## 1.   Demographic Transition, Youth Unemployment, and Informality

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### Governance weaknesses as a structural impediment
- Persistent weak governance and high perceived corruption remain structural constraints despite gradual progress in formal institutions (notably in Public Financial Management).
- Implementation challenges: limited administrative capacity; uneven enforcement; coordination failures across agencies; frequent political and bureaucratic turnover.
- Observed frictions lead to:
  - persistent delays in project execution;
  - low public investment efficiency;
  - weak contract enforcement;
  - higher transaction costs for firms and discouraged long-term private investment.
- Consequence: subdued capital accumulation and productivity growth; greater vulnerability to shocks.

### Demographic pressures, youth labor market outcomes, and informality — key findings
- Working-age population now accounts for roughly two-thirds of the total population.
- NEET (not in employment, education, or training) rates exceed 30 percent.
- Youth unemployment is elevated relative to peers.
- Educated young workers are concentrated in low-productivity informal activities.
- Women face additional barriers to participation and advancement, limiting effective use of human capital.
- Demographic pressures have raised expectations for opportunity and mobility faster than the economy can deliver, turning the demographic transition into a source of social pressure and youth exclusion.

### Migration and remittances — buffers with structural costs
- Around 2.2 million Nepalese—about 7½ percent of the population or around 12 percent of the working-age cohort—reside abroad (2021 National Population and Housing Census).
- Migration is heavily male-skewed: around 82 percent of all absentees are male; the female share rose from 12.4 percent in 2011 to 17.8 percent in 2021.
- Between 2011 and 2021, the total number of Nepalese living abroad increased by around 14 percent; post-2021 application trends suggest continued migration pressure.
- More than half of households rely on remittances, which have amounted to roughly one-third of GDP in recent years.
- Structural costs associated with remittance reliance:
  - Remittances disproportionately absorbed by import-intensive consumption and repayment of low-productivity loans, including real estate borrowing.
  - Over time this contributes to an overvalued real exchange rate, eroded competitiveness, constrained expansion of job-rich tradable sectors.
  - Migration-induced labor shortages in non-tradable sectors weaken the link between wage growth and productivity.

### Low-trust, low-investment equilibrium dynamics
- Interaction of weak governance, limited domestic opportunities, migration dependence, and political volatility generates a low-investment, low-trust equilibrium:
  - Weak institutions → depressed investment and productivity → constrained opportunity creation.
  - Constrained opportunities → outward migration and reliance on remittances.
  - Remittances → private cushioning of hardships but can weaken incentives for public-sector reform in fragile institutional settings.
  - Political volatility and leadership turnover disrupt reform continuity and credibility.
- Perceptions of unfairness and elite capture, especially among youth, amplify grievances and raise the risk of social unrest.
- Cross-country evidence indicates social unrest episodes carry persistent output losses, with larger effects where institutions are weaker.

### Policy priorities and sequencing to break the vicious cycle
- Central message: durable, inclusive growth requires a well-sequenced reform strategy that frontloads credible governance improvements, unlocks private investment and job creation, and strengthens labor-market and human-capital systems.
- Priority 1 — Strengthen institutional credibility and public service delivery:
  - Reduce discretion and ensure even enforcement of rules.
  - Improve transparency in public decision making.
  - Strengthen reliability and perceived fairness of citizen-facing systems (recruitment, licensing, core public services) to reduce youth grievances.
- Priority 2 — Unlock private investment, competition, and productive diversification:
  - Improve business environment, contract enforcement, and market competition.
  - Provide a predictable regulatory framework and level playing field to crowd in private investment and job-creating firms in higher productivity sectors.
- Priority 3 — Raise quality and effectiveness of public investment:
  - Prioritize and execute projects that relieve infrastructure and service bottlenecks.
  - Strengthen project selection, execution discipline, and maintenance planning to raise returns and preserve asset value.
- Priority 4 — Promote labor market inclusion and more productive use of remittances:
  - Strengthen links between education and employment.
  - Expand opportunities for skills upgrading.
  - Support labor market institutions that facilitate mobility while protecting basic standards.
  - Deepen financial intermediation and expand credible domestic investment options to channel remittances toward entrepreneurship, skills accumulation, and reintegration pathways.
- Implementation guidance:
  - Anchor reforms in stronger governance to increase effectiveness and durability.
  - Use clear communication, realistic sequencing, and broad-based ownership to sustain reform momentum and policy continuity given capacity constraints and political volatility.

### Macroeconomic benefits of governance reforms — context and modeling evidence
- Third-party Indicators (TPIs) show corruption in Nepal has declined somewhat relative to the past decade but remains highly prevalent; governance indicators have improved but continue to lag regional peers in government effectiveness, regulatory quality, control of corruption, and rule of law.
- Cross-country evidence links high corruption and weak governance with lower GDP growth, reduced investment, lower tax revenue, and higher inequality.
- Country-level IMF analysis using the Debt, Investment, Growth (DIG-series) model estimates positive growth impacts from fiscal and private sector governance reforms. Estimated impacts in other country cases (DIG model results):
  - Sri Lanka: Real GDP increases by more than 7 percent over 10-year period.
  - Congo: Non-oil real GDP rises by 18 percent over 10-year period.
  - Iraq: Real GDP increases by 10.2 percent over 10-year period.
  - Uganda: Non-oil real GDP growth increases by 1.8 percentage points over 5-year period.

### Governance context, reform agenda, and recent ECF progress
- IMF Governance and Corruption Diagnostic (GCD) for Nepal is underway to assess governance weaknesses across public financial management, revenue administration, financial sector oversight, AML/CFT, rule of law, and anti-corruption frameworks.
- Nepal’s new government elected in March 2026 published a 100-Point Agenda including:
  - increasing transparency in public procurement process;
  - digitalizing public service delivery;
  - automating tax administration;
  - restructuring customs system;
  - issuing a new National Anti-Corruption Action Plan;
  - designing a National Integrity Policy to manage conflicts of interest and protect whistleblowers;
  - restructuring the National Vigilance Center.
- Diagnostic findings and reform priorities highlighted:
  - TADAT identified areas for improving tax administration and compliance that could boost revenue.
  - IMF Fiscal Affairs Department analysis suggests scope for increasing Nepal’s VAT efficiency towards that of upper-middle income countries.
  - Public investment efficiency has declined since the past decade relative to the most efficient economies; PIMA identified areas to improve public investment management practices.
  - Private investment slowed from more than 20 percent of GDP in the pre-pandemic years to about 15 percent of GDP as of FY2025; private-sector-oriented governance and anti-corruption reforms could help reverse this trend.

### Recent reforms under ECF (selected) and priorities ahead
- Fiscal governance reforms under ECF completed:
  - Approved domestic revenue mobilization strategy (DRMS);
  - Adopted customs compliance improvement strategy;
  - Published tax expenditure report;
  - Approved PIMA Action Plan and revised National Project Bank Guidelines;
  - Consolidated extra-budgetary units (EBUs) in central accounts;
  - Published financial statement of operational public enterprises (PEs);
  - Published fiscal risk statement.
- Fiscal governance priorities ahead:
  - Continue to implement DRMS on tax administration, including on compliance and audit, and tax expenditure rationalization;
  - Continue to implement PIMA Action Plan, enforce National Project Bank Guidelines, and enhance capital budget execution and budget credibility;
  - Strengthen financial oversight of PEs and EBUs; further increase coverage of EBUs in central accounts;
  - Broaden fiscal risk assessment; upgrade medium-term fiscal framework and develop a fiscal strategy;
  - Increase digitalization in public administration and services.
- Financial sector and integrity actions completed:
  - Completed onsite loan portfolio review (LPR) for 10 largest banks and approved post-LPR roadmap;
  - Implemented onsite Supervisory Information System for commercial banks;
  - Audited NRB’s financial statement by internationally experienced auditor;
  - Amended AML law.
- Financial sector priorities ahead:
  - Implement post-LPR roadmap to enhance corporate governance of banks, regulatory compliance, supervisory processes, and credit practices; reform related-party lending;
  - Amend NRB Act to strengthen NRB’s mandate and governance, and bank resolution framework;
  - Effectively implement AML/CFT framework to improve financial intelligence, investigation and confiscation framework, and beneficial ownership transparency;
  - Enhance institutional independence of key government agencies and anti-corruption agency, and enforce asset declaration and conflicts of interest systems.

### DIG-series model approach, calibration, and targeted distortions
- Model: Debt, Investment, Growth (DIG-series) general equilibrium model extended to Nepal-specific conditions.
- Three economic distortions targeted:
  - Private investment distortion (휿휿) — cost/time/resources for businesses to access credit, public resources, regulatory approvals that reduce return to private capital (푅푅푡푘).
  - Public investment efficiency (휖휖푡) — fraction of government capital expenditure that becomes productive public capital (퐾푡+1 G = (1−훿G)퐾tG + 휖휖t I t G).
  - VAT collection inefficiency (휗휗) — reduces government revenue from VAT (and other taxes) and thus fiscal space for public investment and transfers.
- Calibration to Nepal:
  - Public investment efficiency relative to the most efficient economies is set at 67 percent.
  - VAT collection efficiency is set at 45 percent.
  - Private investment distortion calibrated to reflect potential growth dividends from structural reforms (based on Aligishiev et al. 2023 and IMF Structural Reform Dividends Toolkit).
- The model evaluates sets of fiscal governance and private-sector governance reforms that jointly reduce the three distortions.

### Scenario design (phasing and depth)
- Central Scenario:
  - Reforms phased in over 5 years with all three distortions reduced to benchmark levels:
    - Private investment-to-GDP ratio increases to about 20 percent over a 10-year period to reach half-way to the pre-pandemic average;
    - Public investment efficiency rises to 80 percent relative to the most efficient economies;
    - VAT collection efficiency improves to 52.5 percent to close the gap with upper middle-income countries by half.
- Alternative Scenario 1 (Deeper reforms):
  - Reforms phased in over 5 years but more ambitious:
    - Private investment-to-GDP ratio raised back to the pre-pandemic average;
    - Public investment efficiency increases to 90 percent relative to the most efficient economies;
    - VAT collection efficiency fully closes the gap with upper middle-income countries.
- Alternative Scenario 2 (Immediate partial reversal):
  - Half of the governance reform efforts undertaken in the Central Scenario during the first five years are immediately reversed in the sixth year.
- Alternative Scenario 3 (Public investment efficiency spillovers):
  - Public investment efficiency rises to 80 percent (as in Central Scenario) and these improvements reduce private investment distortions by half of the magnitude assumed in the Central Scenario (i.e., a 50 percent spillover effect).

### Central Scenario quantitative findings (10-year horizon and distributional effects)
- VAT collection efficiency reforms (standalone):
  - Raise private investment and consumption levels by about 3 percent from the steady state over 10 years;
  - Boost output (real GDP level) by around 3 percent;
  - Reduce public debt-to-GDP ratio by about 6 percentage points.
- Public investment efficiency reforms (standalone):
  - Increase private investment and consumption by 3 percent from the steady state;
  - Raise output by around 3 percent over 10 years.
- Reforms reducing private investment distortions (standalone):
  - Boost private investment by 10 percent and private consumption by 6 percent over 10 years;
  - Lift output by about 7 percent from the steady state;
  - Reduce public debt-to-GDP ratio by around 4 percentage points.
- Combined reform package (all three implemented simultaneously):
  - Output (real GDP level) increases by nearly 13 percent over 10 years (average 1.3 percent annually);
  - Based on impact on real GDP levels over 10 years, real GDP growth in 2035 would be about 1.3 percentage points higher.
- Distributional effects (Central Scenario, 10 years):
  - VAT efficiency reform: consumption for poor households increases by around 5 percent from the steady state; for rich households about 2 percent.
  - Private investment distortion reduction: poor households gain about 11 percent in consumption; rich households gain close to 4 percent.
  - Combined package: reduces consumption inequality by nearly 10 percent over 10 years (Gini-based consumption inequality).

### Alternative scenarios and sensitivity to reform commitment
- Alternative Scenario 1 (Deeper reforms):
  - Output (real GDP level) rises by 23 percent from the steady state over 10 years (average 2.3 percent annually);
  - Public debt-to-GDP ratio declines markedly.
- Alternative Scenario 2 (Reversal after year 5):
  - Half-reversal in year 6 erodes macro gains: output gains at the end of 10 years remain about 40 percent lower than under the Central Scenario, with reduced fiscal gains.
- Implication: strong political commitment and sustained reform implementation are critical to secure and amplify macroeconomic and fiscal gains.

### Public investment efficiency spillovers (Alternative Scenario 3)
- A 50 percent spillover from public investment efficiency improvements to private investment distortions:
  - Doubles the gains in output (real GDP level) and private investment from the steady state over 10 years compared to the standalone public investment efficiency reform under the Central Scenario.
  - Decline in public debt-to-GDP and boost to consumption are also amplified due to higher tax revenue, increased employment, and fiscal space for social transfers.

### Policy implications and conclusions
- A comprehensive, sustained, and coordinated package of governance reforms can yield significant macroeconomic gains for Nepal in terms of:
  - Higher private investment and consumption;
  - Larger output (real GDP) increases;
  - Improved public debt dynamics;
  - Reduced consumption inequality, with disproportionate benefits for liquidity-constrained poor households.
- Reforms that address private investment distortions deliver the largest standalone growth effects; however, coordinated implementation across fiscal governance, tax administration, public investment management, and private-sector governance produces larger and complementary gains.
- Given Nepal’s large development needs, medium-term growth can be supported not only by scaling-up public investment but also by raising its efficiency through governance reforms.
- Digitalization of government processes, stronger tax administration, improved public investment management, strengthened financial sector governance, and effective AML/CFT and anti-corruption measures are key priorities to realize these macro-fiscal and distributional benefits.
- Sustained political commitment to the reform agenda is essential; partial reversals materially erode macroeconomic and fiscal gains.

*Source: GOV ERNANCE, DEMOGRAPHIC TRANSITION, AND MIGRATION IN NEPAL (Content unit: 1nplea2026003), International Monetary Fund.*

### 1.   Demographic Transition, Youth Unemployment, and Informality  ____________________ 4

### 1.   Demographic Transition, Youth Unemployment, and Informality

### Governance weaknesses as a structural impediment
- Persistent weak governance and high perceived corruption remain structural constraints despite gradual progress in formal institutions (notably in Public Financial Management).
- Implementation challenges cited: limited administrative capacity; uneven enforcement; coordination failures across agencies; frequent political and bureaucratic turnover.
- Observed frictions lead to:
  - persistent delays in project execution;
  - low public investment efficiency;
  - weak contract enforcement;
  - higher transaction costs for firms and discouraged long-term private investment.
- Consequence: subdued capital accumulation and productivity growth; greater vulnerability to shocks.

### Demographic transition, youth unemployment, and informality — key findings
- Working-age population now accounts for roughly two-thirds of the total population.
- NEET (not in employment, education, or training) rates exceed 30 percent.
- Youth unemployment is elevated relative to peers.
- Educated young workers are concentrated in low-productivity informal activities.
- Women face additional barriers to participation and advancement, limiting effective use of human capital.
- Demographic pressures have raised expectations for opportunity and mobility faster than the economy can deliver, turning the demographic transition into a source of social pressure and youth exclusion.

### Migration and remittances — buffers with structural costs
- Around 2.2 million Nepalese—about 7½ percent of the population or around 12 percent of the working-age cohort—reside abroad (2021 National Population and Housing Census).
- Migration is heavily male-skewed: around 82 percent of all absentees are male; the female share rose from 12.4 percent in 2011 to 17.8 percent in 2021.
- Between 2011 and 2021, the total number of Nepalese living abroad increased by around 14 percent; post-2021 application trends suggest continued migration pressure.
- More than half of households rely on remittances, which have amounted to roughly one-third of GDP in recent years.
- Structural costs associated with remittance reliance:
  - Remittances disproportionately absorbed by import-intensive consumption and repayment of low-productivity loans, including real estate borrowing.
  - Over time this contributes to an overvalued real exchange rate, eroded competitiveness, constrained expansion of job-rich tradable sectors.
  - Migration-induced labor shortages in non-tradable sectors weaken the link between wage growth and productivity.

### Self-reinforcing low-trust, low-investment equilibrium
- Interaction of weak governance, limited domestic opportunities, migration dependence, and political volatility generates a low-investment, low-trust equilibrium:
  - Weak institutions → depressed investment and productivity → constrained opportunity creation.
  - Constrained opportunities → outward migration and reliance on remittances.
  - Remittances → private cushioning of hardships but can weaken incentives for public-sector reform in fragile institutional settings.
  - Political volatility and leadership turnover disrupt reform continuity and credibility.
- Perceptions of unfairness and elite capture, especially among youth, amplify grievances and raise the risk of social unrest.
- Cross-country evidence indicates social unrest episodes carry persistent output losses, with larger effects where institutions are weaker.

### Policy priorities and sequencing to break the vicious cycle
- Central policy message: durable, inclusive growth requires a well-sequenced reform strategy that frontloads credible governance improvements, unlocks private investment and job creation, and strengthens labor-market and human-capital systems.
- Priority 1 — Strengthen institutional credibility and public service delivery:
  - Reduce discretion and ensure even enforcement of rules.
  - Improve transparency in public decision making.
  - Strengthen reliability and perceived fairness of citizen-facing systems (recruitment, licensing, core public services) to reduce youth grievances.
- Priority 2 — Unlock private investment, competition, and productive diversification:
  - Improve business environment, contract enforcement, and market competition.
  - Provide a predictable regulatory framework and level playing field to crowd in private investment and job-creating firms in higher productivity sectors.
- Priority 3 — Raise quality and effectiveness of public investment:
  - Prioritize and execute projects that relieve infrastructure and service bottlenecks.
  - Strengthen project selection, execution discipline, and maintenance planning to raise returns and preserve asset value.
- Priority 4 — Promote labor market inclusion and more productive use of remittances:
  - Strengthen links between education and employment.
  - Expand opportunities for skills upgrading.
  - Support labor market institutions that facilitate mobility while protecting basic standards.
  - Deepen financial intermediation and expand credible domestic investment options to channel remittances toward entrepreneurship, skills accumulation, and reintegration pathways.
- Implementation guidance:
  - Anchor reforms in stronger governance to increase effectiveness and durability.
  - Use clear communication, realistic sequencing, and broad-based ownership to sustain reform momentum and policy continuity given capacity constraints and political volatility.

### Macroeconomic benefits of governance reforms (context and modeling evidence)
- Third-party Indicators (TPIs) show corruption in Nepal has declined somewhat relative to the past decade but remains highly prevalent; governance indicators have improved but continue to lag regional peers in government effectiveness, regulatory quality, control of corruption, and rule of law.
- Cross-country evidence links high corruption and weak governance with lower GDP growth, reduced investment, lower tax revenue, and higher inequality.
- Country-level IMF analysis using the Debt, Investment, Growth (DIG-series) model estimates positive growth impacts from fiscal and private sector governance reforms. Estimated impacts in other country cases (DIG model results):
  - Sri Lanka: Real GDP increases by more than 7 percent over 10-year period.
  - Congo: Non-oil real GDP rises by 18 percent over 10-year period.
  - Iraq: Real GDP increases by 10.2 percent over 10-year period.
  - Uganda: Non-oil real GDP growth increases by 1.8 percentage points over 5-year period.

*Source: GOV ERNANCE, DEMOGRAPHIC TRANSITION, AND MIGRATION IN NEPAL (Content unit: 1nplea2026003), International Monetary Fund.*

### 3. Given the negative impact of corruption and governance weaknesses on fiscal

### 1nplea2026003 - 3. Given the negative impact of corruption and governance weaknesses on fiscal

### Governance context and reform agenda
- Nepal has progressed under the Extended Credit Facility (ECF) program in introducing fiscal governance reforms and governance reforms to improve the business environment, including through the financial sector channel (Table 2).
- The IMF Governance and Corruption Diagnostic (GCD) for Nepal is underway and will assess governance weaknesses in public financial management, revenue administration, financial sector oversight, AML/CFT, rule of law, and anti-corruption legal and institutional framework.
- Nepal’s new government elected in March 2026 has published a 100-Point Agenda that includes:
  - increasing transparency in public procurement process;
  - digitalizing public service delivery;
  - automating tax administration;
  - restructuring customs system;
  - issuing a new National Anti-Corruption Action Plan;
  - designing a National Integrity Policy to manage conflicts of interest and protect whistleblowers;
  - restructuring the National Vigilance Center.
- The government also published the Good Governance Blueprint developed by the interim government on strengthening governance and public service delivery.
- Diagnostic findings and reform priorities highlighted:
  - Tax Administration Diagnostic Assessment Tool (TADAT) identified several areas for improving tax administration and compliance that could boost revenue.
  - IMF Fiscal Affairs Department analysis suggests scope for increasing Nepal’s value-added tax (VAT) efficiency towards that of upper-middle income countries.
  - Public investment efficiency has declined since the past decade relative to the most efficient economies; the Public Investment Management Assessment (PIMA) identified areas to improve public investment management practices.
  - Private investment slowed from more than 20 percent of GDP in the pre-pandemic years to about 15 percent of GDP as of FY2025; private-sector-oriented governance and anti-corruption reforms could help reverse this trend.

### Recent reforms under ECF and priorities ahead (selected)
- Fiscal governance reforms under ECF:
  - Approved domestic revenue mobilization strategy (DRMS);
  - Adopted customs compliance improvement strategy;
  - Published tax expenditure report;
  - Approved PIMA Action Plan and revised National Project Bank Guidelines;
  - Consolidated extra-budgetary units (EBUs) in central accounts;
  - Published financial statement of operational public enterprises (PEs);
  - Published fiscal risk statement.
- Fiscal governance priorities ahead:
  - Continue to implement DRMS on tax administration, including on compliance and audit, and tax expenditure rationalization;
  - Continue to implement PIMA Action Plan, enforce National Project Bank Guidelines, and enhance capital budget execution and budget credibility;
  - Strengthen financial oversight of PEs and EBUs; further increase coverage of EBUs in central accounts;
  - Broaden fiscal risk assessment; upgrade medium-term fiscal framework and develop a fiscal strategy;
  - Increase digitalization in public administration and services.
- Financial sector, financial integrity, and other reforms under ECF:
  - Completed onsite loan portfolio review (LPR) for 10 largest banks and approved post-LPR roadmap;
  - Implemented onsite Supervisory Information System for commercial banks;
  - Audited NRB’s financial statement by internationally experienced auditor;
  - Amended AML law.
- Financial sector priorities ahead:
  - Implement post-LPR roadmap to enhance corporate governance of banks, regulatory compliance, supervisory processes, and credit practices; reform related-party lending;
  - Amend NRB Act to strengthen NRB’s mandate and governance, and bank resolution framework;
  - Effectively implement AML/CFT framework to improve financial intelligence, investigation and confiscation framework, and beneficial ownership transparency;
  - Enhance institutional independence of key government agencies and anti-corruption agency, and enforce asset declaration and conflicts of interest systems.

### Quantifying macroeconomic impact: DIG-series model approach
- Model: Debt, Investment, Growth (DIG-series) general equilibrium model extended to Nepal-specific conditions (Box 1).
- Three economic distortions the model targets:
  - Private investment distortion (휿휿) — cost/time/resources for businesses to access credit, public resources, regulatory approvals that reduce return to private capital (푅푅푡푘).
  - Public investment efficiency (휖휖푡) — fraction of government capital expenditure that becomes productive public capital (퐾푡+1 G = (1−훿G)퐾tG + 휖휖t I t G).
  - VAT collection inefficiency (휗휗) — reduces government revenue from VAT (and other taxes) and thus fiscal space for public investment and transfers (public debt equation specified in Box 1).
- Calibration to Nepal:
  - Public investment efficiency relative to the most efficient economies is set at 67 percent.
  - VAT collection efficiency is set at 45 percent.
  - Private investment distortion calibrated to reflect potential growth dividends from structural reforms (based on Aligishiev et al. 2023 and IMF Structural Reform Dividends Toolkit).
- The model does not simulate specific legal reforms but evaluates sets of fiscal governance and private-sector governance reforms (e.g., priorities in Table 2) that jointly reduce the three distortions.

### Scenario design (phasing and depth)
- Central Scenario:
  - Reforms phased in over 5 years with all three distortions reduced to benchmark levels:
    - Private investment-to-GDP ratio increases to about 20 percent over a 10-year period to reach half-way to the pre-pandemic average;
    - Public investment efficiency rises to 80 percent relative to the most efficient economies;
    - VAT collection efficiency improves to 52.5 percent to close the gap with upper middle-income countries by half.
- Alternative Scenario 1 (Deeper reforms):
  - Reforms phased in over 5 years but more ambitious:
    - Private investment-to-GDP ratio raised back to the pre-pandemic average;
    - Public investment efficiency increases to 90 percent relative to the most efficient economies;
    - VAT collection efficiency fully closes the gap with upper middle-income countries.
- Alternative Scenario 2 (Immediate partial reversal):
  - Half of the governance reform efforts undertaken in the Central Scenario during the first five years are immediately reversed in the sixth year.
- Alternative Scenario 3 (Public investment efficiency spillovers):
  - Public investment efficiency rises to 80 percent (as in Central Scenario) and these improvements reduce private investment distortions by half of the magnitude assumed in the Central Scenario (i.e., a 50 percent spillover effect).

### Central Scenario quantitative findings (10-year horizon and distributional effects)
- VAT collection efficiency reforms (standalone):
  - Raise private investment and consumption levels by about 3 percent from the steady state over 10 years;
  - Boost output (real GDP level) by around 3 percent;
  - Reduce public debt-to-GDP ratio by about 6 percentage points.
- Public investment efficiency reforms (standalone):
  - Increase private investment and consumption by 3 percent from the steady state;
  - Raise output by around 3 percent over 10 years.
- Reforms reducing private investment distortions (standalone):
  - Boost private investment by 10 percent and private consumption by 6 percent over 10 years;
  - Lift output by about 7 percent from the steady state;
  - Reduce public debt-to-GDP ratio by around 4 percentage points.
- Combined reform package (all three implemented simultaneously):
  - Output (real GDP level) increases by nearly 13 percent over 10 years (average 1.3 percent annually);
  - Based on impact on real GDP levels over 10 years, real GDP growth in 2035 would be about 1.3 percentage points higher.
- Distributional effects (Central Scenario, 10 years):
  - VAT efficiency reform: consumption for poor households increases by around 5 percent from the steady state; for rich households about 2 percent.
  - Private investment distortion reduction: poor households gain about 11 percent in consumption; rich households gain close to 4 percent.
  - Combined package: reduces consumption inequality by nearly 10 percent over 10 years (Gini-based consumption inequality).

### Alternative scenarios and sensitivity to reform commitment
- Alternative Scenario 1 (Deeper reforms):
  - Output (real GDP level) rises by 23 percent from the steady state over 10 years (average 2.3 percent annually);
  - Public debt-to-GDP ratio declines markedly.
- Alternative Scenario 2 (Reversal after year 5):
  - Half-reversal in year 6 erodes macro gains: output gains at the end of 10 years remain about 40 percent lower than under the Central Scenario, with reduced fiscal gains.
- Implication: strong political commitment and sustained reform implementation are critical to secure and amplify macroeconomic and fiscal gains.

### Public investment efficiency spillovers (Alternative Scenario 3)
- A 50 percent spillover from public investment efficiency improvements to private investment distortions:
  - Doubles the gains in output (real GDP level) and private investment from the steady state over 10 years compared to the standalone public investment efficiency reform under the Central Scenario.
  - Decline in public debt-to-GDP and boost to consumption are also amplified due to higher tax revenue, increased employment, and fiscal space for social transfers.

### Policy implications and conclusions
- A comprehensive, sustained, and coordinated package of governance reforms can yield significant macroeconomic gains for Nepal in terms of:
  - Higher private investment and consumption;
  - Larger output (real GDP) increases;
  - Improved public debt dynamics;
  - Reduced consumption inequality, with disproportionate benefits for liquidity-constrained poor households.
- Reforms that address private investment distortions deliver the largest standalone growth effects; however, coordinated implementation across fiscal governance, tax administration, public investment management, and private-sector governance produces larger and complementary gains.
- Given Nepal’s large development needs, medium-term growth can be supported not only by scaling-up public investment but also by raising its efficiency through governance reforms.
- Digitalization of government processes, stronger tax administration, improved public investment management, strengthened financial sector governance, and effective AML/CFT and anti-corruption measures are key priorities to realize these macro-fiscal and distributional benefits.
- Sustained political commitment to the reform agenda is essential; partial reversals materially erode macroeconomic and fiscal gains.

*Source: IMF staff calculations and analysis as presented in the supplied content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2026/english/1nplea2026003.pdf_