IMF Executive Board Concludes 2023 Article IV Consultation with Nepal and Completes First and Second Reviews under the Extended Credit Facility

IMF News, May 1, 2023

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Canonical URL: IMF Executive Board Concludes 2023 Article IV Consultation with Nepal and Completes First and Second Reviews under the Extended Credit Facility

Completion of the first and second reviews under the Extended Credit Facility (ECF) provides Nepal with access to SDR 39.20 million (about US$52.8 million).
Total disbursements under the ECF for budget support thus far amount to SDR 117.70 million (about US$157.4 million).
The ECF arrangement for Nepal was approved on January 12, 2022 in an amount equivalent to SDR 282.42 million (180 percent of quota or about US$384.8 million).
The ECF aims to mitigate the pandemic and global shocks’ impact, protect vulnerable groups, preserve macroeconomic and financial stability, and support sustained growth and poverty reduction, while catalyzing additional financing from development partners.

Real GDP growth is forecast to soften to 4.4 percent in FY2022/23.
Inflation remains elevated but is projected to decline to the Nepal Rastra Bank’s 7 percent target by the end of FY2022/23.
The overall fiscal deficit is expected to reach 4.5 percent of GDP in FY2022/23.
The current account deficit is expected to narrow to 5.2 percent of GDP in FY2022/23 due to weaker import demand, lower commodity prices, a recovery in tourism and buoyant remittances reflecting a post‑pandemic increase in outward migration.
Post-pandemic recovery drivers include tourism recovery, strong agriculture sector performance and resilient remittances.
Risks to the outlook are on the downside.

The government rationalized spending in its mid‑year budget review in response to weaker‑than‑expected tax collections in the first half of the year.
Revenue collection has been disappointing, owing largely to lower import‑related taxes, but substantial expenditure rationalization announced in the midyear budget review is expected to help contain the deficit.
Fiscal policy priorities highlighted:
- Promptly addressing near-term fiscal pressures through expenditure rationalization while protecting high-quality infrastructure and social spending.
- Fiscal consolidation and further structural reforms to support medium-term fiscal sustainability.
- Revenue mobilization, advancing fiscal federalism, addressing fiscal risks, and strengthening public investment management.
- Maintaining momentum on governance reforms to cement gains in fiscal transparency.
- Strengthening financial oversight and governance of public enterprises to limit fiscal risks.

The much‑needed monetary policy tightening last year, together with the gradual unwinding of COVID support measures, helped moderate credit growth and lower inflation.
A cautious, data-driven approach to monetary policy, supported by macroprudential tools, is recommended to maintain external stability and address elevated inflation.
Bank asset quality has deteriorated as higher lending rates depress borrowers’ repayment capacity, though bank capital adequacy ratios are above the regulatory minima.
Directors and staff recommended that the central bank:
- Prioritize bank asset quality, including regulatory initiatives to ensure appropriate classification of loans.
- Advance the financial sector reform agenda and implement outstanding 2021 safeguards assessment recommendations to improve the autonomy and accountability framework of the central bank.
- Strengthen the AML/CFT framework and its effectiveness.
- Improve financial inclusion through digitalization.

Structural reform priorities identified:
- Lower the cost of doing business and remove barriers for foreign investment.
- Improve governance and strengthen anti‑corruption institutions.
Climate and social resilience measures:
- Better-targeted social assistance.
- Investment in climate-resilient infrastructure.
- Policies to boost agricultural productivity to reduce vulnerability to climate shocks and natural disasters.

Directors agreed with the thrust of the staff appraisal, noting global shocks’ impact through higher commodity prices, elevated inflation, and downside risks to the outlook.
Directors recognized mixed program performance in a difficult environment and emphasized the importance of strong program ownership and Fund capacity development.
The next Article IV Consultation with Nepal is expected to be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.
Statement by Mr. Bo Li, Deputy Managing Director and Acting Chair, reiterated that:
- The ECF‑supported reform program has mitigated pandemic and global shocks while protecting vulnerable groups and preserving macroeconomic and financial stability.
- Fiscal consolidation, governance reforms, monetary policy vigilance, financial sector reforms, and structural reforms are critical to achieving sustainable and inclusive growth.

Press Release No. 23/131 — IMF Communications Department