IMF Executive Board Concludes 2019 Article IV Consultation with Nepal
IMF News, February 18, 2019
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- Published: February 18, 2019
Economic performance and near-term outlook
- Real GDP is estimated to have expanded by 6.3 percent in FY 2017/18 (mid-July 2017 to mid-July 2018).
- Growth is expected to reach 6.5 percent in FY2018/19, supported by ongoing reconstruction, investment in hydro-power projects, and strong tourism-related activity.
- Headline inflation averaged 4.2 percent in FY 2017/18, held down by subdued food-price inflation; headline CPI (period average) projected at 4.9 percent for 2018/19.
- Private sector credit posted 24 percent (y/y) growth in December 2018, following average growth rates above 20 percent since FY 2015/16.
Fiscal developments and concerns
- Government expenditure increased by 32.4 percent (year-on-year) in FY 2017/18, driven by transition to fiscal federalism and reconstruction spending; spending was concentrated in the last quarter of the fiscal year.
- Revenue growth was 18.9 percent (y/y) in FY 2017/18.
- Fiscal deficit increased to 6.5 percent of GDP in FY 2017/18, from 3.1 percent of GDP in FY 2016/17.
- Executive Directors noted public debt remains low but urged more to ensure fiscal sustainability, make budgets more realistic and spending more efficient, and build implementation capacity.
- Directors welcomed progress on a fiscal federalism framework and emphasized focus on building policy implementation capacity and instituting a sound public financial management framework at the subnational level.
External sector and reserves
- The current account moved to a deficit of 8.2 percent of GDP in FY 2017/18, following a modest deficit of 0.4 percent in FY 2016/17.
- Imports grew by 27.4 percent (y/y) in FY 2017/18; exports expanded by 15.5 percent (y/y) but exports comprised 3.1 percent of GDP in FY 2017/18.
- Workers' remittances grew by 10.2 percent (y/y) in FY 2017/18 and were equivalent to 25.1 percent of Nepal’s GDP.
- Gross official foreign exchange reserves stood at US$ 8.3 billion as of December 2018, having declined by approximately US$1.2 billion from the record set in January 2018.
Financial sector vulnerabilities and monetary policy
- Expansionary fiscal and credit policies are contributing to rising non-food inflation, a widening current account deficit, falling foreign exchange reserves, and a buildup of financial sector vulnerabilities.
- Directors recommended policy tightening in the near term, including through fiscal consolidation, to avoid an abrupt slowdown and promote more durable expansion.
- Directors considered that monetary policy should be tightened, including to support the exchange rate peg to the Indian rupee.
- To temper excessive credit growth, Directors encouraged strengthening macro‑prudential policies and accelerating financial sector reforms.
- Directors recommended banks be encouraged to build additional capital and provisioning buffers, enhance financial sector oversight and regulations, continue implementing the 2014 FSAP recommendations, and strengthen the AML/CFT regime in line with international best practices.
- Directors noted the recently initiated review of the central bank act provides an important opportunity to strengthen the central bank’s operational autonomy and accountability.
Structural reforms and investment climate
- Directors welcomed efforts to strengthen competition, generate a more conducive environment for investment, and reduce corruption.
- They called for swift implementation of the structural reform agenda, including revising public procurement laws and easing obstacles to firm entry and operations.
- Emphasis on increasing foreign direct investment, strengthening governance and institutions, and enhancing access to finance, particularly for underserved populations outside major cities.
Key statistics (selected from Table 1)
- Real GDP: 0.6 (2015/16); 7.9 (2016/17); 6.3 (2017/18); 6.5 (2018/19 projection).
- Headline CPI (period average): 9.9 (2015/16); 4.5 (2016/17); 4.2 (2017/18); 4.9 (2018/19 projection).
- Total revenue and grants (percent of GDP): 23.3 (2015/16); 24.4 (2016/17); 25.5 (2017/18); 29.2 (2018/19 projection); 29.4 (2019/20 projection).
- Expenditure (percent of GDP): 27.5 (2015/16); 32.0 (2016/17); 34.2 (2017/18); 34.4 (2018/19 projection).
- Net lending/borrowing (percent of GDP): 1.4 (2015/16); -3.1 (2016/17); -6.5 (2017/18); -5.0 (2018/19 projection).
- Private sector credit (annual percent change): 23.2 (2015/16); 18.0 (2016/17); 22.3 (2017/18); 19.8 (2018/19 projection).
- Gross investment (percent of nominal GDP): 33.9 (2015/16); 45.7 (2016/17); 51.8 (2017/18); 55.0 (2018/19 projection); 57.0 (2019/20 projection).
- Current account (in millions of U.S. dollars): 1,339 (2015/16); -93 (2016/17); -2,350 (2017/18); -2,778 (2018/19 projection); -4,129 (2019/20 projection).
- Current account (in percent of GDP): -0.4 (2015/16); -8.2 (2017/18).
- Trade balance (in millions of U.S. dollars): -6,389 (2015/16); -8,446 (2016/17); -10,849 (2017/18); -12,899 (2018/19 projection); -15,061 (2019/20 projection).
- Workers' remittances (in millions of U.S. dollars): 6,253 (2015/16); 6,556 (2016/17); 7,224 (2017/18); 8,495 (2018/19 projection); 9,084 (2019/20 projection).
- Gross official reserves (in millions of U.S. dollars): 8,574 (2015/16); 9,264 (2016/17); 9,304 (2017/18); 8,558 (2018/19 projection); 6,788 (2019/20 projection).
- Public debt (in percent of GDP, memorandum): 27.9 (2015/16); 30.4 (2016/17); 33.1 (2017/18).
- GDP at market prices (in billions of U.S. dollars): 21.2 (2015/16); 24.9 (2016/17); 28.9 (2017/18); 33.0 (2018/19 projection).
- Exchange rate (NPR/US$; period average): 106.4 (2015/16); 106.2 (2016/17); 104.4 (2017/18).
IMF Communications Department; Press Release No. 19/45; February 17, 2019.
