The Nepali authorities and the visiting International Monetary Fund (IMF) team have reached a staff-level agreement for the fifth review of Nepal’s economic reform program supported by the IMF’s Extended Credit Facility (ECF) arrangement.
The staff-level agreement is subject to approval by the IMF Executive Board which will give Nepal access to about $40.6 million (approximately Rs 5.6 billion) in financing, according to a press release issued by the IMF today.
The IMF team led by Sarwat Jahan visited Kathmandu on January 8-19. After the discussions with the Nepali authorities, Jahan issued the statement claiming that the agreement reached between Nepali authorities and visiting IMF team on the policies and reforms needed to complete the fifth review under the ECF. "Upon completion of the Executive Board Review, Nepal would have access to SDR 31.4 million (about $40.6 million), bringing the total IMF financial support disbursed under the ECF to SDR 219.7 million (about $283.9 million), from a total of SDR 282.42 million," the release stated.
According to the IMF team, Nepal continues to make progress with the implementation of the ECF-supported program. "Program performance was satisfactory, with all quantitative performance criteria and indicative targets for end-July 2024 met except for the indicative targets on revenue collection and child welfare grants," they said, adding that implementation of structural benchmarks due before end-December 2024 gained momentum, with reforms in some areas still ongoing. "Key reforms accomplished as a part of the fifth review include amendment of Nepal’s anti-money laundering (AML) law, strengthening the financial oversight of public enterprises, and completing an audit of the FY2023-24 financial statement of the Nepal Rastra Bank (NRB) involving the service of experts with international experience in auditing other central banks."
Despite the cancellation of the initial procurement for the Loan Portfolio Review (LPR) of the 10 largest banks, the NRB remains committed to completing the review and has restarted the process to hire an independent international consultant to assist with the LPR, it added.
The economic recovery that began in FY2023-24 was disrupted by the severe floods in September 2024, which caused widespread damage across critical sectors and further dampened the still-weak domestic demand. Inflation accelerated to 6.1 percent in December 2024 due to spike in food prices following the floods. Nepal’s external position continued to strengthen, bolstered by robust remittances and subdued imports. Accordingly, revenue growth remained modest. Amid the ongoing correction from the post-pandemic credit boom, vulnerabilities in the financial sector are increasing, with the banking sector's non-performing loans reaching 4.4 percent in October 2024, and the financial health of the savings and credit cooperatives (SACCOs) sector deteriorating, they observed.
“Growth is expected to gather pace, exceeding 4 percent in FY2024-25, supported by stronger public capital expenditure, including on post-flood recovery and reconstruction efforts," the visiting team predicted.
Relatedly, 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 improving the food supply. However, the outlook is subject to important downside risks, including under-execution of growth-enhancing capital projects, an increase in financial sector vulnerabilities, and potential disruption to policy continuity and reform implementation.
“Rising financial sector vulnerabilities warrant increased vigilance," they warned, adding, "In this context, it is essential to launch the LPR in a timely manner. An important component of the LPR would be to apply the Basel Committee on Banking Supervision Guidelines. Prioritizing measures to deal with problematic SACCOs would help boost consumption."
The visiting IMF team also held meetings with the Deputy Prime Minister and Finance Minister Bishnu Prasad Paudel, National Planning Commission Vice-Chair Dr Shiva Raj Adhikari, Nepal Rastra Bank Governor Maha Prasad Adhikari, and other senior government and central bank officials. The IMF team also met with representatives from the private sector and development partners.
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