IMF Executive Board Approves US$395.9 Million ECF Arrangement for Nepal

IMF News, January 13, 2022

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Canonical URL: IMF Executive Board Approves US$395.9 Million ECF Arrangement for Nepal

The Executive Board approved a 38-month arrangement under the Extended Credit Facility (ECF) for Nepal equivalent to SDR 282.42 million (180 percent of quota or about US$395.9 million).
Approval enables immediate disbursement of SDR 78.5 million (50 percent of quota, about US$110 million), usable for budget financing.
The ECF arrangement follows Fund emergency support to Nepal in May 2020 under the Rapid Credit Facility (100 percent of quota, SDR 156.9 million, equivalent to US$214 million at the time of approval).
The ECF arrangement aims to help fill financing gaps and catalyze additional financing from Nepal’s development partners.

The Covid-19 pandemic has severely impacted Nepal’s economy, including a collapse of tourism and service sectors and volatile remittances.
Recent activity and fiscal developments and staff projections:
- GDP contracted by 2.1 percent in FY2019/20.
- Staff estimate a partial recovery of growth at 2.7 percent for FY2020/21.
- Forecast growth of 4.4 percent in FY2021/22.
- Current account deficit of 8.3 percent of GDP in FY2020/21.
- Gross international reserves remain adequate but have begun to decline in recent months.
- Fiscal deficit expected to widen from 4.2 percent of GDP in FY2020/21 to 6.3 percent of GDP in FY2021/22.
From April to July 2021 Nepal suffered a devastating second wave of Covid-19, interrupting a gradual recovery in economic activity.
Households experience an ongoing shock to income and social assistance programs have limited coverage, implying a likely setback to poverty alleviation gains.

The Fund-supported program under the ECF has three main objectives, aligned with the government’s Relief, Restructuring, and Resilience (3R) plan:
- Mitigating the Covid-19 impact on health and economic activity, and protecting vulnerable groups, including by making room in the budget for health, social assistance, and job support, while enhancing fiscal transparency and governance.
- Preserving macroeconomic and financial stability, including by maintaining a prudent fiscal stance, preserving reserve adequacy, and strengthening financial sector regulation and supervision.
- Supporting a reform agenda that leads to sustained growth and poverty reduction over the medium term, including by implementing cross-cutting institutional reforms that improve governance and reduce corruption vulnerability.
Key policy actions under the program include:
- Measures to boost revenues and public spending efficiency.
- Strengthening financial sector regulation and supervision.
- Supporting fiscal transparency.
- Measures to enhance governance and combat corruption.

Fiscal policy in the early part of the program accommodates priority spending to address health needs, support the economy, and protect the most vulnerable.
Fiscal deficits would gradually decline once the health crisis wanes, helping to ensure debt sustainability, while also accommodating the authorities’ commitment to further enhance social safety nets.
A comprehensive fiscal structural reform agenda underpins the program, with both revenue mobilization and public financial management reforms to:
- Address the public investment efficiency gaps.
- Strengthen fiscal risk management.
- Improve public debt and cash management.
- Help advance fiscal federalism in a fiscally prudent manner.
Moving ahead with reforms to further enhance fiscal transparency and reporting will be important.
The gradual unwinding of accommodative monetary policy and the authorities’ commitment to remain vigilant toward emerging risks in the external and financial sectors are welcome.

Financial sector regulation and supervision needs to be strengthened, including:
- Ensuring the availability of adequate and timely supervisory data.
- Updating the regulatory framework to better capture risks including to banks’ asset quality.
- Enhancing the quality of supervision.
Measures under the program to further improve the autonomy and accountability framework of the central bank would support the financial sector agenda.
Sustained structural reform efforts are necessary to enhance the business environment, strengthen climate resilience, and raise medium-term growth.
Program support for cross-cutting institutional reforms aims to address governance, vulnerability to corruption, and efficiency of the public sector.

At the conclusion of the Executive Board’s discussion, Mr. Bo Li, Deputy Managing Director and Acting Chair, emphasized:
- The ECF arrangement will support the government’s priorities to mitigate the pandemic’s impact, preserve macroeconomic and financial stability, support sustained growth and poverty reduction, and catalyze additional external financing.
- The arrangement will help anchor and leverage the Fund’s capacity development strategy in Nepal.

IMF Press Release No. 22/6 (January 13, 2022).