IMF Executive Board Concludes 2011 Article IV Consultation with Nepal

Public Information Notice (PIN) No. 11/134
November 4, 2011

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On October 19, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Nepal.1


Living standards in Nepal have improved markedly over the past decade thanks to increased remittances, supportive social programs, and generally prudent fiscal policy that almost halved public debt as a share of GDP. Notable progress has also been made towards the Millennium Development Goals. However, productivity growth has not kept pace with neighboring countries, and structural reforms needed to boost growth and enhance competitiveness have lagged. At the same time, Nepal remains in a lengthy political transition: the Constituent Assembly and the interim Constitution were recently extended for a third time to November 2011.

Maintaining macroeconomic and financial stability has become increasingly challenging since the last Article IV consultation in May 2010, with financial sector risks in particular elevated. Inflation has remained high, averaging about 9½ percent in 2010-11.2 The balance of payments was under pressure for most of the year due to high oil prices, slowing remittances, and weakening competitiveness, though it ended with a modest surplus. The adoption of the budget by the Constituent Assembly was delayed by 7 months due to the political situation. Revenue and spending underperformed the budget targets, net domestic financing exceeded its target, and large losses were incurred by the Nepal Oil Company. Reflecting these developments and heightened stress in the banking system, growth slowed to 3½ percent from 4½ percent the previous year. Mixed progress was made in implementing policy commitments under the Rapid Credit Facility (RCF), approved in May 2010.

Banking sector risks have intensified as financial institutions proliferated in an environment of weak supervision. Asset quality has deteriorated and liquidity pressures increased following the bursting of a bubble in the real estate market, to which banks are significantly exposed. In response, monetary policy eased and liquidity support was extended to institutions in stress, regulatory forbearance measures were implemented, and a widening of deposit insurance was announced. Restructuring of the weak state banks and reform of key bank legislation have been delayed.

The outlook is subject to high degree of uncertainty, with risks on the downside chiefly owing to banking sector fragility. Real GDP growth is expected at 3¾ percent in 2011-12, with good agriculture output compensating for subdued non-agriculture activity. Inflation should ease to 8 percent due to an expected moderation in India’s inflation and a stabilization of commodity prices. The external current account deficit is projected to remain around 1 percent of GDP, but the import cover of foreign reserves is expected to decline. The 2011-12 budget appropriately targets net domestic financing of 2 percent of GDP; however, achieving this will not be easy given ambitious revenue targets set against the backdrop of moderate activity and a significant increase of current spending.

Against this background, the 2011 Article IV consultation focused on maintaining macroeconomic stability and managing financial sector risks.

Executive Board Assessment

Executive Directors welcomed Nepal’s generally prudent fiscal performance, the improvements in living standards, and the progress toward the achievement of the Millennium Development Goals. Looking ahead, Directors stressed that Nepal’s macroeconomic environment has become increasingly challenging, requiring decisive actions to address financial sector fragility while maintaining macroeconomic stability and poverty reduction efforts.

Directors urged the authorities to address the substantial risks in the financial sector with utmost priority. They viewed regulatory forbearance as unsustainable, and stressed the need to strengthen supervision, the regulatory environment, and banks’ corporate governance, while merging and improving the central bank’s emergency liquidity facilities. Directors encouraged the authorities to develop an effective crisis management framework that would facilitate timely intervention and resolution of problem banks. They advised the authorities to press ahead with restructuring the weak state banks—with a few Directors stressing an audit of Nepal Bank Limited by a reputable international auditor—and to strictly enforce the moratorium on new bank licenses.

Directors underlined that continued fiscal prudence remains essential to ensuring macroeconomic stability. They commended the authorities for continuously improving debt dynamics, and for the timely adoption of the 2011-12 budget with an appropriate target for net domestic financing. Given the challenging backdrop of moderate activity and a significant increase of current spending, Directors encouraged the authorities to boost revenue by further strengthening administration and refocusing the tax structure toward domestic sources. Efforts are also needed to restrain administrative expenses and to phase out unproductive subsidies while safeguarding pro-poor spending. Directors called on the authorities to enhance the public finance management framework and to introduce an automatic fuel price adjustment mechanism to limit the losses of the Nepal Oil Corporation.

Directors emphasized that the exchange rate peg has served Nepal well and continues to be a near-term policy priority, and safeguarding it requires a firmer monetary policy stance and targeted rather than blanket liquidity provision for solvent banks facing short-term pressures. They noted the staff’s assessment that the exchange rate appears overvalued, and stressed the importance of boosting productivity. At the same time, if sustained and significant downward exchange-rate pressure were to emerge, preservation of official reserves and an adjustment of the peg would need to be considered. Directors welcomed the authorities’ commitment to remove the exchange restriction to comply with Article VIII of the Fund’s Articles of Agreement.

Directors encouraged the authorities to press ahead with structural reforms to raise productivity and potential growth. Addressing key structural bottlenecks, along with macro-financial stability, would help Nepal achieve higher sustainable growth and promote poverty reduction, and Directors expected these issues to be at the core of a strong reform program that could be supported by an Extended Credit Facility (ECF) arrangement.

Nepal: Selected Economic Indicators
  2008/09 2009/10 2010/11 2011/12
  Est. Proj.

Output and prices (annual percent change)

Real GDP

4.4 4.6 3.5 3.8

Non-agricultural GDP

4.1 5.4 3.1 2.9

CPI (period average)

12.6 9.6 9.5 8.0

CPI (end of period)

11.1 9.0 9.4 8.1

Fiscal Indicators (in percent of GDP)

Total revenue and grants

16.6 18.0 18.4 18.3


19.2 19.0 20.1 21.0


16.4 16.1 16.8 17.7

Net acquisition of NFA

2.8 2.9 3.3 3.3

Net lending/borrowing

-2.6 -1.0 -1.8 -2.7

Net acquisition of FA

-0.4 -1.0 -1.2 -1.1

Net domestic financing

3.0 2.0 2.8 3.3

Money and credit (annual percent change)

Broad money

27.3 14.1 9.5 11.1

Domestic credit

27.1 16.8 13.2 15.0

Private sector credit

29.0 14.2 11.8 6.4


1.6 1.6 1.7 1.7

Investment and saving (in percent of nominal GDP)

Gross investment

31.5 35.8 35.0 32.8


24.6 28.6 27.1 24.8

Central government

6.9 7.2 7.9 8.0

Gross national saving

35.7 33.4 34.1 32.0

Balance of payments


Current account (in millions of U.S. dollars)

536 -378 -167 -156

In percent of GDP

4.2 -2.4 -0.9 -0.8

Trade Balance (in millions of U.S. dollars)

-2,707 -4,078 -4,474 -4,975

In percent of GDP

-21.1 -26.0 -24.4 -24.4

Exports value growth (percent change)

0.5 -6.1 13.9 9.0

Imports value growth (percent change)

14.1 36.4 10.4 10.8

Gross official reserves (in millions of U.S. dollars)

2,907 2,844 3,098 3,180

In months of imports of goods and services

6.0 5.4 5.4 5.0

Memorandum items

Public debt (percent of GDP)

39 36 34 35

GDP at market prices (in billions of Nepalese rupees)

988 1,171 1,327 1,487

GDP at market prices (in billions of U.S. dollars)

12.9 15.7 18.3 20.4

Exchange rate (Nrs/US$; period average)

76.9 74.5 72.4

Real effective exchange rate (eop, y/y percent change)

3.5 7.3

Sources: Nepalese authorities; and IMF staff estimates and projections.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:

2 Nepal’s fiscal year begins in mid-July.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100