Nepal: Moving Forward with IMF Support

IMF News, February 28, 2024

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IMF arrangement approved a third tranche worth about $52 million in November 2023.
The program signals to donors and investors that Nepal’s economy is stable and that the government is implementing reforms in government revenues and spending, monetary and financial policies, and governance.
Publication: Op-ed by Anne-Marie Gulde-Wolf and Tidiane Kinda, originally published on Setopati on February 28, 2024.

Decisive and data-driven monetary policy by the Rastra Bank has helped replenish international reserves and rendered unnecessary the use of import restrictions that reduce tax collection and are costly for businesses.
Budget discipline by the Ministry of Finance, despite a large revenue shortfall, has helped preserve a sustainable debt level—one of Nepal’s major economic strengths.
Near-term growth is below potential; the economy is on a recovery path but requires stronger pickup.

Critical near-term policy to support growth: increase capital spending in a fiscally responsible manner.
Donors are keen to support such spending with concessional lending, but execution rates must improve.
The Planning Commission is producing a public investment strategy, building on plans in the budget and IMF advice, to help accelerate capital spending.
Fiscal discipline must be maintained while addressing low fiscal revenue as a priority.
The government is preparing a domestic revenue mobilization strategy, with support from the IMF; many tax exemptions have already been identified.

Credit-to-GDP went from roughly 50% to nearly 100% over the last decade, a pace characterized as too fast and risky for sustainable lending practices.
International experience suggests excessively rapid credit growth often leads to painful credit busts; Nepal can avoid a sharp correction by adjusting lending practices.
Rastra Bank has improved its supervisory system for banks and amended regulations on asset classification and working capital loans.
- These reforms aim to strengthen bank monitoring, stimulate proper loan classification, and improve lending practices.
- There is a gradual shift in lending towards term loans, better suited for investments, and away from excessive working capital loans and overdrafts.
- An upcoming loan portfolio review will complement recent measures and help address remaining problems.

Governance is a key pillar of the program; advancing governance reform and moving toward international standards will help attract international investors.
Priorities include:
- Amending the NRB Act.
- Enhancing the external audit of the NRB.
- Addressing weaknesses in the anti-money laundering/combatting the financing of terrorism (AML/CFT) framework by the recent passing of the AML/CFT amendment bill and raising effectiveness on the ground.

Risks on the horizon include higher commodity prices, global growth slowdown, and natural disasters that could reduce growth.
The upcoming Investment Summit presents an opportunity to showcase Nepal’s economic potential.
To maximize benefits from the Summit and growing international engagement, Nepal should:
- Improve swiftly and durably its investment climate.
- Build human capital.
- Improve social safety nets.
The IMF is presented as a partner to support Nepal in implementing these reforms and realizing its potential.

Source: Op-ed by Anne-Marie Gulde-Wolf and Tidiane Kinda, originally published on Setopati on February 28, 2024.