According to the IMF, despite a challenging global and domestic environment last year, Nepal continued to make progress with the implementation of the ECF-supported programs.
"Notable achievements include the external audit of the Nepal Rastra Bank with the assistance of international auditors—in line with international best practices, publication of reports on both Covid-related spending and custom exemptions to enhance transparency, drafting of amendments to bank asset classification regulations, and strengthening bank supervision by launching the donor-supported Supervision Information System," IMF said in a press statement. IMF further said Nepali authorities have taken decisive actions to maintain a stable macroeconomic environment. "The much-needed monetary policy tightening last year, together with the gradual unwinding of Covid support measures, helped moderate credit growth and contributed to the moderation of inflation stemming from the global commodity price shock caused by the Ukraine war," said the statement. The monetary policy tightening last year helped stabilize the external economy and is contributing to lower inflation, while the recent mid-year budget review is expected to address near-term fiscal risks stemming from lower-than-expected revenue growth. The IMF has highlighted that sustainable medium-term growth will require fiscal reforms in line with debt sustainability, advancing reforms on banking regulations and supervision, reducing the cost of doing business and barriers to FDI, and enhancing governance. The multilateral agency has pointed out that bank asset quality has deteriorated, reflecting a decline in the repayment capacity of borrowers due to higher lending rates and rising leverage. "Discussions recognized the need for the Nepal Rastra Bank to ensure appropriate reclassification of loans and close monitoring of the impact of a potential deterioration in the repayment capacity of borrowers," said the IMF. The IMF has projected Nepal's GDP growth in FY 2022/23 to be 4.4 percent. However, Nepal remains vulnerable to international shocks, from volatile and higher global commodity prices and from natural disasters and weather variability. Hence, the IMF has suggested a cautious monetary policy is appropriate to bring the still elevated inflation down towards the Nepal Rastra Bank’s 7 percent target and to allow the economy to grow without placing undue pressure on international reserves. "Monetary policy should focus on maintaining a cautious and data-driven stance supported by macroprudential measures. This will help avoid large boom-bust credit cycles, which can create financial sector instability and are not supportive of sustainable growth," reads the statement. During the meeting, Nepali officials and IMF staff agreed that priority should be given to achieving a fiscal deficit that ensures debt sustainability while securing additional concessional financing and enhancing debt management. There were discussions on the need for Nepal to adopt an ambitious structural reform agenda to help establish a sustainable and inclusive long-term growth path. According to the IMF, reducing the cost of doing business and barriers to FDI would support growth potential, especially in sectors such as high-value agricultural products, information technology, energy, and tourism. "Reforms to develop financial instruments tailored to migrant workers, promoting better access to finance, and improving financial literacy can enhance financial inclusion," said IMF. Nepali officials expressed commitment to the policies and reforms envisaged in the ECF-supported program, in particular, formulating a comprehensive revenue mobilization strategy, aimed at enhancing tax collection and making room for priority spending, strengthening the management of fiscal risks, especially those arising from public enterprises, by developing systems for their prompt identification and monitoring, improving efficiency and transparency of public investment spending; continuing to advance reforms on banking regulations and supervision and ensuring bank asset quality and further strengthening NRB’s governance by amending the NRB Act in line with best international practices. Nepali officials also expressed the government's readiness to implement recommendations from the ongoing AML/CFT Mutual Evaluation conducted by the Asia/Pacific Group. The IMF staff mission led by Jarkko Turunen arrived in Nepal on February 15 and stayed in Kathmandu for almost two weeks for a comprehensive review.
