, below the pre-pandemic norm. - Strengthened reserve position provides an increasingly potent backstop to external shocks. - NRB has developed facilities to provide liquidity support to prevent potential systemic financial concerns. ### Program financing and commitments - The program is fully financed, with firm commitments in place for the remainder of the program. - Budget support financing pledges for FY2024/25 through FY2025/26 are in line with the level recorded during the 5th review. - The authorities intend to use the ECF arrangement for budget support. - Projected budget support by development partners over the next few years is mainly due to an increase in support for Investment Climate Improvement by ADB and Development Policy Credit by the World Bank. - Text Table 5 (Projected Financing Gap, In percent of GDP) — FY2024/25 Est. and FY2025/26 Proj. (selected lines): - External financing requirement: -4.2 (FY2024/25 Est.), 1.1 (FY2025/26 Proj.) - Total revenue and grants: 19.6, 20.8 - Expenditure: 22.5, 24.4 - Current account deficit 1/: -3.5, 2.0 - Fiscal deficit: 2.9, 3.6 - Financing sources: -5.1, -0.1 - Total financing: 1.9, 2.4 - Foreign borrowing: 1.5, 1.5 - Net acquisition of financial assets: 1.3, 1.3 - Current and capital grants: 0.6, 0.9 - Net incurrence of liabilities: 3.3, 3.7 - FDI, net: 0.3, 0.4 - Foreign borrowing (component): 0.7, 0.6 - Change in reserves (+ decrease): -7.6, -2.9 - Domestic borrowing: 2.5, 3.0 - External financing gap: 0.9, 1.2 - Fiscal financing gap: 0.9, 1.2 - Financing commitments so far: 0.9, 1.2 - IMF: ECF: 0.1, 0.2 - Asian Development Bank: 0.2, 0.7 - World Bank: 0.6, 0.3 - Note: Current baseline forecast is as of July 28, 2025. 1/ Current account excludes official transfers. ### Risks, program safeguards, and conditionality - The program continues to face important risks, but ample reserves provide a backstop. - Political uncertainty is mitigated by an abiding commitment to the program across all major political parties. - Fiscal measures and guardrails under the program will bolster fiscal buffers. - Lack of implementation of the reforms underpinning Nepal’s budget operations caused delay and uncertainty in disbursement from development partners. - Program reforms are critical to encouraging greater foreign investment by building a framework for macroeconomic stability, which undergirded the recent sovereign credit rating. - Program performance: - All PCs met, including net international reserves and the primary fiscal deficit; all standard continuous PCs met. - Only the IT on child allowance spending was missed. - Six SBs were completed (four met on time); corrective actions planned for missed SBs. - A prior action on procuring the LPR consultant is proposed for this review. ### Article VIII mission findings and exchange/fronting measures - The Article VIII mission (March 2025) found that the standard continuous PCs on non-imposition or non-intensification of exchange restrictions and non-introduction or non-modification of MCPs were observed. - The Article VIII mission found three exchange restrictions and one MCP. These measures were in place prior to approval of the ECF arrangement and the authorities do not plan to remove these measures or seek Board approval. - NRB actions and staff recommendations: - NRB has implemented measures to ease these restrictions; staff encourage continuation toward complete removal. - Since 2010, an exchange restriction on conversion and transfer of salaries of non-resident foreign nationals existed; on August 7, 2025 the NRB amended the Unified Circular to allow non-resident foreign nationals to convert and transfer all their net salaries; staff reassessed and removed that long-standing restriction. - Newly identified exchange restrictions arise from: (i) requirement to provide a tax clearance certificate prior to making payments and transfers for certain current transactions; (ii) limits on the amount of FX for payments of royalties and fees; and (iii) a mandatory security deposit for import payments. - Based on data as of August 19, 2025, the mission identified an MCP related to the exchange rate used for remittance transactions between remittance companies and their offshore partners; economic impact appears limited given low volume in currencies identified with an MCP. - Prior to August 7, 2025, remittance transactions in 22 currencies were required to use the FEDAN exchange rate; on August 7, 2025 NRB amended provisions for the FEDAN rate to apply for remittances in USD currency only; remittances in all other convertible currencies to be done in prevailing exchange rates. - Staff does not recommend approval of the exchange restrictions and the MCP which were in place prior to the program and urges elimination. ### Macroeconomic outlook and projections - Real GDP growth: - Projected to accelerate to 5.2 percent in FY2025/26. - Recovery driven by pickup in capital spending and rebound in domestic demand. - Inflation: - Expected to rise modestly from multi-year lows as consumption recovers but will remain below the monetary policy ceiling. - External position: - External position remains substantially stronger than the level implied by medium-term fundamentals and desired policies, but is projected to gradually weaken over the forecast horizon as implementation of import-intensive capital projects accelerates, remittance growth normalizes, and pent-up import demand picks up. - IMF staff projection highlights (selected lines from Table 1, Note: Current baseline forecast is as of August 7, 2025): - Real GDP (annual percent change): FY2024/25: 4.3, FY2025/26: 5.2, FY2026/27: 5.0 - Headline CPI (period average): FY2024/25: 4.2, FY2025/26: 4.3, FY2026/27: 5.0 - Total revenue and grants (percent of GDP): FY2024/25: 19.6, FY2025/26: 20.8 - Expenditure (percent of GDP): FY2024/25: 22.5, FY2025/26: 24.4 - Gross official reserves (in millions of U.S. dollars): FY2024/25: 17,438; FY2025/26: 18,395; FY2026/27: 18,507 - Net International Reserves (in millions of U.S. dollars): FY2024/25: 16,881; FY2025/26: 17,842; FY2026/27: 18,008 ### Fiscal performance, reforms, and recommendations - Further revenue mobilization needed to underpin fiscal sustainability and support increase in capital expenditure. - Risks of revenue shortfall: - Could lead to under-execution of capital expenditure and adversely impact medium-term growth and debt sustainability. - Authorities should: - Accelerate implementation of their DRMS. - Formulate a plan to manage arrears. - Rationalize tax expenditures in line with the tax expenditure report — including recently introduced tax exemptions for industrial parks and SEZs. - Develop a CIMS. - Make revenue forecasts in the budget more realistic to give more certainty to execute the public investment budget. - Spending efficiency recommendations: - Fertilizer subsidies should be more targeted and restrictions should be lifted on private sector provision. - Public financial management reforms in the FY2025/26 budget, legal amendments, the execution strategy for the 16th Plan, and ongoing implementation of the Public Investment Management Action Plan should help with capital spending. - Social protection: - To protect the vulnerable, authorities should expand the coverage and the per-beneficiary allowance of the child grant. - Fiscal transparency: - Continue to enhance fiscal transparency, building on the recently published fiscal risk statement. ### Monetary policy and financial sector recommendations - Monetary policy: - The monetary policy stance is appropriate and should remain accommodative until conditions are projected to change. - FY2025/26 Monetary Policy Review is consistent with maintaining an accommodative stance. - The interest rate corridor has been tightened and made more symmetrical; over time NRB could consider shifting the bands further down so the midpoint aligns with the appropriate interbank rate. - Amending the NRB Act to provide greater monetary independence from the government would help reduce the term premium and ultimately lower borrowing costs. - Financial sector stability: - Rising financial vulnerabilities require carefully calibrated policy responses offering structural solutions and durable safeguards. - Further efforts needed to address increasing NPLs and improve bank health; prioritize improving the efficiency of the debt recovery framework. - Creation of an AMC should be approached with extra caution and only after ensuring supportive institutions are in place. - Impact of impending regulatory changes should be carefully assessed to avoid forbearance and ensure financial stability. - Directed lending policies should become more targeted and eventually phased out to mitigate lending to unviable borrowers. - NRB governance and bank resolution: - Swift submission of amendments to the NRB Act in line with IMF staff recommendations will improve NRB governance and strengthen the bank resolution framework. - Amendments related to the SGA fall short of best practice but include important measures to strengthen NRB institutional, financial, and personal autonomy and fill gaps identified in the 2023 FSSR. - AML/CFT: - Progress on improving the AML/CFT framework has been substantial, but more effort needed to improve implementation effectiveness. - Priorities include adopting and implementing the fit and proper test for the banking sector, implementing targeted financial sanctions effectively, and boosting on-the-ground investigation and supervision capacity to expedite Nepal’s exit from the grey list. ### Capacity development and structural reforms - IMF CD support areas (January 2024 to July 2025) contributed to reforms in fiscal risks management, execution of capital expenditure, budget realism, CIMS, and AML/CFT. - Key CD activities targeted: - Enhance Tax Administration and Domestic Revenue Mobilization Strategy (FAD TA; FAD Workshop; FAD-SARTTAC TA; SARTTAC Workshop and Training). - Fiscal Transparency, Public Investment Management, and Cash Forecasting (FAD TA; MCM-FAD TA; SARTTAC TA; SARTTAC Training). - Preserve and Strengthen Financial Sector Stability (MCM TA; SARTTAC TA; SARTTAC Training). - Strengthen Data Compilation and Evaluation (SARTTAC TA; STA TA). - Enhance Transparency and Governance (LEG support for drafting guidelines to implement UN Security Council Resolutions). - Structural reforms needed to support private investment, resilience, and inclusive growth: - Address high cost of doing business, enhance service delivery, strengthen institutional capacity. - Modernize the anticorruption framework and institutions and strengthen intergovernmental coordination. - Scale up natural disaster-resilient investment and strengthen social protection. ### Staff recommendation - Staff support the completion of the sixth review of the ECF-supported program and the disbursement of the seventh tranche in the amount of SDR 31.4 million. _Italic: Source — Content unit: 1nplea2025002-source-pdf (PDF chapter/section)._ ### 3.6 million. ### 1nplea2025002-source-pdf - 3.6 million. ### Monetary Indicators (Nepal Rastra Bank and Monetary Survey) - Reserve money (NRB): 826 (2021/22), 912 (2022/23), 987 (2023/24), 1,093 (2024/25), 1,209 (2025/26), 1,335 (2026/27), 1,474 (2027/28), 1,626 (2028/29), 1,791 (2029/30) — values in (millions of US dollars) as presented. - NRB net domestic assets: -319, -528, -970, -1,343, -1,363, -1,264, -1,143, -996, -821 (2021/22–2029/30). - Claims on public sector: -175, 3, -78, -108, -121, -135, -151, -168, -188. - Claims on private sector: 7, 7, 9, 10, 10, 11, 12, 13, 15. - Claims on banks & financial institutions: 270, 1, 0, 4, 4, 5, 4, 4, 4. - Other items (net): -420, -539, -901, -1,249, -1,257, -1,144, -1,009, -846, -653. - NRB net foreign assets: 1,145, 1,440, 1,958, 2,436, 2,572, 2,600, 2,617, 2,623, 2,612. - Monetary Survey (end-period, billions of Nepalese rupees): - Broad money: 5,505, 6,130, 6,964, 7,650, 8,404, 9,240, 10,160, 11,187, 12,311. - Narrow money: 948, 947, 939, 1,510, 1,659, 1,824, 2,006, 2,209, 2,431. - Quasi-money: 4,557, 5,184, 6,025, 6,139, 6,744, 7,416, 8,154, 8,978, 9,880. - Monetary Survey net domestic assets: 4,285, 4,588, 4,884, 5,097, 5,692, 6,499, 7,400, 8,421, 9,557. - Domestic credit: 5,672, 6,169, 6,553, 7,076, 7,664, 8,325, 9,062, 9,927, 10,931. - Credit to public sector: 983, 1,266, 1,350, 1,446, 1,542, 1,648, 1,754, 1,901, 2,096. - Credit to central government: 744, 1,005, 1,052, 1,174, 1,203, 1,260, 1,324, 1,427, 1,574. - Credit to private sector: 4,689, 4,903, 5,202, 5,630, 6,121, 6,678, 7,308, 8,026, 8,835. - Memorandum items: - Private credit (in percent of GDP): 94.2, 91.4, 91.1, 90.8, 89.9, 89.0, 88.5, 88.3, 88.3. - Net international reserves (in mil. U.S. dollars): 8,821, 10,507, 14,064, 16,881, 17,842, 18,008, 18,108, 18,124, 18,028. - Net Foreign Assets, NRB (in percent of GDP): 23.0, 26.8, 34.3, 39.3, 37.8, 34.7, 31.7, 28.9, 26.1. - Nominal GDP (in billions of Nepalese Rupees) 3/: 4,977, 5,367, 5,709, 6,203, 6,806, 7,499, 8,255, 9,090, 10,010. - Notes: - Fiscal year ends mid-July. - Current baseline forecast is as of August 7, 2025. - 3/ 2024/25 GDP is an estimate. ### External Financing Requirements and Sources (FY2023/24–2026/27) - Gross external financing requirements (In Millions of U.S. Dollars): -2,547 (2023/24), -1,917 (2024/25), 554 (2025/26), 1,343 (2026/27). - Current account excluding official transfers (+ = deficit): -1,575, -1,588, 999, 1,923. - Amortization of medium- and long-term debt: 294, 337, 402, 420. - Other net capital flows (- = inflow) 2/: -1,266, -666, -846, -999. - Available financing: -2,985 (2023/24), -2,339 (2024/25), -29 (2025/26), 1,343 (2026/27). - Current and capital grants: 131, 284, 446, 677. - Medium- and long-term borrowing excluding exceptional financing: 558, 668, 716, 1,060. - FDI, net: 63, 158, 218, 239. - Portfolio investment, net: 0, 0, 0, 0. - Change in reserves (+ = decrease) 3/: -3,738, -3,449, -1,410, -633. - Financing Gap: 438 (2023/24), 422 (2024/25), 584 (2025/26), 0 (2026/27). - Exceptional/additional financing 4/: 369, 422, 584, 0. - IMF: ECF arrangement: 94.1, 41.9, 83.6, 0. - Asian Development Bank: 150, 100, 350, 0. - World Bank: 125, 280, 150, 0. - Memorandum items: - Gross official reserves (in millions of U.S. dollars): 14,547 (2023/24), 17,438 (2024/25), 18,395 (2025/26), 18,507 (2026/27). - In months of prospective imports: 10.8, 10.9, 10.4, 9.8. - Notes: - Current baseline forecast as of July 28, 2025. - 3/ Net of valuation changes. - 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 (2020/21–2024/25 Q3) - Capital Adequacy: - Regulatory capital to risk weighted assets: 14.19 (2020/21), 13.58 (2021/22), 13.42 (2022/23), 12.92 (2023/24), 12.39 (2024/25 Q3). - Tier 1 capital to risk weighted assets: 11.12, 10.81, 10.59, 10.20, 9.59. - Asset Quality: - NPLs to total gross loans: 1.48, 1.31, 3.02, 3.86, 5.24. - Loan loss provisions to NPLs: 70.24, 68.25, 62.17, 70.51, 65.12. - Deposits and Credits: - Credit to deposit ratio 1/: ... , 86.22, 81.63, 79.09, 79.45. - Credit to core capital cum deposit 1/: 76.32, ... , ... , ... , ... - Liquidity: - Cash & bank balance to total deposits: 9.51, 8.03, 8.05, 7.43, 7.18. - Total liquid assets to total deposits: 26.18, 27.52, 27.10, 26.44, 25.40. - Exposure to Real Estate: - Share of real estate and housing loans: 11.54, 12.01, 12.27, 12.68, 12.41. - Share of loans collateralized by fixed assets: 74.71, 75.06, 76.87, 76.22, 74.34. - Revolving Loans: - Overdraft 2/: 15.19, 15.25, 15.32, 14.96, 14.57. - Demand & working capital loans: 21.09, 21.51, 18.05, 14.04, 15.61. - Notes: - Data reflects all banks and financial institutions and is presented at the end of the fiscal year (mid-July) unless indicated otherwise. - 1/ Credit to core capital cum deposit was replaced by the Credit to deposit ratio in 2021/2022. - 2/ As of April 2023, NRB started to report separately on 'overdrafts' and 'cash credit'. For FSIs, these have been added back together. ### Access and Phasing Under the Extended Credit Facility (ECF) - Total available from Board approval and reviews: SDR 282.42 million, 180% of quota. - Board approval (Jan 12, 2022): 78.50 SDR million, 50% of quota. - First Review (Jun 12, 2022): 19.60 SDR million, 13% of quota. - Second Review (Jan 12, 2023): 19.60 SDR million, 13% of quota. - Third Review (Nov 1, 2023): 39.20 SDR million, 25% of quota. - Fourth Review (May 1, 2024): 31.40 SDR million, 20% of quota. - Fifth Review (Nov 1, 2024): 31.40 SDR million, 20% of quota. - Sixth Review (May 1, 2025): 31.40 SDR million, 20% of quota. - Seventh Review (Nov 1, 2025): 31.32 SDR million, 20% of quota. - Note: Nepal's quota is SDR 156.9 million. ### Quantitative Performance Criteria and Indicative Targets under the ECF-supported Program - Program targets and outturns (selected items, cumulative Rs. Million): - Primary deficit of the federal government (ceiling; in NPR million): Program target 315,628; Adjusted target 311,931; Outturn 122,918 (status: met for first listed test date). Other entries: 233,270 (target), 245,837 (adjusted), -18,701 (outturn) (met); 256,943 (program target). - Stock of NRB's net international reserves (floor; in U.S. dollars million): Targets/outturns include 9,076/8,851/14,130 (met); 9,649/9,559/15,533 (met); 10,229 (program target). - Accumulation of external payments arrears (ceiling): targets 0, outturns 0 (met). - Indicative targets: - Federal government spending on child allowance (floor; in NPR million): target 6,987; outturns show 6,841 (not met) and subsequent entries 3,092/1,890 (not met) and 6,987. - Floor on tax revenue of the federal government: target 845,938; outturn 818,657 (not met); other entries 392,743/424,698 (met); program target 902,288. - Memorandum items: - Revenues of the budgetary central government under the program (in NPR million): .. / 932,999 / .. - Revenue targets of the budgetary central government (in NPR million): 1,248,620 / .. / 1,125,209. - Foreign-financed project loan disbursements (in NPR million): 83,832 / 80,134 / 9,191 / 21,758 / 91,912. - Primary deficit adjustor for foreign-financed project loan disbursements: .. / -3,698 / .. / 12,567 / .. - Notes and definitions: - 3/ Cumulative from the beginning of the fiscal year. - 4/ Excludes interest payments. - 6/ The program targets for the primary deficit include adjustors for the level of revenue collection; the upward adjustment is capped at NPR 61,009 million for the January 14, 2024 test date and will be phased out starting July 15, 2024. - 7/ The program targets for the primary deficit include adjustors for foreign-financed project loan disbursements on concessional terms. - 5/ The social spending indicative target initially a floor on spending on the child protection grant starting in the second review. ### Indicators of Capacity to Repay the Fund (FY2024/25–2037/38) - Fund obligations based on existing credit (millions of SDR): - Principal: 7.1 (2024/25), 34.9 (2025/26), 39.2 (2026/27), 47.1 (2027/28), 58.8 (2028/29), 69.0 (2029/30), 43.9, 36.1, 28.2, 16.5, 6.3, 0.0, 0.0, 0.0. - Charges and interest: 3.1, 2.8, 2.7, 2.8, 2.7, 2.7, 2.7, 2.8, 2.7, 2.7, 2.7, 2.8, 2.7, 2.7. - Fund obligations based on existing and prospective credit (millions of SDR): - Principal: same initial sequence through 69.0 then 50.2, 48.6, 40.8, 29.0, 18.8, 6.3, 0.0, 0.0. - Charges and interest: 3.1, 2.8, 2.7, 2.8, 2.7, 2.7, 2.7, 2.8, 2.7, 2.7, 2.7, 2.8, 2.7, 2.7. - Total obligations based on existing and prospective credit: - Millions of SDR: 10.2, 37.7, 42.0, 49.8, 61.6, 71.8, 53.0, 51.4, 43.5, 31.8, 21.6, 9.0, 2.7, 2.7. - Billions of Nepali Rupees: 1.8, 6.9, 7.8, 9.4, 11.7, 13.7, 10.1, 9.8, 8.3, 6.1, 4.1, 1.7, 0.5, 0.5. - Percent of exports of goods and services: 0.3, 1.2, 1.2, 1.3, 1.5, 1.6, 1.1, 1.0, 0.7, 0.5, 0.3, 0.1, 0.0, 0.0. - Percent of debt service: 0.7, 2.3, 2.4, 2.5, 2.9, 3.1, 2.1, 1.9, 1.5, 1.0, 0.6, 0.2, 0.1, 0.1. - Percent of GDP and percent of government revenue: values remain at or near 0.0–0.6 across the projection period as listed. - Percent of quota: 6.5, 24.0, 26.8, 31.8, 39.2, 45.8, 33.8, 32.8, 27.7, 20.2, 13.7, 5.8, 1.7, 1.8. - Outstanding IMF credit based on existing and prospective drawings: - Millions of SDR: 380.2 (2024/25), 407.9 (2025/26), 368.7 (2026/27), 321.6 (2027/28), 262.8 (2028/29), 193.8 (2029/30), 143.5, 94.9, 54.1, 25.1, 6.3, 0.0, 0.0, 0.0. - Billions of Nepali Rupees: 68.0, 74.9, 68.9, 60.6, 49.8, 37.0, 27.4, 18.1, 10.3, 4.8, 1.2, 0.0, 0.0, 0.0. - Percent of exports of goods and services: 11.9, 13.0, 10.8, 8.6, 6.4, 4.3, 2.9, 1.8, 0.9, 0.4, 0.1, 0.0, 0.0, 0.0. - Percent of debt service: 25.2, 24.8, 20.8, 16.4, 12.3, 8.3, 5.8, 3.5, 1.8, 0.8, 0.2, 0.0, 0.0, 0.0. - Percent of GDP: 1.1, 1.1, 0.9, 0.7, 0.5, 0.4, 0.2, 0.1, 0.1, 0.0, 0.0, 0.0, 0.0, 0.0. - Percent of government revenue: 5.7, 5.5, 4.4, 3.4, 2.5, 1.7, 1.1, 0.7, 0.4, 0.1, 0.0, 0.0, 0.0, 0.0. - Percent of quota: 242.3, 260.0, 235.0, 205.0, 167.5, 123.5, 91.5, 60.5, 34.5, 16.0, 4.0, 0.0, 0.0, 0.0. - Net use of IMF credit (millions of SDR): 24.3, 27.8, -39.2, -47.1, -58.8, -69.0, -50.2, -48.6, -40.8, -29.0, -18.8, -6.3, 0.0, 0.0. - Disbursements: 31.4 (2024/25), 62.7 (2025/26), then 0.0 thereafter as listed. - Repayments and repurchases: 7.1, 34.9, 39.2, 47.1, 58.8, 69.0, 50.2, 48.6, 40.8, 29.0, 18.8, 6.3, 0.0, 0.0. - Memorandum items: - Exports of goods and services (millions of SDR): 3,203 (2024/25), 3,142, 3,406, 3,735, 4,120, 4,499, 4,922, 5,355, 5,860, 6,412, 7,017, 7,679, 8,404, 9,198 (through 2037/38). - Debt service (billions of NPR): 270.2, 301.9, 331.8, 368.9, 406.7, 444.1, 476.1, 524.9, 572.7, 626.8, 687.5, 756.4, 830.5, 911.5. - Nominal GDP (billions of NPR): 6,203, 6,806, 7,499, 8,255, 9,090, 10,010, 11,024, 12,142, 13,374, 14,732, 16,230, 17,881, 19,701, 21,709. - Government revenue (billions of NPR): 1,193, 1,374, 1,567, 1,783, 2,006, 2,202, 2,436, 2,667, 2,935, 3,231, 3,556, 3,914, 4,308, 4,741. - Quota (millions of SDR): 156.9 across the projection period. - Sources: IMF staff estimates and projections. 1/ Reporting Year: August to July. ### Structural Benchmarks Status and Modifications (January 2025–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 — Status: Not met. - MOF submits to Parliament amendments to modernize the NRB Law addressing 2021 Safeguards Assessments Report recommendations: Original target end-April 2025 — Status: Not 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: Target end-July 2025 — Status: Met. - Revenue Mobilization: - MOF publishes a comprehensive report on tax expenditures: Target end-July 2025 — Status: Met. - MOF approves report on domestic tax expenditures and report on import-related tax expenditures: Target end-April 2025 — Status: Not met (completed with delay). - MOF will adopt a Customs Compliance Improvement Strategy: Target end-December 2025. - Fiscal Sustainability and Fiscal Risk Management: - Comprehensive fiscal risk statement published by MOF with the FY2025/26 Budget: Target end-August 2025 — Status: Met. - Equitable and Sustainable Growth: - NPC approval of revised National Project Bank Operational Procedures and Unified Directives related to project development, prioritization, and selection: Target end-March 2025 — Status: Not met (completed with delay). - Financial Sector Regulation & Supervision (concluded table highlights): - NRB to attain independent international third-party auditors’ signature on contract for in-depth onsite inspections for the 10 largest banks: Status Pending Prior Action. - NRB re-issues regulation on asset classification aligned with BCBS Guidelines (continuous repayment period of three months): Target end-December 2025. - Launch for 10 largest Banks in-depth onsite inspections assisted by independent international third-party auditors: Target end-May 2025 — Status: Not met. - NRB completes in-depth on-site inspections for the 10 largest Banks, assisted by independent international third-party auditors: Target end-December 2025. - MOF submits to Parliament amendments to the NRB Act addressing gaps in bank resolution framework: Target end-April 2025 — Status: Not met; Reset to end-October 2025. - NRB finalizes roadmap referencing alignment of the ACR with BCBS three-month continuous repayment period: Target end-April 2025 — Status: Met. ### External Sector Assessment (Annex I, selected findings) - Overall assessment: - External position in FY2023/24 was substantially stronger than level implied by fundamentals and desirable policies. - Current account shifted to a surplus of 3.9 percent of GDP in FY2023/24, reversing from a deficit of 0.9 percent in FY2022/23. - Recovery in imports has begun; imports expected to continue rising over second half of FY2024/25 due to pent-up demand and higher capital expenditure for post-flood reconstruction. - Current account projected to remain strong in FY2024/25; EBA-lite model projects the current account gap to gradually narrow toward zero over the medium term. - Foreign reserves have continued to rise and are assessed to be adequate, supporting the peg to the Indian rupee and buffering external sector vulnerabilities. - Potential policy responses: - Gradual fiscal consolidation. - Improved execution and efficiency of public capital spending. - Timely resolution of financial sector vulnerabilities, including strengthening bank capitalization and the supervision framework. - Structural reforms: investments in resilient and sustainable infrastructure; reducing frictions in product, financial, and labor markets; facilitating foreign direct investment. - Foreign assets and liabilities: - Net IIP estimated at USD 2,142 million (4.9 percent of GDP) at end-FY2023/24 (mid-July 2024). - Around 90 percent of external assets were reserve assets held by NRB. - External liabilities mostly concessional loans (73 percent of total liabilities); FDI at 16.1 percent. - Net IIP increased from USD -1,346 million (-3.3 percent of GDP) in FY2022/23, driven by sharp reversal in current account and large positive net errors and omissions. - Assessment: Net IIP likely to decline slightly in FY2024/25 as the current account returns to a mild deficit; absolute net IIP is small and no immediate sustainability concerns. - FY2023/24 (percent of GDP snapshot): - NIIP: 4.9 - Gross Assets: 37.7 - Gross Liab.: 32.8 - Debt Liab.: 23.9 *Source: 1nplea2025002-source-pdf - 3.6 million.* ### 7.7 percent in FY2020/21 as ### 1nplea2025002-source-pdf - 7.7 percent in FY2020/21 as ### Current Account, EBA-lite Assessment, and External Position - FY2020/21: 7.7 percent (economic activity rebounded). - FY2021/22: deficit widened to 12.7 percent of GDP driven by accommodative monetary policy, credit and real estate market boom, and elevated commodity prices. - Policy response: tightened monetary policy; unwound pandemic support measures in the financial sector; gradually increased domestic energy prices; implemented administrative measures to restrict imports. - Effects: credit boom halted (particularly in import-related sectors); sharp drop in imports; exacerbated by weak social protection and low public capital spending execution. - Remittances and tourism: rebounded after the pandemic. - Current account path: - FY2022/23: current account narrowed to -0.9 percent of GDP. - FY2023/24: current account recorded a surplus of 3.9 percent of GDP. - EBA-lite CA model (FY2023/24): - CA-Actual 3.9 - Cyclical contributions (from model) (-)0.2 - Additional temporary/statistical factors (-) 2/ - Natural disasters and conflicts (-)2.1 - Adjusted CA 1.6 - CA Norm (from model) 2/-4.4 - Adjustments to the norm (+)0.0 - Adjusted CA Norm -4.4 - CA Gap 6.0-2.9 - o/w Relative policy gap -3.2 - Elasticity -0.13 - REER Gap (in percent) -47.723.0 - Note: 1/ Based on the EBA-lite 3.0 methodology. 2/ Cyclically adjusted, including multilateral consistency adjustments. (in percent of GDP) Nepal: EBA-lite Model Results, 2024. - Assessment highlights: - EBA-lite CA model indicates a CA gap of 6 percent of GDP, with an adjusted CA surplus of 1.6 percent of GDP against an adjusted CA norm of -4.4 percent of GDP. - CA gap estimate subject to elevated uncertainty in public and private capital expenditure execution. - Cyclical CA adjustment in FY2023/24 relatively small due to negative output gap and lower food and energy prices. - COVID-19 adjustors set to zero as remittances and tourism recovered. - Natural disaster adjustment applied following the November 2023 earthquake (temporary disruption to imports). - Outlook: CA gap likely to remain strong in FY2024/25, then narrow toward zero in the medium term as import growth recovers, supported by implementation of public projects which will increase capital expenditure and credit growth. - Interpretation on REER: - Given standard elasticity of trade balance with respect to REER of -0.13, CA model suggests REER would have needed to appreciate by approximately 48 percent to close the CA gap in FY2023/24, implying an external position substantially stronger than fundamentals and desirable policies. ### Real Exchange Rate (REER) - Background: - Period of sustained appreciation 2014-2017. - REER broadly stable 2018-2022 (including during COVID-19). - REER appreciated again in FY2022/23 and continued to appreciate in FY2023/24 by about 0.5 percent. - This appreciation occurred despite a 3.1 percent nominal depreciation of the Nepali rupee against the U.S. dollar, as domestic inflation outpaced that of India and China. - Nepali rupee depreciated a further 2.8 percent against the U.S. dollar during the first half of FY2024/25; persistently high inflation in Nepal relative to trading partners continued in the current fiscal year. - Assessment: - REER appreciation in FY2023/24 aligns with EBA-lite CA model (large positive CA gap). - EBA-lite IREER model estimates a 23 percent REER gap relative to its equilibrium level, implying a negative CA gap — an inconsistency with the CA model. - Inconsistency stems from CA surplus in FY2023/24 being primarily driven by non-price factors: subdued imports from delays in public investment and low capital expenditure execution; slowdown in credit amid financial sector vulnerabilities; post-COVID recovery in remittances. - Given significant role of non-price factors, CA model is primary anchor for external position assessment in FY2023/24. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Financial account remains mostly closed; portfolio flows negligible. - Net capital and financial account inflows: - FY2015/16: 0.3 percent of GDP. - FY2021/22: 6.5 percent of GDP (primarily driven by higher gross official loan and trade credit inflows of 1.9 and 2.2 percent of GDP, respectively). - Since FY2021/22: net inflows declined; gross inflows and outflows both decreased, with gross inflows declining faster. - FY2023/24: net inflows fell to 2.9 percent of GDP, largely due to decline in absorption of external concessional financing (official loans). - Official loans from multilateral sources expected to remain strong; bilateral financing subject to geopolitical uncertainties. - External borrowing by banks, other sectors, and non-resident deposits declined in FY2023/24 (possibly reflecting easing monetary policy). - FDI limited at 0.15 percent of GDP in FY2023/24, with no clear signs of improvement in FY2024/25. - Assessment: - Financial account mostly closed and inflows are mostly long-term concessional loans from development partners; vulnerabilities related to capital flows are limited. ### FX Intervention and Reserves Level - Background: - Nepal is landlocked and relies heavily on India for trade; trade treaty allows settlement with India in Indian rupees; FDI from India can be made in Indian rupees. - Approximately one-quarter of Nepal’s official reserves are held in Indian rupees. - Reserves path: - mid-January 2021: US$11.7 billion (11.5 months of prospective imports of goods and services). - mid-May 2022: US$8.9 billion (drop as current account deficit ballooned). - mid-January 2025: US$15.9 billion (10 months of prospective imports) following policy tightening and other measures. - Assessment and ARA methodology: - Nepal classified as a “credit constrained” non-resource rich economy with a fixed exchange rate regime for Assessing Reserve Adequacy (ARA). - ARA assumes sovereign borrowing at 6.2 percent (average estimate for low-income countries). - Model mechanically puts the optimal level of reserves in Nepal at 5 months of prospective imports of goods and services. - Given high vulnerability to natural disasters and exposure to remittances, a modification raises the optimal level of reserves to 5.7 months by assuming an additional absorption loss of 2 percentage points of GDP (about equivalent to 90th percentile damage from natural disasters and drops in remittances in the last ten years). - This estimate unchanged from previous ESA despite lower-than-expected realized imports in FY2023/24, as import recovery began in first half of FY2024/25 and expected to accelerate over the remainder of the fiscal year. - Data basis: assessment based on FY2023/24 (mid-2024) data for Nepal and end-2024 data for other countries. ### Risk Assessment Matrix — Key Risks and Policy Responses - Financial sector vulnerabilities intensify - Likelihood/Time Horizon: High / Short to Medium Term - Expected Impact: High — accumulated risks from post-pandemic credit boom; unwinding support measures; deterioration in SACCOs; increasing forbearance; bottlenecks in NPL recovery; potential defaults, erosion of bank capital, loss of confidence, credit crunch. - Policy responses: - Continue implementing risk-based supervision. - Implement amended regulatory framework to ensure appropriate use of working capital loans, relevant asset classification, and sufficient provisioning. - Take structural actions to address stress in the savings and credit cooperative sector. - Continue financial sector reforms under the program. - Protect fiscal policy space for downside responses. - Implement Financial Sector Stability Review (FSSR) recommendations. - Frequent and/or severe natural disasters - Likelihood/Time Horizon: High / Medium to long term - Expected Impact: High — severe damage, economic disruption, higher fiscal deficits and debt, impeded long-term growth. - Policy responses: - Improve disaster risk management and resilience in public investment and building codes. - Build and maintain fiscal and reserve buffers. - Maintain and strengthen social safety nets. - Implement climate module recommendations from PIMA. - Accelerate CCDR recommendations to reduce climate vulnerability while promoting growth. - Lower than expected tax revenue collection - Likelihood/Time Horizon: High / Short to Medium Term - Expected Impact: Medium — cuts to public expenditure, reduced fiscal space, higher public debt. - Policy responses: - Achieve program fiscal targets and reforms. - Implement the DRMS. - If revenues lower than projected, preserve public investment and social safety nets and make more use of available concessional financing for capital projects. - Lower than expected execution of public investment - Likelihood/Time Horizon: High / Short to Medium Term - Expected Impact: Medium — lower economic growth and private investment. - Policy responses: - Improve public investment management; implement PIMA recommendations to enhance capex. - Improve budgeting to underpin budgets with realistic analysis. - Political uncertainty and social unrest - Likelihood/Time Horizon: High / Short to Medium Term - Expected Impact: Medium — governance and social instabilities; disrupted economic activity; jeopardized policy and reform continuity. - Policy responses: - Secure policy continuity, including on program reform implementation. - Ensure transparency, accountability, and inclusion in policy implementation. - Restore and preserve public confidence; communicate reform benefits while protecting vulnerable groups. - Trade policy and investment shocks - Likelihood/Time Horizon: High / Short to Medium Term - Expected Impact: Medium — higher trade barriers or sanctions reduce trade, disrupt FDI and supply chains, trigger U.S. dollar appreciation, tighter financial conditions, higher inflation. - Policy responses: - Maintain adequate reserve levels and fiscal policy space; mobilize alternative concessional financing; strengthen donor coordination; enhance domestic revenue mobilization. - Provide targeted policy support to the vulnerable within available fiscal space. - Accelerate structural reforms to diversify and expand export destinations; generate domestic jobs; enhance regulatory efficiency and governance; promote market competition. - Commodity price volatility - Likelihood/Time Horizon: Medium / Short to Medium Term - Expected Impact: Medium — increased commodity price volatility, external and fiscal pressures, social discontent, economic instability. - Policy responses: - Continue developing hydropower to diversify energy sources. - Accelerate structural reforms to diversify import sources and improve agricultural and food security. - Ensure convergence between domestic and global commodity prices while protecting the vulnerable given available policy space. - Stand ready to tighten monetary policy in case of second-round effects. ### AML/CFT Reforms — Recent Actions and Planned Measures - Context: - Reforms based on recommendations in Mutual Evaluation Report (MER) adopted by Asia/Pacific Group on Money Laundering (APG) in August 2023. - Reforms include streamlining MLA requests, enhancing FIU capabilities, publication of National AML/CFT Strategy, new Targeted Financial Sanctions guidelines, and Fit and Proper Test guidelines. - April 2024: Nepal amended its AML/CFT law, laying foundation for further reforms after prolonged parliamentary delays. - FATF grey-listing: - Nepal added to FATF grey list in February 2025 due to capacity constraints and need for phased implementation. - Grey-listing may lead to near-term macroeconomic implications, including higher payment costs affecting remittance flows and trade finance. - Authorities have not yet observed tangible economic impacts; plan a stocktaking exercise to assess potential effects including on remittance costs. - Political commitment and Action Plan: - Nepal made high-level political commitment to work with FATF and APG; agreed an Action Plan through January 2027. - Priority actions include: - Finalizing and publishing the updated National Risk Assessment (NRA). - Adopting and implementing fit and proper test for banking sector. - Strengthening supervision, including risk-based supervisory manuals for casino, Dealers of Precious Metals and Stones (DPMS), and real estate sectors. - Issuing a directive to enhance transparency of real estate transactions. - Issuing other sector-specific directives following AML law amendments. - Addressing deficiencies in adoption and implementation of UNSCRs related to financing of terrorism and proliferation; Fund TA has supported these efforts. - Developing guidelines on beneficial ownership (BO) transparency and working toward a central BO registry. - IMF support: - Fund staff committed to supporting reforms through targeted capacity development and technical assistance, currently focused on implementing UNSCRs and coordinating with other TA providers. ### Asset Management Company (AMC) Considerations - Rationale: - NRB preparing legislation for AMCs in response to increasing NPLs. - Since July 2022, significant rise in NPLs after credit boom in 2021 and 2022. - Drivers: economic slowdown, shock to real estate market leading to drop in prices and lack of demand. - NPLs increased around 370 percent and NPL ratio rose from 2.4 percent to 5.3 percent between July 2022 and April 2025. - Banks recovering NPLs but struggling to sell NPL-collateral, causing a 325 percent increase in non-bank assets over this period. - Role and cautions regarding AMCs: - AMCs can help stabilize banking sector by removing NPLs from bank balance sheets, restoring lending capacity and confidence. - AMCs are not a panacea; authorities should set realistic expectations regarding asset valuations, economic recovery trajectories, and financial commitments. - Establishing and operating an AMC efficiently is complex; consider only when financial stability is at significant risk and strong institutions exist to support independent and efficient AMC operation. - Fiscal costs of publicly owned AMCs can be substantial: initial funding, operational costs, potential losses from asset sales. - Reference: - Draws from IMF 2024 Technical Note: ‘The Case for (and Against) Asset Management Companies in Banking Crises’ (applicable to publicly and privately owned AMCs). *Source: 1nplea2025002-source-pdf* ### 3. The establishment of an AMC requires an in-depth analysis regarding its business case ### 3. The establishment of an AMC requires an in-depth analysis regarding its business case ### Preconditions for successful AMC establishment - Focused Mandate: Limit AMC scope to specific categories of NPLs in problematic banks with clearly defined goals to enhance effectiveness and clarity. - Defined Lifespan: AMCs should not operate indefinitely; they should be subject to a sunset clause and periodic performance assessments. - Legal and Regulatory Framework: Require supportive legal infrastructure, particularly concerning bankruptcy and property rights; reliable accounting practices; adequate supervision and crisis management frameworks to ensure authorities have an accurate picture of problems and NPLs to be transferred. - Political Commitment: Strong and sustained political will to address systemic banking issues and recognize problem loans and losses. - Commercial Focus: Governance, asset selection, valuation, transfer pricing, and transparency/disclosure requirements must be designed on commercial terms. ### Design elements and operational calibration - Mandate - Define the AMC mandate by law, focusing on prudent valuation and maximizing value from distressed assets within the AMC’s lifespan. - Avoid competing public policy objectives; couple the mandate with an AMC business plan that sets clear targets for timely disposal of NPLs. - Require a governance framework promoting independent, commercially focused operations and decision-making; skilled management; appropriate incentive structures; transparent processes; and efficient asset recovery strategies. - Eligible banks and assets - Target selection of eligible banks: typically institutions with significant NPL levels and systemically important to the financial sector; scope should follow financial stability considerations. - Exclude non-systemic non-bank financial institutions (e.g., SACCOs that are not systemically important and were not regulated when the NPLs were created). - Clearly identify eligible assets in legislation: NPLs, distressed assets, and other financial instruments hindering bank performance. - Legal framework should set a transfer window, insist on full transfer of asset ownership, and set out the transfer mechanism. - Suitability: larger, homogenous and collateralized loans are generally more suitable for transfer; smaller loans dependent on borrower performance often yield better outcomes when retained by originating banks. - Valuation and transfer pricing - Accurate valuation and fair transfer pricing are essential to ensure transparency, correct incentives, and minimize moral hazard. - High transfer prices relative to actual asset value increase financial and fiscal costs and risks for the AMC, impeding the AMC’s objective to recover the price paid plus operational and financial costs—owners must absorb resulting losses. - Valuation policy and methodology should be clear, comprehensive, uniform by asset class, equally applied across banks, and aligned with the commercial mandate to maximize recoveries. - Transfer pricing must ensure banks fully recognize and account for losses accurately upon asset transfer. - Funding and capital structure - Funding options may include government funding, private investment, or a combination. - Maintain a robust capital structure sufficient to absorb potential losses, minimize further capital injections, and support long-term sustainability. - Initial government funding may be necessary, preferably through liquid instruments such as cash or guaranteed bond issuances. - AMCs should pay a market interest rate for funding in line with risk profile. - AMCs without government support may need stronger capital structures and may offer higher interest rates on issued instruments, impacting asset acquisition ability; demand for private bonds may be limited depending on regulatory treatment. - Financing by the central bank is not recommended as it could undermine independence or impede monetary policy implementation. ### Operations, governance, and transparency - Legal and organizational form - Establish AMCs as separate legal entities with clear mandates, supported by legislation ensuring stability and autonomy to mitigate political and interest-group interference. - Governance structures must include a board of directors with authority over internal policies, risk appetite, and executive oversight, complemented by specialized committees. - Consider an advisory supervisory board without decision-making powers to advise and monitor progress. - Internal controls, ethical codes, and conflict-of-interest disclosures are essential. - Management, incentives, and staffing - Organizational structure should align with the AMC’s business plan and lifespan. - Remuneration systems should incentivize timely and value-maximizing recoveries. - Skilled management supported by appropriate incentive structures and transparent processes is required. - Asset disposal strategy and reporting - Adopt realistic, data-driven business plans that define asset disposal strategies and avoid warehousing that erodes value. - Loan servicing options: temporarily retained by originating banks, developed in-house, or outsourced—each option has trade-offs. - Publish regular audited financial statements using international standards to enable public scrutiny and performance benchmarking. - Oversight should focus on governance, risk management, and asset divestment performance without compromising the AMC’s professional independence. ### Related program and macro-financial context (excerpts from Letter of Intent and MEFP) - Growth and macro outlook - Growth in FY2024/25 is now estimated to be between 4-5 percent. - Inflation declined from 6.1 percent in December 2024 to 2.7 percent in June 2025. - Non-performing loans (NPLs) increased to 5.2 percent in April 2025, impacting bank capital. - Key program commitments and timelines - Amendments to the bank resolution regime in the NRB Act: proposed submission to Parliament by end-October 2025 (reset of prior timeline). - Drafting legislation on the establishment of an Asset Management Company (AMC) to deal with bank NPLs; the AMC will prioritize banks’ timely loss recognition and cash recovery and will be designed with extreme caution. - Procurement of independent international consultant to assist with the LPR is in its final stage; contract to be signed as a prior action for the sixth review under the ECF. - Finalize the LPR of the ten largest banks by end-December 2025. - Commitment to align asset classification regulation 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. - Request for SDR 31.4 million to be made available for the sixth review under the ECF. ### Key policy recommendations and safeguards for AMC success - Legislate a clear, commercially oriented AMC mandate with a legally defined lifespan and business plan targeting timely disposal of NPLs. - Ensure valuation methodologies and transfer pricing are transparent, uniform by asset class, and aligned with market principles to avoid fiscal losses and moral hazard. - Design funding and capital structure to absorb losses and minimize future capital injections; avoid central bank financing. - Establish robust governance, operational independence, and transparency, including audited financial reporting under international standards and appropriate oversight structures. - Target eligible banks and asset types based on financial stability considerations; prioritize larger, homogenous, collateralized loans for AMC transfer and retain smaller, borrower-specific loans with originating banks. - Couple AMC establishment with broader banking sector reforms: timely loss recognition, limited and timebound regulatory forbearance, and strengthened supervision and crisis management frameworks. *Source: NEPAL — INTERNATIONAL MONETARY FUND (content unit: 1nplea2025002-source-pdf)* ### 3. Growth has picked up in FY2024/25, but remains below potential, with subdued ### 3. Growth has picked up in FY2024/25, but remains below potential, with subdued demand contributing further to a strong external position and disinflation ### FY2024/25: Recent performance and key outcomes - Real GDP growth in FY2024/25 is estimated to be 4-5 percent, but has remained below potential, constrained by the pace of the domestic demand recovery, limited fiscal space, and elevated outward migration. - Inflation decelerated to 2.7 percent y/y in mid-June 2025—comfortably within our 5.0 percent policy ceiling for FY2024/25—driven by improved food supply, favorable global commodity prices, and weak consumer spending. - The external position strengthened as exports, remittances, and tourism receipts grew robustly while imports recovered gradually. - Projected current account surplus for FY2024/25: 3.9 percent of GDP. - International reserves increased further and remain comfortably above adequacy levels, providing ample buffer against external shocks. ### FY2025/26 outlook and medium-term prospects - Growth recovery is expected to gather pace in FY2025/26, underpinned by policy measures to improve project execution and boost market confidence. - Policy drivers expected to stimulate private demand and reinforce growth momentum: - Public spending on physical infrastructure. - Policy and regulatory measures to boost business and consumer confidence. - Still-accommodative lending rates. - Multiplier effects from infrastructure investment and sectoral recovery are expected to bolster broader economic activity. - Continued growth in tourist arrivals, rising imports, and additional hydropower capacity will provide further impetus. - Inflation is expected to edge up from multi-year lows as demand strengthens, but will remain within 5.0 percent, anchored by a cautious and data-driven monetary policy. - With higher import demand and a moderation in remittance inflows, the current account balance is expected to decline in FY2025/26, while international reserves will remain at an adequate level. - The medium-term outlook remains favorable, underpinned by strategic investments in priority infrastructure, including in hydropower generation and transmission, and continued structural reforms aimed at reducing the cost of doing business, enhancing productivity, and improving competitiveness. *Source: IMF country report chapter text.* ### 5. Risks to the outlook skew downward, largely reflecting domestic challenges. We ### 1nplea2025002-source-pdf - 5. Risks to the outlook skew downward, largely reflecting domestic challenges. We ### Risks to the outlook - Downside risks skew downward, driven largely by domestic challenges: weak public expenditure execution for growth-enhancing capital projects, limited revenue mobilization, and a challenging business and investment climate. - Financial sector risks include a further rise in bank NPLs and more failures among cooperatives. - Inadequate implementation of the AML/CFT framework could delay exiting from Increased Monitoring of the FATF and hinder access to the global financial system. - Climate vulnerability: despite minimal contribution to global carbon emissions, Nepal is vulnerable to climate change–induced natural disasters and weather variability, impacting food production, poverty reduction and growth. - External risks include: sharp growth slowdowns in major trade- and remittance-partner economies, higher global commodity prices, and sharp declines in foreign aid — with pronounced impacts on prices, food security, activity, and the poor and vulnerable. - Policy stance: authorities intend forward-looking, data-driven monetary and fiscal policy and stand ready to adjust the policy stance. ### Fiscal policy and public finances Findings - Tax revenue increased 10.7 percent year-on-year in the first 11 months of FY2024/25; customs, VAT, and excise each contributed around 3 percentage points. - Revenues fell short of budget targets. - Capital spending grew 6.2 percent year-on-year in the first 11 months of the fiscal year and faced execution challenges due to procurement complexity, staff shortages, inter-agency coordination gaps, and project preparation delays. Policy orientation and measures - Continued commitment to gradual growth-friendly fiscal consolidation to keep public debt stable consistent with the program framework. - FY2025/26 budget measures include new taxes on alcohol, tobacco products, diamonds and other precious stones, luxury goods, and digital services; measures to improve tax compliance; more allocation to capital expenditure; incentives to encourage private sector investment (allowing outward investment, increasing PPP budget through the Investment Board, tax exemptions for capital goods imports for a few niche industries, tax incentives for startups and investment in special economic zones and industrial parks). - Expansion of public school midday meal program (from Rs. 15 to Rs. 20 per meal) and maintenance of the child grant program (not expanded), with child grants executed at 94 percent of budget in FY2023/24. ### Revenue mobilization - Commitment to enhance domestic revenue collection through the Domestic Revenue Mobilization Strategy (DRMS). - QPC on the primary deficit and the IT on revenue collection for January 2025 were met. - Adoption of reports on domestic and import-related excise and VAT expenditures: end-April 2025 SB, not met, completed with delay. - Development and adoption of a Customs Compliance Improvement Strategy: end-December 2025 SB (planned) covering compliance monitoring, stakeholder education, detection and enforcement, and incentives/sanctions. - FY2025/26 tax policy reforms: elimination of VAT exemptions on diamonds and other precious stones; reduction of the exemption threshold for tax on luxury goods; expansion of the digital service tax to include online advertising and sale of user data; change of customs duties on alcohol and tobacco from specific to ad valorem basis. - In July 2025, published a comprehensive report on tax expenditures (end-July 2025 SB). ### Expenditure and public investment reforms - Amendments to the Financial Procedures and Fiscal Responsibility Act require subnational governments to adopt medium-term expenditure frameworks to support multi-year projects. - FY2025/26 budget allows creation of new staff positions and procurement procedures to begin before the fiscal year to give one month of extra lead time; introduces sanctions (e.g., responsibility for cost overruns) for agencies delaying project decisions; procurement law revision and standardization of local procurement documents. - National Project Bank (NPB) reforms: - NPC approved National Project Bank (Operational and Management) Guideline, 2025 in March 2025 and issued a supplement in June 2025 (end-March 2025 SB, not met, completed with delay). - Unique identifiers for each project; projects must be entered into NPBMIS to be included in LMBIS. - FY2025/26 budget restricts future federal projects to a minimum size of Rs. 30 million. - NPC plans a national dashboard for projects costing more than Rs. 100 million. - Plan to integrate PPBMIS and LPBMIS within NPBMIS. - Creation of an alternative investment financing vehicle: - Target size of the fund is 2 percent of GDP; one-quarter will be paid up capital. - Government initially the majority shareholder. - Fund to finance projects with financial returns (e.g., power projects and airports) with selection criteria including financial return, environmental sustainability, employment generation, governance standards, and risk assessment. - Quarterly financial statements to shareholders and annual statements to the MoF within three months of fiscal year-end; publication for transparency; internal audit and final audit by OAG. ### Cash flow and fiscal risk management - Cabinet approved Guidelines on Cash Flow Management in 2023; regular forecasts to limit negative TSA balances, improve debt management and budget formulation, and inform NRB liquidity forecasting. - Amendments to Financial Procedures and Fiscal Responsibility Act to facilitate consolidation of commercial bank accounts for autonomous bodies and extra budgetary units under the Treasury. - Fiscal risk registry established and fiscal risk section published in the FY2024/25 Fiscal Policy Statement. - With IMF TA, a comprehensive fiscal risk statement was published with the FY2025/26 budget (end-August 2025 SB, met) analyzing sensitivity of budget estimates and public debt projections to fiscal risks; included PPPs and bond guarantees. - Commitment to improve future fiscal risk statements by including project guarantees and risks associated with the alternative investment financing vehicle. ### Public enterprises, extra-budgetary units and subnational oversight - Four priority nonfinancial PEs (Nepal Electricity Authority, Nepal Oil Corporation, Nepal Airlines Corporation (NAC), Nepal Telecom) had 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 publish their financial statements by end-September 2025. - Review performance of 7 selected SOEs and prepare reform plans; plan to make Nepal Airlines Corporation a public company and sell 30 percent of Nepal Telecom shares to the public. - FCGO included 90 EBUs at the federal level and 9 EBUs at the provincial level in FY2023/24 annual financial statements (end-January 2025 SB, not met). FCGO drafting revised procedures for EBUs and coordinating with OAG to compile a comprehensive list of EBUs for inclusion in NPSAS-based financial statements for FY2024/25. ### Social spending and human capital - 16th Plan guides medium-term strategy — enhancing governance, social justice, and prosperity. - National Social Registry (NSR) development, including national ID cards, to better target social transfers. - Programs supported: child grants, public school midday meal program, scholarship program, National Employment Program, national nutrition and maternal health programs. - Child grants: 94 percent of budget executed in FY2023/24 covering all eligible applicants. - FY2025/26 budget: maintains child grant program in the 25 lowest socio-economic districts and expands midday meal program nationwide (covering all children up to grade 5) with meal rate increase from Rs. 15 to Rs. 20. - FY2025/26 budget increases health resources and raises eligibility age for the senior citizen allowance from 68 to 70 while preserving entitlements of existing recipients. ### Monetary and exchange rate policy - Primary target: price stability while maintaining financial sector and external sector stability. - Domestic inflation has steadily declined; recovery in consumer demand and investment spending remains inadequate. - External position strengthened: foreign exchange reserves growing; balance of payments projected to remain in surplus; short-term interest rate differential with India likely to narrow further. - Accommodative monetary stance and deleveraging plus large remittance inflows led to large excess liquidity. - Lending rates declined by about 430 basis points since July 2023. - NRB has taken an accommodative stance given subdued inflation and adequate FX reserves; monetary policy to remain cautious and data driven. - Monetary toolkit: interest rate corridor (IRC) and cash reserve ratio (CRR) guide short-term interest rates; authorities committed to aligning interbank rate closer to IRC midpoint over time. - Financial sector regulatory measures remain coordinated but distinct from monetary policy. ### Financial sector policies and supervision Key indicators and actions - Aggregate gross NPL levels of the banking sector rose to 5.2 percent in April 2025. - NPLs likely to rise further due to weak demand and recovery difficulties. - Banks with NPLs above 5 percent must submit comprehensive NPL management strategies. - NRB prioritizes supervisory measures to encourage NPL resolution and is preparing a legal framework for an Asset Management Company (AMC) contingent on reforms to the debt recovery framework and insolvency law; AMC legislation to specify governance, eligible exposures, valuation, transfer pricing, financing and lifespan. - Loan portfolio review (LPR) of the 10 largest banks prioritized: - Cancelled initial procurement restarted December 2024; procurement delays slowed LPR launch (end-May 2025 SB, not met). - Contract with consultant to assist NRB with LPR to be signed (prior action). - Finalize LPR of ten largest banks by end-December 2025 (end-December 2025 SB). - Roadmap referencing December 2025 alignment of asset classification regulation with BCBS Guidelines was completed (end-April 2025 SB, met). - Banks with capital shortfalls will be required to submit time-bound capital plans. - Regulatory alignment: - Amend asset classification regulation to align with a continuous repayment period of three months for reclassification of non-restructured/non-rescheduled loans per BCBS Guidelines (end-December 2025 SB). - Amend BAFIA and related party lending (RPL) provisions with phased-in regulations to preserve financial stability. - Plan to implement Liquidity Coverage Ratio and Net Stable Funding Ratio in the next fiscal year. - Continue to improve risk-based supervision per 2023 FSSR recommendations and IMF TA; prioritize implementation of the TA roadmap. - Enhance WCL guidelines to reduce misuse while maintaining scope and core purpose. - Phase-out regulatory forbearance; use macro-prudential tools as needed. - Supervisory and remedial measures: - NRB has taken remedial actions for capital issues including suspension of dividend payments and taking control of banks where necessary. - Streamline prompt corrective action framework with clear escalation across distress states and ensure consistency with bank resolution framework. - SACCOs and DCGF: - Established National Cooperatives Regulatory Authority (NCRA) in January to register, regulate and supervise SACCOs; cooperate with NRB. - Prioritize dealing with problematic SACCOs and establish a judicial recovery mechanism to improve recovery of problematic SACCO loans to repay depositors. - Participation of SACCOs in the Deposit and Credit Guarantee Fund (DCGF) contingent on registration, supervision, and legal amendments to allow DCGF to set strict membership criteria and establish a separate Fund from the banking sector. Selected numeric/statistical highlights (from fiscal and program tables) - Primary deficit of the federal government (ceiling; in NPR million): Program target 315,628; Adjusted target 311,931; Outturn 122,918 — status met (as reported in program table excerpt). - Stock of NRB's net international reserves (floor; in U.S. dollars million): Program target 9,076; Adjusted target 8,851; Outturn 14,130 — met. - Indicative target: floor on tax revenue of the federal government: Adjusted target 845,938; Outturn 818,657 — not met (cumulative reporting context). - Foreign-financed project loan disbursements (in NPR million) example: Program target 83,832; Adjusted target 80,134; Outturn 9,191 (example entries from Table 2). - The program requests that an amount of SDR 31.4 million be made available for the sixth review. - Seventh review scheduled to be completed on or after November 1, 2025; based on the July 15, 2025 test date. ### Governance, AML/CFT, and structural reforms - NRB governance and autonomy: - Amend NRB Act to include key Safeguards Assessment (SGA) recommendations; submission to Parliament delayed to coordinate with bank resolution amendments (end-April 2025 SB, not met) and agreed to be submitted by October 2025. - OAG commissioned audit of NRB’s financial statements involving at least one member of the Institute of Chartered Accountants of Nepal belonging to a global accounting network (end-July 2025 SB). - Completed all but one SGA recommendation unrelated to the NRB Act. - AML/CFT: - ALPA amended in 2024 with IMF advice; implementation procedures for UN Security Council Resolutions published with IMF TA. - On track to publish National Risk Assessment and increase NRB AML Supervision Department resources. - Develop risk-based AML/CFT supervision manuals and supervisory plans for real estate, casino, and Dealers in Precious Metals and Stones (DPMS) sectors. - Develop guidelines on beneficial ownership transparency for legal persons and work toward a central BO registry with possible IMF or development partner TA. - Structural reforms to boost growth: - Passed the Bill on Facilitating Investment and five other laws to enhance governance, advance privatization, reduce regulatory bottlenecks, foster investment, strengthen fiscal discipline, and improve cooperative oversight. - Developed a time-bound action plan of 408 measures over three years (High-Level Economic Reform Suggestion Commission) to improve macro fundamentals, restore private sector confidence, and strengthen institutional capacity. - Modernizing anticorruption framework and enhancing fraud detection and enforcement. - Priorities: reduce cost of doing business (procurement streamlining), digitalize public administration/services, strengthen coordination across tiers of government to advance fiscal federalism. - Scale up climate-related investments guided by NDC and NAP focusing on climate-smart agriculture, sustainable forest management, resilient infrastructure, and disaster risk financing. - 16th Plan implementation prioritizes productivity and job creation in agriculture, industry, and tradable services; promotes social inclusion and labor mobility. ### Risks, contingencies and external support - Debt overhang among borrowers and related bank capital constraints limit monetary policy transmission. - Improved revenue mobilization could create fiscal space for growth-enhancing infrastructure while staying within ECF program guardrails; expenditure compression should prioritize protection of capital and social spending. - Major commodity price shock may require monetary tightening to maintain external stability and keep inflation in check. - Foreign exchange reserve buffers considered adequate to cushion temporary shocks; for shocks beyond buffers, authorities will seek assistance from development partners. - Ability to mobilize additional external resources supported by low risk of debt distress and ECF-supported program commitments. - NRB prepared to provide systemic liquidity support in event of bank stress while triaging deeper solvency problems (triaging options: (i) using banks’ resources, (ii) restructuring, or (iii) resolution/liquidation). - Policies to prevent SACCO spillovers include registration and strengthened regulation. ### Financing and program monitoring - Remaining financing needs for the program expected to be covered by assistance from the IMF, the World Bank, the Asia Development Bank, and other development partners. - IMF disbursements to be made available to the budget during the program period. - Program monitored through quantitative performance criteria, indicative targets, and structural benchmarks as listed in program tables and the Technical Memorandum of Understanding (TMU). - ECF program monitored semi-annually by the IMF Executive Board. *Sources: Nepali authorities; and IMF staff estimates/projections.* ### 1. Program exchange rates are used for formulating and monitoring quantitative ### Program exchange rates and measurement conventions ### Exchange rates and valuation rules - Program exchange rate for USD/NPR: NPR 136.6 per one USD (corresponds to the exchange rate on June 3, 2025). - Gold valuation: USD 3351.9 per troy ounce (price in June 2025 from the IMF website on primary commodity prices). - Conversion rule: All assets and liabilities denominated in U.S. dollars (USD) will be converted into Nepali Rupees (NPR) at NPR 136.6 per one USD. - SDRs and non-USD foreign currencies: converted into USD at the June 3, 2025 exchange rates reported in Table 1. Table 1. Nepal: Program Exchange Rates (reference date June 3, 2025) - U.S. dollars / Nepali rupee: 0.007 - U.S. dollars / U.K. pound: 1.350 - U.S. dollars / Indian rupee: 0.012 - U.S. dollars / Chinese yuan: 0.139 - U.S. dollars / Euro: 1.139 - U.S. dollars / Japanese yen: 0.007 - U.S. dollars / Brunei dollar: 0.777 - U.S. dollars / Korean won: 0.001 - U.S. dollars / Kuwaiti dinar: 3.265 - U.S. dollars / Malaysian ringgit: 0.236 - U.S. dollars / Australian dollar: 0.645 - U.S. dollars / Bahrain dinar: 2.660 - U.S. dollars / Canadian dollar: 0.728 - U.S. dollars / Danish krone: 0.153 - U.S. dollars / Hong Kong dollar: 0.127 - U.S. dollars / Swedish krona: 0.104 - U.S. dollars / Swiss franc: 1.217 - U.S. dollars / Omani rial: 2.601 - U.S. dollars / Qatari riyal: 0.275 - U.S. dollars / Russian ruble: 0.013 - U.S. dollars / Saudi Arabian riyal: 0.267 - U.S. dollars / Thai baht: 0.031 - U.S. dollars / U.A.E. dirham: 0.272 - U.S. dollars / Singapore dollar: 0.776 - U.S. dollars / SDR: 1.360 ### Definitions and scope ### Residency basis - For the TMU, “external” and “domestic” are defined on a residency basis. ### Net International Reserves (NIR) — definition and measurement - NIR 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 the vaults of NRB), and readily available deposits abroad (including balances on accounts maintained with overseas correspondent banks). - Excluded from reserve assets: assets that are pledged, collateralized, or otherwise encumbered; claims on residents; precious metals other than monetary gold; illiquid assets; and claims on foreign exchange arising from derivatives in foreign currencies vis-à-vis domestic currency (such as futures, forwards, swaps, and 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 (such as futures, forwards, swaps, and options); and all arrears on principal or interest payments to commercial banks, suppliers, or official export credit agencies. - Measurement: all foreign-currency related assets and liabilities converted into USD at the exchange rates specified in paragraph 1, Table 1. ### Program targets and adjustors ### NIR program targets - Targets for the program NIR are set as a floor. - Program NIR targets include an adjustor for budget support from development partners: - If actual disbursement of budget support is below projected levels, the NIR floor will be adjusted downward by the difference between actual and projected disbursements under the program. - Projections of budget support from development partners for the period January 15, 2025 to July 15, 2025 are presented in Table 2. - A downward adjustment to the NIR floor for the condition described above will be capped at USD 743 million. Table 2. Nepal: Budget Support from Development Partners Projected under the Program - Date: July 15, 2025 — Cumulative over the period from January 15, 2025 to July 15, 2025 (USD million): 190 ### Primary deficit of the budgetary central government — targets and adjustors - Targets for the primary deficit of the budgetary central government are set as a ceiling. - Targets are set for cumulative flows from the end of the previous fiscal year. - Program targets for the primary deficit include adjustors for foreign-financed project loan disbursements on concessional terms: - Adjustor for higher than projected disbursements: if actual disbursements above projections, the primary deficit ceiling will be adjusted upward by the difference. - Adjustor for lower than projected disbursements: if actual disbursements below projections, the primary deficit ceiling will be adjusted downward by the difference. - The adjustor ensures the program does not constrain foreign-financed project loan disbursements on concessional terms and aligns project spending with actual disbursements. - Projections of foreign-financed project loan disbursements for the following 2 test dates are presented in Table 4. Table 4. Nepal: Foreign-Financed Project Loan Disbursements Projected under the Program - Date: January 13, 2025 — Cumulative over the respective fiscal year (Million NPR): 9,191 - Date: July 15, 2025 — Cumulative over the respective fiscal year (Million NPR): 91,912 ### Budgetary central government coverage ### Institutional coverage - The budgetary central government, for the purpose of the program, consists of all entities listed in the Administrative Expenditure Estimate table of the budget (Table 3). Institutions listed include (selection preserved from source): - President - Deputy President - Chief of Provinces - Federal Parliament - Courts - Commission for Investigation of Abuse of Authority - Office of the Auditor General - Public Service Commission - Election Commission - National Human Rights Commission - Council of Justice - National Natural Resources and Fiscal Commission - National Women Commission - National Dalit Commission - National Inclusion Commission - Indigenous Nationalities Commission - Madhesi Commission - Tharu Commission - Muslim Commission - Office of Prime Minister and Council of Ministers - Ministry of Finance - Ministry of Industry, Commerce and Supply - Ministry of Energy, Water Resources and Irrigation - Ministry of Law, Justice and Parliamentary Affairs - Ministry of Agriculture and Livestock Development - Ministry of Water Supply - Ministry of Home Affairs - Ministry of Culture, Tourism and Civil Aviation - Ministry of Foreign Affairs - Ministry of Forest and Environment - Ministry of Land Management, Cooperative and Poverty Alleviation - Ministry of Physical Infrastructure and Transport - Ministry of Women, Children and Senior Citizen - Ministry of Youth and Sports - Ministry of Defense - Ministry of Urban Development - Ministry of Education, Science and Technology - Ministry of Communications and Information Technology - Ministry of Federal Affairs and General Administration - Ministry of Health and Population - Ministry of Labour, Employment and Social Security - National Planning Commission - MOF- Domestic Debt Service - MOF- External Debt Service (Multilateral) - MOF- External Debt Service (Bilateral) - MOF Staff Benefits and Retirement Benefits - MOF Miscellaneous - Province (Equalization, Special and Complementary) - Local Level (Equalization, Special and Complementary) ### Social and revenue indicative targets ### Indicative target on social spending - Focus: child grant spending implemented by the federal government and monitorable in a timely way. - Target covers child grant activity codes: 7.1.1.10 (dalit children), 7.1.1.41 (areas designated children), and 7.1.1.43 (areas designated children). - Set as a floor for cumulative flows from the end of the previous fiscal year. - Recognition rule: spending should be recognized on a cash basis and flows recorded when cash is paid. ### Indicative target on tax revenues of the federal government (starting with the July 15, 2024 test date) - Defined as the tax revenue of the federal government — includes tax revenues of the budgetary central government to be deposited in the Federal Treasury. - Excludes: non-tax revenue, revenue sharing for provinces and local levels, and other receipts. - Import-related tax revenue includes import-related customs, VAT, and excise duty. - 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 - A continuous performance criterion applies to the non-accumulation of new external payments arrears on external debt contracted or guaranteed by the budgetary central government or NRB. - External payment arrears defined as total amount of external debt service obligations (principal and interest)—deriving from loans arranged or guaranteed by the central government and the NRB, penalties, and interest charges deriving from these loans not paid at maturity—falling due to nonresidents after approval of this arrangement and that have not been paid when due in accordance with the relevant contractual agreements (including any contractual grace period). - Exclusions from prohibition on accumulation of new arrears: - (i) external arrears that are subject to debt rescheduling agreements or negotiations; and/or - (ii) disputed external debt service obligations. ### Definition of debt (per Guidelines on Public Debt Conditionality) - Debt is a current, i.e., not contingent, liability created under a contractual arrangement through provision of value in assets (including currency) or services, requiring obligor to make payments in assets (including currency) or services according to a specific schedule. - Primary forms of debt: - (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits), and temporary exchanges equivalent to fully collateralized loans (repurchase agreements and official swap arrangements); - (ii) suppliers’ credits (deferred payments for goods/services); - (iii) leases (debt equals present value at inception of all lease payments expected to be made during agreement, excluding payments for operation, repair, or maintenance). - Under this definition, arrears, penalties, and judicially awarded damages from failure to make payment under a contractual obligation that constitutes 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 prohibitions (continuous performance criteria) - (1) Prohibition on the imposition or intensification of restrictions on making of payments and transfers for current international transactions. - (2) Prohibition on the introduction or modification of multiple currency practices. - (3) Prohibition on the conclusion of bilateral payments agreements that is inconsistent with Article VIII. - (4) Prohibition on the imposition or intensification of import restrictions for balance of payments reasons. ### Provision of information to the IMF - Program monitoring will use data supplied to the IMF by the Ministry of Finance (MOF) and the NRB as specified in Table 5, consistent with program definitions and within the specified time frame. - Authorities will transmit promptly to the IMF staff any data revisions within 14 days after being made. - Any data and information indicating non-observance of continuous performance criteria will be provided immediately. - Authorities will transmit any information or data not defined in the TMU but pertinent for assessing or monitoring performance relative to program objectives. - All reports and data should be transmitted to the IMF electronically and in English. *Source: International Monetary Fund, Nepal TMU (reference date June 3, 2025).* ### 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 ### Data reporting requirements (summary) - The authorities will inform IMF staff immediately of the creation of any new extra-budgetary funds or programs that carry out operations of a fiscal nature as defined in the IMF’s Manual on Government Finance Statistics 2014. - Reports and data are provided in English and in excel files. Submission lags are counted after the end of the respective week, month, quarter, or fiscal year in the Nepali calendar, unless otherwise indicated. Key data items, frequencies, and submission lags (selected highlights preserved exactly): - Summary of budgetary central government accounts (revenues broken down by economic classification and grants; expenditures broken down by economic classification; net acquisition of financial assets broken down by loan investment and share investment) on a cash basis. Frequency: M. Submission lag: 30 calendar days. - FCGO monthly reports will be used as the basis for program monitoring for the above. - Summary of budgetary central government’s net incurrence of liabilities (domestic borrowing disbursement and principal repayment; external borrowing disbursement and principal repayment). Frequency: Q. Submission lag: 30 calendar days. - PDMO monthly reports will be used for program monitoring of public debt disbursements and budget support disbursements. - Domestic and external public debt stock (broken down by currency, maturities, creditors, and instruments), disbursements, and debt service costs, including interest payments and amortization schedules until full loan repayment. Frequency: A. Submission lag: 60 calendar days. - Debt guarantees issued by budgetary central government and the NRB. Frequency: Q. Submission lag: 45 calendar days. - Audited Financial statements of public enterprises. Frequency: A. Submission lag: 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). Frequency: H. Submission lag: 30 calendar days. - Child grant program data (amount budgeted; amount dispersed; number of recipients). Frequency: H. Submission lag: 30 calendar days. - The Annual Budget (Budget speech with annex). Frequency: A. Submission lag: 30 calendar days after the delivery of the budget speech. - Mid-year budget review. Frequency: A. Submission lag: 30 calendar days. - Annual budget execution report. Frequency: A. Submission lag: 90 calendar days. - National accounts data. Frequency: A, Q. Submission lag: 90 calendar days. Selected Nepal Rastra Bank (NRB) and financial sector reporting (selected highlights): - 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. Frequency: M. Submission lag: 5 working days after the end of the month. - Monthly consumer price indexes (CPIs). Frequency: M. Submission lag: 30 calendar days. - Program net international reserves and its components at program and current exchange rates. Frequency: M. Submission lag: 7 working days. - Breakdown of gross foreign assets and liabilities of the NRB by currency at actual and program exchange rates. Frequency: M. Submission lag: 15 calendar days. - Balance of payments (BPM6). Frequency: M. Submission lag: 30 calendar days. - Central bank daily purchases and sales of foreign exchange by counterparts. Frequency: W. Submission lag: 2 working days after the end of the week. - Daily interbank turnover in the FX spot market. Frequency: W. Submission lag: 15 working days. - Commercial bank-by-bank data (balance sheet by currency; income statements; loan classification and provisioning by borrower type and sector; breakdown of deposits; FSI indicators). Frequency: M. Submission lag: 75 calendar days. - NPL-specific data (NPLs per category and sector; provisioning; NPL restructuring/rescheduling; reclassification; loan write-offs). Frequency: Q. Submission lag: 30 calendar days. - Daily FEDAN rates (at 10am and 2pm) for 22 currencies. Frequency: M. Submission lag: 2 working days after the end of the month. Note: A = Annually; Q = Quarterly; H = Half-yearly; M = Monthly; W = Weekly. ### Debt sustainability analysis (DSA) findings and projections - Risk assessments: - Risk of External Debt Distress: Low - Overall Risk of Debt Distress: Low - Granularity in the Risk Rating: Not Applicable - Application of Judgment: Yes - DSA date: August 28, 2025 - Present value (PV) of the external debt-to-exports ratio breaches the indicative threshold under an export shock scenario, which mechanically suggests a moderate risk rating. Staff applied judgment to override the mechanical signal because remittances—amounting to more than three times the value of exports—are the primary source of foreign exchange earnings in Nepal. - Public debt stood at 48.3 percent of GDP in FY2023/24, lower than projected in last year’s DSA. - Public debt is projected to peak at 49.5 percent of GDP in FY2025/26 and gradually decline thereafter under the program baseline. - Nepal’s debt carrying capacity: composite indicator (CI) score is calculated at 3.14, based on the April 2025 WEO and the 2023 World Bank CPIA index. - The better-than-expected outcome reflects fiscal consolidation efforts that curtailed primary expenditure despite an increase in the net acquisition of financial assets (NAFA). - Projections and sustainability hinge on sustained fiscal consolidation (as envisaged under the ECF-supported program and reaffirmed in the FY2024/25 mid-year budget review), including reforms to tax policy and public spending, and structural reforms to diversify exports, enhance productivity and competitiveness, and strengthen resilience to shocks, particularly natural disasters. ### Public debt coverage, definitional issues, and cash management concerns - Public debt in this DSA comprises: general government debt, central bank borrowing on behalf of the government, and government guarantees. - Provincial and local governments currently hold no debt. The Public Debt Management Act of 2022 permits subnational borrowing, but no such activity has commenced to date—apart from on-lending arrangements by the central government. - The Social Security Fund and other extra-budgetary units are not authorized to borrow and therefore carry no debt. - IMF disbursements during 2020–2024 were used for direct budget support. Bond issuances by the central bank over this period were exclusively for monetary policy operations and do not constitute public debt. - The government has issued guarantees for SOE debts; stock of guarantees amounted to NPR 49.4 billion by the end of FY2023/24 (0.85 percent of GDP). The stock of guarantees increased by NPR 2.9 billion since the last DSA. - Public debt definition in the LIC DSF includes the negative balance of the Treasury Single Account (TSA). According to the Government Finance Statistics Manual and Public Sector Debt Statistics Guide, a negative cash balance in the TSA is treated as part of government gross debt. - Extra-budgetary funds and subnational governments are not integrated into the TSA system. This fragmentation complicates cash management and reduces fiscal transparency. - Consolidated net balance across all government accounts is positive at 4.6 percent of GDP as of Q2 FY2024/25, but these other cash balances are not eligible to offset the negative TSA balance in the LIC DSF debt measure due to uncertainties regarding liquidity and availability for debt service purposes. - The negative TSA balance increased to 4 percent of GDP in FY2023/24, up from 3.4 percent in FY2022/23, but is constrained by a binding domestic borrowing ceiling. The negative balance of government accounts at the NRB cannot exceed 5 percent of the previous year’s government revenue; there is legal uncertainty whether the limit applies to the consolidated balance across all accounts or to the TSA only. - The negative TSA balance is not part of the public debt as reported by the authorities. ### Contingent liabilities, SOE fiscal risks, and stress-test assumptions - The contingent liability stress test includes: - SOE debt: 2 percent of GDP - PPP projects: 2.1 percent of GDP - Financial markets: 5 percent of GDP - PPP-related liabilities are estimated by the World Bank PPI database at around 6 percent of GDP as of 2022, though PPP liabilities have not been formally compiled by the authorities. - Baseline figures incorporate NAFA, which averaged 1.4 percent of GDP annually since 2009, fell to -0.9 percent in FY2022/23, and rebounded to 0.5 percent of GDP in FY2023/24. Under the program baseline, NAFA is assumed to return to its historical average over the medium term. - The contingent liability stress test for SOE debt is applied in addition to NAFA embedded in the baseline projections. The assumed 2 percent of GDP contingent liability from SOEs covers approximately one-fifth of total liabilities of all non-financial SOEs and the full liabilities of Nepal Airlines Corporation. - SOE-related fiscal risks are elevated and require close monitoring. Recommendations for strengthening oversight include: - Timely publication and audit of SOE financial statements. - Expanding the fiscal risk registry to incorporate subnational governments and PPPs. - Publishing a comprehensive fiscal risk statement with the FY2025/26 budget (end-August 2025 SB). - The default financial market risk of 5 percent of GDP is retained, consistent with the current assessment that Nepal’s banks are adequately capitalized. However, vulnerabilities include rising NPLs, weaker capitalization, and stagnating credit to the private sector—particularly in the SACCO sector. - The launch of a loan portfolio review (LPR) for the ten largest banks by the Nepal Rastra Bank (NRB) is underway; its findings will inform future calibration of the financial market contingent liability. ### Public debt management progress and priorities - Key reforms and status: - Public Debt Management Act (PDMA) enacted in October 2022, consolidating debt management functions within the PDMO. - Statutory ceiling on external public debt set at one-third of the previous fiscal year’s GDP. - PDMO assumed responsibility for domestic debt issuance from the NRB in April 2024; progress in dematerializing debt securities and a smooth transition have been reported. - Institutional governance strengthened: Debt Management Committee now chaired by the Revenue Secretary, enhancing separation between domestic debt management and monetary policy operations. - Medium-Term Debt Strategy (MTDS) published on the PDMO’s website; intended to be updated annually and serve as an input into the annual budget process. - Ministry of Finance launched a fiscal risk register in August 2023 to identify, disclose, and manage fiscal risks. - Two IMF TA missions (January and April 2024) supported database management and reporting for IT Customs Systems and helped customs revenue collection for domestic revenue mobilization. - Remaining challenges and priorities: - Limited resources and frequent staff rotation at the PDMO have slowed PDMA implementation. - Middle- and back-office functions require further enhancement. - Priorities include institutionalizing cash flow forecasting and integrating it with debt management operations; anchoring annual borrowing and issuance plans in the MTDS and market conditions; and deepening the domestic bond market. *Prepared by the staff of the International Monetary Fund and the International Development Association.* ### 5. Nepal’s total public debt has been on an ### 5. Nepal’s total public debt has been on an increasing trajectory ### Debt trajectory and drivers - Public debt rose from 25 percent of GDP in FY2015/16 to 48.3 percent in FY2023/24. - Increase began in 2016, driven by the country’s transition to fiscal federalism and reconstruction needs following the 2015 earthquake. - Public debt rose further in FY2019/20 in response to the COVID-19 pandemic and continued to increase as the initial post-pandemic rebound in credit and imports gave way to a slowdown, weighing on GDP growth and reducing tax revenues. ### External public debt (concessional profile) - External debt accounted for 47.1 percent of total debt and 22.8 percent of GDP in 2024 (Text Table 2). - Multilateral creditors account for 87 percent of external debt. - Multilateral loans carry low interest rates averaging 1 percent and long maturities averaging 36 years. - Present value (PV) of external debt is estimated at 17.5 percent of GDP in FY2023/24. - Bilateral loans mostly from Japan, India, China, and Korea have been extended on concessional terms. - DSA incorporates Nepal’s transition in IDA financing from IDA-only to Gap status in FY2025/26 and authorities’ agreement with IDA to access blend term credits at fixed rates. - Selected line items from Text Table 2 (2024 totals, in million US$ and percent total debt where listed): - Total: 20,645 (100) — 48.3 percent of GDP - External: 9,732 — 47.1 percent of total; 22.8 percent of GDP - Multilateral creditors: 8,346 — 40.4 percent of total; 19.5 percent of GDP - World Bank: 4,585 — 22.2 percent of total; 10.7 percent of GDP - ADB: 3,049 — 14.8 percent of total; 7.1 percent of GDP - Other Multilaterals: 239 — 1.2 percent of total; 0.6 percent of GDP - Bilateral Creditors: 1,024 — 5.0 percent of total; 2.4 percent of GDP - Paris Club: 430 — 2.1 percent of total; 1.0 percent of GDP - o/w: JICA 381 — 1.8 percent of total; 0.9 percent of GDP - EXIM Bank of Korea 38 — 0.2 percent of total; 0.1 percent of GDP - Non-Paris Club: 594 — 2.9 percent of total; 1.4 percent of GDP - o/w: EXIM Bank of China 254 — 1.2 percent of total; 0.6 percent of GDP - EXIM Bank of India 303 — 1.5 percent of total; 0.7 percent of GDP - Bonds: 0 — 0.0 percent - Commercial creditors: 0 — 0.0 percent - Other international creditors: 0 — 0.0 percent - Domestic: 10,913 — 52.9 percent of total; 25.5 percent of GDP - Held by residents, total: 10,913 — 52.9 percent of total; 25.5 percent of GDP - Held by non-residents, total: 0 — 0.0 percent - T-Bills: 3,020 — 14.6 percent of total; 7.1 percent of GDP - Bonds: 5,786 — 28.0 percent of total; 13.5 percent of GDP - Loans: 2,107 — 10.2 percent of total; 4.9 percent of GDP - Contingent liabilities: 369 — 1.8 percent of total; 0.9 percent of GDP - o/w: Public guarantees: 369 — 1.8 percent of total; 0.9 percent of GDP - Nominal GDP: 42,714 (US$ million) reported. ### Domestic public debt dynamics and vulnerabilities - Domestic public debt rose from 10.1 percent of GDP in FY2015/16 to 25.5 percent in FY2023/24. - Domestic debt has been increasing faster than external debt and more than doubled over the period. - Decline in revenue and grants, coupled with higher domestic debt, resulted in a notable rise in the domestic debt service-to-revenue ratio which now exceeds that of Nepal’s peers. - More than 85 percent of total government interest spending in FY2023/24—amounting to 1.3 percent of GDP—was allocated to service domestic debt. - Interest rates on domestic debt have been declining recently, trending toward 3–4 percent depending on the instrument. - Composition of domestic debt in FY2023/24: - Less than 30 percent held in short-term Treasury bills (maturities up to one year). - Just under 70 percent held in medium- to long-term development bonds (maturities of 3 to 7 years). - Domestic financial institutions are the primary holders; all domestic public debt is held by residents. ### Private external debt and banks’ external borrowing - Private external debt was about 2.5 percent of GDP in FY2019/20 and increased to an estimated 3.7 percent of GDP in FY2023/24. - Private medium- and long-term external debt is assumed to increase to 5.5 percent of GDP in the long term. - Most private external borrowing so far has been by banks and hydropower projects. - Bank external borrowing has been constrained by limited access, high relative cost, and regulations (e.g., maximum spread limit on banks’ foreign loans and limits on potential lenders). - Authorities signaled increasing openness to foreign capital inflows following the sovereign credit rating BB- from Fitch obtained in November 2024. ### Recent macroeconomic performance (FY2023/24) and near-term outlook - Real GDP growth: estimated 3.7 percent in FY2023/24. - Growth projected to accelerate to 4.3 percent in FY2024/25 and stabilize around 5 percent in the medium and long term. - Inflation (CPI, period average): 5.4 percent in FY2023/24; projected 4.2 percent in FY2024/25; converging to 5 percent in medium and long term. - Drivers supporting FY2023/24 growth: agriculture, export-oriented sectors, strong remittance inflows. - Weaknesses: import contraction, decline in credit growth, under-execution of capital spending. - FY2024/25 risks: September 2024 floods and delayed reconstruction efforts; recovery supported by favorable agricultural conditions, sustained remittances, and increased capital spending—particularly construction. - Structural challenges: low domestic job creation, substantial infrastructure gaps, vulnerability to natural disasters and climate change. ### Medium- and long-term growth drivers and climate considerations - Medium-term stabilization around 5 percent contingent on structural reforms under the ECF-supported program and effective use of concessional external financing for social and capital spending. - Institutional reforms expected to improve capital expenditure execution: - Issuance of revised National Project Bank Operational Procedures in March 2025 (with a supplement in June 2025). - Implementation of PIMA action plan by the National Planning Commission in February 2024. - SARTAAC TA mission on Addressing Issues in the Capital Budget Execution in January 2025. - Legislative reforms announced: revision of the Land Acquisition Act and amendment of the Public Procurement Act. - Industrial contribution to growth expected to rise with significant expansion of hydropower generation and exports. - Climate change impact: World Bank CCDR projects long-term growth 0.15 percentage points lower under RCP 4.5 scenario compared to a no–climate change baseline over 2040–2060. - Recommended adaptation and mitigation actions: climate-smart urbanization, low-carbon and resilient infrastructure, improved disaster risk management, mobilizing climate finance; GRID approach and action plan adopted in November 2023 by Government of Nepal and 16 development partners. ### Fiscal developments and outlook - Primary deficit narrowed to 1.3 percent of GDP in FY2023/24, down from 4.5 percent in FY2022/23. - Projected primary deficit: - Remains at 1.3 percent of GDP in FY2024/25. - Widens to 2 percent in FY2025/26 (reflecting gradual improvement in capital expenditure execution). - Fiscal consolidation path: - Fiscal deficit projected to decline to 1.7 percent of GDP in the medium term and stabilize around 1.5 percent of GDP over the long term, consistent with the ECF-supported program. - Policy recommendations to support consolidation: - Close VAT exemptions and gradually phase out tax holidays and concessions granted to special industries. - Improve collection of VAT and income tax arrears via a comprehensive arrears management plan and an automated system for reminders and administrative/legal notifications. - Strengthen customs revenue through a Customs Compliance Improvement Strategy (CCIS) (end-December SB). - Text Table 3 selected fiscal and macro assumptions (current DSA; key entries): - Real growth (%): FY2023/24 3.7; FY2024/25 4.3; medium term 5.0; long term 5.0 - CPI (period average, %): FY2023/24 5.4; FY2024/25 4.2; medium term 4.9; long term 5.6 - Revenues and grants (% GDP): FY2023/24 19.4; FY2024/25 20.2; medium term 22.0; long term 22.5 - Primary expenditure (% GDP): FY2023/24 20.7; FY2024/25 20.9; medium term 23.8; long term 24.1 - Net acquisition of non-financial assets (% GDP): FY2023/24 3.4; FY2024/25 3.4; medium term 5.5; long term 6.0 - Primary balance (% GDP): FY2023/24 -1.3; FY2024/25 -1.3; medium term -1.8; long term -1.6 - Net incurrence of liabilities (% GDP): FY2023/24 3.3; FY2024/25 4.2; medium term 4.7; long term 4.6 - Net domestic financing (% GDP): FY2023/24 1.7; FY2024/25 2.5; medium term 3.3; long term 3.2 - Exports of G&S (% GDP): FY2023/24 7.6; FY2024/25 7.9; medium term 8.6; long term 8.5 - Imports of G&S (% GDP): FY2023/24 32.8; FY2024/25 36.3; medium term 35.7; long term 38.6 - Remittances (% GDP): FY2023/24 24.5; FY2024/25 23.3; medium term 26.7; long term 23.6 - Current account balance (% GDP): FY2023/24 3.9; FY2024/25 3.9; medium term -2.9; long term -3.4 ### Debt-stabilizing primary balance and role of NAFA - Debt-stabilizing primary deficit is estimated at approximately 3.5 percent of GDP based on existing debt stock and projected fiscal path. - Continuation of sizeable Net Acquisition of Financial Assets (NAFA) implies a much lower debt-stabilizing primary deficit of about 2.2 percent of GDP. - NAFA increased in FY2023/24 relative to the previous year and is currently trending toward its historical average. - Proposed fiscal path is expected to stabilize public debt, assuming NAFA remains broadly in line with historical patterns—net of changes in the Treasury Single Account (TSA) balance. ### External sector and reserves - Current account shifted to a surplus of 3.9 percent of GDP in FY2023/24 (from a deficit of 0.9 percent in FY2022/23), driven by subdued domestic demand and strong growth in remittances and tourism. - Current account surplus projected to remain at 3.9 percent of GDP in FY2024/25, before shifting into a deficit over the medium term and widening to around 3.4 percent of GDP as growth returns to potential and deferred import demand materializes. - Exports are projected to normalize to around 8.6 percent of GDP over the medium term. - Remittances expected to remain substantial—around 24 percent of GDP in the medium term. - Gross official reserves projected to reach the equivalent of 10.9 months of prospective imports in FY2024/25 and stabilize at around 7–8 months of import coverage in the medium term. *Source: IMF staff compilation from the provided text.* ### 16. Financing: External government financing declined during 2021–2023, both in nominal terms and ### 16. Financing: External government financing declined during 2021–2023, both in nominal terms and ### Financing overview - External government financing declined during 2021–2023, both in nominal terms and as a share of GDP, as the authorities increasingly relied on domestic borrowing and drew down balances from the Treasury Single Account (TSA). - Concessional loans from development partners—primarily multilateral development banks—are expected to remain a key source of financing for both balance of payments and fiscal needs. - The shift in IDA financing terms is not expected to change this trend. - External financing increased in FY2023/24 and is expected to rise further in FY2024/25 and over the medium term. - External financing is now expected to average around 2 percent of GDP in the medium term—only marginally higher than the 1.9 percent of GDP projected in the previous DSA. - Domestic borrowing is projected to cover approximately two-thirds of fiscal financing needs over the medium- to long-term, although it remains more costly and risk-prone than external concessional financing. - Interest rates on domestic borrowing are expected to gradually rise to around 4- 5 percent over the medium term. - Interest rates on newly contracted external loans, along with concessional terms such as long maturities and grace periods, are expected to remain broadly unchanged. - About one-third of newly issued domestic debt is assumed to be short-term, implying significant refinancing risk. ### External Borrowing Program (Text Table 4) - PPG external debt contracted or guaranteed - Volume of new debt, US$ million 1/: 1,090 - Present value of new debt, US$ million 1/: 572 - Sources of debt financing - Concessional debt, of which 2/: 1,014 (Present value: 512) - Multilateral debt: 817 (Present value: 416) - Bilateral debt: 197 (Present value: 96) - Non-concessional debt, of which: 866 0 - Semi-concessional debt 3/: 866 0 - Commercial terms 4/: 0 0 - Uses of debt financing - Project financing: 815 - Budget financing: 275 - Memorandum items - Indicative projection FY2025/26: 1,300 (Present value: 795) - Indicative projection FY2026/27: 1,086 (Present value: 687) - Notes: - 1/ Contracting and guaranteeing of new debt. The present value of debt is estimated using the terms of recent individual loans and applying the 5 percent program discount rate. - 2/ Debt with a grant element that exceeds 35 percent. - 3/ Debt with a positive grant element which is lower than the minimum grant element of 35 percent. - 4/ Debt without a positive grant element. *Sources: Nepalese authorities; and IMF staff estimates.* ### Realism checks and debt dynamics - Unexpected changes in both public and external debt over the last five years are within the 25-75 percent interquartile range of distribution across all LICs. - Public debt-creating flows over the next five years are similar to the 5-year historical average. - The contribution of future GDP growth is somewhat lower than the 5-year historical average (the historical average includes the pandemic). - The contribution of the primary deficit is lower, reflecting the authorities’ commitment to stabilize debt over the medium-term and actions during the FY2024/25 mid-year budget review. - External debt-creating flows over the next five years are also similar to the 5-year historical average, with a slightly smaller contribution of the current account. - The projected 3-year fiscal adjustment is well-below the 75th percentile across all LICs with Fund-supported programs since 1990; the adjustment is expected to materialize more in the medium term. - The mild fiscal expansion’s projected impact on growth is stronger than implied by conventional fiscal multiplier assumptions, though divergence is smaller than in the previous DSA; the expansion is temporary with consolidation expected in the medium term. - The projected impact of public investment on growth is less conservative than historical experience and in line with historical averages; more targeted and efficient capital spending would be an upside to projections. ### Debt carrying capacity and thresholds (Text Table 5) - Nepal’s Composite Indicator (CI) score: 3.14, based on the April 2025 World Economic Outlook and the 2023 World Bank CPIA index; classification: Strong. - Applicable thresholds for countries with strong capacity: - PV of external debt at 55 percent of GDP and 240 percent of exports. - External debt service at 21 percent of exports and 23 percent of revenue. - PV of total public debt at 70 percent of GDP. - CI calculation components and contributions (10-year averages): - CPIA coefficient: 0.39, 10-year average value: 3.38, contribution: 1.304 (42%) - Real growth rate coefficient: 2.72, 10-year average value: 4.00, contribution: 0.11 (3%) - Import coverage of reserves coefficient: 4.05, 10-year average value: 57.32, contribution: 2.327 (74%) - Import coverage of reserves^2 coefficient: -3.99, 10-year average value: 32.85, contribution: -1.31 (-42%) - Remittances coefficient: 2.02, 10-year average value: 15.49, contribution: 0.31 (10%) - World economic growth coefficient: 13.52, 10-year average value: 2.97, contribution: 0.40 (13%) - CI Score: 3.141 (100%) — CI rating: Strong ### Tailored stress tests and disaster shock - LIC-DSF stress tests applied at default settings; an additional natural disaster shock was applied following 2024 Supplementary Guidance Note. - Natural disaster shock: - One-off shock of 10 percentage points of GDP to the debt-to-GDP ratio in the second year of the projection period (FY2025/26). - Real GDP growth lowered by 1.5 percentage points and exports lowered by 3.5 percentage points in the year of the shock. - More extreme scenario presented: - One-off shock of 20 percentage points of GDP to the debt-to-GDP ratio, with a reduction in real GDP growth and exports by 5 and 7 percent, respectively. - Expected disbursement of a US$ 100 million DPC CAT DDO 2 from IDA would provide important contingent financing for climate resilience and disaster response. ### External debt sustainability - All external debt indicators remain below their indicative thresholds under the baseline. - PPG external debt stock projected to gradually decrease to about 20 percent of GDP by FY2034/35. - PV of PPG external debt-to-GDP ratio expected to remain within the range of 12–14 percent over the medium term—well below the indicative threshold of 55 percent. - PV of the PPG external debt-to-exports ratio remains below its threshold but appears elevated due to Nepal’s low exports-to-GDP ratio. - Debt service-to-exports ratio and debt service-to-revenue ratio remain comfortably below their indicative thresholds. ### Key vulnerabilities and stress-test outcomes - External debt is most vulnerable to export shocks: - The PV of external PPG debt-to-exports ratio breaches the thresholds in an export shock stress test scenario. - Export shock calibration is particularly severe for Nepal due to high export volatility over the past decade (including the 2015 earthquake and COVID-19), and a one-off 46 percent spike in exports in FY2021/22 due to a palm oil re-export event. - Because of a small exports denominator, the indicator is highly sensitive to macroeconomic assumptions. - Public debt is most vulnerable to a growth shock: - Growth shock (temporary, second and third year of projection) is set to either the 10-year historical average growth minus one standard deviation or projected growth minus one standard deviation, whichever is lower. - The shock would raise the PV of debt-to-GDP ratio close to the 70 percent threshold in 2035, and PV of debt-to-revenue and debt service-to-revenue ratios also rise significantly, though none of the thresholds are breached. - Other stress-test observations: - Under all other shock scenarios, the PV of debt-to-GDP ratio remains below the indicative threshold. - The PV of external PPG debt-to-GDP ratio also breaches the threshold for one year in the combined shocks scenario, driven by the export shock. ### Role of remittances and other mitigating factors - Remittances are the major source of foreign exchange: - Remittance-to-GDP ratio averaged 23 percent of GDP in 2015-2024 and is among the largest in the world. - Remittance-to-exports ratio is by far the largest in the world (2018-22 averages). - Standard deviation of remittance growth over the last 10 years: 7.4 percent; export growth standard deviation: 19.3 percent. - The current level of remittances is well above 7 percent of GDP—the minimum needed to maintain the strong rating, everything else equal. - Net errors and omissions have been consistently positive and large (averaging over 2 percent of GDP in the last 5 years), indicating large unaccounted foreign exchange inflows. - Transition to BPM6 accounting (assisted by IMF TA mission in June 2024) should improve official estimates and may reduce net errors and omissions. ### Overall risk rating and outlook - Risk assessments: - Risk of public external debt distress and overall debt distress: assessed as low. - All debt indicators remain below relevant indicative thresholds under the baseline. - PV of public debt-to-GDP ratio remains below the 70 percent benchmark during the projection period. - Public debt projections: - Public debt projected to peak at around 49.5 percent of GDP in FY2025/26 and gradually decline thereafter. - PV of public debt-to-GDP projected to rise from 39 percent to a peak of 40.7 percent—well below the 70 percent benchmark. - Debt service-to-revenue ratio increased sharply over the past four years—approaching 50 percent—driven by a high share of short-term domestic debt (about one-third of the total), rising interest payments, and a recent decline in the revenue-to-GDP ratio. - Debt service-to-revenue ratio expected to decline to around 32 percent over the medium term. - Factors supporting low-risk assessment: - PV of external PPG debt is 13.8 percent of GDP in FY2023/24—well below the indicative threshold of 55 percent. - High concessionality of external borrowing and low cost of debt servicing. - High and increasing international reserves projected to remain well above adequacy in the medium and long term. - Authorities’ demonstrated fiscal consolidation in FY2023/24 and FY2024/25 (projected). ### Policy recommendations and priorities - Strengthen resilience to shocks and boost exports: - Step up investment in resilient and sustainable infrastructure. - Streamline regulations and administrative processes to improve productivity and competitiveness. - Sustain stronger domestic revenue mobilization. - Rigorous analysis of contingent liabilities: - Assess risks related to non-guaranteed commercial SOE debt, unfunded pension liabilities, PPP projects, and budget support for the financial sector, including SACCOs. - Improve subnational public financial management and reporting. - Mainstream the medium-term debt strategy (MTDS) and cash flow forecasting: - Develop the government bond market further to facilitate domestic borrowing. - Move towards longer-maturity debt replacing short-term bills to reduce rollover risk. - Increase utilization of concessional external borrowing to close infrastructure gaps. - Ensure prudent execution of the medium-term fiscal consolidation strategy, including tax revenue and spending reforms envisaged in the ECF arrangement. *Source: Nepalese authorities; and IMF staff estimates.* ### 27. The authorities broadly agreed with the debt sustainability assessment. They reiterated their ### The authorities broadly agreed with the debt sustainability assessment. ### Authorities' position and fiscal anchors - The authorities broadly agreed with the debt sustainability assessment. - They reiterated their commitment to medium-term fiscal consolidation and to stabilizing the debt-to-GDP ratio. - They emphasized the importance of maintaining key fiscal anchors: - legislative limit on external debt—set at 33 percent of the previous year’s GDP under the Public Debt Management Act; - annual ceilings on domestic borrowing established by the Natural Resources and Fiscal Commission. - They welcomed the incorporation of Nepal’s shift in IDA financing terms in the new DSA and noted that it does not affect the assessment that Nepal remains at low risk of debt distress. - They concurred with the importance of lengthening the maturity profile of public debt and reaffirmed their intention to continue utilizing concessional external financing. ### External Debt Sustainability: key projections and indicators (selected) - External debt (nominal, percent of GDP): - 2022: 24.6 - 2023: 26.3 - 2024: 26.5 - 2025: 27.5 - 2035: 23.4 - 2045: 26.3 - Public and publicly guaranteed (PPG) external debt (percent of GDP): - 2022: 20.6 - 2023: 21.8 - 2024: 22.8 - 2025: 23.6 - 2035: 21.4 - Change in external debt (percent of GDP): -0.8, 1.6, 0.2, 0.9, 0.1, -0.6, -0.4, -0.3, -0.2, -0.1, -0.2 (series as presented) - Identified net debt-creating flows (percent of GDP): 9.6, 0.8, -5.2, -5.3, -0.4, 1.0, 1.5, 1.7, 1.9, 2.2, 1.1, 0.8, 1.1 (series as presented) - Non-interest current account deficit (percent of GDP): 12.3, 0.6, -4.2, -4.2, 1.2, 2.5, 2.9, 3.1, 3.2, 3.5, 2.4, 2.1, 2.5 (series as presented) - PV of PPG external debt-to-GDP ratio (selected values): 13.8, 14.0, 14.3, 13.9, 13.6, 13.4, 13.2, 12.9, 11.9 (series as presented) - PV of PPG external debt-to-exports ratio (selected values): 181.2, 149.6, 166.5, 163.5, 159.5, 155.2, 153.1, 150.8, 140.4 (series as presented) - PPG debt service-to-exports ratio (selected values): 9.6, 10.3, 10.2, 9.8, 11.6, 11.2, 10.8, 10.5, 10.1, 8.5, 8.3 (series as presented) - Key macro assumptions (selected): - Real GDP growth (percent): 5.6, 2.0, 3.7, 4.3, 5.2, 5.0, 5.0, 5.0, 5.0, 5.0 - Effective interest rate (percent): 1.1, 1.1, 1.4, 1.1, 1.0, 1.0, 1.1, 1.2, 1.3, 1.4 - Government revenues (excluding grants, percent of GDP): 22.4, 18.8, 19.0, 19.2, 20.2, 20.9, 21.6, 22.1, 22.0, 21.9, 21.7 - Nominal GDP (Million of U.S. dollars, selected): 41,183; 41,048; 42,914; 45,509; 48,778; 53,518; 58,630; 64,244; 70,306; 110,555; 274,769 ### Public Sector Debt: key projections and indicators (selected) - Public sector debt (percent of GDP): - 2022: 42.7 - 2023: 47.0 - 2024: 48.3 - 2025: 49.4 - 2035: 47.6 - 2045: 48.2 - Public sector external debt (percent of GDP): - 2022: 20.6 - 2023: 21.8 - 2024: 22.8 - 2025: 23.6 - 2035: 21.4 - Change in public sector debt (percent of GDP): -0.5, 4.2, 1.4, 1.0, 0.1, -0.2, -0.4, -0.5, -0.4, -0.3, -0.2, -0.3, -0.2, -0.1, 0.2 (series as presented) - Primary deficit (percent of GDP, selected): 2.2, 4.5, 1.3, 1.3, 2.0, 2.0, 1.7, 1.6, 1.6, 1.6, 1.5, 1.5, 1.7, 2.7, 1.6 (series as presented) - Revenue and grants (percent of GDP, selected): 22.9, 19.3, 19.4, 19.6, 20.8, 21.7, 22.3, 22.7, 22.6, 22.7 - Automatic debt dynamics (percent of GDP, series): -3.4, -1.7, -1.1, -3.2, -3.2, -2.9, -2.9, -2.9, -2.8, -2.7, -2.6, -2.6, -2.5, -2.5, -2.5 - PV of public debt-to-GDP ratio (selected): 39.4, 40.1, 40.5, 40.7, 40.6, 40.5, 40.3, 40.3, 40.2, 40.1, 40.0, 40.0, 41.9 (series as presented) - Debt service-to-revenue and grants ratio (selected): 24.1, 41.7, 51.2, 52.4, 30.6, 26.4, 24.3, 30.0, 33.3, 31.0, 33.7, 31.9, 32.3, 31.8, 34.5 - Gross financing need (percent of GDP, selected): 10.4, 11.6, 11.7, 12.9, 9.7, 9.0, 8.5, 9.8, 10.5, 10.0, 10.5, 10.0, 10.1, 10.0, 10.7 ### Stress tests and sensitivity analysis (selected) - Natural disaster stress test definitions: - Standard natural disaster shock: one-off shock of 10 percentage points of GDP to the debt-to-GDP ratio in FY2025/26; real GDP growth lowers by 1.5 percentage points and exports lower by 3.5 percentage points in the year of the shock. - Larger magnitude natural disaster shock: one-off 20 percentage points of GDP to the debt-to-GDP ratio in FY2025/26; real GDP growth lowers by 5 percentage points and exports lower by 7 percentage points in the year of the shock. - Table 3 (Sensitivity for public and PPG external debt, 2025-2035) — baseline PV of Debt-to-GDP ratio: 14.0 for 2025 and a series of values 14, 14, 14, 13, 13, 13, 13, 13, 13, 13, 13 (as presented). - Table 3 shows alternative scenarios, bound tests, and tailored tests including Combined contingent liabilities, Natural disaster, and the Combination of shocks (B6) with higher ratios under stress (series as presented). - Table 4 (Public debt sensitivity) — baseline PV of debt-to-GDP ratio 2025: 40.1 and projections under scenarios including Natural disaster and Combined contingent liabilities with elevated ratios (series as presented). - Benchmarks and thresholds are reported in the tables and figures; when thresholds are breached bold values indicate breaches (as noted in table footnotes). ### Policy implications and program context - The authorities’ reaffirmation of fiscal anchors and limits (33 percent legislative limit on external debt; annual ceilings on domestic borrowing) underpins the DSA conclusion of low risk of debt distress. - Continued use of concessional external financing and efforts to lengthen debt maturities are consistent with limiting debt service pressures. - The DSA incorporates Nepal’s shift in IDA financing terms and does not change the low risk assessment. - Stress tests—particularly natural disaster and combined shocks—show scenarios under which debt indicators rise materially, underscoring the value of maintaining fiscal buffers, concessional financing, and maturity extension. *Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1nplea2025002-source-pdf.pdf* ### 1. The political landscape in Nepal underwent a drastic change with the ### 1. The political landscape in Nepal underwent a drastic change with the ### Political developments - Youth-led (“Gen Z”) protests on September 9 led to the resignation of Prime Minister K.P. Sharma Oli and triggered the fall of Nepal’s coalition government. - Protests were sparked by the now-lifted ban of social media platforms and fueled by long-standing grievances related to corruption, governance, and inequality, exacerbated by relatively subdued growth and lack of job opportunities. - Nepal’s former chief justice Sushila Karki was sworn in as interim Prime Minister on September 12, becoming Nepal’s first female PM. - President Ram Chandra Poudel has dissolved the Parliament and set March 5, 2026, as the date for general elections. - The interim government has committed to preserving macroeconomic stability while fostering post-protest recovery and pledged to address corruption, strengthen governance, and promote youth employment. ### Economic impact and outlook - Damages from the protests are still being assessed; staff will revisit the outlook as soon as more information is available. - Likely temporary economic disruptions include constraints on commerce and logistics, interruptions to tourism and hospitality, and localized damage to public and private assets. - Prompt formation of an interim administration is expected to contain adverse economic impact; timely election of a new government could help anchor a more stable political landscape and further strengthen private-sector confidence. - The authorities plan to maintain fiscal discipline by reallocating funds toward post-protest reconstruction, election-related spending, and more productive investment projects. - An Integrated Business Recovery Plan offers grants, tax incentives, and operational support; a Reconstruction Fund has been established to assist in restoring affected public and private assets. - The authorities remain committed to preserving macroeconomic and financial stability while supporting a prompt, orderly, and sustainable post-protest recovery. ### Program performance and requests - The pending prior action (PA) for this review has been completed: the Nepal Rastra Bank (NRB) signed a contract with an independent international third-party auditor to assist in-depth on-site inspections of the 10 largest banks. - On August 31, the NRB issued a notice that a contract had been signed on August 28 with the selected consultant to perform a loan portfolio review of 10 commercial banks; auditors have begun their offsite qualitative assessment, with on-site work starting by end-October. - The authorities request the completion of the sixth review under the ECF-supported program and SDR 31.4 million be made available. ### Monetary policy - The NRB will maintain an accommodative monetary policy stance given subdued inflation and weak domestic demand. - Authorities are refining the monetary toolkit, including enhancements to the interest rate corridor and liquidity management instruments, and aim to align the interbank rate with the corridor midpoint to improve monetary transmission. - NRB governance will be improved through the proposed amendment to the NRB Act. - Coordination between monetary and financial sector policies is being strengthened to preserve stability without compromising growth. - Exchange restrictions have been eased and further relaxation committed. ### Financial sector policy - NPL decreased to 4.62 percent in July 2025, compared to 5.24 percent in April, 2025. - Banks with elevated NPLs have been mandated to submit comprehensive management strategies; the NRB is actively supervising these institutions. - The LPR of the ten largest banks is expected to conclude by December 2025; a roadmap requires any bank with capital shortfalls to submit time-bound capitalization plans. - Preparations for establishing an Asset Management Company (AMC) are underway; the AMC will be launched only after improvements to the debt recovery framework and insolvency law are in place. Governance, valuation, and transfer pricing standards will be strictly enforced. - The National Cooperatives Regulatory Authority (NCRA), established in January, is tasked with registering, regulating, and supervising SACCOs; legal amendments are being prepared to strengthen the Deposit and Credit Guarantee Fund (DCGF) and create a separate guarantee fund for SACCOs. A judicial recovery mechanism for problematic SACCOs will be established. - The NRB is implementing risk-based supervision, finalizing the capital adequacy framework review, and introducing the Liquidity Coverage Ratio and Net Stable Funding Ratio in the next fiscal year. Guidelines for working capital loans are being refined and the prompt corrective action framework is being streamlined. - Comprehensive amendments to the NRB Act and the Bank and Financial Institutions Act (BAFIA) to strengthen the bank resolution framework will be finalized by October 2025 and submitted to Parliament in due course. ### Fiscal policy - The Domestic Revenue Mobilization Strategy (DRMS) has been adopted. - Tax revenues rose 10.7 percent year-on-year in the first 11 months of FY2024/25. - The publication of a comprehensive tax expenditure report in July 2025 has been completed. - The FY2025/26 budget introduces revenue-enhancing and progressive policies, including levies on luxury goods, digital services, and high-value imports. - A Customs Compliance Improvement Strategy is under development with IMF support; tax laws are being modernized for digital commerce and IT services. - Capital spending grew by 6.2 percent year-on-year. The FY2025/26 budget introduces sanctions for agencies with delays in project-related decisions; procurement laws are being revised and local procurement documents will be standardized. - The National Project Bank (NPB) has been strengthened with new guidelines approved in March 2025 establishing standardized procedures and unique identifiers for each project; integration with budget systems and a national dashboard for large-scale investments are underway. - Social protection: the National Social Registry (NSR) continues development; the FY2025/26 budget maintains the child grant program in the twenty-five districts with the lowest socio-economic development indicators and expands the public school midday meal program. The FY2025/26 budget raises the eligibility age for the senior citizen allowance while safeguarding entitlements of existing recipients. ### Governance and structural reforms - Substantial progress has been made in strengthening the AML/CFT framework: since February 2025, amendments to the Assets (Money) Laundering Prevention Act and related regulations have been introduced; implementation procedures for UN Security Council Resolutions have been published with IMF support. - Risk-based supervision manuals are being developed for high-risk sectors; onsite and offsite examinations will be conducted and enforcement measures applied as needed. The AML Supervision Department of the NRB has received additional resources. - Work is underway to establish a central beneficial ownership registry and implement National Fit and Proper Guidelines; a centralized electronic Know-Your-Customer (eKYC) system is being implemented. - Six major laws have been passed to improve governance, facilitate investment, and strengthen fiscal discipline, including the Bill on Facilitating Investment and reforms in the cooperative sector, privatization, and public oversight. - A three-year action plan based on High-Level Economic Reform Suggestion Commission recommendations includes streamlining procurement, digitalizing public services, enhancing intergovernmental coordination, and scaling up climate-resilient investments guided by the Nationally Determined Contributions and the National Adaptation Plan. Implementation of the 16th Plan prioritizes productivity and job creation in agriculture, industry, and tradable services. *Supplementary Letter of Intent and Authorities’ statement, Kathmandu, September 25, 2025; Statement by Alternate Executive Director, October 1, 2025.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1nplea2025002-source-pdf.pdf_