Press Release: Statement of an IMF Mission at the Conclusion of the Staff Visit to Nepal

July 3, 2008

Press Release No. 08/161

An International Monetary Fund (IMF) mission led by Mr. Brian Aitken, Deputy Division Chief in the Asia and Pacific Department, visited Kathmandu, Nepal, during June 17-27, 2008 to exchange views with the authorities and other key stake holders on recent economic developments and the budget under preparation by the authorities.

The mission issued the following statement in Kathmandu on June 27:

"Nepal's macroeconomic situation is good but fragile. Maintaining the exchange rate peg—which has been critical in keeping inflation low and stable—will require a fiscal policy that recognizes the limited resources available. The budget should be designed to support this environment and provide a foundation for growth going forward.

"Despite the recent political turmoil the macroeconomic outlook remains stable. Output growth for this year could rise to 4¾ percent led by the service sector and a rebound in agriculture. Rising international prices for food and fuel could push average inflation to 8 percent. In the coming year output growth could rise further to 5½ percent.

"The ability to borrow from domestic financial markets remains a key constraint to next year's budget. Responsible fiscal management during the years of conflict has given Nepal a solid platform for economic growth. Protecting this asset will require a budget that recognizes the economy's limited resources.

"Fuel policies are key. Paying for the substantial losses of the state oil company at current international prices would either necessitate a sharp curtailment in current budget spending or would push domestic borrowing to unsustainable levels. To safeguard the government's fiscal position, fuel prices should be raised. The introduction of an automatic pricing mechanism to allow adjustment of prices to world levels would help depoliticize the elimination of oil subsidies."


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