IMF Executive Board Concludes 2020 Article IV Consultation with Nepal
IMF News, April 6, 2020
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Bibliographic details
- Published: April 6, 2020
Background and scope
- The 2020 Article IV Staff Report was prepared for the Executive Board’s consideration on March 17, 2020 on a lapse-of-time basis.
- Report reflects discussions with Nepali authorities in Kathmandu during January 5-17, 2020 and is based on information available as of end-January 2020.
- The report was prepared before COVID-19 became a global pandemic and therefore does not reflect the implications of those developments; the outbreak has greatly amplified uncertainty and downside risks around the outlook.
Recent macroeconomic performance
- Drivers of recent strong growth:
- Greater political stability.
- More reliable electricity supply and broader access.
- Reconstruction activity following the 2015 earthquakes.
- FY2018/19 performance:
- Real GDP growth: 7.1 percent.
- Headline inflation (December 2019): 6.5 percent.
- Current account deficit: 7.7 percent of GDP.
- Central government deficit: 4.6 percent of GDP.
- Early FY2019/20 developments:
- Remittances decelerated due to slowing in remittance-sending economies, including India.
- Weaker agricultural performance.
- Current account deficit narrowed in the first months of FY2019/20 due to lower imports of fuel and construction materials.
- Gross official reserves: US$8.7 billion in December 2019, equal to 6.9 months of prospective imports.
- Credit growth: 14.8 percent (y/y) in December 2019 versus 25.4 percent (y/y) a year earlier.
Executive Board assessment — outlook and risks
- Growth outlook:
- FY2019/20 growth expected to ease to 6 percent.
- Reasons cited: slower growth in India, sluggish remittance inflows, weaker agricultural production.
- Inflation outlook:
- Inflation expected at 6 percent due to high food inflation.
- External and financial risks:
- Narrowing of the current account deficit and stabilization of gross official reserves observed amid moderating growth.
- Credit growth moderated from very high levels, but credit as a share of GDP remains elevated relative to peers.
- Downside risks include renewed balance of payments pressures and increased financial-sector risks if credit growth accelerates sharply or remittances slow abruptly.
- Nepal’s external position in FY2018/19 assessed as weaker than the level consistent with fundamentals and desirable policy settings.
Policy recommendations and priorities
- Financial-sector and macroprudential policy:
- Continue measures to prevent excessive credit growth and contain financial-sector risks.
- Maintain macroprudential measures implemented by the NRB.
- Continue strengthening bank supervision and regulation; actions already taken include 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 ITS expected to improve risk assessment.
- Activation of the countercyclical capital buffer requiring banks to increase capital by July 2020 is appropriate.
- NRB should closely monitor asset quality and concentration risk.
- Fiscal policy and fiscal federalism:
- Fiscal policy should be geared to containing external pressures and protecting fiscal sustainability.
- A fiscal deficit of 4.5 percent of GDP, similar to FY2018/19 outcome, would be prudent.
- Continue upgrades to tax administration; adopt a top-down budget process and MTFF based on conservative revenue and expenditure assumptions to instill prioritization and avoid unrealistic revenue expectations among SNGs.
- Manage the transition to fiscal federalism carefully: align SNG overall expenditure envelope with available funding, impose tight limits on subnational borrowing, establish robust reporting and monitoring for SNGs, and clearly delineate roles and responsibilities across government levels.
- Monetary policy and central bank governance:
- Strengthen monetary policy implementation through a well-functioning interest rate framework to reduce short-term interest rate volatility.
- Introduce a standing deposit facility as a first step toward establishing a reliable interest rate corridor implementation track record.
- Modernize NRB governance to improve autonomy and accountability: strengthen independent oversight, safeguard institutional and personal autonomy, enhance internal controls and external audit quality, and underpin reforms with supportive human resource management.
- Structural reforms to boost growth:
- Encourage high-quality investment projects, in particular FDI.
- Ensure an enabling implementation environment for infrastructure projects and FDI as post-earthquake reconstruction spending declines.
- Focus on adequate staffing, better skills matching, and aligning incentives across government ministries responsible for project approvals, implementation, and monitoring.
Key statistics and projections (selected from Table 1)
- Real GDP (annual percent change):
- 2016/17: 8.2
- 2017/18: 6.7
- 2018/19: 7.1
- 2019/20 (Est.): 6.0
- 2020/21 (Projections): 5.7
- 2021/22 (Projections): 5.5
- 2022/23 (Projections): 5.4
- 2023/24 (Projections): 5.3
- Headline CPI (period average):
- 2016/17: 4.5
- 2017/18: 4.1
- 2018/19: 4.6
- 2019/20: 5.9
- 2020/21: 5.8
- 2021/22: 5.6
- Central government fiscal indicators (in percent of GDP):
- Total revenue and grants: 2016/17: 24.1; 2017/18: 25.3; 2018/19: 26.0; 2019/20: 25.8; 2020/21: 25.5; 2021/22: 25.6
- Tax revenue (selected years): 2016/17: 20.7; 2017/18: 21.1; 2018/19: 21.9; 2019/20: 21.8; 2020/21: 21.6; 2021/22: 21.4; 2022/23: 21.3
- Expenditure: 2016/17: 27.2; 2017/18: 31.9; 2018/19: 30.6; 2019/20: 30.4; 2020/21: 30.0; 2021/22: 29.7; 2022/23: 29.4; 2023/24: 29.3
- Net lending/borrowing: 2016/17: -3.1; 2017/18: -6.7; 2018/19: -4.6; 2019/20: -4.5; 2020/21: -4.4; 2021/22: -4.2; 2022/23: -4.1; 2023/24: -3.9; 2024/25: -3.7
- Money and credit (annual percent change):
- Broad money: 2016/17: 15.5; 2017/18: 15.8; 2018/19: 13.2; 2019/20: 11.9; 2020/21: 11.6; 2021/22: 11.1; 2022/23: 10.9; 2023/24: 10.7
- Domestic credit: 2016/17: 20.2; 2017/18: 26.1; 2018/19: 21.7; 2019/20: 17.6; 2020/21: 15.7; 2021/22: 14.3; 2022/23: 13.8; 2023/24: 13.3; 2024/25: 13.1
- Private sector credit: 2016/17: 18.0; 2017/18: 22.3; 2018/19: 19.1; 2019/20: 15.0; 2020/21: 12.5; 2021/22: 12.2; 2022/23: 12.0
- Saving and Investment (in percent of nominal GDP):
- Gross investment: 2016/17: 45.2; 2017/18: 55.2; 2018/19: 62.3; 2019/20: 54.6; 2020/21: 53.4; 2021/22: 52.4; 2022/23: 51.5; 2023/24: 50.6; 2024/25: 49.8
- Balance of Payments (current account in millions of U.S. dollars and percent of GDP):
- Current account (US$ millions): 2016/17: -93; 2017/18: -2,350; 2018/19: -2,369; 2019/20: -1,760; 2020/21: -1,832; 2021/22: -1,963; 2022/23: -2,104; 2023/24: -2,215; 2024/25: -2,323
- Current account (in percent of GDP): 2016/17: -0.4; 2017/18: -8.1; 2018/19: -7.7; 2019/20: -5.2; 2020/21: -4.9; 2021/22: -4.8; 2022/23: -4.7
- Trade balance (US$ millions and percent of GDP):
- Trade balance (US$ millions): 2016/17: -8,446; 2017/18: -10,849; 2018/19: -11,373; 2019/20: -11,658; 2020/21: -12,379; 2021/22: -13,140; 2022/23: -13,956; 2023/24: -14,770; 2024/25: -15,643
- Trade balance (in percent of GDP): 2016/17: -33.5; 2017/18: -37.4; 2018/19: -37.1; 2019/20: -34.2; 2020/21: -33.1; 2021/22: -32.2; 2022/23: -31.4; 2023/24: -30.5; 2024/25: -29.6
- Workers' remittances (US$ millions):
- 2016/17: 6,556
- 2017/18: 7,224
- 2018/19: 7,769
- 2019/20: 8,402
- 2020/21: 8,825
- 2021/22: 9,270
- 2022/23: 9,737
- 2023/24: 10,227
- 2024/25: 10,742
- Gross official reserves (US$ millions):
- 2016/17: 9,264
- 2017/18: 9,304
- 2018/19: 8,545
- 2019/20: 8,536
- 2020/21: 8,419
- 2021/22: 8,233
- 2022/23: 8,045
- 2023/24: 7,850
- 2024/25: 7,673
- In months of prospective imports: 2016/17: 8.3; 2017/18: 7.9; 2018/19: 6.6; 2019/20: 5.1
- Public debt (in percent of GDP):
- 2016/17: 30.2
- 2017/18: 30.1
- 2018/19: 33.7
- 2019/20: 35.7
- 2020/21: 37.4
- 2021/22: 39.0
- 2022/23: 40.3
- 2023/24: 41.1
- Nominal GDP (in billions of U.S. dollars):
- 2016/17: 25.2
- 2017/18: 29.0
- 2018/19: 30.7
- 2019/20: 34.1
- 2020/21: 40.8
- 2021/22: 44.5
- 2022/23: 48.4
- 2023/24: 52.9
- Private Sector Credit (in percent of GDP):
- 2016/17: 74.7
- 2017/18: 80.6
- 2018/19: 84.0
- 2019/20: 86.0
- 2020/21: 87.5
- 2021/22: 88.2
- 2022/23: 88.9
- 2023/24: 89.8
- 2024/25: 90.2
- Exchange rate (NPR/US$; period average):
- 2016/17: 106.2
- 2017/18: 104.4
- 2018/19: 112.9
Sources: Nepalese authorities; and IMF staff estimates and projections. Data as of January 31, 2020.
