Nepal: IMF Reaches Staff-level Agreement on 4th Review Under the Extended Credit Facility

IMF News, June 6, 2024

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Canonical URL: Nepal: IMF Reaches Staff-level Agreement on 4th Review Under the Extended Credit Facility

IMF team led by Mr. Tidiane Kinda visited Kathmandu during May 22 to June 5 to discuss policies and reforms for completion of the 4th review under the Extended Credit Facility (ECF).
The Nepali authorities and IMF staff reached staff-level agreement for a disbursement of about US$41.6 million under the fourth review of the ECF arrangement.
The agreement is subject to approval by the IMF’s Executive Board.

Completion would make available SDR 31.4 million (about US$41.6 million).
Total disbursements under the ECF thus far: SDR 188.3 million (about US$249.7 million).
Total ECF amount: SDR 282.42 million (about US$380.2 million).

Growth:
- Growth projected around 3 percent in FY2023/24.
- Growth expected to reach 4.9 percent in FY2024/25, supported by stronger domestic demand.
Inflation:
- Inflation decreased from a peak of 8.6 percent in September 2022 to 4.6 percent in April 2024.
- Inflation is projected to remain within the NRB’s target ceiling of 5.5 percent.
External position:
- External position continues to strengthen, reflecting prudent policies, buoyant remittances, and subdued imports.
Drivers expected to boost growth in FY2024/25:
- Cautiously accommodative monetary policy stance.
- Planned increase in capital expenditure in the FY2024/25 budget.
- Additional hydropower generation.
- Continued increase in tourist arrivals.
Medium-term outlook:
- Favorable, with strategic investments in infrastructure, especially in the energy sector, expected to support potential growth.

Fiscal constraints:
- Tax-to-GDP ratio remains below pre-pandemic levels, limiting fiscal space for development spending, including infrastructure and targeted social benefits.
Recent fiscal reforms and measures:
- Approval of a Domestic Revenue Mobilization Strategy by the Ministry of Finance aimed at strengthening tax collection.
- Approval of an Action Plan by the National Planning Commission (NPC) aimed at improving execution of budgeted capital projects.
- Reforms to enhance fiscal transparency are well advanced, including:
- Incorporating most Extra Budgetary Funds accounts in the annual financial statements published by the Financial Comptroller General Office.
- Publishing audited financial statements for some key public enterprises.
Near-term fiscal transparency deliverables agreed with authorities:
- Publication of a comprehensive tax expenditure report.
- Publication of a fiscal risk statement.
- Revising and approving the National Project Bank Operational Procedures and the Unified Directives related to project development, prioritization, and selection.
- Reporting consolidated financial information of all extrabudgetary operational funds.

Banking sector:
- Banks’ non-performing loans doubled since August 2022 to 4.0 percent in April 2024.
- Bank profitability declined.
- Major NRB achievements include finalization and full implementation of the Supervisory Information System for all banks.
- Progress on procurement of an independent international consultant to assist NRB in the conduct of the Loan Portfolio Review (LPR) of the 10 largest banks.
SACCO sector:
- Financial health of the savings and credit cooperatives (SACCO) sector has deteriorated.
- Authorities are starting to develop a strategy to deal with issues in the SACCO sector, including reforming the supervisory framework and architecture.
Public enterprises and audits:
- Priority to publish annual financial statements by all majority and wholly owned public enterprises.
- Audit of the financial statements of four priority public enterprises agreed.
Recommended financial governance actions:
- Launch the LPR of the banking system.
- Submit to Parliament amendments of the NRB Act.
- Involve experts with international experience in auditing and central bank auditing for an audit of NRB’s FY23/24 financial statements.
- Implement key reforms in the 2023 Financial Sector Stability Report.

Program aims:
- Support sustained growth, protect vulnerable groups, and help preserve macroeconomic and financial stability.
Fiscal policy guidance:
- Accelerate capital spending to boost domestic demand.
- Execute planned increase in capital expenditure while limiting overall spending growth to achieve growth-friendly fiscal consolidation as envisaged in the FY2024/25 budget.
Monetary policy guidance:
- Pursue a cautious and data-driven approach to monetary policy.
- Strengthen the monetary framework to maintain price and external stability.
Financial sector priorities:
- Strengthen Nepal’s financial system as a top priority through the LPR, NRB Act amendments, audits, and public enterprise financial transparency.

Nepal committed to strengthening its AML/CFT framework.
Amendments to a set of 15 laws, including on money laundering, have been recently enacted.
Secondary legislation is under preparation to bring Nepal’s AML/CFT legal framework in line with international standards.
Nepal will seek technical support from the IMF and other donors to ensure effectiveness of the new legal framework.

Source: Press Release No. 24/209, June 6, 2024, International Monetary Fund.