IMF approves disbursement of US$41 million for Nepal

The Executive Board of the International Monetary Fund (IMF) approved the disbursement of US$41 million for Nepal on Tuesday, marking a significant step in the country’s ongoing financial support under the four-year Extended Credit Facility (ECF).

Concluding its fourth review of the program, the IMF has now allowed Nepali authorities to withdraw a total of US$247.7 million. The IMF praised Nepal’s progress, highlighting that the program has helped mitigate the impact of the pandemic and global shocks on the economy, protected vulnerable groups, and preserved macroeconomic and financial stability.

“Nepal has made good progress with the implementation of the programme, which has helped mitigate the impact of the pandemic and global shocks on economic activity, protect vulnerable groups, and preserve macroeconomic and financial stability,” the IMF stated.

Economic Projections and Challenges
Nepal’s projected economic growth for the fiscal year 2023/24 is around 3 percent, which remains below potential due to subdued domestic demand and post-pandemic balance sheet repairs. However, economic activity is expected to pick up with growth reaching 4.9 percent in FY2024/25, driven by stronger domestic demand.

“The cautiously accommodative monetary policy stance, planned increase in capital expenditure in the FY2024/25 budget, additional hydropower generation, and a continued increase in tourist arrivals are expected to boost domestic demand and growth,” the statement read.

Inflation and Financial Sector Risks
Inflation is expected to stay within the Nepal Rastra Bank’s (NRB) target ceiling of 5.5 percent. However, the IMF warned that failing to raise the execution rate of capital projects could deprive the economy of much-needed stimulus, affecting growth as domestic risks dominate the outlook.

Fragile political stability in Nepal could also disrupt policy continuity and reform implementation, posing a threat to economic stability. The IMF highlighted that financial sector vulnerabilities, such as a rise in non-performing loans (NPL) or failures of cooperative lenders, could endanger the banking system’s soundness.

“Intensification of financial sector vulnerabilities such as a further rise in non-performing loans (NPL) or more failures of cooperative lenders could endanger banking system soundness,” the IMF noted, adding that “high commodity prices could slow the recovery in energy-intensive sectors.”

Policy Recommendations
Bo Li, Deputy Managing Director and Acting Chair of the IMF’s Executive Board, emphasized the need for a cautious and data-dependent monetary policy to preserve price and external stability amidst weak monetary policy transmission and balance sheet repairs.

“Continuing to strengthen Nepal’s financial system remains a top priority. Financial policy should remain vigilant and focused on building regulatory frameworks that promote sustainable credit growth while proactively addressing emerging vulnerabilities in the savings and credit cooperatives sector,” Li said.

Li also stressed the importance of structural reforms to foster investment and inclusive growth, including improving the business climate, building human capital, and enhancing social safety nets.

Furthermore, he suggested Nepal should ensure the full execution of the child grant budget and expand the program to all districts in the country, underlining the need for continued progress in social programs to support vulnerable populations.