Nepal: Staff Report for the 2014 Article IV Consultation
IMF Staff Country Reports, July 18, 2014
Source details
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- Nepal: Staff Report for the 2014 Article IV Consultation
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Bibliographic details
- Published: July 18, 2014
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9781498386784.002
Key issues and context
- Context: Successful elections for a new Constituent Assembly and formation of a new government have stabilized the political situation.
- Subject areas: Balance of payments, Credit, External debt, Inflation, Monetary base, Money, Prices, Public debt, Remittances.
- Keywords: authority, capital budget execution, CR, Credit, debt, Global, IFC work, Inflation, ISCR, monetary management, prefix, remittance inflow, Remittances, reserve money growth, South Asia, staff analysis, transmission mechanism.
Macroeconomic situation and outlook
- Current assessment: Nepal’s macroeconomic situation remains broadly favorable.
- Growth: Growth is projected to recover in 2013/14 owing to good monsoons, robust growth in services, and increased public spending.
- Inflation: Inflation is moderating, in line with developments in India.
- External position: High remittance inflows are supporting a strong external position, as well as high reserve money growth.
- Risks: Risks to the outlook are slightly tilted to the downside, involving slower-than-expected growth in countries hosting Nepali workers and domestic financial sector risks.
Medium-term prospects
- Remittances: Remittances are expected to continue to support the external position.
- Growth drivers: Outlook for growth depends on improving the environment for private investment.
- Public investment and reforms: This requires a decisive boost in public capital spending, and structural reforms in key areas.
Financial sector assessment
- FSAP findings: The recent assessment under the FSAP, Nepal’s first, raised concerns about asset quality and interconnectedness, as well as financial sector infrastructure—including the legal framework—and supervision and crisis preparedness.
- Cooperatives sector: A largely unsupervised cooperatives sector is growing rapidly.
- Vulnerabilities: Despite progress, significant vulnerabilities remain.
Key policy recommendations
- Monetary policy:
- Aim at controlling the volatility and level of excess reserves in the financial system.
- Implication: a modest tightening of monetary conditions.
- Exchange rate policy:
- The exchange rate peg to the Indian rupee provides a useful nominal anchor for the economy.
- Assessment: the real exchange rate is broadly in line with fundamentals.
- Fiscal and structural policy:
- Capital spending needs to be boosted to provide key infrastructure.
- Implement reforms to support private investment to generate sustained economic growth and employment opportunities.
- Financial sector reform:
- Further reforms to bolster regulation and supervision, and improve financial infrastructure are needed to reduce risk and increase access to finance.