Nepal’s economy continues to recover steadily despite disruptions to trade and aid globally, states the International Monetary Fund’s (IMF) Sixth Review under the Extended Credit Facility (ECF), published on Monday. The IMF has predicted Nepal’s economic growth at 4.3 percent in 2024/25, supported by a revival in construction and manufacturing, continued hydropower expansion, and a good agricultural harvest that buffered the effects of the Sept 2024 floods.

The IMF notes that Nepal has been relatively sheltered from the recent trade tensions and aid-related shocks in the world due to its small export base—exports account for hardly three percent of GDP. The external position has strengthened, driven by robust growth in exports, remittances, and tourism that have outpaced the increase in imports. Nepal’s foreign gross reserves stood at $17.6bn as of mid-2025, which is equal to nearly 11 months of imports, and the current account is expected to remain in surplus at 3.9 percent of GDP.

Inflation has also moderated significantly—from a post-flood peak of 6.1 percent in Dec 2024 to just 2.7 percent in June 2025—aided by improved food supply, lower Indian inflation, and subdued consumer demand. The IMF is expecting inflation to be held within the Nepal Rastra Bank's (NRB) target of about five percent for 2024/25.

Although Nepal’s growth prospect appears to be good, the IMF warns of continued financial sector vulnerabilities. Non-performing loans (NPLs) rose to 5.2 percent as of end-April 2025, eroding banks’ capital buffers, as the NRB reintroduced forbearance for the construction sector. Average provisioning coverage dipped to 65 percent, and commercial banks' core capital dropped to 9.5 percent, weakening their loss-absorbing buffers.

On the fiscal side, spending growth was repressed even in the face of weak revenues. Tax receipts grew by 10.7 percent, supported by new excise duties on petroleum products, tobacco, and alcohol, but remained less than expected. The primary fiscal deficit was estimated at 1.3 percent of GDP, mirroring continued fiscal consolidation.

The IMF called on the authorities to accelerate capital spending execution, improve public investment management, and execute the Domestic Revenue Mobilization Strategy (DRMS) for fiscal sustainability. It also called for the expansion of child grant programs and social protection initiatives to buffer the most vulnerable households.

Nepal’s progress under the IMF-supported program has been ‘broadly adequate’. The country met all quantitative performance criteria on international reserves and fiscal deficit, but missed the indicative target on child welfare grants.

The IMF has recommended that Nepal raise capital expenditure and remove bottlenecks to public investment to underpin domestic demand and medium-term growth. It has also emphasized improving revenue mobilization by removing unnecessary VAT exemptions and improving tax compliance.

In order to address rising vulnerabilities in the banking sector, the IMF has urged completing the loan portfolio review (LPR) of the 10 largest banks and advised caution in establishing the intended Asset Management Company (AMC) for addressing bad loans. In addition, the IMF has called for enhanced governance and financial integrity through the amendment of the Nepal Rastra Bank Act to enhance central bank independence and the full implementation of anti-money laundering regimes to enable the graduation of Nepal from the FATF gray list.

The IMF forecasts Nepal’s GDP growth to accelerate to 5.2 percent in 2025/26, driven by higher capital spending and a rebound in domestic demand. The medium-term outlook is favorable, supported by mega infrastructure and hydropower projects, alongside structural reforms to improve competitiveness and private-sector development.

However, political uncertainty, financial sector weaknesses, and slow pace of reforms could derail progress, cautions the IMF. Rising emigration, natural disasters, and global economic headwinds also pose significant downside risks.

Deputy Managing Director of IMF Bo Li praised Nepal for trying to maintain macroeconomic stability amidst political uncertainty, and said: “Nepal’s reform program under the ECF continues to underpin a gradual economic recovery while preserving macroeconomic stability and protecting the vulnerable. Continued commitment to economic reforms remains crucial to support growth, reduce poverty, and foster public trust.”

With the conclusion of this review, the IMF Executive Board approved a disbursement of $43m, with total disbursements under the ECF reaching $341m since the program began in 2022.

The overall assessment of the IMF is that Nepal’s recovery is firming but fragile. The IMF highlights that sustained reform implementation, enhanced governance, and prudent fiscal and monetary management will be key to making growth more resilient and inclusive in the years to come.