Press Release: IMF Executive Board Concludes 2014 Article IV Consultation with Nepal
IMF News, July 16, 2014
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- Published: July 16, 2014
Economic overview and near-term developments
- On July 3, 2014, the Executive Board concluded the Article IV consultation with Nepal.
- Nepal’s economy has stabilized, though growth remains low, following elections for a new Constituent Assembly which has reduced political uncertainty.
- Growth and inflation
- Growth is projected to recover to 4¾ percent in 2013/14, from below 4 percent the year before.
- Inflation moderated to 8.9 percent year on year in March 2014 after increasing by double-digits following the depreciation of the Indian rupee (to which the Nepali rupee is pegged).
- Remittances, reserves, and liquidity
- Remittances grew by 17.5 percent in the first eight months of 2013/14 and are set to reach nearly 30 percent of GDP in 2013/14.
- This has led to a sizeable current account surplus and further build-up of international reserves, which stood at $5.8 billion in March.
- With limited sterilization of remittance inflows, nominal interbank and treasury bill rates remain close to zero and excess reserves in the financial system persist.
- Debt
- A debt sustainability analysis indicates that Nepal is now at a low risk of debt distress.
Medium-term prospects and risks
- Growth outlook
- Growth is projected to remain at around 4.5 percent, with gradual improvements in implementation of the capital expenditure and budget supporting activity as remittance growth moderates.
- Inflation outlook
- Inflation is expected to decline in line with developments in India.
- Downside risks
- Possible weaker than expected recovery in India.
- Slowdown in countries hosting Nepali migrant workers.
Financial sector assessment and vulnerabilities
- Progress and remaining weaknesses
- Progress has been made in addressing financial sector weaknesses, with efforts to enhance supervision, consolidate the sector, and strengthen the legal framework for crisis management and bank resolution.
- Nepal’s first-ever assessment under the Financial Sector Assessment Program (FSAP) identified significant financial sector vulnerabilities.
- Supervisory and systemic concerns
- Bank supervision remains largely compliance-based, fragmented, and under-resourced.
- Concerns about the reliability of financial soundness indicators remain.
- Stress tests suggest banking system strains if asset quality deteriorates moderately.
- Interconnections within the financial system and to other sectors are substantial, adding to concerns about lending practices.
- Cooperatives sector
- A largely unsupervised cooperatives sector is growing rapidly, partly fueled by directed lending policies, and poses a significant risk to the stability of the financial system.
Executive Board assessment — main messages and policy recommendations
- Overall Board view
- Directors welcomed Nepal’s strong fiscal and external positions and progress in raising living standards, supported by large remittance inflows.
- Directors noted that economic growth remains subdued, with downside risks from a weaker-than-expected recovery in India or a slowdown in countries hosting Nepali migrant workers.
- Directors emphasized the need for continued sound macroeconomic management and deeper structural reforms to boost competitiveness and longer-term prospects.
- Fiscal policy recommendations
- Given a low risk of debt distress, Nepal has fiscal room to support growth, particularly by improving the execution of capital expenditure budgets and social programs.
- Directors recommended creating additional fiscal space by reducing implicit subsidies to the state oil and electricity companies.
- Directors encouraged further improvements to the legal and institutional framework, including the passage of a Fiscal Responsibility and Budget Management Act.
- Monetary and liquidity management
- Elevated level and volatility of liquidity in the financial system, generated by remittance inflows, call for active management by the central bank to reduce financial sector risks and improve monetary policy transmission.
- Important that the central bank be adequately equipped with government securities to mop up excess liquidity, and that cooperation with the Ministry of Finance be strengthened.
- Directors supported the planned introduction of an interest rate corridor to improve monetary management.
- Directors encouraged the authorities to phase out directed lending and caps on interest spreads.
- Financial sector reform priorities
- Fully implement FSAP recommendations.
- Further consolidate the banking sector through closure of insolvent banks and tightened licensing standards.
- Expedite the adoption of risk-based supervision.
- Enhance oversight of credit cooperatives.
- Improve the legal framework, particularly for bank resolution.
- Further develop financial infrastructure to harness the sector’s potential to support growth and reduce risks.
- Structural reforms to boost competitiveness
- Step up efforts to address infrastructure bottlenecks, improve labor relations, increase competition, and reduce the regulatory burden to increase employment and reduce dependence on workers’ remittances.
Selected economic indicators (highlights from table, 2010/11–2014/15)
- Output and prices (annual percent change)
- Real GDP: 3.4; 4.8; 3.9; 5.0 (2010/11–2013/14)
- CPI (period average): 9.6; 8.3; 9.9; 8.8; 7.8
- CPI (end of period): 9.7; 11.5; 7.7; 8.0; 7.5
- Fiscal indicators (in percent of GDP)
- Total revenue and grants: 17.7; 18.7; 19.3; 21.1; 21.3
- Net lending/borrowing: -1.0; -0.6; 1.4; 0.2
- Net incurrence of liabilities (domestic): 2.3; 2.4; 1.1
- Money and credit (annual percent change)
- Broad money: 12.3; 22.7; 16.3; 20.5; 19.9
- Domestic credit: 13.7; 16.9; 15.5; 18.0
- Private sector credit: 13.1; 11.3; 20.2; 16.4
- Saving and investment (in percent of nominal GDP)
- Gross investment: 30.0; 29.8; 29.4
- Private: 26.6; 26.7; 25.7; 25.9
- Gross national saving: 29.1; 34.9; 33.1; 33.5; 27.0
- Balance of Payments
- Current account (in millions of U.S. dollars): -181; 909; 635; 801; 676
- Trade balance (in millions of U.S. dollars): -4,470; -4,605; -5,247; -5,961; -6,760
- Trade balance (in percent of GDP): -23.5; -24.4; -27.3; -30.9; -33.3
- Workers' remittances (in millions of U.S. dollars): 3,545; 4,414; 4,931; 5,671; 6,297
- Workers' remittances (percent of GDP): 18.6; 23.4; 25.6; 31.0
- Gross official reserves (in millions of U.S. dollars): 3,085; 4,307; 4,972; 6,082; 7,120
- Gross official reserves (in months of prospective GNFS imports): 5.8; 7.4; 8.2; 8.6
- Memorandum items
- Public debt (in percent of GDP): 34.5; 36.3; 31.5; 30.5
- GDP at market prices (in billions of Nepalese rupees): 1,367; 1,527; 1,693; 1,931; 2,183
- GDP at market prices (in billions of U.S. dollars): 19.0; 18.9; 19.2
- Exchange rate (NRs/US$; period average): 71.9; 81.0; 88.0
- Real effective exchange rate (eop, y/y percent change): -4.6; -2.3
Press Release No. 14/346 — July 16, 2014 — IMF Communications Department.