IMF Staff Completes 2018 Article IV Mission to Nepal
IMF News, December 13, 2018
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Bibliographic details
- Published: December 13, 2018
Mission facts and context
- Mission leader: Geert Almekinders.
- Visit dates: December 2-13.
- Meetings included: Minister of Finance Dr. Yuba Raj Khatiwada, Central Bank Governor Dr. Chiranjibi Nepal, other high-level government officials, private sector representatives, and donor community.
- Statement issued at conclusion of visit.
- Press Release No. 18/473. Date: December 13, 2018.
Macroeconomic assessment and key statistics
- Real GDP growth:
- Growth is expected to reach 6.5 percent in FY 2018/19.
- Fiscal position:
- Fiscal deficit reached 6.5 percent of GDP in FY 2017/18.
- Credit and financial indicators:
- Credit growth accelerated to 25 percent most recently in October.
- The IMF team supports maintaining the 80 percent limit on the credit-to-core capital cum deposit (CCD) ratio.
- External sector:
- Current account deficit reached 8.2 percent of GDP in FY 2017/18.
- Some outflows of reserves have occurred.
Staff findings
- Recent pickup in economic activity after a prolonged period of subdued growth, supported by:
- Greater political stability.
- A more reliable supply of electricity.
- Expanding post-earthquake reconstruction activity, services, and manufacturing.
- The improved outlook provides an opening to address deep-seated structural weaknesses and boost long-term growth.
- The current expansion has generated challenges that need careful management:
- Rising fiscal deficit.
- Rapid credit growth raising financial stability concerns.
- Expansion of domestic demand contributing to a widening current account deficit and reserve pressures.
- Progress noted on fiscal framework for Nepal’s new federal system, with potential to improve quality and delivery of government services.
- Need to ensure that the general government budget envelope does not expand unduly as responsibilities devolve; central government will ultimately need to shrink.
Policy recommendations
- Macroeconomic policy stance:
- A measured tightening of policies is warranted to safeguard macroeconomic and financial stability.
- Specific recommendations: higher interest rates, tighter macroprudential policies, and a smaller fiscal deficit than currently budgeted.
- Goal: reduce pressure on the current account by constraining import growth and align expansion with domestic productive capacity.
- Fiscal federalism and public financial management:
- Ensure the general government budget envelope does not expand unduly with fiscal decentralization.
- Build policy implementation capacity at sub-national level.
- Put in place a sound public-financial management framework at the sub-national level.
- Support for authorities’ efforts to reform the tax system and review options to consolidate central government expenditure by forming the Public Expenditure Review Commission.
- Financial sector and macroprudential measures:
- Temper excessive credit growth through macro-prudential measures.
- Maintain the 80 percent limit on the CCD ratio; resist pressures to change its calculation to expand room for credit growth.
- Encourage banks to build additional capital and provisioning buffers against potential losses.
- Accelerate ongoing reforms to strengthen financial-sector oversight and regulation.
- Structural reforms to boost medium-term growth and jobs:
- Make the economy more competitive and generate a more conducive environment for investment.
- Support government efforts to improve the business climate, including revising investment-related laws and regulations ahead of the Investment Summit to be held in March 2019.
- Swiftly implement the structural reform agenda aimed at easing obstacles to firm entry and operations.
- Priorities: increase foreign direct investment, strengthen governance and institutions, and enhance access to finance—particularly for the underserved population outside major cities.
Concluding remarks
- Measured policy adjustments today could yield more stable and higher future growth.
- The team expressed sincere gratitude to the Nepal Rastra Bank and the Government of Nepal for their hospitality and exchanges of views.
IMF Staff Completes 2018 Article IV Mission to Nepal — Press Release No. 18/473