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IMF Executive Board Concludes 2020 Article IV Consultation with Nepal
April 6, 2020
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IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Pemba Sherpa
Phone: +1 202 623-7100Email: MEDIA@IMF.org
April 6, 2020
PRESS OFFICER: Pemba Sherpa
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Washington, DC – On March 17, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Nepal and considered and endorsed the staff appraisal without a meeting.[2]
Recent strong growth in Nepal has been supported by greater political stability, an electricity supply that is more reliable and with broader access, and reconstruction activity following the devastating earthquakes in 2015. Nepal has seen significant poverty reduction, though vulnerabilities remain, exacerbated by climate related shocks.
Growth performed well in FY2018/19. Growth increased to 7.1 percent, reflecting a rebound in agriculture, earthquake reconstruction, and buoyant tourism. Higher food prices prompted a rise in headline inflation to 6.5 percent in December 2019. The current account deficit was 7.7 percent of GDP in FY2018/19, with remittances helping to finance the large trade deficit. The central government deficit narrowed to 4.6 percent of GDP, due to improvements in revenue collection and underspending with respect to the budget. Provinces and local governments also saw spending under-execution.
There are signs of moderation in economic activity in FY2019/20. Remittance inflows have recently decelerated because of a slowdown in major remittance-sending economies, including India. Agricultural sector performance has been weaker this year. During the first months of FY2019/20, the current account deficit narrowed considerably, due to lower imports of fuel and construction material, reflecting both slowing reconstruction activities and greater domestic electricity and cement production. Gross official reserves were at US$8.7 billion in December 2019, remaining adequate at 6.9 months of prospective imports. Credit growth tapered to 14.8 percent (y/y) in December 2019 compared to 25.4 percent (y/y) a year earlier, reflecting regulatory tightening and slowing deposit growth due to sluggish remittances.
Executive Board Assessment
In concluding the 2020 Article IV Consultation with Nepal, Executive Directors endorsed staff’s appraisal as follows:
Growth is expected to moderate, helping to contain macroeconomic stability risks. Nepal’s recent strong growth performance has been supported by a stable political environment, a more reliable electricity supply, and post-earthquake reconstruction spending. For FY2019/20, growth is expected to ease to 6 percent including because of slower growth in India, sluggish remittance inflows, and weaker agricultural production. Inflation is expected at 6 percent due to high food inflation. In the context of moderating growth, there has been a welcome narrowing of the current account deficit and stabilization of gross official reserves. Credit growth has moderated from very high levels, though credit as a share of GDP remains elevated relative to peers. Nonetheless, downside risks remain, including renewed balance of payments pressures and increase in financial-sector risks if credit growth were to increase sharply or remittances slowdown abruptly. Nepal’s external position in FY2018/19 is assessed as weaker than the level consistent with fundamentals and desirable policy settings.
Efforts to prevent excessive credit growth and contain financial-sector risks should continue. The NRB has appropriately implemented macroprudential measures to limit the buildup of systemic risk in the financial sector. It has also 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. The recent regulatory requirement for banks to cross-check corporate borrowers’ financial information against the ITS is expected to facilitate more prudent risk assessment by banks. Activation of the countercyclical capital buffer that will require banks to increase their level of capital by July 2020 is appropriate. The NRB should continue to closely monitor asset quality of banks and improve monitoring of concentration risk.
Fiscal policy should be geared towards containing external pressures and protecting fiscal sustainability. In this regard, a fiscal deficit of 4.5 percent of GDP, similar to the outcome in FY2018/19, would be prudent. Recent upgrades to tax administration are commendable. Staff underscores that a top-down budget process and MTFF based on conservative revenue and expenditure assumptions would instill greater prioritization and would avoid creating unrealistic revenue expectations among SNGs. 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.
The transition to fiscal federalism is a monumental challenge and needs to be carefully managed. To protect fiscal sustainability, the overall expenditure envelope of SNGs needs to be aligned with available funding, with tight limits on any subnational borrowing. A robust reporting and monitoring system for SNGs is urgently needed. There also needs to be a clear delineation of roles and responsibilities across levels of government to ensure adequate delivery of services and investments.
Strengthening the implementation of monetary policy requires a well-functioning interest rate framework that reduces volatility in short-term interest rates. Less short-term interest rate volatility would support financial market development and improve policy signaling and transmission. Staff emphasizes the need to introduce a standing deposit facility as a first step towards establishing a reliable implementation track record for the interest rate corridor.
Achieving the central bank’s mandated price and financial stability objectives calls for modernizing the NRB governance framework to improve its autonomy and accountability, Reforms are needed to strengthen independent oversight, safeguard institutional and personal autonomy, and enhance internal controls and quality of external audit, all underpinned by supportive human resource management.
To boost growth prospects, structural reforms that encourage high-quality investment projects, in particular FDI, are critical. As post-earthquake reconstruction spending draws to a close in coming years, maintaining the recent growth momentum will require an enabling implementation environment for infrastructure projects and FDI. To ensure that high-quality projects move forward in a clear and timely manner, staff encourages authorities to focus on adequate staffing, better skills matching, and aligning incentives across and within government ministries responsible for project approvals, implementation, and subsequent monitoring.
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Table 1. Nepal: Selected Economic Indicators, 2016/17-2024/25 1/ |
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|
|
2016/17 |
2017/18 |
2018/19 |
2019/20 |
2020/21 |
2021/22 |
2022/23 |
2023/24 |
2024/25 |
|
|
|
|
Est. |
Projections |
|||||
|
Output and prices (annual percent change) |
|
|
|
|
|||||
|
Real GDP |
8.2 |
6.7 |
7.1 |
6.0 |
5.7 |
5.5 |
5.4 |
5.3 |
5.3 |
|
Headline CPI (period average) |
4.5 |
4.1 |
4.6 |
6.0 |
5.9 |
5.8 |
5.6 |
5.3 |
5.3 |
|
Headline CPI (end of period) |
2.7 |
4.6 |
6.0 |
5.9 |
5.8 |
5.7 |
5.5 |
5.3 |
5.3 |
|
Fiscal Indicators: Central Government (in percent of GDP) |
|
|
|
|
|||||
|
Total revenue and grants |
24.1 |
25.3 |
26.0 |
25.8 |
26.0 |
25.8 |
25.5 |
25.6 |
25.5 |
|
of which: Tax revenue |
20.7 |
21.1 |
21.9 |
21.9 |
21.8 |
21.6 |
21.4 |
21.3 |
21.4 |
|
Expenditure |
27.2 |
31.9 |
30.6 |
30.4 |
30.4 |
30.0 |
29.7 |
29.4 |
29.3 |
|
Expenses |
19.4 |
23.0 |
23.6 |
23.1 |
23.1 |
22.9 |
22.7 |
22.7 |
22.8 |
|
Net acquisition of nonfinancial assets |
7.8 |
8.9 |
7.0 |
7.3 |
7.3 |
7.1 |
7.0 |
6.7 |
6.5 |
|
Operating balance |
4.7 |
2.3 |
2.4 |
2.8 |
2.9 |
2.9 |
2.9 |
2.8 |
2.8 |
|
Net lending/borrowing |
-3.1 |
-6.7 |
-4.6 |
-4.5 |
-4.4 |
-4.2 |
-4.1 |
-3.9 |
-3.7 |
|
Statistical discrepancy |
-1.3 |
-3.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
Net financial transactions |
1.8 |
3.6 |
4.6 |
4.5 |
4.4 |
4.2 |
4.1 |
3.9 |
3.7 |
|
Net acquisition of financial assets |
1.4 |
-0.7 |
1.7 |
1.6 |
0.9 |
0.9 |
0.9 |
0.9 |
0.9 |
|
Net incurrence of liabilities |
3.2 |
2.9 |
6.3 |
6.1 |
5.3 |
5.0 |
5.0 |
4.8 |
4.6 |
|
Foreign |
1.3 |
2.4 |
2.1 |
2.4 |
1.9 |
1.6 |
1.6 |
1.5 |
1.3 |
|
Domestic |
1.9 |
0.4 |
4.2 |
3.7 |
3.4 |
3.4 |
3.4 |
3.3 |
3.3 |
|
Money and credit (annual percent change) |
|
|
|
|
|||||
|
Broad money |
15.5 |
19.4 |
15.8 |
13.2 |
11.9 |
11.6 |
11.1 |
10.9 |
10.7 |
|
Domestic credit |
20.2 |
26.1 |
21.7 |
17.6 |
15.7 |
14.3 |
13.8 |
13.3 |
13.1 |
|
Private sector credit |
18.0 |
22.3 |
19.1 |
15.0 |
13.8 |
12.5 |
12.2 |
12.0 |
12.0 |
|
Saving and Investment (in percent of nominal GDP) |
|||||||||
|
Gross investment |
45.2 |
55.2 |
62.3 |
54.6 |
53.4 |
52.4 |
51.5 |
50.6 |
49.8 |
|
Private |
23.6 |
25.8 |
30.0 |
25.1 |
24.4 |
24.0 |
23.5 |
23.3 |
23.0 |
|
Central government |
7.8 |
8.9 |
7.0 |
7.3 |
7.3 |
7.1 |
7.0 |
6.7 |
6.5 |
|
Change in Stock |
13.8 |
20.5 |
25.3 |
22.2 |
21.7 |
21.3 |
21.0 |
20.6 |
20.2 |
|
Gross national saving |
44.8 |
47.1 |
54.6 |
49.4 |
48.5 |
47.6 |
46.8 |
46.0 |
45.3 |
|
Private |
41.3 |
46.1 |
53.3 |
47.8 |
47.0 |
46.1 |
45.3 |
44.6 |
44.0 |
|
Central government |
3.5 |
1.0 |
1.2 |
1.6 |
1.5 |
1.5 |
1.4 |
1.4 |
1.4 |
|
Balance of Payments |
|||||||||
|
Current account (in millions of U.S. dollars) |
-93 |
-2,350 |
-2,369 |
-1,760 |
-1,832 |
-1,963 |
-2,104 |
-2,215 |
-2,323 |
|
In percent of GDP |
-0.4 |
-8.1 |
-7.7 |
-5.2 |
-4.9 |
-4.8 |
-4.7 |
-4.6 |
-4.4 |
|
Trade balance (in millions of U.S. dollars) |
-8,446 |
-10,849 |
-11,373 |
-11,658 |
-12,379 |
-13,140 |
-13,956 |
-14,770 |
-15,643 |
|
In percent of GDP |
-33.5 |
-37.4 |
-37.1 |
-34.2 |
-33.1 |
-32.2 |
-31.4 |
-30.5 |
-29.6 |
|
Exports of goods (y/y percent change) |
9.9 |
15.5 |
12.1 |
1.4 |
9.9 |
9.9 |
9.9 |
9.9 |
9.9 |
|
Imports of goods (y/y percent change) |
30.0 |
27.4 |
5.4 |
2.4 |
6.5 |
6.5 |
6.5 |
6.2 |
6.3 |
|
Workers' remittances (in millions of U.S. dollars) |
6,556 |
7,224 |
7,769 |
8,402 |
8,825 |
9,270 |
9,737 |
10,227 |
10,742 |
|
In percent of GDP |
26.0 |
24.9 |
25.3 |
24.7 |
23.6 |
22.7 |
21.9 |
21.1 |
20.3 |
|
Gross official reserves (in millions of U.S. dollars) |
9,264 |
9,304 |
8,545 |
8,536 |
8,419 |
8,233 |
8,045 |
7,850 |
7,673 |
|
In months of prospective imports |
8.3 |
7.9 |
7.0 |
6.6 |
6.1 |
5.5 |
5.1 |
4.7 |
4.3 |
|
Memorandum items |
|
|
|
|
|||||
|
Public debt (in percent of GDP) |
26.1 |
30.2 |
30.1 |
33.7 |
35.7 |
37.4 |
39.0 |
40.3 |
41.1 |
|
Nominal GDP (in billions of U.S. dollars) |
25.2 |
29.0 |
30.7 |
34.1 |
37.4 |
40.8 |
44.5 |
48.4 |
52.9 |
|
Nominal GDP (in billions of Nepalese Rupees) |
2,674 |
3,031 |
3,464 |
3,892 |
4,354 |
4,860 |
5,406 |
5,997 |
6,687 |
|
Private Sector Credit (in percent of GDP) |
74.7 |
80.6 |
84.0 |
86.0 |
87.5 |
88.2 |
88.9 |
89.8 |
90.2 |
|
Exchange rate (NPR/US$; period average) |
106.2 |
104.4 |
112.9 |
… |
… |
… |
… |
… |
… |
|
Real effective exchange rate (average, y/y percent change) |
3.6 |
0.2 |
-1.4 |
… |
… |
… |
… |
… |
… |
|
Sources: Nepalese authorities; and IMF staff estimates and projections. |
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Note: Data as of January 31, 2020. 1/ Fiscal year ends in mid-July. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
