Nepal: IMF Reaches Staff-level Agreement on 3rd Review Under the Extended Credit Facility

IMF News, October 5, 2023

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Canonical URL: Nepal: IMF Reaches Staff-level Agreement on 3rd Review Under the Extended Credit Facility

IMF team led by Mr. Tidiane Kinda visited Kathmandu during September 21 to October 5 to hold discussions on policies and reforms for the 3rd review of the authorities’ ECF-supported program.
The Nepali authorities and IMF staff reached staff-level agreement on the policies and reforms needed to complete the 3rd review under the ECF; the agreement is subject to approval by the IMF’s Executive Board.
Press Release No. 23/338 referenced; the statement reflects IMF staff preliminary findings and does not necessarily represent the views of the IMF’s Executive Board.
Completion would make available SDR 39.20 million (about US$51.3 million), bringing total disbursements under the ECF thus far to SDR 156.9 million (about US$205.4 million), from a total of SDR 282.42 million (about US$369.8 million).

External position: strengthened, supported by prudent fiscal and monetary policies, buoyant remittances, and post-pandemic rebound in tourism, despite spikes in regional food prices.
Growth:
- Growth is projected to recover to 3.5 percent in FY2023/24, which is below potential, due to weak domestic demand.
- Growth is estimated to have slowed in FY2022/23, reflecting last year’s import restrictions, regulatory uncertainty on land markets and construction licensing, lower credit flows, and weaker domestic demand in a context of large post-COVID emigration outflows.
Inflation:
- Inflation remains high at 7.5 percent in August but is expected to recede.
Fiscal:
- The ensuing shortfall in revenue pushed the FY2022/23 fiscal deficit upward, but to a level that remains consistent with a sustainable level of public debt, reflecting budget discipline.
Medium-term outlook:
- Remains favorable as strategic investments in infrastructure, especially in the energy sector, are expected to support potential growth.

Necessary balance sheet repairs after the credit boom and the sluggishness in the real estate market have been limiting credit growth in spite of monetary relaxation.
Reforms under the ECF aim to generate more stable, pro-growth credit while maintaining price and external stability.
Nepal Rastra Bank (NRB) achievements:
- Full implementation of the Supervisory Information System (SIS) for Class A, B and C banks (excluding the onsite module).
- Issuance of a new set of bank asset classification regulations aimed at strengthening monitoring capability and improving bank asset quality.

Ministry of Finance achievements:
- Formulation of a fiscal risk register.
- Publication of the non-custom tax exemptions.
- Implementation of a cash flow forecasting framework.
Additional future reforms and transparency measures highlighted:
- Publication of a comprehensive tax expenditure report.
- Publication of annual financial statements by public enterprises.
- Audit of the financial statements of the four-priority public enterprises.
- Reporting consolidated financial information of all extrabudgetary operational funds.

Priority actions agreed between the Nepali authorities and IMF staff:
- Formulation of a Domestic Revenue Mobilization Strategy to improve tax collection.
- Developing an action plan to improve the efficiency of public investment spending.
- Launching a loan portfolio review of the banking system.
- Continuing to strengthen the NRB’s SIS onsite module.
- Amending the NRB Act.
Fiscal policy guidance:
- Accelerating the planned increase in capital spending, as envisaged in the FY2023/24 budget, to help boost aggregate demand.
Monetary policy guidance:
- Pursue a cautious and data-driven approach to monetary policy to maintain price and external stability.

Nepal is committed to strengthening its AML/CFT, supported by IMF technical assistance.
Authorities are diligently making progress to implement recommendations from the AML/CFT Mutual Evaluation, including enacting amendments of AML laws to bring them in line with international standards.

The IMF team met with the Honorable Minister of Finance Dr. Prakash Sharan Mahat, Nepal Rastra Bank Governor Mr. Maha Prasad Adhikari, National Planning Commission Vice-Chairman Dr. Min Bahadur Shrestha, other senior government and NRB officials, development partners and representatives of the business and banking community.
The IMF team expressed gratitude to the Nepali authorities for their hospitality and for open and constructive discussions.

International Monetary Fund press release No. 23/338, October 5, 2023.

Press Release No. 22/6](https://www.imf.org/en/News/Articles/2022/01/13/pr2206-nepal-imf-executive-board-approves-us-million-ecf-arrangement)