The International Monetary Fund (IMF) has urged Nepal to strengthen its financial regulations following its recent inclusion on the Financial Action Task Force (FATF) gray list. The call comes as the IMF approved a $41.8m disbursement under the Extended Credit Facility (ECF), bringing total disbursements to $289.1m in support of Nepal’s budget and economic recovery efforts.
The ECF arrangement, approved in Jan 2022 for about $372.2m, has facilitated Nepal’s economic recovery while ensuring macroeconomic and financial stability. Despite these efforts, the country faces challenges, including subdued domestic demand and the impact of the Sept 2024 floods.
The IMF projects Nepal’s economic growth at 4.2 percent for FY 2024-25, supported by increased capital spending on reconstruction, an accommodative monetary policy, and additional hydropower generation. Inflation is expected to remain close to the Nepal Rastra Bank’s target of five percent. However, risks such as under-execution of capital spending, financial-sector vulnerabilities, and political instability remain.
Bo Li, Deputy Managing Director of the IMF, acknowledged Nepal’s progress despite political and climate-related disruptions. He emphasized the importance of prudent fiscal policies, revenue mobilization, and structural reforms to sustain growth.
The IMF urged Nepal to continue fiscal consolidation while increasing capital spending and protecting vulnerable populations. It welcomed Nepal’s Domestic Revenue Mobilization Strategy and called for strengthening public investment management and fiscal transparency. On monetary policy, the IMF recommended a cautious, data-driven approach to maintain price and external stability. It also emphasized the need to amend the Nepal Rastra Bank Act to enhance governance and accountability.
The financial sector remains a key concern, with the IMF advising regulatory alignment with international standards and the development of a strategy to address weaknesses in savings and credit cooperatives. The Fund also stressed the urgency of strengthening Nepal’s anti-money laundering and counter-terrorism financing framework in light of its FATF gray listing.
The IMF further highlighted the need for structural reforms to enhance the business climate, improve governance, and strengthen anti-corruption institutions. Given Nepal’s vulnerability to natural disasters, it called for resilience-building measures to mitigate climate shocks.
