## _cr15224 — Executive Summary and Selected Boxes ## Source details **Canonical URL:** [_cr15224 — Executive Summary and Selected Boxes](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15224.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15224.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15224.pdf.json) --- ### Context and request for Fund assistance - A magnitude 7.8 earthquake struck Nepal on April 25; a second quake on May 12 was magnitude 7.3. - Human and physical impact: - Over 8,800 lives were lost. - 22,300 injuries. - An estimated 8 million people have been affected. - Over half a million houses destroyed (498,852 houses destroyed) and another 256,697 houses partially damaged (as of May 28). - Three million people rendered homeless. - An additional 3 percent of Nepal’s population has been pushed into poverty as a direct result of the earthquakes — "as many as a million more poor people." - Damage and financing request: - Damages and losses are estimated at US$7 billion (NR 706 billion), or nearly one third of GDP. - PDNA: NR 517 billion (US$5.15 billion) value of destroyed physical assets; NR 189 billion (US$1.89 billion) economic losses. - Authorities requested SDR 35.65 million (approximately US$50 million) under the Rapid Credit Facility (RCF), equivalent to 50 percent of quota, to be disbursed as direct budget support to the Ministry of Finance’s account at the Nepal Rastra Bank (NRB). - At a June 25 donor conference, donors pledged about US$4 billion of grants and concessional loans to be disbursed over five years. ### Pre-earthquake macroeconomic background - Poverty and growth: - Poverty fell from over 50 percent in 2003/04 to just under 25 percent in 2010/11. - Growth accelerated to 5.5 percent in 2013/14; average growth of 4 percent in the three previous years. - Growth was 3.5 percent last year (historical note); the growth outlook in 2014/2015 revised downwards to 3.04 percent. - Inflation and external: - Inflation was 6.8 percent (y/y) in mid-April 2015; inflation has averaged 9.3 percent in the past five years; inflation moderated to less than 7.5 percent in the eleven months of 2014/2015. - Remittances reached 28 percent of GDP in 2013/14. - Net of remittances, Nepal ran a current account deficit of 23.6 percent of GDP in 2013/14. - Reserves rose to US$6.3 billion by mid-April 2015, equal to 29 percent of GDP and covering almost eight months of prospective imports. ### Impact of the earthquake — costs, growth, inflation, and reserves - Aggregate costs and composition: - Total cost estimated about US$7 billion, or 1/3 of GDP. - Damage to buildings and infrastructure estimated about 24 percent of GDP. - Economic losses estimated at 9 percent of GDP. - PDNA estimate of recovery and reconstruction costs: US$7 billion over the next five years; total NR 706.5 billion (100). - Private sector sustained about 3.3 times the value of damages and losses of the public sector. - Sectoral damage highlights (NR billions and share as presented): - Housing and human settlements: 350.5 — 49.6 - Health and Education: 38.9 — 5.5 - Tourism: 81.2 — 11.5 - Electricity: 21.2 — 3.0 - Transport: 22.1 — 3.1 - Finance: 31.9 — 4.5 - Total: 706.5 — 100 - Growth and medium-term prospects: - Staff pre-earthquake baseline: 5.0 percent for 2014/15; Central Bureau of Statistics revised to 3.4 percent in year to mid-July 2015; staff projected growth falling to 3.04 percent for 2014/15 in some sections. - Tourism receipts could fall by some 1½ percent of GDP in 2015/16 compared with 2013/14. - Growth expected to gradually rebound to around 5.5 percent in 2016/17. - Potential growth projected to fall to around 4 percent over the medium term. - Inflation and monetary implications: - Agricultural products account for some 40 percent of the CPI basket; reduced supply and transport damage will raise inflation pressures. - Staff envisages maintaining official reserves at about 7 months of prospective imports (excluding construction-related imports) over the next few years with concerted support. - Without RCF disbursement and exceptional donor support, central bank reserves would fall to about 5 months of imports. - External current account: - Reconstruction imports will rise; one-off surge in remittances expected but insufficient to offset higher imports. - Current account projected to be in deficit of about 4 percent of GDP on average during the next 5 years. ### Financial sector impact and risks - Initial estimates of sectoral financial hits: - Financial hit to banks NR 38 billion (about 1.8 percent of GDP). - Insurance sector NR 3 billion, net of reinsurance. - Asset quality and supervision: - Asset quality expected to deteriorate, particularly in rural areas; more data and diagnostics needed. - NRB’s regulatory forbearance allows banks to restructure debts of viable SMEs and other borrowers for a limited period. - An in-depth special inspection of 54 banks started in 2014; completion is important to assess true impact. - Contingency: - If earthquake-related damage results in much larger NPLs, NRB might need to implement a well structured bank restructuring strategy urgently. ### Uncertainties and margins of error - PDNA compiled within 2 months; estimates are early and subject to revision. - Recovery speed of private sector (tourism, agriculture, SMEs) uncertain; slower recovery could increase cumulative losses. - Remittances historically increase after disasters; World Bank analysis suggests significant increases in similar contexts, but Nepal’s large temporary migrant stock could limit sustained additional inflows. - Recovery speed depends on absorptive capacity, implementation bottlenecks, and donor coordination. ### Public financial management (PFM), reconstruction implementation, and institutional measures - Strengthening PFM is key to swift, efficient reconstruction and improved public investment quality. - Measures and institutional actions: - Creation of the National Reconstruction Authority: - Extra-Ordinary Mechanism with a sunset clause of a maximum of six years. - Led by the Prime Minister with its own staff and a chief executive officer; authority to fast-track procurement, land acquisition and environmental impact assessments. - Authorities committed to provide scrutiny and shared responsibility to domestic civil society and international partners. - Reforms to the regular capital budget: - For spending items included in the approved budget, government bodies will no longer require re-authorization from District Development Committee, line ministry and NPC prior to tendering. - Multi-year projects included in the approved budget no longer need re-authorization at the start of each fiscal year. - A project will be included in the budget only if a feasibility study has been done and environmental assessment and land acquisition requirements completed. - Recommendation to establish a specialized NPC unit to manage appraisal, approval and monitoring of capital budget projects; roles clarified: MOF — budget formulation; NPC — ensure development strategy reflected in budget. - Short-run practical measures from FAD technical assistance: medium-term expenditure framework, robust appraisal function, independent review mechanisms, better prioritized selection criteria, streamlined implementation rules. ### Social spending, poverty mitigation, and reconstruction priorities - Staff recommended protecting priority social spending—including health and education—to mitigate negative impact on poverty. - Early estimates suggest an additional 3 percent of the population pushed into poverty (as many as a million more poor people). - Nepal’s 13th Development Plan (2013-16) aims to graduate from least-developed country status by 2022, with a target annual growth rate of 6 percent and reduce poverty to 18 percent by FY2016. ### Fiscal outlook, debt, and DSA findings - Pre-earthquake fiscal position: - Surpluses in past two fiscal years due to under-execution of spending; public debt fell to 28 percent of GDP by mid-2014 (public debt declined in 2014 to 28.3 percent of GDP from 32.3 percent in 2013). - External debt end-FY2013/2014: 17.9 percent of GDP (US$3.5 billion); 86 percent concessional borrowing from World Bank and ADB. - Domestic debt declined from 12.2 percent of GDP in 2012/13 to 10.4 percent by end-FY2013/14. - Reconstruction financing approach: - Total recovery and reconstruction need borne by the budget: NR 670 billion or US$6.7 billion, or about 31 percent of GDP over 2015/16–2020/21. - External support secured (indicative) through ICNR: about NR 408 billion or US$4.08 billion for 2015/16-2019/20. - Government intent: "seek external grants and concessional loans as much as possible before resorting to domestic borrowing." - Debt sustainability (LIC DSA) — key findings: - Nepal’s risk of debt distress remains low. - PV of PPG external debt: 10.7 percent of GDP in 2014; projected to rise to 12.1 percent of GDP by 2020 (increase of 1.4 percent of GDP over next 6 projection years). - Public debt-to-GDP ratio: rises from 28.3 percent in 2014 to 31.2 percent in 2035. - PV of public debt-to-GDP: increases from 21.1 percent in 2014 to 25.6 percent by 2035. - PV of public debt as ratio of revenues and grants: 101.5 percent in 2014 rising to 108.4 percent by 2035. - Domestic debt share projected to increase from 37 percent in 2014 to 51 percent of total public debt in 2035. - Stress tests: indicators remain well below thresholds under standard shocks due to assumed high concessionality of official borrowing. - Selected DSA numeric indicators (values preserved as listed): - PV of external debt (selected years): 10.7; 10.9; 11.5; 11.7; 11.9; 12.1; 12.1; 12.2; 9.6. - PV of debt in percent of exports (selected): 92.0; 113.8; 147.1; 145.2; 144.2; 139.8; 135.2; 129.9; 102.1. - Debt service-to-exports (percent, selected): 10.6; 9.5; 11.2; 7.8; 9.6; 9.3; 9.0; 8.9; 8.6; 7.0; 7.6. - Public sector debt (percent of GDP, selected): 36.4; 32.3; 28.3; 25.1; 26.5; 27.5; 28.4; 28.4; 28.8; 31.6; 31.2. - Aid flows (Billions USD, selected): 0.7; 0.5; 0.6; 0.5; 0.8; 0.9; 0.9; 0.9; 1.0; 1.4; 2.1 (Grants: 0.5; 0.3; 0.5; 0.4; 0.6; 0.7; 0.7; 0.7; 0.8; 1.0; 1.6). - Nominal GDP (Billions USD, selected): 18.9; 19.3; 19.8; 21.2; 23.6; 26.0; 28.2; 29.9; 31.7; 42.6; 77.0. - Gross workers' remittances (Billions USD, selected): 4.4; 4.9; 5.5; 6.2; 6.7; 7.3; 7.9; 8.5; 9.3; 14.0; 31.6. ### Monetary policy, exchange rate, and reserves management - Monetary stance: - Authorities agreed monetary policy should remain accommodative, at least initially, to support recovery and reconstruction financing needs. - Monetary policy aims to control level and volatility of excess liquidity while accommodating some increase in inflation. - Once conditions normalize, authorities will aim to keep inflation close to that in India. - Exchange rate: - Nepal’s pegged exchange regime to the Indian rupee will be maintained. - Reserve objective: - Authorities and staff envisage maintaining official foreign reserves at about 7 months of prospective non-reconstruction-related imports over the next three years with partner support. ### Policy discussions, recommendations, and next steps - Immediate and medium-term priorities: - Boost capacity to plan, prioritize, and implement capital spending; simplify administrative procedures; coordinate National Reconstruction Authority with annual budget process. - Protect priority social spending—health and education—to mitigate poverty impact. - Seek grants and concessional resources to finance rehabilitation and reconstruction while safeguarding debt sustainability. - Continue financial sector reforms to improve regulation, supervision, transparency, and access to formal financial services. - Develop contingency strategy for potential rise in NPLs and prepare bank restructuring options if necessary. - IMF engagement: - Staff supports RCF disbursement request of SDR 35.65 million (50 percent of quota, equivalent to US$50 million). - Authorities expressed interest in longer-term engagement, possibly through the Extended Credit Facility (ECF), to address governance, PFM, structural challenges, and financial system weaknesses. - Authorities committed to update the safeguards assessment; external auditor of NRB authorized to share documents with Fund staff. - PFM and capital budget execution reforms: - Short-run practical measures: reestablish and strengthen the medium-term expenditure framework; establish competent appraisal function (preferably in NPC); independent review of major projects; better targeted selection and prioritization criteria; refine rules for project implementation and monitoring. - Consider establishment of a specialized NPC unit; FAD can provide technical assistance, including HQ missions or a resident long-term advisor. ### Select macroeconomic assumptions and projections (values preserved as listed) - Historical average real GDP growth over past five years: 4.5 percent. - Real GDP growth (series of projected values listed): 4.8; 4.1; 5.4; 4.3; 0.9; 3.4; 4.4; 5.4; 3.9; 3.8; 3.8; 4.1; 4.0; 4.0; 4.0. - GDP deflator in US dollar terms (change in percent, series): -5.4; -1.8; -2.6; 6.2; 8.6; 3.9; 6.5; 4.5; 4.5; 2.1; 2.0; 3.9; 2.0; 2.0; 2.0. - Effective interest rate (percent, series): 0.9; 0.9; 2.5; 1.1; 0.5; 0.1; 0.3; 0.3; 0.5; 0.7; 1.0; 0.5; 1.0; 1.0; 1.0. - Growth of exports of G&S (US dollar terms, percent, series): 11.7; 8.4; 12.0; 6.9; 7.3; -11.9; -8.8; 12.6; 11.4; 11.1; 9.6; 4.0; 6.0; 6.9; 6.5. - Growth of imports of G&S (US dollar terms, percent, series): 0.6; 14.0; 13.2; 14.7; 9.0; 7.0; 23.8; 6.5; 8.3; 5.8; 6.0; 9.6; 7.8; 8.0; 7.6. - Government revenues (excluding grants, percent of GDP, series): 16.0; 17.5; 18.4; 18.4; 19.1; 19.4; 19.7; 19.9; 19.9; 20.2; 21.6; 20.6. *Source: IMF staff report — EXECUTIVE SUMMARY and selected boxes and appendices (July 17, 2015).* ### EXECUTIVE SUMMARY ### _cr15224 - EXECUTIVE SUMMARY ### Context and request for Fund assistance - A magnitude 7.8 earthquake struck Nepal on April 25; a second quake on May 12 was magnitude 7.3. - Over 8,800 lives were lost and 8 million people—nearly a third of Nepal’s population—have been affected. - Half a million homes were destroyed and another 250,000 were damaged. - Damages and losses are estimated at US$7 billion or nearly one third of GDP. - The Nepalese authorities request financial assistance under the Fund’s Rapid Credit Facility (RCF) for urgent balance of payments and fiscal needs: - Request: SDR35.65 million (50 percent of quota), with the full amount to become available upon Board approval, to be disbursed as direct budget support. - Because the Central Bank Law does not permit central bank lending to the government (beyond short-term overdrafts), the authorities request the funds be transferred to the Ministry of Finance’s account at the central bank. - At a June 25 donor conference, multilateral and bilateral donors pledged about US$4 billion worth of grants and concessional loans to be disbursed over five years to cover remaining financing needs. ### Background and pre-earthquake macroeconomic performance - Nepal remains Asia’s poorest country despite progress in reducing poverty: - Poverty fell from over 50 percent of the population in 2003/04 to just under 25 percent in 2010/11. - Growth and inflation pre-earthquake: - Growth accelerated to 5.5 percent in 2013/14; average growth of 4 percent in the three previous years. - Inflation was 6.8 percent (y/y) in mid-April 2015, about 2 percentage points above Indian CPI. - Fiscal and external conditions pre-earthquake: - Fiscal position: surpluses in the past two fiscal years due to under-execution of spending; public debt fell to 28 percent of GDP by mid-2014. - External position: current account surplus reached 4.6 percent of GDP in 2013/14; remittances reached a record-high 28 percent of GDP. - Net of remittances, Nepal ran a current account deficit of 23.6 percent of GDP in 2013/14. - Reserves rose to US$6.3 billion by mid-April 2015, equal to 29 percent of GDP and covering almost eight months of prospective imports. - Pre-earthquake constraints: government’s weak budget implementation capacity held back growth and propped up the external position. ### The impact of the earthquake — key findings and projections - Overall cost and composition: - Total cost estimated at about US$7 billion, or ⅓ of GDP. - Damage to buildings and infrastructure estimated at about 24 percent of GDP. - Economic losses (e.g., foregone revenue in agriculture and tourism) estimated at 9 percent of GDP. - Growth and medium-term prospects: - Central Bureau of Statistics revised GDP projection for 2014/15: growth falling to 3.4 percent in the year to mid-July 2015 (staff pre-earthquake baseline forecast was 5.0 percent). - Tourism receipts could fall by some 1½ percent of GDP in 2015/16 compared with 2013/14. - Growth is expected to gradually rebound to around 5.5 percent in 2016/17. - Potential growth is projected to be adversely affected, falling to around 4 percent over the medium term. - Inflation and monetary implications: - Agricultural products account for some 40 percent of the CPI basket; reduced supply and transport damage will raise inflation pressures. - Stepped-up foreign aid and higher inflows of remittances would further boost liquidity in the financial system. - Staff envisages maintaining official reserves at about 7 months of prospective imports (excluding construction-related imports) over the next few years with concerted support. - Fiscal impact: - Revenue losses are unlikely to be fully offset by higher duty collection from reconstruction-related imports. - Expenditure pressures substantial due to damage to infrastructure and government properties and likely financial assistance to households and businesses. - Government may need to borrow more; fiscal deficit and public debt could increase in the medium term. - External current account and reserves: - Reconstruction imports will rise; one-off surge in remittances expected but insufficient to offset higher imports. - Current account projected to be in deficit of about 4 percent of GDP on average during the next 5 years. - Without RCF disbursement and exceptional donor support, central bank reserves would fall to about 5 months of imports—below the reserve adequacy metric suggesting maintenance at about 7 months of imports. - Financial sector risks: - Initial estimates: financial hit to banks NR 38 billion (about 1.8 percent of GDP) and to the insurance sector NR 3 billion, net of reinsurance. - Asset quality expected to deteriorate, particularly in rural areas; more data and diagnostics needed. ### Uncertainties and margins of error - PDNA compiled within 2 months; early estimates necessary to start reconstruction though subject to revision. - Recovery speed of private sector (tourism, agriculture, SMEs) is uncertain; slower recovery could increase cumulative losses. - Remittances historically increase after disasters; World Bank analysis suggests significant increases in similar contexts, but Nepal’s large temporary migrant stock could limit sustained additional inflows. - Recovery speed also depends on increasing absorptive capacity by addressing implementation bottlenecks and effective coordination among donors and implementing agencies. ### Policy issues, discussions, and next steps - Discussions focused on: - Economic and fiscal impact of the earthquake. - Strengthening government capacity to plan, prioritize, and implement capital spending. - Steps to address risks to the financial system from widespread property damage. - Debt sustainability. - Donor support and fiscal strategy: - Donor pledges totaling US$4 billion over 5 years allow scaling up capital spending while keeping domestic government borrowing to a minimum, reducing crowding out of private reconstruction financing. - Pledges include concessional loans; updated joint IMF/World Bank Debt Sustainability Analysis concludes Nepal’s risk of debt distress remains low. - Next steps after RCF: - Authorities expressed interest in discussing longer-term Fund engagement, possibly through the Extended Credit Facility (ECF). - A package of macroeconomic and structural reforms—addressing weak implementation capacity, financial system weaknesses, structural challenges, governance, and public financial management—could speed recovery and support the next phase of growth and development. *Source: IMF staff report — EXECUTIVE SUMMARY (July 17, 2015).* ### 11. The authorities agreed that strengthening public financial management (PFM) will ### 11. The authorities agreed that strengthening public financial management (PFM) will ### PFM and reconstruction implementation - Strengthening public financial management (PFM) is key to swift and efficient implementation of reconstruction efforts and to enhance the quality of public investment in the near- and longer-term. - The earthquake added urgency to improve capital budget execution. - Recent IMF Fiscal Affairs Department technical assistance proposed short-run practical measures aimed at: - strengthening medium-term budget planning, - establishment of a robust appraisal function, - development of targeted selection and prioritization criteria, - improved use of monitoring processes in project implementation. - Authorities have taken steps in two areas: - Creation of the National Reconstruction Authority to speed up reconstruction in the districts most affected by the earthquake: - This is an Extra-Ordinary Mechanism informed by international practices and grounded on past experience in Nepal in dealing with natural disasters and shocks. - The authority will be subject to a sunset clause of a maximum of six years. - The Authority will have its own staff, be led by the Prime Minister, and a chief executive officer will be appointed to implement reconstruction work with the ability to fast-track public procurement, land acquisition and environmental impact assessments. - To allay concerns about transparency and accountability, the authorities committed to provide a substantial role for scrutiny and shared responsibility assigned to domestic civil society and international development partners. - Reforms to the “regular” capital budget to prevent delays and shortfalls: - For spending items included in the approved budget, government bodies will no longer be required to obtain authorization from the District Development Committee, the line ministry and the NPC—a process that could take up to six months—so government bodies should be able to immediately start the tendering process after budget adoption. - Multi-year projects included in the approved budget in one year no longer need to be re-authorized at the start of each fiscal year. - Going forward, a project will only be included in the budget if a feasibility study has been done, and if environmental assessment and land acquisition requirements have been completed. - Recent consensus among major political parties to promulgate a new constitution and hold elections for local governments as early as possible is expected to boost accountability for pace and quality of local government spending. ### Social spending and poverty impact - Staff recommended protecting priority social spending—including health and education spending which has increased significantly in recent years—to mitigate the earthquake’s negative impact on poverty. - Experience in other low-income countries shows natural disasters can lead to long-term decline in productive capacity through divestment of limited physical capital by the poor. - A contingency plan should be developed in case earthquake-related damage and cost to the budget is much larger than currently expected. - Early estimates suggest an additional 3 percent of Nepal’s population has been pushed into poverty as a direct result of the earthquakes; this translates into as many as a million more poor people. - Nepal’s 13th Development Plan (2013-16) aims at graduating from least-developed country status by 2022, with key objectives to achieve an annual growth rate of 6 percent and to bring down the percentage of the population living below the poverty line to 18 percent by FY2016. ### Monetary policy stance - Authorities agreed monetary policy should remain accommodative, at least initially. - Post-quake recovery and reconstruction will increase private sector financing needs. - Larger aid inflows (on top of surging remittances) could lead to more excess liquidity in the banking system. - Monetary policy aims to control the level and volatility of excess liquidity, while accommodating some increase in inflation (due to higher transportation and business costs). - As the economy recovers, Nepal Rastra Bank (NRB) will closely monitor price developments and aim to keep Nepalese inflation close to that in India. ### Financial sector reforms and stability - The 2014 FSAP identified financial sector weaknesses: asset quality issues, interconnections in the financial system, weaknesses in financial sector infrastructure (including legal framework), supervision, and crisis preparedness. - The NRB has implemented macro-prudential measures and improved supervision, including assistance of an MCM resident advisor; efforts will continue as NRB builds a new headquarters. - DFID restructured its TA program to respond to the earthquake and is working with NRB to establish a disaster recovery centre. - On June 29, the Executive Board of the World Bank approved a US$100 million Post Disaster Second Financial Sector Stability Credit. - Authorities reiterated commitment to a 2014–16 program of financial sector reforms with two over-arching objectives: - (i) ensure stability of the financial system by improving regulation, supervision, and transparency closer to international norms; - (ii) start improving access to formal financial services. - Supplementary measures will support the sector’s recovery from the earthquake and ensure operational resilience against natural disasters. - An in-depth special inspection of 54 banks started in 2014; completion is important to assess true impact. ### Contingency for non-performing loans - A contingency strategy should be developed if earthquake-related damage to property results in much larger non-performing loans (NPLs). - So far, estimates of impact on banks’ balance sheets seem manageable; NRB’s policy response—described in the PDNA as “carefully designed regulatory forbearance [allowing banks] to restructure the debts of viable SMEs and other borrowers for a limited period of time”—is appropriate. - If impact is considerably larger, banks’ ability to lend may be severely constricted and NRB might need to implement a well structured bank restructuring strategy urgently. ### Exchange rate and structural reforms - Nepal’s pegged exchange regime has generally served the country well and will be maintained. - Competitiveness weakened in recent years due to external shocks, under-implementation of the capital budget, slow reforms, and loose monetary policies that generated higher inflation than trading partners (including India). - The 2014 Article IV staff report concluded the real exchange rate of the Nepalese rupee is broadly in line with fundamentals, taking into account dependence on large remittance inflows. - Structural reforms to improve competitiveness are crucial to support recovery and reduce vulnerabilities: - Better public infrastructure and reforms to reduce regulatory burden. - Accelerating development of hydropower potential and large privately-financed infrastructure projects would boost confidence. - World Bank and ADB have committed substantial funds for sectoral reforms, but undisbursed project loan commitments from these two organizations now exceed 7 percent of GDP due to slow implementation and uptake of reforms. ### IMF engagement and financial assistance - Authorities expressed interest in longer-term Fund engagement, possibly through the Extended Credit Facility (ECF), aimed at improving governance, PFM, and addressing entrenched structural challenges including financial system weaknesses; discussions will commence in coming months. - Authorities requested a disbursement under the Fund’s Rapid Credit Facility (RCF) in the equivalent of SDR 35.65 million (US$50 million), equivalent to 50 percent of quota. - The disbursement amounts to ¼ percent of GDP and will address urgent balance of payments and fiscal needs resulting from the April 25, 2015 earthquake. - The amount represents only a small share of the earthquake’s cumulative impact on the budget and balance of payments over coming years. - The Fund’s support complements financing from the ADB, World Bank, and bilateral partners and is expected to play a catalytic role in firming up pledged aid. ### Access and capacity to repay; safeguards - Nepal has adequate capacity to repay the Fund despite outstanding RCF and ECF disbursements. - Most public debt is concessional; debt service is low relative to projected foreign reserves and government revenue. - Nepal’s debt to GDP ratio has decreased in recent years; the bulk of debt is long term and owed to the World Bank and ADB. - Authorities committed to update the safeguards assessment. A May 2011 safeguards assessment noted external audit mechanisms needed improvement and NRB’s financial reporting would be strengthened by resolving qualifications raised by external auditors each year. ### Staff appraisal and recommendations - Staff noted the earthquake caused large damage to houses, government buildings and infrastructure; reconstruction will take time and require international assistance. - Staff supports the authorities’ RCF disbursement request of SDR 35.65 million (50 percent of quota, equivalent to US$50 million) based on damage severity, urgent BOP need, and authorities’ policy commitments including seeking grants and concessional resources to finance earthquake-related capital expenditures. - Key staff observations and recommendations: - The main challenge is boosting capacity to plan, prioritize, and implement capital spending; authorities are simplifying administrative procedures and established the National Reconstruction Authority. - Coordination between the National Reconstruction Authority and the annual budget process is crucial for transparent, accountable, and effective use of earthquake relief funds. - Authorities remain committed to medium-term fiscal and debt sustainability; fiscal balance is expected to turn into a deficit in 2015/16 owing to earthquake-related spending, but authorities have sought and obtained pledges for grants and concessional resources to finance rehabilitation and reconstruction while safeguarding debt sustainability. - Authorities committed to maintain financial sector stability; NRB’s temporary limited regulatory flexibility for restructuring debts of viable SMEs and other borrowers is appropriate, but a contingency strategy should be developed if NPLs rise much more than currently estimated. *Source: IMF staff report excerpt.* ### Box 1. Nepal: Damage from the 2015 Earthquake ### Box 1. Nepal: Damage from the 2015 Earthquake ### Event overview and human impact - On April 25, 2015, a magnitude 7.8 earthquake struck the historic district of Gorkha, about 76 km northwest of Kathmandu. - The April 25 earthquake was followed by more than 300 aftershocks greater than magnitude 4.0, including one measuring 7.3 on May 12. - Casualties and affected population: - More than 8,800 casualties. - 22,300 injuries. - An estimated 8 million people have been affected. - Geographic spread: - Fourteen of the country’s 75 districts were declared ‘crisis-hit’. - Another 17 neighbouring districts are partially affected. - Distributional notes: - Poorer, rural areas were more adversely affected than towns and cities. - More females died than males because of roles that assign indoor chores to women. - Timing note: - The loss of life could have been much higher were it not for the fact that the first earthquake took place on a Saturday, the weekly holiday, and during the daytime. ### Post Disaster Needs Assessment (PDNA): process and methodology - The government called for a PDNA under the leadership of the National Planning Commission (NPC) to assess impact and define a recovery strategy including funding implications. - PDNA organization: - Over 250 officials and experts from the government and 30 development partner agencies. - Organized into 23 thematic groups. - Each group had a dedicated Joint Secretary from the relevant line ministry and the NPC to work with a lead agency among development partners. - Data collection, field visits, and verification took place from May 22 to June 10. - Key findings of the PDNA were presented at the International Conference on Nepal’s Reconstruction (ICNR) on 25 June. - Methodology: - PDNA follows a methodology developed by the European Union, the World Bank and the UN system for post-disaster assessments and recovery planning. - For each sector or thematic group, the PDNA uses three main concepts: (i) damage, (ii) losses, and (iii) recovery needs. - Damage: value of destroyed physical assets. - Losses: losses and higher costs of production of goods and services arising from the disaster. - Recovery needs: consider reconstruction with better specifications, equipment, improved governance and risk reduction while maintaining fiscal prudence and acceptable levels of recovery. ### Aggregate cost estimates and sectoral distribution - PDNA estimate of recovery and reconstruction costs: US$7 billion over the next five years. - Total value of disaster effects (damages and losses): NR 706 billion (US$ 7 billion). - NR 517 billion (or 76 percent) represents the value of destroyed physical assets. - NR 189 billion (24 percent) reflects economic losses from the disaster. - Public vs private sector: - The private sector sustained about 3.3 times the value of damages and losses of the public sector. ### Key sectoral damage and loss figures (NR billions and share) - Housing and human settlements: 350.5 — 49.6 - Health and Education: 38.9 — 5.5 - Cultural heritage: 19.2 — 2.7 - Productive Sectors (total): 178.1 — 25.2 - Agriculture: 28.4 — 4.0 - Irrigation: 0.4 — 0.1 - Commerce: 17.0 — 2.4 - Industry: 19.3 — 2.7 - Tourism: 81.2 — 11.5 - Finance: 31.9 — 4.5 - Infrastructure Sectors (total): 66.8 — 9.5 - Electricity: 21.2 — 3.0 - Communications: 8.7 — 1.2 - Community Infrastructure: 3.3 — 0.5 - Transport: 22.1 — 3.1 - Water and Sanitation: 11.4 — 1.6 - Cross-cutting Issues (total): 52.9 — 7.5 - Governance: 18.8 — 2.7 - Disaster Risk Reduction: 0.2 — 0.0 - Environment and Forestry: 34.0 — 4.8 - Total: 706.5 — 100 ### Notable sectoral impacts and vulnerabilities - Housing and human settlements account for almost fifty percent of damage and loss: - 498,852 houses were destroyed. - 256,697 houses were partially damaged (as of May 28). - Education and health: - Nearly 7,000 schools were completely or significantly damaged. - Healthcare infrastructure, including health facilities, toilets, and water systems, have been destroyed. - Productive sectors and livelihoods: - Tourism has been severely affected; tourist arrivals are likely to stay low for a few years. - Central and western affected regions are largely rural and dependent on agriculture. - Widespread loss of livestock will potentially cause a severe income shock in the short term. *Source: Box 1. Nepal: Damage from the 2015 Earthquake* ### Box 3. Raising Capital Budget Execution in Post-Earthquake Nepal (concluded) ### Box 3. Raising Capital Budget Execution in Post-Earthquake Nepal (concluded) ### Institutional recommendation: specialized NPC unit and roles of MOF and NPC - Establish a specialized organizational unit in the NPC to manage the appraisal, approval and monitoring of the preparation of the capital budget projects. - Clearly define responsibilities of the MOF and NPC: - MOF: focus on the budget formulation process. - NPC: ensure that the government’s development strategy is reflected in the budget. - If authorities pursue the recommendation, the Fund (FAD) can provide resources to assist establishment of improved planning, selection and implementation for major capital projects. Modalities could include intensive technical assistance ranging from an HQ mission to a resident long-term advisor. ### Short-run, practical measures to improve capital budget execution (identified by past FAD PFM technical assistance) - Planning - Reestablish and strengthen the medium-term expenditure framework to complement medium-term budget planning. - Establish a robust and competent function for appraisal of major capital projects, preferably in the NPC. - Charge this function with developing the appraisal system and preparing and streamlining relevant regulations and guidelines. - Introduce mechanisms for independent review of major projects as soon as possible to carry out obligatory reviews of all major projects based on terms of reference provided by the NPC project appraisal office. - Allocation - Develop better targeted selection and prioritization criteria based on cost benefit analyses, project life cycle and future recurrent costs, project readiness for implementation, as well as associated risks. - Present consolidated information to decision-makers, including priority ratings and future maintenance and operational costs. - Delivery - Refine, streamline and enforce rules and procedures for project implementation, adjustments and completion. - Continue evaluations of major projects and use the findings to readjust projects and inform future project design. ### Reconstruction planning and coordination - The earthquake increased urgency to address Nepal’s infrastructure gap, underscoring the importance of boosting the government’s ability to manage capital expenditure and complex reconstruction projects. - Authorities plan to establish the National Reconstruction and Rehabilitation Implementation Committee, comparable to reconstruction efforts in other countries that have experienced natural disasters (for example, Pakistan, Chile, and China). - International experience shows that effective and rapid post-disaster recovery requires a comprehensive reconstruction plan that clearly outlines recovery objectives and implementation strategies. - For Nepal, such a plan should be underpinned by effective coordination mechanisms to enhance the ability of line ministries to execute their capital and reconstruction budgets. *Source: _cr15224 - Box 3. Raising Capital Budget Execution in Post-Earthquake Nepal (concluded).* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Impact of the April 25, 2015 earthquake - Human and physical toll: - "More than 8,800 people have been killed and 22,300 injured." - "Over half a million houses destroyed and another quarter million damaged and three million people rendered homeless." - "An additional 3 percent of Nepal’s population has been pushed into poverty as a direct result of the earthquakes" — "as many as a million more poor people." - Damage and economic loss estimates (Post-Disaster Needs Assessment, PDNA): - Damages to properties: "NR 517 billion or US$ 5.15 billion." - Estimated economic losses: "NR 189 billion or US$ 1.89 billion." - Total estimated cost of the earthquake: "NR 706 billion or US$ 7 billion, equivalent to nearly one third of the Gross Domestic Product (GDP)." - Sectoral impact and growth: - Agriculture and tourism hit hard. - Expected economic growth slowdown: "around 3.04 percent in 2014/15." ### Reconstruction needs and financing strategy - Total recovery and reconstruction need borne by the budget: "NR 670 billion or US$ 6.7 billion, or about 31 percent of GDP over the period 2015/16–2020/21." - External support secured (indicative) through ICNR: - "About NR 408 billion or US$ 4.08 billion for reconstruction from development partners for the period 2015/16-2019/20." - Financing approach and risks: - Government intent: "seek external grants and concessional loans as much as possible before resorting to domestic borrowing." - Concerns about large domestic borrowing: "reduce the availability of domestic funds for the private sector" and "undo Nepal's sustained efforts to bring down the public debt." - External stability risk: reconstruction-related import needs and shortfalls in tourism and export earnings expected to "push the external current account into deficit and lead to a decline in Nepal’s foreign reserves." - Request to the IMF: - Request for disbursement under the Rapid Credit Facility (RCF): "SDR 35.65 million (approximately US$ 50 million)." - Proposed use: "direct budget support to the Ministry of Finance’s account at the Nepal Rastra Bank (NRB)." - Expected catalytic effect: "Fund assistance would help catalyze additional inflows of external resources." - Reserve objective with partner support: "maintain official foreign reserves at about 7 months of prospective non-reconstruction-related imports over the next three years." ### Fiscal policy, public debt, and budget execution - Pre-earthquake fiscal position and debt trends: - "Public debt declined in 2014 to 28.3 percent of GDP from 32.3 percent in 2013." - External debt at end-FY 2013/2014: "17.9 percent of GDP (US$3.5 billion)" with "86 percent concessional borrowing from the World Bank and the Asian Development Bank (ADB)." - Domestic debt: "declined from 12.2 percent of GDP in 2012/13 to 10.4 percent by the end of FY2013/14." - Capital budget execution and institutional measures: - A law enacted to establish a "Reconstruction Authority" coordinated with the annual budget process. - Planned measures: "strengthening budget planning, establishment of a robust appraisal function, development of targeted selection and prioritization criteria as well as improved use of monitoring processes in project implementation." - Commitment to "maintain public debt levels consistent with a 'low' risk of debt distress rating." - Fiscal projections and financing composition (macroeconomic assumptions): - Primary balance: deterioration from "a surplus of 1.9 percent of GDP in 2014 to a deficit of 1.4 percent in 2035." - Net incurrence of liabilities: "rise from -1.3 percent of GDP in 2013/14 to an average of 3.0 percent over the next five years, decreasing to 1.0 percent towards the end of the DSA horizon." - Net domestic financing: "rising to 1.7 percent of GDP in the long term." - Revenue and grants, primary expenditure and other baseline items are shown in the projections (values preserved in DSA tables in source). ### Monetary and exchange rate stance - Monetary policy: "maintain an accommodative monetary policy stance to support economic recovery and ensure that banks have sufficient liquidity." - Inflation objective: "Once economic conditions normalize, we will aim to keep inflation in the neighborhood of that in India." - Exchange rate policy: "Nepal will continue to peg the Nepalese Rupee to the Indian Rupee." - Financial sector reforms: continued implementation; earthquake "has raised the stakes" for strengthening legal framework, bank supervision/regulation, and crisis management/resolution. ### Debt sustainability analysis (LIC DSA) — key findings - Overall risk assessment: "Nepal’s risk of debt distress continues to be assessed to be low." - Drivers supporting low risk: - "Generally prudent fiscal policy and low execution of capital spending budgets have continued to underpin declining levels of public debt." - High concessionality of official borrowing assumed. - External debt trajectory and projections: - Previous DSA projection: PV of PPG external debt to decline to "13.6 percent of GDP in 2014." - Actual PV of PPG external debt in 2014: "10.7 percent of GDP in 2014, 2.9 percent of GDP lower than projected in the previous DSA." - New projection: PV of PPG external debt "projected to rise by 1.4 percent of GDP over the next 6 projection years, to 12.1 percent of GDP by 2020," owing to increased concessional external borrowing for reconstruction. - Public debt composition and creditors (2014): - Public debt (external) value: "3,531" (million USD) — shown as "17.9" percent of GDP, NPV "2,468" (million USD) in table. - Multilateral: "3,215" (million USD) — "16.3" percent of GDP, NPV "2,435" (million USD). - Asian Development Bank: "1,502" (million USD) — "7.6" percent of GDP, NPV "1,245" (million USD). - World Bank: "1,582" (million USD) — "8.0" percent of GDP, NPV "1,028" (million USD). - IMF: "36" (million USD) — "0.2" percent of GDP, NPV "32" (million USD). - Official bilateral: "333" (million USD) — "1.7" percent of GDP, NPV "33" (million USD). - Paris Club: "225" (million USD) — "1.1" percent of GDP, NPV "10" (million USD). - Non-Paris Club: "108" (million USD) — "0.5" percent of GDP, NPV "23" (million USD). - Public domestic debt instruments and levels (selected entries): - Treasury Bills: "131.6", "136.5", "136.5" (values by year as listed). - Development Bonds: "57.5", "51.6", "47.1". - National Savings Bonds: "15.7", "15.7", "16.6". - Memorandum: "Total domestic debt outstanding as percent of GDP 13.7, 12.2, 10.4" (by year). ### Policy commitments and safeguards - Commitment to Fund obligations: - "We will not introduce measures or policies that would compound balance of payments difficulties." - "We do not intend to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions, trade restrictions for balance of payments purposes, or multiple currency practices, or to enter into bilateral payments agreements which are inconsistent with Article VIII of the Fund’s Articles of Agreement." - Safeguards and transparency: - Authorities "are committed to undergo an update of the safeguards assessment made by the Fund in 2011." - "The audited financial statement for the year ended July 16, 2014 has been published on the NRB website." - External auditor of the NRB authorized "to share relevant documents and hold discussions with Fund staff." - A memorandum of understanding will be established between the Government of Nepal and the NRB regarding responsibilities for servicing financial obligations to the IMF. - Authorization for publication: - "We authorize the Fund to publish this Letter of Intent and the staff report for the request for disbursement under the RCF." _Appendix I. Letter of Intent — Government of Nepal; Letter dated July 17, 2015, and accompanying LIC DSA (IMF/World Bank staff)._ ### Box 1. Macroeconomic Assumptions Table ### Box 1. Macroeconomic Assumptions Table ### Note - MT (medium term) is the average over the next 5 years, and LT (long term) is the average over the following 7-20 years. ### External Debt Sustainability — A. Baseline - Remittances were included formally in the analysis; remittances reached 28 percent of GDP in 2013/14. - Over the medium term, the present value (PV) of external debt stabilizes at: - 9 percent of GDP + remittances - 29 percent of exports + remittances - 60 percent of revenues - Debt service ratios stabilize over the medium term at: - debt service-to-exports + remittances: 2 percent - debt service-to-revenues: 3 percent - Under the baseline scenario, external debt indicators remain well below indicative sustainability thresholds. ### External Debt Sustainability — B. Stress Tests and Alternative Scenarios - Standard shocks applied: shocks to GDP growth, exports, non-debt creating flows, a combination of these shocks, and a one-time 30 percent nominal depreciation shock. - Under the most severe shock (to non-debt creating flows, capturing a remittance shock): - The PV of debt to exports + remittances rises rapidly over the next three years but stays below the threshold, and thereafter declines. - All other indicators remain well below the thresholds. - Overall finding: debt dynamics remain resilient to standard shocks. ### Public Debt Sustainability — Baseline Projections - Ratio of public debt to GDP: - rises from 28.3 percent in 2014 to 31.2 percent in 2035. - PV terms for public debt to GDP: - increases from 21.1 percent in 2014 to 25.6 percent by 2035. - PV of public debt as a ratio of revenues and grants: - rises from 101.5 percent in 2014 to 108.4 percent by 2035. - Composition shift: - domestic debt share projected to increase from 37 percent in 2014 to 51 percent of total public debt in 2035. ### Public Debt Sustainability — Stress Tests - Debt dynamics remain resilient under standard stress tests. - Most extreme shocks for the PV of public debt-to-GDP ratio: - real GDP growth at historical average minus one standard deviation - permanently lower GDP growth - Under these extreme tests: - PV of public debt-to-GDP ratio increases to 31 percent by 2035, remaining well below the 56 percent threshold. ### Contingent Liabilities and Pension Costs - Contingent liabilities arise mainly from state owned enterprises (SOEs) and rising pension costs. - SOE performance: - Nepal Oil Corporation (NOC) and Nepal Electricity Authority (NEA) have been the two biggest loss-making SOEs, on average making combined losses of 1½ percent of GDP a year, and needing frequent government bail-outs despite periodic (though not automatic) price adjustments to recover costs. - Decline in international oil prices during the second half of 2014 reduced NOC’s losses; in early 2015 retail prices exceeded NOC’s breakeven prices. - Civil service pension liabilities: - currently at a modest 1¼ percent of GDP - rise to 1½ percent by 2025 - can be addressed through adequate parametric reforms in the medium term according to a 2014 IMF TA mission on pension reforms. ### Authorities’ Views - The authorities broadly concurred with the findings of the DSA. - They underscored commitment to a prudent borrowing policy while noting the large reconstruction need following the earthquake. - The authorities will seek to mobilize concessional borrowing to finance reconstruction and to put the economy on a path of higher growth and faster poverty reduction. *Source: Box 1. Macroeconomic Assumptions Table (extracted from the accompanying DSA text).* ### 12. The DSA suggests Nepal’s risk of debt distress is low. Generally prudent fiscal ### _cr15224 - 12. The DSA suggests Nepal’s risk of debt distress is low. Generally prudent fiscal ### Key findings and assessment - The DSA concludes Nepal’s risk of debt distress is low, supported by generally prudent fiscal policy and low execution of capital spending budgets. - Higher financing requirements driven by post-earthquake reconstruction and higher public investment expenditures are judged to be manageable under the assumption that they are temporary and that financing terms are favorable. - Indicators of the public external debt stock and public debt service ratios remain comfortably within the policy-dependent indicative thresholds, even under stress tests, owing to the assumed continued high level of concessionality of official borrowing. ### Post-earthquake impact and reconstruction financing - International pledges announced at the International Conference on Nepal’s Reconstruction (25 June 2015): about US$4 billion in grants and concessional loans to be disbursed over a period of five years. - Human and physical impact reported: - More than 8,800 people lost their lives. - More than 22,300 people were injured. - Over half a million houses were destroyed and another quarter million was damaged, rendering three million people homeless. - Around half a million buildings were also destroyed. - An additional 3 percent of Nepal’s population (as many as a million people) estimated pushed into poverty as a direct result of the earthquakes, on top of the 25 percent already estimated to be living below the poverty line. - Total value of damages and losses in production: about US$7 billion, equivalent to nearly one-third of the country’s GDP. ### Debt and sustainability indicators (selected figures preserved from the source) - PV of external debt (selected projection values shown in source): 10.7; 10.9; 11.5; 11.7; 11.9; 12.1; 12.1; 12.2; 9.6 (values as listed in the source table). - PV of PPG external debt mirrors PV of external debt in the presented years: 10.7; 10.9; 11.5; 11.7; 11.9; 12.1; 12.1; 12.2; 9.6. - In percent of exports (PV of debt entries): 92.0; 113.8; 147.1; 145.2; 144.2; 139.8; 135.2; 129.9; 102.1 (values as listed in the source table). - In percent of government revenues (PV of PPG external debt): 58.4; 59.2; 60.5; 60.2; 60.2; 60.7; 60.6; 60.4; 44.6. - Debt service-to-exports ratio (in percent): 10.6; 9.5; 11.2; 7.8; 9.6; 9.3; 9.0; 8.9; 8.6; 7.0; 7.6 (values as listed). - PPG debt service-to-revenue ratio (in percent): 6.7; 5.8; 7.1; 4.1; 4.0; 3.8; 3.8; 3.8; 3.9; 3.2; 3.3. - Public sector debt (percent of GDP, selected historical and projection values): 36.4 (2012); 32.3 (2013); 28.3 (2014); 25.1 (average reported for 2015?); 26.5; 27.5; 28.4; 28.4; 28.8; 31.6; 31.2 (presented in source table). - PV of public sector debt (selected values shown): 21.1; 18.0; 18.8; 19.9; 20.7; 20.6; 21.2; 24.0; 25.6 (values as listed). - Gross financing need (in percent of GDP): 6.2; 4.1; 1.9; 3.5; 6.5; 5.7; 5.4; 4.2; 4.6; 5.1; 5.3. - Grant element of new public sector borrowing (in percent, selected projection values shown): 49.4; 45.3; 44.9; 44.9; 46.0; 44.9; 45.9; 49.7; 48.7; 49.5 (values as listed). - Grant-equivalent financing (in percent of GDP, selected projection values shown): 2.7; 4.3; 3.7; 3.5; 3.4; 3.2; 3.1; 2.4; 2.9 (values as listed). - Aid flows (Billions of US dollars, selected years): 0.7; 0.5; 0.6; 0.5; 0.8; 0.9; 0.9; 0.9; 1.0; 1.4; 2.1 (of which Grants: 0.5; 0.3; 0.5; 0.4; 0.6; 0.7; 0.7; 0.7; 0.8; 1.0; 1.6; of which Concessional loans: 0.2; 0.1; 0.1; 0.1; 0.2; 0.2; 0.2; 0.2; 0.2; 0.4; 0.6). - Nominal GDP (Billions of US dollars, selected values): 18.9; 19.3; 19.8; 21.2; 23.6; 26.0; 28.2; 29.9; 31.7; 42.6; 77.0 (values as listed in source table). - Gross workers' remittances (Billions of US dollars, selected values): 4.4; 4.9; 5.5; 6.2; 6.7; 7.3; 7.9; 8.5; 9.3; 14.0; 31.6 (values as listed). ### Stress tests, scenarios, and sensitivity analysis - Staff-run stress tests and sensitivity analyses are reported and show indicators remain within policy-dependent indicative thresholds under a range of shocks, primarily because of assumed high concessionality of official borrowing. - The source presents multiple scenario and bound tests (e.g., real GDP growth shocks, export value shocks, US dollar GDP deflator shocks, net non-debt creating flow shocks, combination shocks, one-time 30 percent nominal depreciation), with tabulated outcomes for PV of debt-to-GDP+remittances, PV of debt-to-exports+remittances, PV of debt-to-revenue, debt service indicators, and memoranda on grant element assumptions. (Specific scenario-by-year numeric matrices are shown in the source tables.) ### Projections and macroeconomic assumptions (selected) - Historical average real GDP growth over the past five years: 4.5 percent. - Key macro assumptions (selected values as presented): - Real GDP growth (series of projected values listed in table): 4.8; 4.1; 5.4; 4.3; 0.9; 3.4; 4.4; 5.4; 3.9; 3.8; 3.8; 4.1; 4.0; 4.0; 4.0. - GDP deflator in US dollar terms (change in percent): -5.4; -1.8; -2.6; 6.2; 8.6; 3.9; 6.5; 4.5; 4.5; 2.1; 2.0; 3.9; 2.0; 2.0; 2.0. - Effective interest rate (percent): 0.9; 0.9; 2.5; 1.1; 0.5; 0.1; 0.3; 0.3; 0.5; 0.7; 1.0; 0.5; 1.0; 1.0; 1.0. - Growth of exports of G&S (US dollar terms, in percent): 11.7; 8.4; 12.0; 6.9; 7.3; -11.9; -8.8; 12.6; 11.4; 11.1; 9.6; 4.0; 6.0; 6.9; 6.5. - Growth of imports of G&S (US dollar terms, in percent): 0.6; 14.0; 13.2; 14.7; 9.0; 7.0; 23.8; 6.5; 8.3; 5.8; 6.0; 9.6; 7.8; 8.0; 7.6. - Government revenues (excluding grants, in percent of GDP): 16.0; 17.5; 18.4; 18.4; 19.1; 19.4; 19.7; 19.9; 19.9; 20.2; 21.6; 20.6. ### Policy implications and recommendations (as reflected in the source) - Maintain prudent fiscal policy to preserve low risk of debt distress. - Manage reconstruction and higher public investment spending under the assumption of temporary financing needs and seek favorable financing terms (high concessionality) to keep debt indicators within thresholds. - Ensure effective use of pledged grant and concessional loan resources for rehabilitation and reconstruction efforts. *Source: IMF staff report and accompanying Debt Sustainability Analysis tables and figures in the provided content unit.* ### 3.5 percent last year. The damage to property has adversely affected productive capacity. ### 3.5 percent last year. The damage to property has adversely affected productive capacity. ### Growth outlook and sectoral impact - Growth was 3.5 percent last year. - The damage to property has adversely affected productive capacity. - The earthquakes have particularly affected the agriculture and tourism sectors. - The growth outlook in 2014/2015 has been revised downwards to 3.04 percent, the lowest in eight years. - The authorities expect GDP growth to register 6 percent in 2015/2016 on account of the significant public and private sector investments in reconstruction and expansion in economic activities. - The growth recovery will largely be determined by the vigor of the reconstruction effort. ### Inflation outlook - Inflation has averaged 9.3 percent in the past five years. - Inflation had moderated to less than 7.5 percent in the eleven months of 2014/2015. - Inflationary pressures are expected to build up due to supply-side bottlenecks, an expansionary budget to finance reconstruction efforts, and upward pressure on wages of both skilled and unskilled workers. - The authorities expect that inflation will be contained to a single digit. - Once economic conditions normalize, the authorities will aim to keep inflation close to that in India. ### Fiscal position and public finance - Fiscal deficit is expected to emerge as revenues fall and expenditures rise reflecting efforts to provide assistance to earthquake-affected businesses and households, including vulnerable groups in the short-term, while supporting the reconstruction efforts. - The authorities established the National Reconstruction Authority under the leadership of the Prime Minister to coordinate rehabilitation and reconstruction activities over the next five years. - The annual budget for 2015/2016 allocated more than US$8 billion for reconstruction and development. - Based on the annual budget, the authorities have allocated US$740 million to the National Reconstruction Fund. - Budget priorities also include agriculture, education, health, tourism, infrastructure development, connectivity and the construction of hydroelectric power plants. - The authorities reaffirm commitment to a prudent borrowing policy and will seek external grants and concessional loans to finance reconstruction efforts. - The authorities will strengthen public financial management to accelerate capital expenditure through improved budget planning, project selection, implementation and results monitoring. - Budget allocation for unimplemented and slow moving projects will be realigned to ongoing and better performing programs and projects. - Projects with detailed feasibility studies and completed environmental assessment and land acquisition requirements will be prioritized. - Funds have been allocated for project development and changes to the procurement law are being introduced to fast track public procurement and facilitate project implementation. - The authorities appreciate the technical assistance provided by the Fund in public financial management and will consider recommendations to further improve arrangements for capital budget management. ### External position and current account - The fall in foreign exchange receipts from exports and tourism and increased imports of reconstruction-related goods are expected to push the current account into deficit. - This will strain Nepal’s external position and the pace of public sector reconstruction will importantly depend on the amount of external financing that Nepal receives to rebuild. - The authorities expect that without the mobilization of substantial grants and concessional loans, foreign reserves would decline significantly over the medium term even as they expect an increase in workers’ remittances to support their families. ### Request for Financial Assistance - The authorities request financial assistance under the RCF to address Nepal’s urgent balance of payments need and mitigate the risks of economic disruption as reconstruction activity gets under way. - The requested assistance is a disbursement of SDR35.65 million (approximately US$50 million) under the RCF to ease the pressure on Nepal’s fiscal resources and foreign exchange reserves. - The authorities request the funds to be disbursed as budget support to the account of the Ministry of Finance at the Nepal Rastra Bank (NRB). - The IMF’s involvement is expected to help catalyze further donor support for reconstruction efforts. ### Monetary policy stance - The Nepal authorities have adopted a cautious and balanced stance of monetary policy to support economic recovery as well as to contain inflationary pressure expected to arise from fiscal expansion. - The authorities will continue to maintain a pegged exchange rate to the Indian rupee. ### Financial sector measures and inclusion - The NRB has put in place regulatory relief for banks in the affected areas, enabling banks to extend relief to their customers; temporary relief measures cover loan-loss provisioning and loan rescheduling. - The NRB waived approval to open a branch and launch mobile and branchless banking in the market center of selected earthquake-affected areas. - An Economic and Rehabilitation Fund was established under the NRB to provide a refinancing facility and interest subsidy on loans extended to earthquake-affected areas covering residential construction, agriculture, business and tourism development. - Prior financial inclusion policies include branching policy outside of Kathmandu, provision of interest-free loans to facilitate establishment of branches in underserved areas, introduction of branchless banking and mobile banking, and implementation of financial literacy and financial consumer protection initiatives. - A nationwide campaign was announced to encourage households to open at least one bank account by ensuring that cash transfers by the government will only be done through bank accounts. - The authorities will continue to implement the financial sector reform program to strengthen the legal framework and institutional capacity for bank supervision and regulation and for financial crisis management and bank resolution. ### Structural reforms and development strategy - The authorities are determined to implement an ambitious structural reform agenda under Nepal’s 13th Development Plan (2013-2016), which aims at graduating from least developed country status by 2022. - Priority areas identified include infrastructure (especially transportation and energy), education and training, increasing SME access to finance, and strengthening social safety nets. - The authorities acknowledge the importance of public-private partnerships in addressing infrastructure gaps, particularly in increasing energy supply through hydroelectric power generation. ### International engagement and safeguards - The authorities welcome the debt sustainability analysis that highlights Nepal’s risk of debt distress continues to remain low, underpinned by prudent debt management and fiscal policy. - The authorities consent to undergo an update of the Safeguards Assessment undertaken by the Fund in 2011 in connection with the 2010 RCF disbursement to further examine the external audit mechanism and financial reporting framework of the NRB. - The authorities look forward to the Board’s approval of a disbursement under the Rapid Credit Facility of the PRGT to assist in catalyzing further resources for rehabilitation and reconstruction. - The appointment of a full-time IMF Resident Representative in Nepal to reinforce the effectiveness of the Fund’s engagement is welcomed. - The authorities consent to the publication of the staff report and the Letter of Intent. *Source: IMF staff report content provided in the PDF excerpt.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15224.pdf_