Nepal: IMF Reaches Staff-level Agreement on 5th Review Under the Extended Credit Facility

IMF News, January 21, 2025

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Canonical URL: Nepal: IMF Reaches Staff-level Agreement on 5th Review Under the Extended Credit Facility

IMF team led by Ms. Sarwat Jahan visited Kathmandu during Jan 8 to Jan 19, 2025.
Press Release No. 25/009 dated January 21, 2025.
Staff-level agreement reached for the fifth review of Nepal’s economic reform program under the IMF’s Extended Credit Facility (ECF); agreement is subject to approval by the IMF Executive Board.
Upon completion of the Executive Board Review, Nepal would have access to SDR 31.4 million (about US$40.6 million).
Total IMF financial support disbursed under the ECF would be SDR 219.7 million (about US$283.9 million), from a total of SDR 282.42 million.

Program performance described as satisfactory.
All quantitative performance criteria and indicative targets for end-July 2024 were met except for the indicative targets on revenue collection and child welfare grants.
Implementation of structural benchmarks due before end-December 2024 gained momentum; some reforms remain ongoing.
Key reforms accomplished as part of the fifth review include:
- Amendment of Nepal’s anti-money laundering (AML) law.
- Strengthening the financial oversight of public enterprises.
- Completing an audit of the FY2023/24 financial statement of the Nepal Rastra Bank (NRB) involving experts with international experience in auditing other central banks.
Loan Portfolio Review (LPR) of the 10 largest banks:
- Initial procurement for the LPR was cancelled.
- NRB restarted the process to hire an independent international consultant to assist with the LPR.
- Completion of the review by the IMF’s Executive Board requires progress in key steps for launching the LPR and maintaining reform momentum.

Recent shocks and impacts:
- Severe floods in September 2024 caused widespread damage across critical sectors and dampened still-weak domestic demand.
- Inflation accelerated to 6.1 percent in December 2024 due to a spike in food prices following the floods.
External and fiscal developments:
- Nepal’s external position continued to strengthen, bolstered by robust remittances and subdued imports.
- Revenue growth remained modest.
Financial sector vulnerabilities:
- Non-performing loans in the banking sector reached 4.4 percent in October 2024.
- Financial health of the savings and credit cooperatives (SACCOs) sector deteriorated.
Growth and near-term trajectory:
- Growth is expected to gather pace, exceeding 4 percent in FY2024/25, supported by stronger public capital expenditure, including post-flood recovery and reconstruction efforts.
- Imports are expected to rebound in the second half of the year.
- Flood-driven food inflation is expected to ease as transport networks are repaired and agricultural output recovers.
Downside risks highlighted:
- Under-execution of growth-enhancing capital projects.
- An increase in financial sector vulnerabilities.
- Potential disruption to policy continuity and reform implementation.

Fiscal policy:
- Growth-friendly fiscal consolidation is critical—by accelerating capital expenditure coupled with stronger revenue mobilization.
- Timely execution of spending will further support growth and recovery.
Monetary policy:
- Monetary policy should continue to follow a data-driven approach to maintain price and external stability while supporting growth.
Financial sector and oversight:
- With amendments to the AML Law enacted, the next steps should focus on the effectiveness and application of the new legal framework.
- Amendments of the NRB Act are key to strengthening the central bank’s independence and governance.
- Rising financial sector vulnerabilities warrant increased vigilance.
- It is essential to launch the LPR in a timely manner; an important component would be to apply the Basel Committee on Banking Supervision Guidelines.
- Prioritizing measures to deal with problematic SACCOs would help boost consumption.

The IMF team met with:
- Honorable Deputy Prime Minister and Finance Minister Mr. Bishnu Prasad Paudel.
- National Planning Commission Vice-Chairman Honorable Dr. Shiva Raj Adhikari.
- Nepal Rastra Bank Governor Mr. Maha Prasad Adhikari.
- Other senior government and central bank officials, private sector representatives, and development partners.
IMF statement: “The IMF team is grateful to the Nepali authorities for their hospitality and for open and constructive discussions.”

Source: International Monetary Fund — Press Release No. 25/009, January 21, 2025.