## 2006. Directors commended the authorities for maintaining macroeconomic stability. ## Source details **Canonical URL:** [2006. Directors commended the authorities for maintaining macroeconomic stability.](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06407.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06407.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06407.pdf.json) --- ### Executive summary and staff recommendation - Government request: completion of outstanding PRGF reviews and extension of the PRGF arrangement by one year to November 18, 2007. - Staff recommends approval of: - Waivers for nonobservance of performance criteria, - Completion of the second and third reviews, - Extension of the arrangement. - Key program priorities: - Fiscal reforms to raise revenue collection, reduce leakages, enhance audit, improve taxpayer services in the Inland Revenue and Customs Departments, and strengthen fiscal transparency. - Financial sector reforms to improve the banking framework and loan recovery, re-engineer NRB, and restructure troubled commercial and development banks. - Public sector reforms to reduce flow losses of Nepal Oil Corporation (NOC) and resolve accumulated suppliers’ credits. - Waiver requests and SPC status: - Waivers requested for eight SPCs: two on customs administration; two on operationalization of the large taxpayer office in the Inland Revenue Department; compulsory retirement scheme in NRB; finalization of NRB’s 2003/04 accounts by an international auditor; finalization of 2003/04 accounts of NOC by an international auditor; implementation of an automatic pricing mechanism for oil products. - Actions related to SPCs (i)–(v) implemented; for SPC (vi) understandings reached on corrective measures and a revised time frame though a revised performance criterion has not been set. ### Macroeconomic outlook and key indicators - Growth and inflation: - Real GDP growth: estimated less than 2 percent in 2005/06; projected to increase to 3−4 percent in 2006/07. - Headline inflation: rose to 8¼ percent (12-month basis) in mid-July 2006. - Underlying CPI inflation: projected to remain around 5−6 percent; underlying inflation excludes the ten most volatile items (about 35 percent of the CPI basket). - Fiscal performance and deficits: - Revenue fell short of the 2005/06 budget target by 1½ percent of GDP. - Domestically financed deficit in 2005/06 was 1½ percent of GDP (budgeted ¾ percent of GDP). - Budgeted revenue-to-GDP: 12¼ percent in 2005/06 rising to 13 percent in 2006/07. - Overall deficit (before grants) projected to rise to 6¾ percent of GDP in 2006/07. - External aid projected to increase from 3¾ percent of GDP in 2005/06 to 6¼ percent in 2006/07. - Overall deficit (after grants) projected at 3 percent of GDP and domestically financed deficit at 1½ percent of GDP for 2006/07. - Balance of payments and reserves: - Current account (excluding official transfers) shifted into surplus in 2005/06 as private remittances rose sharply. - International reserves rose to US$1¾ billion (6½ months of imports of goods and services) in mid-July 2006. - Reserves projected to remain around 6 months of imports over the medium term with continued remittances and higher aid. - Donor support (reported): - India: budget grant of around US$20 million for 2006/07 and a concessional line of credit of US$100 million for project financing. - AsDB: approved a rural finance loan in October 2006 and considering an education sector loan. - World Bank: planned to expand allocation for the Poverty Alleviation Fund and provide budget support contingent on fiscal need and structural reforms progress. - Headline statistics: - Nominal GDP (2004/05): US$7,477 million - Population (2004/05): 25.2 million - GDP per capita (2004/05): US$296.7 - Poverty rate: 31 percent (2003/04) ### Risks and political context - Political developments: - Ceasefire in place; peace talks with Communist Party of Nepal (Maoist) begun. - Roadmap discussions: interim constitution, combatants’ arms management, interim government with CPN(M) participation, constituent assembly elections (timeframe not finalized). - Program risks: - Primary risk: political instability and constraints on policy implementation until the peace process advances. - Maoist participation in government introduces policy uncertainties, especially on labor market reforms and privatization/liquidation of insolvent SOEs. - Maoist leaders expressed willingness to work with multilateral institutions while emphasizing nationally driven priorities. ### Fiscal policy orientation for 2006/07 and medium term - Expenditure and revenue priorities: - Scale up social sector and public investment on health, education, and rural infrastructure via the Medium Term Expenditure Framework. - Allocation for security-related spending reduced by ½ percent of GDP to 2¾ percent of GDP. - Increase grants for village development committees to address weak local implementation capacity. - Revenue rebound expected from 12¼ percent of GDP in 2005/06 to 13 percent of GDP in 2006/07; part of increase from higher customs duty rates and higher corporate and excise taxes on alcohol, beer, and cigarettes (about ⅓ percent of GDP). - Debt outlook and medium-term targets: - Public debt projected to remain on a downward trajectory over the medium term despite higher deficits in 2006/07. - Medium-term objectives: raise resources for infrastructure and reforms while lowering public debt-to-GDP ratio. - Revenue-to-GDP target: increase to 13½ percent by 2008/09 through tighter administration and base broadening. - Deficit targets: overall deficit around 3 percent of GDP; domestically financed deficit around 1½ percent of GDP. - Provision for reform costs: room to meet costs, bulk would be interest payments on recapitalization of insolvent commercial banks (recapitalization with external assistance, most likely World Bank). - Public enterprise liabilities to resolve outstanding SOE liabilities expected in the range of ¼−¾ percent of GDP. - Excluding liabilities from financial sector and public enterprise reforms (expected 7−8 percent of GDP), public debt-to-GDP projected to decline from 56¼ percent at end-2005/06 to around 50 percent over the medium term. - External vulnerability: NPV of debt-to-exports ratio estimated at 165 percent at end-2005/06 (above indicative threshold). ### Monetary and exchange rate policies and liquidity management - Exchange rate policy: - NRB intends to maintain the exchange rate peg to the Indian rupee; peg helps anchor inflation expectations. - Level of the peg viewed as broadly appropriate despite real exchange rate appreciation since early 2005; real exchange rate oscillated within 5 percent of its mean level between 2000 and mid-2006. - Emphasis on structural reforms and infrastructure investments to improve external competitiveness rather than changing level of peg. - Money and credit projections for 2006/07: - Broad money growth: projected at around 16 percent. - Reserve money growth: NRB intends to restrict to 16 percent. - Real GDP growth assumption: 3−4 percent. - Real private credit growth: 8−9 percent. - NRB net foreign assets target: increase by US$110 million (MEFP ¶10). - Liquidity management challenges and measures: - Estimated remittance inflows: around US$1½ billion in 2005/06. - Net foreign currency purchases to ease upward pressure on the exchange rate: around US$300 million in 2005/06, with substantial reduction in NRB T-bill holdings. - With limited NRB T-bill stock, continued remittances and higher aid pose a significant challenge for 2006/07. - Mission suggestions: acquire additional stock of T-bills from the Ministry of Finance; explore allowing larger volume of import payments to India in convertible currencies (MEFP ¶11); issue NRB bills. ### Structural reforms — tax administration, transparency, and customs - 2006/07 declared a year to improve compliance; measures focus on LTO and Customs Department (MEFP ¶12). - Planned measures: - Comprehensive audits of large taxpayers and quarterly excise audits. - Automation and computerization to improve taxpayer services and data sharing. - Tariff rationalization consistent with WTO commitments; obtain parliamentary approval of amended Customs Act in time for the 2007/08 budget. - Fiscal Transparency Act expected to be adopted in 2006/07; effort to update financial condition information of SOEs. - Box 1 — Tax administration reform measurable targets: - LTO: comprehensive audits, including quarterly excise return audits of large taxpayers. - Customs: establish a WAN between Kathmandu HQ and five largest customs offices by mid-March 2007; improve ASYCUDA functionality; streamline Birgunj clearance. - IRD: fully operationalize excise sticker regime; reduce VAT nonfiling rate from over 20 percent to 12½ percent by end-2006/07; implement ETDS for all large taxpayers after mid-January 2007; extend computerization to reduce under-invoicing. ### Structural reforms — financial sector - Key challenges: 1. Gaps in regulatory and legal framework compromising financial soundness. 2. Need to strengthen NRB supervisory capacity. 3. High NPLs in Nepal Bank Limited (NBL) and Rastriya Banijya Bank (RBB). 4. Limited loan recoveries from large, willful defaulters who exploit judicial delays. - 2006/07 reform program highlights: - Legal and structural: revise BFIA; NRB guidelines for mergers and acquisitions; present Anti-Money Laundering Act (MEFP ¶13). - Enforcement: GON and NRB committed to actions against willful defaulters; BFIA amendments specify penalties (passport seizures, restricted access to government services). - Supervisory strengthening: NRB self-assessment against Basle Core Principles; improve off-site reporting; re-engineer NRB to eliminate noncore functions and commission an international audit of 2005/06 accounts. - Restructuring insolvent banks: restructure NBL and RBB under external management; assist loan recoveries; prepare for privatization with World Bank assistance; privatization advisors process underway. - Financial sector indicators (end-2005/06): - 6 banks, 8 development banks, and 24 finance companies did not meet minimum capital adequacy requirements (recently rolled back from 12 percent to 11 percent). - Four private commercial banks did not meet capital adequacy requirements; three had NPLs in double digits. - NBL and RBB represent more than half of banking system assets; half of their loan portfolio is nonperforming. - Negative net worth at end-2005/06: NBL Nrs. 6½ billion; RBB Nrs. 18½ billion. ### Nepal Oil Corporation (NOC) and oil sector reforms - Accumulated losses and causes: - Accumulated NOC losses as of September 2006: Nrs. 13 billion (2¼ percent of GDP). - Causes: failure to raise domestic prices timely; operational inefficiencies; financing via suppliers’ credits from Indian Oil Corporation (IOC), domestic commercial bank borrowings, and the budget. - Price increases of 20−70 percent during January 2005 to May 2006 were insufficient to eliminate flow losses. - Flow loss projections and budget impact: - Flow losses projected at Nrs. 4−7 billion (¾−1 percent of GDP); add to projected public debt-to-GDP ratio. - Government will cover additional flow losses transparently until prices reach break-even. - NOC’s monthly losses in September 2006: Nrs. 640 million (1 percent of GDP on an annualized basis). - Domestic petroleum prices are currently 20–45 percent below break-even levels. - Policy actions and recommendations: - Acharya Committee recommendations (September 2006): timely price increases; depoliticize price increases via an automatic pricing mechanism; improve NOC operational efficiency; increase private sector participation. - Actions taken/planned: aviation fuel prices raised in September 2006; draft Petroleum Sale and Distribution Act approved by cabinet in October 2006; discussions with IOC to convert suppliers’ credits into a concessional loan. - Government program envisages measures to reduce flow NOC losses to zero by mid-July 2007 and provisions to finance flow losses during this period while resolving supplier credits with IOC. - Operational improvements: reduce handling losses and overheads; introduce automatic pricing mechanism once flow losses eliminated. ### Program monitoring, conditionality, and Fund relations - Monitoring and reviews: - Program monitored through semi-annual reviews with quantitative and structural performance criteria. - Authorities requested completion of second and third reviews and extension of the arrangement by one year to November 18, 2007; rephasing of remaining amounts into two equal disbursements tied to fourth and fifth reviews. - Fourth review expected by mid-April 2007; fifth review by mid-October 2007. - Quantitative targets and test dates (selected): - Floor on NFA of NRB (millions of U.S. dollars): 1,842.7; 1,852.7; 1,882.7; 1,912.7; 1,952.7 (test dates Jul. 17, 2006; Oct. 17, 2006; Jan. 14, 2007; Apr. 13, 2007; Jul. 15, 2007). - Ceiling on NDA of NRB (billions of Nepalese rupees): -28.1; -26.1; -23.8; -22.7; -18.8. - Reserve Money (indicative targets, Nrs. billions): 110.1; 112.9; 117.4; 120.8; 127.7. - As of July 17, 2006, Reserve Money: Nrs. 110.1 billion. - PRGF disbursement schedule excerpts: - SDR 7.13 million (10 percent of quota) — Available Date: November 19, 2003 — Disbursed. - SDR 7.13 million (10 percent of quota) — Available Date: October 20, 2004 — Disbursed. - SDR 14.26 million (20 percent of quota) — Available Date: November 8, 2006 — Conditions: observance of specified performance criteria and completion of second and third reviews. - Fund relationship snapshot (as of September 30, 2006): - Quota: 71.30 (SDR Million) 100.00 (Percent Quota) - Fund holdings of currency: 71.31 100.02 - Outstanding PRGF arrangements: 14.26 SDR Million 20.00 Percent Quota ### Staff appraisal, prospects, and recommendations - Prospects: - Achievement of durable peace would enable higher, sustained growth and poverty reduction. - Macroeconomic stability has been maintained despite political uncertainties and security issues. - Medium-term potential: growth rates upwards of 5 percent if macro stability and structural reforms in financial sector, public enterprises, and governance are implemented. - Staff recommendations: - Maintain prudent fiscal policies and implement tax administration improvements to plug leakages and broaden the tax base. - Mobilize adequate external assistance to finance social sectors and infrastructure while placing public debt on a downward path. - Finance liabilities from financial sector and public enterprise reforms with external assistance where possible. - Maintain exchange rate peg and coordinate NRB and MOF actions to place additional T-bills at NRB’s disposal and consider liberalization of import payments mechanism with India for monetary management. - Complete financial sector legal and supervisory reforms, substantially increase loan recovery from willful defaulters, and continue NBL and RBB restructuring toward privatization. - Address NOC losses through timely price adjustments, operational efficiency improvements, and enactment of Petroleum Sale and Distribution Act; introduce automatic pricing mechanism to depoliticize pricing. - Board actions (subsequent summary): - Executive Board completed the second and third reviews and approved a disbursement equivalent to SDR 14.3 million. - Board approved waivers for non-observance of a quantitative performance criterion and eight structural performance criteria. - Board extended the PRGF arrangement by one year to November 18, 2007; original arrangement approved November 19, 2003 for SDR 49.9 million. *Source: _cr06407 - 2006. Directors commended the authorities for maintaining macroeconomic stability.* ### 2006. Directors commended the authorities for maintaining macroeconomic stability. ### _cr06407 - 2006. Directors commended the authorities for maintaining macroeconomic stability. ### Executive summary and staff recommendation - The Koirala government requested completion of outstanding PRGF reviews and extension of the PRGF arrangement by one year to November 18, 2007. - Staff recommends approval of: - Waivers for nonobservance of performance criteria, - Completion of the second and third reviews, - Extension of the arrangement. - Key program priorities identified: - Fiscal reforms to raise revenue collection, reduce leakages, enhance audit, improve taxpayer services in the Inland Revenue and Customs Departments, and strengthen fiscal transparency. - Financial sector reforms to improve the banking framework and loan recovery, further re-engineer NRB, and restructure troubled commercial and development banks. - Public sector reforms to reduce flow losses of Nepal Oil Corporation and resolve accumulated suppliers’ credits. - The authorities have requested waivers for nonobservance of eight structural performance criteria (SPCs) related to: - Customs administration (two SPCs), - Operationalization of the large taxpayer office in the Inland Revenue Department (two SPCs), - Compulsory retirement scheme in the Nepal Rastra Bank, - Finalization of NRB’s 2003/04 accounts by an international auditor, - Finalization of 2003/04 accounts of Nepal Oil Corporation (NOC) by an international auditor, - Implementation of an automatic pricing mechanism for oil products. - Actions related to SPCs (i)–(v) have been implemented; for SPC (vi) understandings were reached on corrective measures and a revised time frame, though a revised performance criterion has not been set. ### Macroeconomic outlook and key indicators - Real GDP growth: - Estimated less than 2 percent in 2005/06. - Projected to increase to 3−4 percent in 2006/07 with a broad-based acceleration in non-agriculture activity. - Inflation: - Headline inflation rose to 8¼ percent (12-month basis) in mid-July 2006. - Underlying CPI inflation projected to remain around 5−6 percent, in line with price developments in India. - Underlying inflation is computed by excluding the ten most volatile items (about 35 percent of the CPI basket). - Fiscal performance and deficits: - Revenue fell short of the 2005/06 budget target by 1½ percent of GDP. - Domestically financed deficit in 2005/06 was 1½ percent of GDP (more than budgeted ¾ percent of GDP). - Budgeted revenue-to-GDP: 12¼ percent in 2005/06 rising to 13 percent in 2006/07. - Overall deficit (before grants) projected to rise to 6¾ percent of GDP in 2006/07. - External aid projected to increase from 3¾ percent of GDP in 2005/06 to 6¼ percent in 2006/07. - Overall deficit (after grants) projected at 3 percent of GDP and domestically financed deficit at 1½ percent of GDP for 2006/07. - Balance of payments and reserves: - Current account (excluding official transfers) shifted into surplus in 2005/06 as private remittances rose sharply. - International reserves rose to US$1¾ billion (6½ months of imports of goods and services) in mid-July 2006. - With continued remittances and higher aid, reserves are projected to remain around 6 months of imports of goods and services over the medium term. - Donor support (as reported): - India provided a budget grant of around US$20 million for 2006/07 and a concessional line of credit of US$100 million for project financing. - AsDB approved a rural finance loan in October 2006 and was considering an education sector loan. - The World Bank planned to expand allocation for the Poverty Alleviation Fund and provide budget support contingent on fiscal need and progress in structural reforms. ### Risks and political context - Major political developments: - A ceasefire is in place and peace talks with Communist Party of Nepal (Maoist) had begun. - Roadmap discussions included an interim constitution, management of combatants’ arms, an interim government with CPN(M) participation, and constituent assembly elections (timeframe not finalized). - Program risks: - Primary risk to program implementation is political instability and constraints on policy implementation until the peace process gains traction. - The eventual participation of the Maoists in government presents policy uncertainties, especially on labor market reforms and privatization/liquidation of insolvent state-owned enterprises. - Maoist leaders publicly expressed willingness to work with multilateral institutions while emphasizing nationally driven policy priorities. ### Fiscal policy orientation and priorities for 2006/07 - Expenditure priorities: - Significant scaling up of social sector and public investment programs on health, education, and rural infrastructure, prioritized via the Medium Term Expenditure Framework. - Allocation for security-related spending reduced by ½ percent of GDP to 2¾ percent of GDP. - Increased grants for village development committees to partly address weak local implementation capacity. - Revenue measures and projections: - Projected rebound in activity and reduced supply disruptions expected to boost revenue from 12¼ percent of GDP in 2005/06 to 13 percent of GDP in 2006/07. - Part of revenue increase expected from higher customs duty rates on selected imports and higher corporate and excise taxes on alcohol, beer, and cigarettes (about ⅓ percent of GDP). - Debt outlook: - Despite higher deficits in 2006/07 compared to 2005/06, public debt is projected to remain on a downward trajectory over the medium term. ### Structural reforms: progress and priorities - Progress to date: - Since April 2006, measures related to improvements in tax administration and international audit of loss-making NOC have been implemented. - Most quantitative performance criteria and indicative targets for second and third reviews were met. - Core structural reform areas for the 2006/07 program: - Tax administration: improve customs administration, fully operationalize large taxpayer office, strengthen audit and taxpayer services. - Financial sector: re-engineer Nepal Rastra Bank, implement compulsory retirement scheme, restructure troubled commercial and development banks, improve loan recovery. - Public enterprises and governance: reduce NOC losses, finalize international audits, introduce an automatic pricing mechanism for oil products (understood corrective measures and revised timing; automatic mechanism not yet implemented). - Specific implementation notes: - Completion of SPCs for second and third reviews was delayed by political and security conditions; all SPCs except the automatic oil pricing mechanism were implemented by the authorities. - For the automatic pricing mechanism for oil products, understandings were reached on corrective measures and a revised timetable, but a revised performance criterion has not been set. *Source: _cr06407 - 2006. Directors commended the authorities for maintaining macroeconomic stability.* ### 11. Beyond 2006/07, the authorities intend to keep the budget focused on ### _cr06407 - 11. Beyond 2006/07, the authorities intend to keep the budget focused on ### Fiscal framework and debt sustainability - Medium-term objectives: raise resources to finance infrastructure and structural reforms while lowering the public debt-to-GDP ratio. - Revenue target: increase the revenue-to-GDP ratio to 13½ percent by 2008/09 through tighter administration and base broadening (including elimination of VAT exemptions and reducing customs and excise leakages). - Spending priorities: rise in spending on key social sector and infrastructure projects as implementation capacity improves; security-related spending to be further curtailed as peace is reestablished. - Deficit targets: - overall deficit: around 3 percent of GDP; - domestically financed deficit: around 1½ percent of GDP. - Provision for reform costs: room to meet costs of financial and public enterprise sector reforms; bulk of these costs would be interest payments on recapitalization of insolvent commercial banks (recapitalization with external assistance, most likely from the World Bank). - Public enterprise liabilities: budget needs to provide for resolving outstanding liabilities of ailing state-owned enterprises; these costs expected to be in the range of ¼−¾ percent of GDP. - Debt projections and exclusions: - Excluding liabilities from financial sector and public enterprise reforms (expected to be in the range of 7−8 percent of GDP), public debt-to-GDP ratio projected to decline from 56¼ percent at end-2005/06 to around 50 percent over the medium term. - The thrust of the Debt Sustainability Analysis (DSA) presented in the 2005 Article IV staff report remains valid. - External vulnerabilities: most external debt indicators remain below policy-dependent indicative thresholds under the baseline scenario with the exception of the NPV of debt-to-exports ratio (estimated at 165 percent at end-2005/06). ### Monetary and exchange rate policies - Exchange rate regime: Nepal Rastra Bank (NRB) intends to maintain the exchange rate peg to the Indian rupee. - Rationale: substantial and increasing volume of current account transactions with India; peg has helped anchor inflation expectations. - Authorities view level of the peg as broadly appropriate despite real exchange rate appreciation since early 2005; the real exchange rate oscillated within 5 percent of its mean level between 2000 and mid-2006. - Policy emphasis: structural reforms and infrastructure investments to reduce transportation and transactions costs to improve external competitiveness rather than changes in the level of the peg. - Money and credit projections for 2006/07: - broad money growth: projected at around 16 percent; - reserve money growth: NRB intends to restrict to 16 percent; - real GDP growth: picks up to 3−4 percent (assumption underlying projections); - real private credit growth: 8−9 percent; - NRB net foreign assets target: increase by US$110 million (MEFP ¶10). - Liquidity management challenges: - Estimated remittance inflows: around US$1½ billion in 2005/06. - Net foreign currency purchases to ease upward pressure on the exchange rate: around US$300 million in 2005/06, with substantial reduction in NRB T-bill holdings. - With limited stock of T-bills at NRB’s disposal, continued strong remittances and pickup in aid inflows pose a significant challenge for monetary management in 2006/07. - Mission suggestions for NRB: acquire additional stock of T-bills from the Ministry of Finance; explore allowing a larger volume of import payments to India in convertible currencies (MEFP ¶11); issue NRB bills. ### Structural reforms — Fiscal sector (tax administration and transparency) - 2006/07 declared as a year to improve compliance; measures focus on enhancing operational efficiency of the Large Taxpayer Office (LTO) and the Customs Department (MEFP ¶12). - Planned measures include comprehensive audits of large taxpayers, automation to improve taxpayer service, and computerization to step up data sharing within revenue departments. - Tariff policy: significant rationalization of the tariff regime, including reductions in customs duties, consistent with WTO and other international commitments. - Fiscal transparency: government committed to implementing recommendations from the fiscal transparency module of the IMF’s Report on Standards and Codes; Fiscal Transparency Act expected to be adopted in 2006/07; effort to provide updated information on financial condition of state-owned enterprises (MEFP ¶12). Box 1 — Tax administration reform measures (2006/07 program) - Large Taxpayer Office: comprehensive audits, including of excise returns of large taxpayers on a quarterly basis. - Customs Department: - establish a wide area network (WAN) between headquarters in Kathmandu and the five largest customs offices by mid-March 2007; - improve ASYCUDA functionality with assistance from AsDB and UNCTAD; - streamline customs clearance procedures at Birgunj; - obtain parliamentary approval of an amended Customs Act to rationalize the tariff regime in time for the 2007/08 budget. - Inland Revenue Department: - fully operationalize the excise sticker regime to address excise leakages; - target reduction of the VAT nonfiling rate from the current level of over 20 percent to 12½ percent by end-2006/07; - implement electronic tax deduction at source (ETDS) for all large taxpayers after mid-January 2007; - extend computerization at the large taxpayer and retail levels to reduce under-invoicing. ### Structural reforms — Financial sector - Key challenges identified: 1. Remaining gaps in the regulatory and legal framework compromise overall soundness of financial institutions (Box 2). 2. NRB needs to strengthen supervisory capacity. 3. High level of nonperforming loans (NPLs) in two state owned/controlled banks (Nepal Bank Limited and Rastriya Banijya Bank) impedes effective financial intermediation. 4. Limited loan recoveries from large, willful defaulters; defaulters able to use judicial process to stall recoveries. - Financial sector reform program for 2006/07: - Legal and structural measures: - revise the Banking and Financial Institutions Act (BFIA); - NRB to provide guidelines for mergers and acquisitions; - present an Anti-Money Laundering Act to Parliament (MEFP ¶13). - Enforcement and recovery: - GON and NRB committed to take action against willful defaulters; penalties were specified through BFIA amendments in September 2006 (passport seizures and restricted access to government services); - explore stricter measures if penalties are unsuccessful. - Supervisory strengthening and consolidation: - NRB to conduct a self-assessment against the Basle Core Principles and improve risk assessment and early detection of weaknesses; - eliminate delays in reporting and processing of off-site data; - create a framework to facilitate resolution and transformation of financial institutions through exit, mergers and acquisitions; - NRB “reengineering” plans to eliminate noncore functions, improve supervision, achieve compliance with international reporting standards, divest selected NRB shareholdings, and commission an international audit of its 2005/06 accounts. - Restructuring of insolvent banks: - GON and NRB committed to restructuring NBL and RBB under external management teams, assist with loan recoveries, and prepare for privatization with World Bank assistance; - process of appointing privatization advisors for NBL is underway; preliminary discussions on recapitalization needs have been held. - Financial sector indicators and problems (as reported): - At end-2005/06, 6 banks, 8 development banks, and 24 finance companies did not meet minimum capital adequacy requirements (recently rolled back from 12 percent to 11 percent). - Four private commercial banks did not meet capital adequacy requirements at end-2005/06; three had NPLs in double digits. - NBL and RBB represent more than half of banking system assets; half of their loan portfolio is nonperforming. - Negative net worth at end-2005/06: NBL Nrs. 6½ billion; RBB Nrs. 18½ billion. ### Nepal Oil Corporation (NOC) and oil sector reforms - Accumulated losses and causes: - Accumulated NOC losses as of September 2006: Nrs. 13 billion (2¼ percent of GDP). - Causes: failure to raise domestic prices on a timely basis; operational inefficiencies; bulk financed through suppliers’ credits from Indian Oil Corporation (IOC), remainder financed via domestic commercial bank borrowings and the budget. - Despite price increases of 20−70 percent during January 2005 to May 2006, increases were insufficient to eliminate flow losses. - Flow loss projections and budgetary impact: - Flow losses projected at Nrs. 4−7 billion (¾−1 percent of GDP); these would add to the projected public debt-to-GDP ratio. - Government will cover additional flow losses transparently until prices are raised to break-even levels. - NOC’s monthly losses in September 2006: Nrs. 640 million (1 percent of GDP on an annualized basis). - Domestic prices of petroleum products are currently 20–45 percent below break-even levels. - Policy actions and recommendations: - Acharya Committee recommendations (submitted September 2006): timely price increases to eliminate flow losses; depoliticization of price increases through an automatic pricing mechanism; improve operational efficiency of NOC; increase private sector participation in the oil sector. - Actions taken/planned: - aviation fuel prices raised in September 2006; - draft Petroleum Sale and Distribution Act to liberalize the oil sector and increase private sector participation approved by the cabinet in October 2006; - price increases for other products recommended; - discussions underway with IOC to convert suppliers’ credits into a concessional loan; - government program for 2006/07 envisages implementation of measures to reduce flow NOC losses to zero by mid-July 2007 and making provisions to finance flow losses during this period while resolving the stock of suppliers’ credits in discussions with IOC. - Operational improvements: studies suggest NOC could reduce handling losses (shrinkage allowance) and overhead costs by improving productivity; once flow losses are eliminated, introduce an automatic pricing mechanism to depoliticize pricing and facilitate private sector participation. _Italic: Source — _cr06407 - 11. Beyond 2006/07, the authorities intend to keep the budget focused on_ (PDF chapter content provided)._ ### 18. The authorities remain ambivalent about participation in the HIPC initiative for ### _cr06407 - 18. The authorities remain ambivalent about participation in the HIPC initiative for ### HIPC participation: authorities' stance - Authorities are ambivalent about participation in the HIPC initiative for which Nepal has been assessed eligible. - Principal concern: possible reduction in aid flows from key bilateral donors. - Recognize that debt relief under the initiatives (especially the MDRI) could be substantial. - Authorities are weighing the costs and benefits of debt relief. ### Program monitoring and requests - The program will be monitored through semi-annual reviews with proposed quantitative and structural performance criteria. - Authorities request: - Completion of the second and third reviews at this time. - Extension of the arrangement by one year to November 18, 2007. - Rephasing of the remaining amount under the arrangement into two equal disbursements associated with fourth and fifth reviews. ### Staff appraisal — macroeconomic outlook and growth prospects - Achievement of durable peace would create conditions for higher, sustained growth and poverty reduction. - Economy remained resilient despite political uncertainties and unsettled security environment; macroeconomic stability has been maintained. - 2006/07: a modest increase in real GDP growth is expected, especially as tourism and transportation rebound. - Manufacturing revival conditional on reducing cost of doing business (resolving labor disputes, eliminating extortions). - Medium-term potential: Nepal could achieve growth rates upwards of 5 percent if continued macroeconomic stability and structural reforms in financial sector, public enterprises, and governance are implemented. ### Fiscal policy and public finance recommendations - Prudent fiscal policies and reforms are key to maintaining macroeconomic stability and achieving PRSP/PRGF objectives. - 2006/07 budget features: - Focus on social sectors and infrastructure spending in rural areas. - Higher targeted revenue-to-GDP ratio. - Low domestic financing. - Medium-term fiscal priorities: - Raise revenue (improvements in tax administration to plug leakages, broaden tax base, improve taxpayer services). - Reduce security-related spending. - Mobilize adequate external assistance to step up expenditure on social sectors and infrastructure. - Place public debt to GDP ratio on a downward trajectory. - Liabilities from financial sector and public enterprise reforms should be financed with external assistance. - Staff welcomes GON steps to increase fiscal transparency. ### Exchange rate and monetary management - Maintaining the exchange rate peg is appropriate; policies are geared to supporting the peg. - 2006/07 required actions: coordinated efforts by the NRB and the MOF to place additional T-bills at the disposal of the NRB and possible liberalization of import payments mechanism with India for effective monetary management. ### Financial sector reforms and banking sector - Financial sector reforms have advanced but much remains to be accomplished. - Needed actions: - Improve legal framework to meet WTO commitments to financial liberalization in 2010, facilitate consolidation, and raise financial sector integrity. - Improve NRB supervision over the financial sector. - NRB planned divestment in financial institutions to free resources for core functions and meet international reporting standards. - Further steps to improve financial condition of NBL and RBB for eventual privatization. - Substantially increase loan recovery from large, willful defaulters to resolve banks’ nonperforming portfolio and enable early privatization at low budget cost. ### National Oil Corporation (NOC) and oil sector recommendations - NOC losses need to be addressed; steps to improve efficiency in the oil sector are required. - Staff looks forward to implementation of the Acharya Committee recommendations and passage of the Petroleum Sales and Distribution Act. - Increment in public debt to GDP ratio from flow losses would be manageable over the medium term. - Staff urges GON to reduce inefficiencies in NOC, including through greater private sector participation in the oil sector. - Corrective actions taken by authorities: raising oil prices by 20−70 percent. - Introduction of an automatic pricing mechanism for oil products is needed to meet program objectives. ### Program prospects, risks, and staff recommendations - Prospects for implementing the 2006/07 program are fair. - Government is a coalition historically steering PRSP reforms and is strongly committed to PRSP/PRGF reforms. - Efforts by government, donors, and civil society to persuade the Maoists that the PRSP reform agenda is in Nepal’s best interest. - Primary risk: implementation delays due to difficulties in reaching political consensus. - Staff considers risks acceptable given authorities’ demonstrated commitment and encourages perseverance. - On multiple waivers requested for completion of second and third reviews: - Nonobservance of the quantitative performance criterion on NFA of the NRB was minor. - Non-observance of seven structural performance criteria was temporary. - For the eighth structural performance criterion (automatic pricing mechanism for oil products), corrective actions (oil price increases of 20−70 percent) have been taken; no further performance criterion is proposed on that item. - Staff recommends approval of waivers for nonobservance of performance criteria, completion of second and third reviews, and extension of the arrangement by one year to November 18, 2007. ### Key headline statistics from the chapter - Nominal GDP (2004/05): US$7,477 million - Population (2004/05): 25.2 million - GDP per capita (2004/05): US$296.7 - Poverty rate: 31 percent (2003/04) *Source: IMF staff report text provided in the content unit.* ### 1. IMF Countr ### _cr06407 - 1. IMF Countr ### Quantitative Performance Criteria (selected items) - I. Ceiling on net foreign assets (NFA) of the NRB (In billions of Nepalese rupees) - IMF Country Report No. 04/329: 1/459.6 1,489.6 1,514.6 1,544.6 - Adjusted: 3/1,461.1 1,492.6 1,518.4 1,493.8 - Actual: 4/1,448.9 1,496.9 1,493.5 1,478.4 - II. Ceiling on net domestic assets (NDA) of the NRB (In billions of Nepalese rupees) - IMF Country Report No. 04/329: 5/-20.1 -22.6 -16.1 -14.2 - Adjusted: 6/-20.2 -22.8 -16.4 -10.4 - Actual: 7/-20.4 -26.2 -18.9 -14.3 - III. Ceiling on change in net domestic financing of central government budget (Cumulative from July 15, 2004; In billions of Nepalese rupees) - IMF Country Report No. 04/329: 8/0.5 1.4 2.2 3.5 - Adjusted: 9/0.4 1.1 2.0 7.5 - Actual: -1.1 -2.8 -2.5 4.8 - IV. Ceiling on short-term external debt contracted or guaranteed by the central government and NRB - IMF Country Report No. 04/329: 0.0 0.0 0.0 0.0 - Adjusted: 0.0 0.0 0.0 0.0 - Actual: 0.0 0.0 0.0 0.0 - V. Accumulation of external payments arrears (Continuous performance criterion during the program period) - IMF Country Report No. 04/329: 0.0 0.0 0.0 0.0 - Adjusted: 0.0 0.0 0.0 0.0 - Actual: 1.3 1.3 1.3 1.3 ### Indicative Targets (IT) - VI. Ceiling on reserve money (In billions of Nepalese rupees) - IMF Country Report No. 04/329: 89.4 89.1 97.5 101.6 - Actual: 88.3 86.1 93.1 96.5 - VII. Floor on central government revenue (Cumulative from July 15, 2004; In billions of Nepalese rupees) - IMF Country Report No. 04/329: 10/10.8 25.0 43.1 68.3 - Adjusted: 11/10.8 25.0 43.0 68.1 - Actual: 12.8 29.7 46.0 68.9 - Footnotes and calculation conventions (selected) - 1/ Mid-October 2004 and mid-January 2005 are performance criteria test dates. Figures for mid-April and mid-July 2005 are indicative targets. - 3/ Valued at program exchange rates; monetary gold valued at program price (US$360 per oz.). - 4/ Valued at program exchange rates; monetary gold valued at program price (US$360 per oz.). Adjusted upward/downward by excess/shortfall of foreign program financing. - 5/ Net Domestic Assets (NDA) as defined in the TMU. Calculated as the difference between reserve money (VI.1.) and NFA (I.1). Adjusted upward/downward by the shortfall/excess of rupee equivalent of foreign financing. Details specified in the TMU. - 6/ Calculated as the difference between reserve money (VI.1) and NFA (I.2). Adjusted upward/downward by shortfall/excess of rupee equivalent of foreign financing. - 7/ Calculated as the difference between reserve money (VI.2.) and NFA (I.3). - 8/ Adjusted upward/downward by shortfall/excess of rupee equivalent of foreign financing. Adjusted upward/downward by excess/shortfall of privatization receipts. Details specified in the TMU. - 9/ Adjusted upward/downward by shortfall/excess of privatization receipts. Adjusted upward/downward by shortfall/excess of rupee equivalent of foreign financing. Details specified in the TMU. - 10/ Adjusted upward/downward by excess/shortfall of privatization receipts. Details specified in the TMU. - Table 5 title: Quantitative Performance Criteria and Indicative Targets (In billions of Nepalese rupees; unless otherwise stated) ### Status of Structural Performance Criteria and Benchmarks — Second Review Under the PRGF Arrangement - Structural Performance Criteria (Fiscal and Monetary Reforms) - Implement time-bound action plan to improve customs administration - Test Date: November 15, 2004 - Implementation Date: October 2006 - Fully operationalize the large taxpayers office (LTO) in the Inland Revenue Department - Test Date: November 15, 2004 - Implementation Date: November 22, 2004 - Implement new framework for monetary operations, including a liquidity-monitoring framework - Test Date: November 15, 2004 - Implementation Date: November 15, 2004 - Structural Performance Criteria (Financial Sector Reforms) - Strengthen the Nepal Rastra Bank (provide for compulsory retirement scheme in NRB employee rules and regulations) - Test Date: November 15, 2004 - Implementation Date: July 16, 2005 - Structural Benchmarks - Strengthen the Nepal Rastra Bank (revise human resources policies) - Test Date: November 15, 2004 - Implementation Date: July 16, 2005 - Prepare a time-bound action plan to strengthen Financial Management and Internal Audit Departments of NRB - Test Date: November 15, 2004 - Implementation Date: November 15, 2004 - Implement restructuring plans for NIDC - Test Date: November 15, 2004 - Implementation Date: September 2004 - Complete liquidation/privatization of two SOEs 1/ - Test Date: November 15, 2004 - Implementation Date: May 2006 - Cabinet approval of amended Civil Service Ordinance - Test Date: November 15, 2004 - Implementation Date: July 6, 2005 - NRB to reconcile accounting data with program monitoring data - Test Date: Quarterly test dates - Implementation Date: Completed - 1/ Bhaktpur Brick Factory and Nepal Rosin and Turpentine privatized. ### Structural Performance Criteria and Benchmarks — Third Review Under the PRGF Arrangement - Structural Performance Criteria (Fiscal Reforms) - Implement time-bound action plan to improve customs administration - Test Date: January 15, 2005 - Implementation Date: October 2006 - Fully operationalize the large taxpayers office (LTO) in the Inland Revenue Department - Test Date: January 15, 2005 - Implementation Date: October 2006 - Structural Performance Criteria (Financial Sector Reforms) - Finalize audits of NRB’s 2003/04 accounts by an international auditor - Test Date: January 15, 2005 - Implementation Date: April 18, 2005 - Structural Performance Criteria (Public Sector Reform) - Finalize audit of NOC 2003/04 accounts by international auditor - Test Date: February 15, 2005 - Implementation Date: June 15, 2006 - Implement automatic pricing mechanism for oil products 1/ - Test Date: December 31, 2004 - Implementation Date: -- - Structural Benchmarks - Cabinet approval of Fiscal Transparency Ordinance 2/ - Test Date: January 15, 2005 - Implementation Date: Rescheduled - Amend BFI ordinance including for consistency with other legislation 3/ - Test Date: February 15, 2005 - Implementation Date: Rescheduled - Cabinet approval of Asset Management Companies Ordinance 4/ - Test Date: January 15, 2005 - Implementation Date: -- - Implement restructuring plans for ADBN - Test Date: January 15, 2005 - Implementation Date: March 16, 2006 - Implement restructuring plans for NIDC 5/ - Test Date: January 15, 2005 - Implementation Date: -- - Adopt Petroleum Products Sale and Distribution Ordinance 6/ - Test Date: February 15, 2005 - Implementation Date: Rescheduled - Complete liquidation/privatization of three SOEs 7/ - Test Date: January 15, 2005 - Implementation Date: -- *Source: _cr06407 - 1. IMF Countr (PDF chapter content provided).* ### 8. NRB to reconcile accounting data with program ### _cr06407 - 8. NRB to reconcile accounting data with program monitoring data ### NRB reconciliation and program-monitoring status - NRB to reconcile accounting data with program monitoring data. - Notes on quarterly test dates and completion: - 1/ Not observed. SPC not reset. Revised understandings reached for 2006/07. - 2/ July 15, 2007 (SB). - 3/ July 15, 2007 (SPC) and August 15, 2007 (SB). - 4/ Not rescheduled; as explained in text of staff report. - 5/ Employee liabilities settled, including under VRS; Nepalgunj branch closed and debt related transactions shifted to headquarters. - 6/ Cabinet approval October 2006; Submission to parliament (SB, January 15, 2007). - 7/ Lumbini Sugar Mill privatized. ### Medium-term macroeconomic framework (selected projections and levels) - Real sector: - Real GDP growth (percent change): 2.7 1.9 3.7 4.5 5.0 5.5 5.5 - Agriculture: 3.0 1.7 2.6 3.5 4.0 4.5 4.5 - Nonagriculture: 2.1 2.8 4.3 5.0 5.6 6.1 6.1 - GDP deflator (percent change): 4.6 7.2 6.5 6.0 5.5 5.0 5.0 - Saving-investment balance (percent of GDP): - Gross Fixed Investment: 18.9 18.5 20.5 22.0 23.5 24.0 25.3 - Public 1/: 5.8 6.0 8.3 8.8 9.2 9.3 9.7 - Private: 13.2 12.5 12.2 13.2 14.3 14.7 15.6 - Gross national savings (incl. income and transfers from abroad): 26.7 27.9 27.3 28.7 29.7 30.2 31.6 - Fiscal sector (percent of GDP): - Total revenue: 12.9 12.2 13.1 13.3 13.5 13.6 13.8 - Grants: 2.7 2.2 3.7 3.0 2.9 2.8 2.6 - Current expenditure: 11.6 11.4 13.0 12.5 12.4 12.4 12.4 - Capital expenditure and net lending: 4.9 4.8 6.8 7.0 7.2 7.3 7.5 - External sector: - Export value (percent change) 2/: 11.2 4.0 8.5 12.9 12.4 11.8 11.3 - Import value (percent change): 12.3 18.3 16.1 10.9 10.3 9.1 8.6 - Current account balance (excluding official transfers)/GDP: -0.3 0.6 0.2 -0.1 -0.4 -1.2 -1.8 - Overall balance/GDP: 0.1 3.7 1.2 0.1 0.2 0.2 0.4 - Financing gap (in millions of U.S. dollars): 0 0 45 90 50 40 0 - Change in reserves (in millions of U.S. dollars): -21 -296 -146 -95 -73 -61 -46 - External debt/GDP (in percent): 45.8 43.0 41.6 40.3 39.2 38.2 37.2 - Debt service ratio: 4.5 4.2 3.5 3.5 3.4 3.4 3.2 - Monetary sector: - Broad money (percent change): 8.3 15.6 16.0 ............ - Private sector credit (percent change): 12.9 8.3 16.2 ............ - Memorandum item: - Nominal GDP (Nrs. billions): 533.5 582.9 643.9 713.0 790.2 875.3 969.6 ### PRGF disbursements schedule and Fund transactions - Table of proposed disbursements under the PRGF Arrangement: - SDR 7.13 million (10 percent of quota) — Available Date: November 19, 2003 — Conditions: Disbursed. - SDR 7.13 million (10 percent of quota) — Available Date: October 20, 2004 — Conditions: Disbursed. - SDR 14.26 million (20 percent of quota) — Available Date: November 8, 2006 — Conditions: Observance of the mid-October 2004, mid-November 2004, December 31, 2004, mid-January 2005, and mid-February 2005 performance criteria and completion of the second and third reviews. - SDR 10.69 million (15 percent of quota) — Available Date: April 15, 2007 — Conditions: Observance of the mid-January 2007, end-January 2007, mid-February 2007 and mid-March 2007 performance criteria and completion of the fourth review. - SDR 10.69 million (15 percent of quota) — Available Date: October 15, 2007 — Conditions: Observance of the mid-July 2007 performance criteria and completion of the fifth review. - Projected Fund transactions under the PRGF, 2005/06–2010/11 (In millions of SDRs): - Total use of fund resources (UFR) outstanding: 14.3 39.2 49.9 48.5 45.6 42.8 36.0 - PRGF disbursements: 0.0 25.0 10.7 0.0 0.0 0.0 0.0 - Debt service (total): 0.3 0.3 0.3 1.8 3.2 3.2 7.1 - Memorandum items: - Total UFR as a percentage of quota: 20.0 55.0 70.0 68.0 64.0 60.0 50.5 - Total UFR as a percentage of GDP: 0.3 0.6 0.8 0.7 0.6 0.5 0.4 - Debt service to the Fund as a percentage of exports of goods and services 1/: 0.0 0.0 0.0 0.1 0.2 0.2 0.4 ### External financing needs and sources (U.S. dollars) - Gross financing needs (2005/06–2010/11): 349 229 207 227 312 387 - Components (in millions of U.S. dollars): - External current account deficit (excl. official transfers): -45 -166 42 13 12 20 - Debt amortization: 96 100 105 109 116 117 - Repayments of arrears: 1.7 0.0 0.0 0.0 0.0 0.0 - Reserves accumulation: 29 6 14 9 57 36 14 6 (note: table formatting indicates reserves accumulation entries as 29 6 14 9 57 36 14 6; preserve exact sequence as presented) - IMF repurchases and repayments: 0 0 0 244 - Financing sources (in millions of U.S. dollars): - Foreign direct investment (net): -7 27 31 35 41 47 - Official creditors 1/: 311 59 35 99 64 96 89 70 3 (preserve exact sequence as presented) - Other flows 2/: 44 -4 36 -5 13 -5 -508 -458 -363 (preserve exact sequence as presented) - Accumulation of arrears (exceptional): 0.0 0.0 0.0 0.0 0.0 0.0 - Financing gap 3/: ... 4 5 9 0 5 0 4 0 0 (preserve exact formatting: "3/...459050400") - Notes: - 1/ Includes both loans and grants. - 2/ Includes all other net financial flows, and errors and omissions. - 3/ Includes prospective IMF disbursements. ### NRB safeguards, data, and statistical issues - Safeguards Assessment: - A safeguards assessment of the NRB was completed on September 2, 2002. - Assessment concluded substantial risks exist in external and internal audits, and internal control system of the NRB. - A safeguards monitoring assessment completed in October 2004. - Implementation progress is being monitored under the current PRGF arrangement. - Exchange rate and reserves: - As of September 30, 2006, the exchange rate for the Nepalese rupee (Nr) was US$1=Nrs. 73.6. - Statistical system weaknesses and developments: - Central Bureau of Statistics (CBS) compiles national accounts using the 1968 SNA; shortcomings in source data, timeliness, and detail. - CPI uses weights from the 1995/96 household expenditure survey and covers only urban areas; national index aggregates regional indices using population weights. - WPI developed by NRB first published July 2001; weights based on 1999/2000 data. - STA missions assisted development of quarterly national accounts and rebasing to 2000/01. - Monetary data from NRB subject to revisions with lags up to 12 months; reporting lags and incomplete coverage impede publication of key aggregates in IFS. - Balance of payments: net errors and omissions remain large; work underway to improve estimation of workers’ remittances and private capital flows. - Incomplete and conflicting data on government external grants and loans; new database developed with DFID assistance but direct external grants reporting remains a problem. ### Program implementation, waivers, and government commitments - Government letter (October 26, 2006) to IMF Managing Director summarized discussions and requests: - Requested waivers for nonobservance of performance criteria and completion of second and third reviews. - Requested waiver for nonobservance of the floor on NFA for October 16, 2004. - Noted previous waiver granted on January 18, 2006 for nonaccumulation of external payment arrears that developed during 2005. - Requested waivers for nonobservance of eight SPCs related to customs administration, large taxpayer office operationalization, compulsory retirement scheme in NRB, finalization of 2003/04 accounts of NRB and NOC by international auditors, and implementation of an automatic pricing mechanism for oil products. - Actions related to SPCs (i)−(v) completed; revised time frame agreed for (vi) along with measures to reduce NOC losses. - Requested extension of the arrangement by one year to November 18, 2007, and rephasing of remaining undisbursed amount. - Government commitment: - Fully committed to reform agenda in the 10th Plan/PRSP aiming to reduce poverty via private-sector led growth and social inclusion. - Government stands ready to take additional measures as required and to consult with IMF in advance of adoption of such measures. - Government intends to make the letter, the MEFP, and the staff report available to the public and authorize posting on the IMF website subsequent to Board completion of the reviews. ### Fund relationship snapshot (as of September 30, 2006) - Membership status: Joined 9/06/61; Article VIII, Sections 2, 3, and 4 in May 1994. - Quota and holdings: - Quota: 71.30 (SDR Million) 100.00 (Percent Quota) - Fund holdings of currency: 71.31 100.02 - Net cumulative allocation (SDR Department): 8.10 100.00 - Outstanding PRGF arrangements: 14.26 SDR Million 20.00 Percent Quota - Projected obligations to Fund (in millions of SDRs; based on existing use of resources and present holdings of SDRs): - Charges/Interest: 0.06 0.15 0.15 0.15 0.14 (Forthcoming 2006–2010 sequence) - Principal: 1.43 2.85 (Forthcoming entries) - Total: 0.06 0.15 0.15 1.57 2.99 *Source: IMF staff report content provided in the source PDF.* ### 1. Nepal is at an important juncture after the people’s movement of April 2006. On ### _cr06407 - 1. Nepal is at an important juncture after the people’s movement of April 2006. On ### Political context - The Government of Nepal (GON) is making a determined effort to further the peace process and restore participatory democracy. - The government is in close contact with the Communist Party of Nepal (Maoist) to further cement the ceasefire, and is discussing the formation of a government with their participation to decisively end the armed conflict that has beset Nepal for over a decade. - Discussions are underway for elections to a constituent assembly and formation of representative institutions at the central and local levels. - Prime Minister Koirala and Mr. Prachanda (Chairman, CPN(M)) have written to the United Nations to assist with monitoring human rights, the ceasefire and combatants’ arms, and fair conduct of constituent assembly elections. ### Economic context and PRGF framework - New opportunities for socioeconomic transformation have emerged and public expectations for growth and improved living standards are high. - The GON is firmly committed to achieving the goals of Nepal’s 10th Plan/ Poverty Reduction Strategy Paper (PRSP), finalized in July 2003, which lays out objectives and policy agenda for 2002−07. - The PRSP agenda has been supported by the Poverty Reduction and Growth Facility (PRGF) arrangement approved by the IMF’s Executive Board in November 2003. - This memorandum reviews progress under the PRGF since the first review in October 2004 and outlines policies for 2006/07; the GON requests completion of the second and third reviews and an extension of the PRGF arrangement to November 2007. - Preparations at the National Planning Commission are underway to review performance during 2005/06. ### Program implementation and conditionality status - The GON has taken steps to bring the program back on track and remains committed to PRGF policy understandings. - Key structural reform actions for the reviews have been completed; compensatory measures or revised timeframes were agreed where actions were not completed. - All structural performance criteria (SPCs) for the reviews were implemented except for the introduction of an automatic pricing mechanism for oil products. - Measurable progress has been made on structural benchmarks (SBs). - Most quantitative performance criteria (QPCs) and indicative targets (ITs) for reviews were met. - For SPCs completed with delay and the QPC not met, the GON is requesting waivers from the IMF’s Executive Board. ### Macroeconomic developments and outcomes (2004/05−2005/06) - Real GDP growth averaged 2¼ percent during 2004/05−2005/06. - Underlying CPI inflation averaged 4½ percent. - International reserves rose from US$1½ billion at end-2003/04 to over US$1¾ billion at end-2005/06, supported by robust private remittances even as foreign aid inflows declined. - In 2004/05 the overall and domestically financed deficits were lower than programmed. - In 2005/06 revenues fell short of the budget target by 1½ percent of GDP (GON format) as political uncertainties rose and growth slowed; aid declined further. - The net domestically financed deficit in 2005/06 was higher than budgeted by ½ percent of GDP. - Monetary and exchange rate policies of the Nepal Rastra Bank (NRB) remained geared to maintaining the exchange rate peg to the Indian rupee. ### Structural reforms achieved (summary) - Fiscal reforms: - Tax administration: Performance indicators and pilot performance-based incentive schemes introduced in the Large Taxpayer Office (LTO) and the model customs office at Sirsiya Dry Port in October 2006. - Customs Department prepared a valuation database. - Outstanding actions related to full operationalization of the LTO in the Inland Revenue Department (IRD) and a time-bound customs action plan were completed. - Fiscal Transparency: Fiscal transparency module of IMF’s ROSC completed; a draft Fiscal Transparency Act prepared. - Financial sector: - NRB amended employee rules for a tenure-based Compulsory Retirement Scheme (CRS) at end-2004/05; staff reduction of 19 achieved with the CRS. - International audits: NRB 2003/04 audit finalized April 2005; 2004/05 audit finalized May 2006; both received qualified opinions though quality improved and progress toward IFRS noted. - Restructuring: NBL and RBB (under external managers) made operating profits in 2005/06, reduced NPLs, improved lending practices, and advanced computerization. - ADBN restructuring progressed via voluntary retirement scheme, management changes, and board reconstitution. - NIDC restructuring progressed with branch rationalization, staff reduction, and an asset valuation report. - Public sector reforms: - Privatized or liquidated SOEs to create space for private sector: Bhaktpur Brick Factory, Lumbini Sugar Mill, Nepal Rosin and Turpentine, Hetauda Textile Factory, Nepal Coal Limited; Cottage and Handicrafts Emporium liquidated during 2004/05−2005/06. - Internal unbundling of Nepal Electricity Authority completed in 2004/05; Nepal Telecommunications Corporation transformed into a company in 2004/05. - Automatic pricing mechanism SPC for oil products not met by end-December 2004; petroleum product prices raised by 20−70 percent during January 2005 and May 2006. - NOC continued to make substantial losses; financial review of NOC’s 2003/04 accounts by international accounting firm finalized June 2006; committee submitted corrective action recommendations in late September. - Draft Petroleum Sale and Distribution Act to liberalize oil sector and increase private participation approved by the cabinet in October 2006. - Regulation, private sector development, and governance: - Secured Transactions, Company, Securities, and Insolvency Acts adopted in September/October 2005. - Parliament is discussing draft Procurement, Governance, and Civil Service Acts. ### Macroeconomic objectives and policies for 2006/07 - Growth and inflation: - Real GDP growth is expected to increase to 3−4 percent in 2006/07. - Underlying CPI inflation projected to remain around 5−6 percent, in line with India. - Current account projected to remain in surplus with continued strong remittance inflows. - Monetary aggregates and reserves: - Broad money growth projected at around 16 percent in 2006/07, assuming real GDP growth of 3−4 percent and a small decline in velocity. - Reserve money growth projected at 16 percent. - Targeted increase in the NRB’s net foreign assets (NFA) of US$110 million. - Projected real private sector credit growth of 8−9 percent. ### Fiscal policies for 2006/07 and medium term - 2006/07 budget objectives: - Raise and improve quality of public spending, raise revenue-to-GDP ratio, and limit domestic borrowing. - Revenues expected to rebound to 13⅓ percent of GDP. - Revenue measures include higher customs duty rates on selected imports and higher corporate taxes and excises on alcohol, beer, and cigarettes. - Significant scaling up of social sector and public investment programs on health, education, and rural infrastructure, prioritized along the Medium-Term Expenditure Framework. - Allocation for security-related spending reduced by ½ percent of GDP to 2¾ percent. - Overall deficit (after grants) expected to rise to 5½ percent of GDP. - External aid projected to increase from 3¾ percent of GDP in 2005/06 to 6¼ percent. - Gross domestically financed deficit would be limited to Nrs. 18 billion (2¾ percent of GDP). - Medium-term objectives (beyond 2006/07): - Raise resources for infrastructure and structural reforms while lowering public debt-to-GDP ratio. - Revenue-to-GDP ratio aimed to increase to 13¾ percent by 2008/09 from tighter administration and base broadening, including elimination of VAT exemptions and reducing customs and excise leakages. - Overall deficit (after grants) targeted to be limited to 5¼ percent of GDP. - Gross domestically financed deficit could be progressively lowered to 2½ percent of GDP. - Room expected to meet costs of further financial and public enterprise sector reforms. ### Monetary and exchange rate policy measures - Maintain the peg to the Indian rupee; the level of the exchange rate peg considered appropriate. - NRB actions to manage liquidity and operations: - Explore options to allow a large volume of import transactions with India, including by the NOC, to be made in convertible currencies. - Approach MOF to issue a stock of T-bills (which could be placed in a separate government account at the NRB) to assist liquidity management. - NRB Board to approve by January 15, 2007 a Master Repo Agreement for the NRB and commercial banks to strengthen legal basis for repo operations. - Auditor General agreed to appoint an international firm to audit NRB 2005/06 accounts to address IFRS noncompliances and improve internal audit and financial management. ### Structural reform program for 2006/07 (detailed) - Fiscal reforms — Tax administration: - LTO to conduct a comprehensive audit of at least 80 large taxpayers in 2006/07. - LTO instructed to conduct quarterly audits of excise returns of large taxpayers, effective immediately; first such audit to relate to mid-October, 2006. - Excise sticker regime to be fully operational by April 15, 2007. - IRD study of VAT nonfilers; proportion of nonfilers to be reduced from over 20 percent to 12½ percent by end-2006/07. - Compulsory electronic tax deduction at source (ETDS) for all large taxpayers after January 15, 2007, and for Kathmandu-based government offices after July 15, 2007. - Computerization to be extended at large taxpayer and retail levels to reduce underinvoicing as part of IRD’s Compliance Year efforts. - Customs Department: - New three-year reform program approved by MOF. - Establish a wide area network (WAN) between headquarters in Kathmandu and the five largest customs offices by March 15, 2007. - Improve ASYCUDA functionality with AsDB and UNCTAD assistance. - Streamline customs clearance at Birgunj. - Steps to gain parliamentary passage of an amended Customs Act in time for inclusion in the 2007/08 budget. - Fiscal transparency: - Draft Fiscal Transparency Act to be forwarded for parliamentary passage in 2006/07. - MOF and line ministries to request Auditor General to update statutory audited accounts of four enterprises for 2005/06 by April 15, 2007 to assess contingent liabilities. ### Financial sector program (2006/07 actions) - Legal and supervisory framework: - Revised Banking and Financial Institutions Act (BFIA) to be finalized; cabinet approval to be sought by July 15, 2007. - Draft Anti-Money Laundering Bill to be presented to Parliament by January 15, 2007. - Interim NRB guidelines under existing BFIA to be issued by January 15, 2007 to clarify mergers and acquisitions procedures. - Strict implementation of NRB licensing policy including “fit and proper” criteria for new entrants. - Loan recovery and enforcement: - GON to impound passports and restrict access to public services of willful defaulters as stated in the 2006/07 budget speech and BFIA amendments. - If necessary, NRB will review blacklisting directives to explore possibility of criminal action against willful defaulters. - NRB “re-engineering” and supervisory strengthening: - NRB to divest shareholding in the Non-Life Insurance Division of Rastriya Beema Sansthan, the Citizen Investment Trust, and at least two rural development banks by July 15, 2007. - NRB to conduct a self-assessment of compliance with Basel Core Principles for Effective Banking Supervision by January 15, 2007 and intends to request IMF technical assistance to review results. - Develop a manual for analyzing data submission by development banks and finance companies by March 15, 2007 to enhance off-site supervision. - Supervision department to develop an early warning system based on off-site data and improve communication of risks to senior management. - Commercial banks and privatization preparations: - With NBL and RBB in their third year under external managers, NRB has begun preparations for eventual privatization with external assistance. - Modalities under consideration include sale to strategic investors after NPLs have been reduced to a manageable size. ### Nepal Oil Corporation (NOC) - SPC related to introduction of an automatic pricing mechanism for oil products was not met by end-December 2004. - Petroleum product prices were raised by 20−70 percent during January 2005 and May 2006 to address NOC losses. - Despite price increases, NOC continued to make substantial losses due to rising international oil prices and operating inefficiencies. - Financial review of NOC’s 2003/04 accounts by an international accounting firm finalized in June 2006 to accurately assess its financial condition. - GON appointed a committee which submitted a report and recommended corrective actions in late September. - Draft Petroleum Sale and Distribution Act to liberalize the oil sector and increase private sector participation was approved by the cabinet in October 2006. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 14. To address NOC losses, the GON will gradually adjust upwards prices of oil ### _cr06407 - 14. To address NOC losses, the GON will gradually adjust upwards prices of oil ### Oil sector and Nepal Oil Corporation (NOC) - The GON will gradually adjust upwards prices of oil products to ensure that NOC will reduce flow losses to zero by mid-July 2007 with an automatic pricing mechanism for oil products being introduced at that time. - In the interim, suitable measures to finance flow losses have been devised. - The GON is discussing suitable arrangements with Indian Oil Corporation to resolve accumulated suppliers’ credits. - Structural performance criterion: Finalize audit of NOC 2005/06 accounts in accordance with international standards by March 15, 2007 (Table 2). ### Program monitoring framework - The program will be monitored using definitions, data sources, and frequency set out in the attached Technical Memorandum of Understanding (TMU). - The government will make available to Fund staff all core data, appropriately reconciled and on a timely basis, as specified in the TMU. - The program’s performance criterion on nonaccumulation of external payment arrears is continuous throughout the program period; as of September 30, 2006, there were no external payment arrears. ### Reviews, focus areas, and commitments - Fourth review under the PRGF arrangement expected to be completed by mid-April 2007; will focus on: - (i) implementation of administration reforms at the Inland Revenue and Customs Departments; - (ii) financial sector reform; - (iii) safeguards issues; and - (iv) progress in oil sector and SOE reform. - Fifth review under the arrangement expected to be completed by mid-October 2007. - The NRB and GON committed to accurate data reporting; NRB intends to follow through with IMF recommendations to improve its financial accounts, internal audit, and financial management made in the context of the Safeguards Assessment. ### Quantitative performance criteria and indicative targets (selected figures) - Performance criteria and indicative targets shown in Table 1 (test dates: Jul. 17, 2006; Oct. 17, 2006; Jan. 14, 2007; Apr. 13, 2007; Jul. 15, 2007). - Floor on net foreign assets of the NRB (in millions of U.S. dollars): 1,842.7; 1,852.7; 1,882.7; 1,912.7; 1,952.7. - Ceiling on net domestic assets of the NRB (in billions of Nepalese rupees): -28.1; -26.1; -23.8; -22.7; -18.8. - Reserve Money (indicative targets, in billions of Nepalese rupees): 110.1; 112.9; 117.4; 120.8; 127.7. - As of July 17, 2006, Reserve Money stood at Nrs. 110.1 billion. - Stock of net domestic financing of the central government budget at start (July 17, 2006): Nrs. 93.6 billion. - The ceiling on net domestic financing will be adjusted upward for onlending operations to cover flow losses of Nepal Oil Corporation. ### TMU definitions and adjustment rules (high-level) - Net foreign assets (NFA) of NRB: market value of gross foreign assets minus gross foreign liabilities, at program exchange rates. Monetary gold valued at program prices (US$600 per oz.). - NFA floor adjusted by shortfall/excess of identified foreign program financing (Table 2). - Net domestic assets (NDA) defined as reserve money minus rupee value of NFA; NDA ceiling adjusted by shortfall/excess of identified foreign program financing; upward adjustment capped at Nrs. 5 billion (around 1 percent of GDP). - Reserve Money (RM): currency in circulation outside NRB, deposits of commercial banks at NRB, and other private sector deposits at NRB. - Net domestic financing (NDF) of the budget defined as cumulative change from July 17, 2006 in specified government debt instruments; ceiling adjusted by shortfall/excess of rupee equivalent of foreign program financing and adjusted 100 percent for shortfall/excess in privatization receipts. - Central government revenue: reported in treasury accounts (economic classification), excluding principal repayments to the budget by corporations and including privatization receipts; revenue floor cumulative from start of fiscal year and adjusted 100 percent by excess/shortfall in privatization receipts. - Contracting or guaranteeing of new medium- and long-term nonconcessional external debt: defined by original maturity more than one year and grant element less than 35 percent using OECD CIRR methodology; excludes IMF, World Bank, and AsDB financing and certain counterguarantees. - Stock of short-term external debt: original maturity up to one year owed or guaranteed by NRB and central government; excludes normal import-related credits. ### Structural performance criteria and benchmarks (selected timing and targets) - Fiscal sector: - Large Taxpayer Office (LTO) to conduct comprehensive audit of large taxpayers by January 15, 2007 (fourth review) and by July 15, 2007 (fifth review, cumulative audit for at least 70 large taxpayers). - IRD to reduce VAT nonfilers to 15 percent or less of registered VAT taxpayers by January 15, 2007; to 12.5 percent or less by July 15, 2007. - Submission to Parliament of draft Petroleum Sales and Distribution Act by January 15, 2007 (structural benchmark). - Financial sector: - NRB to divest all of its shareholding in Non-Life Insurance Division of Rastriya Beema Sansthan and Citizen Investment Trust by February 15, 2007. - NRB to conduct a self-assessment of compliance with the updated Basel Core Principles by January 15, 2007. - Auditor General to appoint an international auditor for NRB 2005/06 accounts by January 31, 2007; finalize audit of NRB 2005/06 accounts by an international auditor by July 15, 2007 (fifth review). - Customs and administration benchmarks: - Customs Department to establish Wide Area Network (WAN) for headquarters and at least five large customs offices by March 15, 2007. - Customs Department to implement single-window customs clearance at Birgunj customs office by July 15, 2007. ### Data reporting and tables for monitoring - Data to be provided in formats shown in Tables 4–9; Ministry of Finance and NRB to furnish program monitoring data. - A written reconciliation of NRB program data (NFA, NDA and Reserve Money) with accounting records will be prepared for all test dates. - All program data to be furnished within eight weeks after the end of each test date. ### Program exchange rates and gold price (Table 1) - Nepalese rupee: 75.0 - Indian rupee: 46.45 - SDR: 0.68 - Japanese yen: 117.0 - Euro: 0.80 - Pound sterling: 0.55 - Gold prices (U.S. dollars per ounce): 600.0 ### Program foreign financing (Table 2) — cumulative by test date - Oct. 17, 2006: 32.9 - Jan. 14, 2007: 45.7 - Apr. 13, 2007: 50.2 - Jul. 15, 2007: 73.5 *Source: IMF staff report and accompanying Technical Memorandum of Understanding (TMU) contained in the provided document.* ### 1. This statement reports on developments since the staff report was circulated to the ### _cr06407 - 1. This statement reports on developments since the staff report was circulated to the ### Political developments - On November 8, the government and the Communist Party of Nepal (Maoist) reached a wide ranging political agreement. - As part of the agreement: - The Maoists will locate their forces in identified cantonments. - They will place under United Nations monitoring their arms in return for an equal number of government arms placed under similar monitoring. - Formation of an interim parliament and government with the participation of the Maoists by December, on the way to constituent assembly elections in June 2007. - The structure of the constituent assembly and modalities for the election have been agreed. - The international community has welcomed the agreement. - The GON and the CPN (M) have requested the United Nations (UN) to assist in monitoring the peace process and fair conduct of constituent assembly elections; the UN Secretary General's personal representative is currently in Kathmandu monitoring the situation. ### IMF Executive Board actions and financing - The Executive Board completed the second and third reviews under Nepal's three-year PRGF Arrangement and approved a disbursement equivalent to SDR 14.3 million (about US$21.2 million). - Completion of these reviews brings total disbursements under the program to SDR 28.5 million (about US$42.5 million). - The Board approved waivers for: - Non-observance of a quantitative performance criterion related to the second review. - Eight structural performance criteria related to the second and third reviews. - The Board decided to extend the current PRGF arrangement by one year to November 18, 2007. - The three-year arrangement was originally approved on November 19, 2003 for an amount equivalent to SDR 49.9 million (about US$74.3 million). ### Macroeconomic performance and outlook - Real GDP at producers’ price grew by 1.9 percent in 2005/06 compared to 2.7 percent in 2004/05. - Consumer price inflation (y-o-y annual average) increased to 8 percent in 2005/06 from 4.5 percent in 2004/05. - Workers' remittances increased to about US$1.3 billion in 2005/06. - In terms of GDP, workers’ remittances increased to about 17 percent in 2005/06 compared to about 12 percent in 2004/05. - Nepal Rastra Bank (NRB) reserves increased to close to US$1.8 billion at end of 2005/06 from US$1.5 billion in 2004/05. - Growth expectations: - The Nepalese economy is expected to register a modest growth of 4 to 5 percent in 2006/07. - External sector projections: - Merchandise exports will remain dampened in 2006/07. - Recovery in tourism is expected given improved security. - Workers' remittances will continue to grow. - Reserve accumulation of US$125 million is projected. ### Inflation and risks - Inflation risks: - Full pass-through of high and volatile international oil prices to domestic oil prices has not yet taken place. - Lifting of the oil subsidy is likely to add pressure on prices, though recent fall in global oil prices is likely to ease the inflation outlook. - Tight monetary policy stance of the NRB is likely to anchor inflationary expectations. - Indian prices, expected to remain moderate, are likely to contain Nepalese prices to around 6 percent in 2006/07. ### Fiscal policy and public finances - Fiscal deficit was 1.7 percent of GDP in 2005/06, up from 0.8 percent in 2004/05, due mainly to lower revenue collection. - Revenue collection declined to 12.2 percent of GDP in 2005/06 from 12.9 percent in 2004/05. - Net domestic borrowing remained low at 1.5 percent of GDP in 2005/06. - Budget 2006/07 aims: - Improve quality of government spending with increased allocation for capital expenditure. - Increase revenue collection through adjustment in revenue rates, improved VAT collection, and improvements in tax administration. - Fiscal projection: - Overall fiscal deficit in 2006/07 is expected to be slightly higher. - Increased foreign loans are expected to finance part of the fiscal deficit. - Net domestic financing projected to remain at about 1.5 percent of GDP. ### Monetary and exchange rate policies - Central objective: maintain the pegged exchange rate regime to the Indian rupee. - The authorities agree the current level of the exchange rate peg is appropriate. - A slight inflation differential between Nepal and India caused a marginal real appreciation of the Nepalese rupee vis-à-vis Indian rupee; RER expected to revert to a neutral position. - NRB monetary policy 2006/07 (announced July 23, 2006): - Broad money projected to grow by 16 percent in 2006/07. - Bank credit to the private sector projected to expand by 16.2 percent in 2006/07. - Liquidity management: - NRB is relying on open market operations: sale auction, purchase auction, repo auction and reverse repo auction. - To mop up liquidity from increased workers' remittances, NRB has decided to offload government treasury bills from its holding. - A liquidity monitoring and forecasting framework (LMFF) has been put in place. ### Structural reforms and institutional measures - Fiscal reforms: - A large tax office (LTO) in the Inland Revenue Department (IRD) has been operationalised. - The government has drafted the Fiscal Transparency Act. - LTO will undertake a comprehensive audit of at least 80 large taxpayers in 2006/07 and conduct quarterly audits of excise returns of large taxpayers. - The GON will conduct a study of VAT evasion and is committed to making compulsory electronic tax deduction at source for large taxpayers. - A wide area network (WAN) will be established between Kathmandu HQ and the five largest customs offices. - Public enterprise reforms: - Five state-owned enterprises were privatized or liquidated. - Nepal Telecommunication Corporation converted into a public limited company. - Petroleum product prices were raised by an average of 35.7 percent in 2005/06 to improve NOC's financial position. - An international audit firm reviewed NOC's accounts for 2003/04; a committee submitted a report on addressing NOC operational deficiencies on September 21, 2006. - A bill relating to the sale and distribution of petroleum has been presented to parliament. - Financial sector reforms: - NRB amended employment rules to introduce tenure based Compulsory Retirement Scheme (CRS). - International auditors finalized NRB's accounts for 2003/04 and 2004/05; Auditor General approved auditing of 2005/06 accounts by international auditors. - Foreign management teams in two state-owned commercial banks made progress; significant staff reductions occurred. - Secured transactions, company, securities and insolvency Bills were enacted. - Enactment of a revised Banking and Financial Institutions Act (BFIA) and Anti-Money Laundering Bill are in the pipeline. - GON and NRB determined to take appropriate action against willful defaulters to settle non-performing loans. - NRB decided to divest its shareholding in some financial institutions and will conduct a self-assessment of compliance with Basel Core Principles for Effective Banking Supervision. ### Program implementation, performance criteria, and waivers - Most quantitative performance criteria (QPC) under the second and third reviews were met. - Authorities requested a waiver for nonobservance of the floor on NFA for October 16, 2004. - Authorities requested waivers for delayed implementation of structural performance criteria (SPC); for all except one SPC, corrective actions have recently been taken as stated in the Staff Report. - Government intends to implement the revised understandings on an automatic pricing mechanism for oil products. - Authorities thanked the IMF Executive Board for granting a waiver on January 18, 2006 for unintentional non-observance of the QPC on the non-accumulation of external payment arrears. ### Conclusions and requests - A decade-long conflict and political tensions slowed growth and impeded poverty reduction; recent political change offers an opportunity to accelerate growth and structural reforms. - Authorities emphasize that maintaining macroeconomic stability and accelerating structural reforms are topmost priorities, but are challenging during political transition. - Authorities solicit support from the international community to accelerate economic growth and reduce poverty. - Authorities remain committed to transparency and consent to publication of the staff report on the review, the LOI and the memorandum. - Authorities reiterated appreciation to the donor community for their continued assistance and support. *Statement by Hooi Eng Phang, Executive Director for Nepal; Press Release No. 06/251, November 13, 2006.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06407.pdf_