Press Release No. 07/250

Press Release: IMF Executive Board Completes Fifth Review Under the PRGF Arrangement with Nepal and Approves US$16.9 Million Disbursement

November 9, 2007

The Executive Board of the International Monetary Fund (IMF) today completed the fifth and final review of Nepal's economic performance under the Poverty Reduction and Growth Facility (PRGF) arrangement. The completion of the review makes SDR 10.69 million (about US$16.9 million) available to Nepal, which would bring the total amount drawn under the arrangement to SDR 49.9 million (about US$79.1 million).

The Executive Board also approved Nepal's request for waivers of the nonobservance of six structural performance criteria. Waivers were granted in light of the minor or temporary nature of the nonobservance of five of the performance criteria, and the corrective actions taken towards the completion of the sixth performance criterion on the revision of the Banking and Financial Institutions Act (BAFIA).

The three-year PRGF arrangement with Nepal was approved on November 19, 2003 (see Press Release No. 03/202) for an amount equivalent to SDR 49.9 million (about US$79.1 million). At the conclusion of the third review, the PRGF arrangement was extended to November 18, 2007.

Following today's Executive Board discussion of Nepal's economic performance, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

"The Nepalese authorities are to be commended for implementing prudent macroeconomic policies and structural reforms under difficult political circumstances.

"As the peace process moves forward, achievement of sustained higher economic growth and poverty reduction rests on resolution of political uncertainties and continued implementation of key structural reforms in the fiscal, financial, and public enterprise sectors.

"Continued macroeconomic stability is contingent on prudent fiscal policies that take into account the changing needs of the peace process. The 2007/08 budget is appropriately focused on boosting social sector and infrastructure spending, raising the revenue to GDP ratio, and limiting domestic financing. For the medium term, fiscal policy should remain focused on increasing revenue, including through improvements in tax administration, and on securing adequate concessional external assistance to raise social and infrastructure spending while reducing the public debt-to-GDP ratio. The authorities' commitment to enhancing fiscal transparency is welcome.

"The exchange rate peg to the Indian rupee has served Nepal well in anchoring inflation. Improving external competitiveness requires efficiency-enhancing structural reforms and infrastructure investments.

"Further financial sector reform can help improve intermediation and secure stability. Key areas include early enactment of the revised Banking and Financial Institutions Act, improvements in the Nepal Rastra Bank's supervisory framework, restructuring of the two largest commercial banks, and strong efforts to ensure loan recovery from large, willful defaulters.

"Recent adjustments to petroleum prices are a welcome step on the way to place the finances of the Nepal Oil Corporation on a sustainable footing," Mr. Kato said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies that are adopted in a participatory process involving civil society and development partners and articulated in the country's Poverty Reduction Strategy Paper. This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.