## Nepal—Assessment Letter for the Asian Development Bank

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### Macroeconomic outcomes 2006/07
- Real GDP rose by 2½ percent, notwithstanding poor weather conditions which affected paddy production, and political uncertainties which continued to dampen nonagricultural activity.
- With monetary management by Nepal Rastra Bank (NRB) geared to maintaining the exchange rate peg to the Indian rupee, headline inflation remains broadly in line with price developments in India.
- The 2006/07 budget exceeded its revenue target, with a strong tax administration effort.
- Current spending was lower than budgeted, reflecting savings from the postponement of elections to the next fiscal year, and capital spending picked up.
- While external aid fell short of the budgeted amount, domestic financing was limited.
- International reserves were around US$2 billion (6½ months of goods and services imports), supported by robust remittances.

### Near-term prospects and macroeconomic policy
- On balance, real GDP growth could rise to 4 percent in 2007/08, subject to favorable agricultural performance, and continued strength in tourist arrivals with a knock on effect on the service sector more generally.
- The unsettled political environment poses the most immediate risk to growth.
- The 2007/08 budget is appropriately focused on social sectors and infrastructure spending in rural areas, a higher targeted revenue-to-GDP ratio, and limited domestic financing.
- The exchange rate peg to the India rupee should help continue to contain inflation to levels close to those in India.
- Structural reforms and infrastructure investments are key to maintaining competitiveness over the medium term.

### Structural reform progress and priorities
- Structural reforms have progressed, but much remains to be accomplished.
- As part of the PRGF-supported program in 2006/07−2007/08, progress has been made in tax administration, and financial and public sector reforms.
- Continued reforms in these areas are key for sustained growth and poverty reduction.

### Specific reform recommendations
- Fiscal reforms:
  - Further improve tax administration to reduce leakages and broaden the tax base.
  - Improve public expenditure management and increase fiscal transparency.
- Financial sector reforms:
  - Reforms can help improve intermediation and financial stability.
  - While the revised Bank and Financial Institutions Act would provide a strengthened framework for financial sector integrity, the NRB needs to further address gaps in its supervisory framework.
  - Progress is required in loan recovery from large, willful defaulters to improve the financial condition of the two largest commercial banks.
- Energy sector pricing:
  - The October price adjustments for petroleum products are welcome, but further increases and the introduction of an automatic pricing mechanism are required to place the loss-making Nepal Oil Corporation’s finances on a sustainable footing.

### Status of IMF relations
- The fifth (and final) review under the Poverty Reduction and Growth Facility was completed on November 9, 2007.
- The 2008 Article IV consultation is slated for spring 2008.

*Source: Nepal—Assessment Letter for the Asian Development Bank, November 16, 2007.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/np/pp/2007/eng/_111607.pdf_