IMF Staff Completes 2020 Article IV Mission to Nepal

IMF News, January 17, 2020

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Nepal’s economy has been growing well above its long-term average in the last few years, supported by greater political stability, improved electricity supply, and reconstruction activity following the devastating earthquake in 2015.
In FY19/20, signs of moderation are evident; the IMF team projects economic growth around 6 percent.
Factors contributing to the moderation:
- slower growth in India (a main trading partner),
- sluggish remittance inflows,
- weaker agricultural production.
Inflation is expected at 6 percent due to persistent high food inflation.
Recent macroeconomic developments:
- narrowing of the current account deficit,
- stabilization of gross official reserves,
- slower credit growth.

Fiscal policy recommendations:
- Fiscal policy should be geared towards containing external pressures and protecting fiscal sustainability.
- A fiscal deficit of 4.5 percent of GDP, similar to the outcome in FY2018/19, would be prudent.
Public financial management and federal transition:
- The transition to fiscal federalism is described as a monumental challenge and needs to be carefully managed.
- To protect fiscal sustainability, the overall expenditure envelope of subnational governments needs to be aligned with available funding, with tight limits on any subnational borrowing.
- While important steps have been taken to improve public financial management, further efforts are needed to ensure that spending is of high quality and executed in a timely manner.
Tax administration:
- Recent upgrades to tax administration are commended.

The Nepal Rastra Bank (NRB) actions:
- The NRB has appropriately taken a series of macroprudential measures to limit the buildup of systemic risk in the financial sector.
- Credit growth has approached levels that are supportive of economic growth while protecting financial stability.
- The NRB has taken actions to further strengthen bank supervision and regulation, including the introduction of a supervisory information system and implementation of selected elements of the Basel III capital framework.
- Recent regulatory requirement for banks to cross-check corporate borrowers’ financial information against the recently launched Integrated Tax System is expected to facilitate more prudent risk assessment by banks.
- The NRB’s policy of activating the countercyclical capital buffer that will require banks to increase their level of capital by July 2020 is appropriate.
Ongoing monitoring needs:
- The NRB should continue to closely monitor asset quality of banks and improve monitoring of concentration risk.

Priority reform:
- Strengthen the implementation of monetary policy by putting in place a well-functioning interest rate framework that reduces volatility in short-term interest rates.
Expected benefits:
- Improved financial market development,
- Enhanced policy signaling and transmission.

Role of FDI:
- Foreign direct investment can contribute to development objectives by supporting economic activity and creating jobs.
Reform and implementation needs:
- Recent reform efforts have helped improve the investment climate.
- To boost foreign investment, new legislation and regulations need to be supported by an enabling implementation environment.
- Improving implementation capacity requires adequate staffing, better skills matching, and aligning incentives across and within Ministries to ensure high-quality projects move forward in a clear and timely manner.

An IMF team led by Ms. Laura Jaramillo visited Kathmandu during January 5-17 to hold discussions for the 2020 Article IV consultation.
The team met Minister of Finance Dr. Yuba Raj Khatiwada, Nepal Rastra Bank Governor Dr. Chiranjibi Nepal, other high-level government officials, as well as representatives from the private sector and development partners.
Staff disclaimer:
- End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
Concluding remark from the mission: “The team expresses its sincere gratitude to the Government of Nepal and NRB for their warm hospitality and constructive discussions.”

IMF Press Release No. 20/11 — IMF Communications Department, January 17, 2020