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

_IMF News, January 13, 2022_

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## Bibliographic details
- Published: January 13, 2022

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### Program overview and financing
- 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.

### Macroeconomic context and outlook
- 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.

### Program objectives and key policy actions
- 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.

### Immediate priorities and conditional policy direction
- 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 and structural reform priorities
- 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.

### Statement by IMF management
- 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).*

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## References

- [Bo Li](https://www.imf.org/en/About/senior-officials/Bios/bo-li)
- [IMF COVID-19 Hub](https://www.imf.org/en/Topics/imf-and-covid19)
- [Policy Tracker](https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19)
- [Financial Assistance](https://www.imf.org/en/Topics/imf-and-covid19/COVID-Lending-Tracker)
- [Questions & Answers](https://www.imf.org/en/About/FAQ/imf-response-to-covid-19)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2022/01/13/pr2206-nepal-imf-executive-board-approves-us-million-ecf-arrangement_