International Monetary Fund (IMF) projects that Nepal’s economic growth will be around 6 percent in this fiscal year.
“In this fiscal year (FY19/20), there are signs of moderation, and the IMF team projects economic growth around 6 percent, including because of slower growth in India (a main trading partner), sluggish remittance inflows, and weaker agricultural production. Inflation is expected at 6 percent due to persistent high food inflation. In the context of more moderate growth, there has been a welcome narrowing of the current account deficit, stabilization of gross official reserves, and slower credit growth.
“Building on the growth and reform momentum, additional policies are needed to continue to support inclusive growth, while safeguarding macroeconomic and financial stability.
Following an End-of-Mission, IMF staff teams convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.
Nepal’s economy has been growing well above its long-term average in the last few years, supported by greater political stability, improved electricity supply, and reconstruction activity following the devastating earthquake in 2015.
Economic growth is expected to remain healthy but moderate to around 6 percent in FY 19/20 amid slower growth in India, sluggish remittances, and weaker agricultural production. In this context, there has been a welcome narrowing of the current account deficit, stabilization of gross official reserves, and slower credit growth.
Additional policies are needed to continue to support inclusive growth, while safeguarding macroeconomic and financial stability. Fiscal policy should remain prudent, and the transition to fiscal federalism carefully managed. Macroprudential measures should remain in place to limit the buildup of financial sector risk. Recent reforms to boost foreign investment need a supportive implementation environment.
An International Monetary Fund (IMF) team led by Ms. Laura Jaramillo visited Kathmandu during January 5-17 to hold discussions for the 2020 Article IV consultation. The team met Minister of Finance Dr. Yuba Raj Khatiwada, Nepal Rastra Bank Governor Dr. Chiranjibi Nepal and other high-level government officials, as well as representatives from the private sector and development partners. At the conclusion of the visit, Ms. Jaramillo issue the following statement:
“Nepal’s economy has been growing well above its long-term average in the last few years, supported by greater political stability, improved electricity supply, and reconstruction activity following the devastating earthquake in 2015.
“Fiscal policy should be geared towards containing external pressures and protecting fiscal sustainability. In this regard, a fiscal deficit of 4.5 percent of GDP, similar to the outcome in FY2018/19, would be prudent. Recent upgrades to tax administration are commendable. The transition to fiscal federalism is a monumental challenge and needs to be carefully managed. To protect fiscal sustainability, the overall expenditure envelope of subnational governments needs to be aligned with available funding, with tight limits on any subnational borrowing. While important steps have been taken to improve public financial management, further efforts are needed to ensure that spending is of high quality and executed in a timely manner.
“The Nepal Rastra Bank (NRB) has appropriately taken a series of macroprudential measures to limit the buildup of systemic risk in the financial sector. In this context, credit growth has approached levels that are supportive of economic growth while protecting financial stability. The NRB has taken actions to further strengthen bank supervision and regulation, including the introduction of a supervisory information system and implementation of selected elements of the Basel III capital framework. The recent regulatory requirement for banks to cross-check corporate borrowers’ financial information against the recently launched Integrated Tax System is expected to facilitate more prudent risk assessment by banks. The NRB’s policy of activating the countercyclical capital buffer that will require banks to increase their level of capital by July 2020 is appropriate. The NRB should continue to closely monitor asset quality of banks and improve monitoring of concentration risk.
“A priority reform for the NRB is to strengthen the implementation of monetary policy by putting in place a well-functioning interest rate framework that reduces volatility in short-term interest rates. This would allow the NRB to improve financial market development as well as policy signaling and transmission.
“Foreign direct investment can contribute to the authorities’ development objectives by supporting economic activity and creating jobs. Reform efforts in recent years have helped improve the investment climate. To boost foreign investment, new legislation and regulations need to be supported by an enabling implementation environment. Improving implementation capacity requires adequate staffing, better skills matching, and aligning incentives across and within Ministries to ensure high-quality projects move forward in a clear and timely manner.
“The team expresses its sincere gratitude to the Government of Nepal and NRB for their warm hospitality and constructive discussions.”