IMF Executive Board Concludes 2017 Article IV Consultation with Nepal

IMF News, March 27, 2017

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Real GDP growth at market prices slowed to 0.6 percent in 2015/16 (mid-July 2015 to mid-July 2016) following the 2015 earthquakes and trade disruptions at the southern border.
Growth is projected to reach 5.5 percent in 2016/17 and 4.5 in 2017/18.
Inflation (CPI, period average) was 9.9 percent in 2015/16, eased to 6.7 percent in 2016/17, and is projected at 7.6 percent in 2017/18. CPI (end of period) was 6.5 percent in 2015/16 and 7.5 percent in 2016/17.
Trade disruptions and shortages drove inflation to 12 percent (y/y) in January 2016, but inflation eased to 3.2 percent in January 2017, mainly due to lower food prices.
The current account surplus reached 6.3 percent of GDP in 2015/16 on account of lower imports; the current account is projected at -73 million U.S. dollars in 2016/17 and -338 million U.S. dollars in 2017/18.
Workers' remittances growth slowed sharply to 1 percent in 2015/16 from an annual average of 15 percent over the previous 5 years; remittances (in millions of U.S. dollars) were 6,253 in 2015/16, 6,467 in 2016/17, and projected 6,787 in 2017/18.
Gross official reserves reached a record US$8.7 billion in January 2017, covering more than nine months of imports; table shows reserves (in millions of U.S. dollars) 8,574 in 2015/16, 8,690 in 2016/17, and 8,494 projected in 2017/18.

Budget under-spending worsened in 2015/16; revenues exceeded the budget due to one-off telecom sector collections, resulting in a budget surplus for the fourth year in a row.
Net public debt declined to 22 percent of GDP (noted in text), down from 34 percent of GDP in 2011/12.
Selected fiscal indicators (in percent of GDP):
- Total revenue and grants: 23.3 (2015/16), 24.2 (2016/17), 24.1 (2017/18).
- Tax revenue: 18.7 (2015/16), 20.0 (2016/17), 20.1 (2017/18).
- Expenditure: 22.0 (2015/16), 25.3 (2016/17).
- Net lending/borrowing: 1.4 (2015/16), -1.1 (2016/17), -1.2 (2017/18).
Public debt (memorandum): 27.3 percent of GDP (2015/16).

Private sector credit growth surged to a 7-year high of 31 percent (y/y) in January 2017; table shows private sector credit (annual percent change) 23.2 (2015/16), 19.0 (2016/17), 16.7 (2017/18).
Broad money growth: 19.5 (2015/16), 13.6 (2016/17).
Staff notes the monetary policy framework needs further strengthening; an interest rate corridor was introduced.
Recommendations for monetary framework:
- Fix the floor of the interest rate corridor to reduce volatility of interbank interest rates.
- Adopt a medium-term inflation objective consistent with eliminating the inflation wedge with India on a sustained basis.
With remittances set to slow, fiscal policy turning expansionary, and the current account turning to a deficit, staff advises tightening monetary policy to prevent the exchange rate from becoming somewhat overvalued.

Risks to the outlook are broadly balanced.
Upside scenario: rebound in economic activity could be more pronounced and persistent if policy and structural reform momentum is sustained and deepened.
Downside risks:
- Domestic political instability.
- Weak financial sector and rapid credit growth.
- Slowing remittances impacting financial sector liquidity.
- Lower growth in India due to the demonetization shock.

Rebalance macroeconomic policy mix toward a more accommodative fiscal position and a tighter monetary stance to support recovery while maintaining macroeconomic and financial stability.
Scale up government spending to rebuild after the earthquakes and address infrastructure gaps, but:
- Ensure spending is realistic and prioritized given limited implementation capacity.
- Do not exceed the economy’s aggregate absorptive capacity.
- Anchor scaling up in a medium-term expenditure framework to ensure quality and fiscal sustainability.
Accelerate financial sector reforms in line with FSAP recommendations to mitigate macro-financial risks, including:
- Strengthening financial sector supervision, building on recent amendments to the regulatory framework.
- Maintaining macro-prudential measures introduced after the 2010-11 episode of financial sector pressures once temporary relief lapses in July.
Raise Nepal’s potential growth through sustained efforts to build policy implementation capacity, improve the business climate, and develop the hydropower sector.
Complement prioritized investment in transportation infrastructure and power supply with structural reforms to deregulate product and factor markets.

Real GDP (annual percent change): 6.0 (2013/14); 2.7 (2014/15); 0.6 (2015/16); 5.5 (2016/17); 4.5 (2017/18).
CPI (period average): 9.0 (2013/14); 7.2 (2014/15); 9.9 (2015/16); 6.7 (2016/17); 7.6 (2017/18).
Current account (in millions of U.S. dollars): 908 (2013/14); 1,067 (2014/15); 1,339 (2015/16); -73 (2016/17); -338 (2017/18).
Trade balance (in millions of U.S. dollars): -6,082 (2013/14); -6,670 (2014/15); -6,389 (2015/16); -8,079 (2016/17); -8,856 (2017/18).
Gross official reserves (in millions of U.S. dollars): 6,172 (2013/14); 7,162 (2014/15); 8,574 (2015/16); 8,690 (2016/17); 8,494 (2017/18).
GDP at market prices (in billions of Nepalese rupees): 1,965 (2013/14); 2,120 (2014/15); 2,249 (2015/16); 2,532 (2016/17); 2,848 (2017/18).
Exchange rate (NRs/US$; period average): 98.3 (2013/14); 99.5 (2014/15); 106.3 (2015/16).

Press Release No. 17/100 — March 27, 2017