KATHMANDU, MAY 9
The International Monetary Fund (IMF) has projected Nepal's real GDP to grow by 4.4 per cent in fiscal year 2022-23, supported by the ongoing recovery of tourism, strong agriculture sector performance and resilient remittances.
Similarly, inflation is projected to decline to the Nepal Rastra Bank's seven per cent target by the end of this fiscal, while the overall fiscal deficit is expected to reach 4.5 per cent of GDP in fiscal year 2022-23.
Although revenue collection is said to be disappointing owing largely to lower import-related taxes, substantial expenditure rationalisation announced in the mid-year budget review is expected to help contain the deficit, according to the IMF.
The current account deficit is also expected to narrow to 5.2 per cent of GDP in fiscal 2022-23 due to weaker import demand, lower commodity prices, a recovery in tourism and buoyant remittances that reflect a post-pandemic increase in outward migration.
Speaking virtually with the media at a meeting today, Nepal's IMF Mission Chief Jarkko Turunen informed that the IMF executive board meeting held on May 1 had completed the first and second review of the extended credit facility (ECF) allowing the Nepali authorities to withdraw second disbursement of $52.8 million for budget support. He also clarified that the economic programme supported by the ECF is focused on preserving macroeconomic and financial stability as well as fostering sustainable and inclusive growth over the medium term.
In January 2022, the IMF had approved a 38-month arrangement to disburse $398.5 million to Nepal under the ECF. The financing package was provided to Nepal to mitigate the impact of COVID pandemic on health and economic activities, protect vulnerable groups, preserve macroeconomic and financial stability, and support sustained growth and poverty reduction. Of the amount, Nepal has already received $110 million as the first instalment.
"The executive board recently concluded the Article IV consultation with Nepal, which is an annual assessment of the economic outlook and policies that the IMF conducts with all member states. I want to congratulate the Nepali authorities for the progress made and in advancing their economic policies. Despite a challenging global and domestic environment last year, including the impact of Russia's war in Ukraine, Nepal continued to make progress with the implementation of the ECF-supported programme. The Nepali authorities have taken decisive actions to maintain a stable macroeconomic environment in the context of post-COV- ID-19 recovery and global shocks," Turunen shared.
He also said that the much-needed monetary policy tightening by the Nepal Rastra Bank (NRB) last year, together with the gradual unwinding of COVID support measures, helped moderate credit growth and lower inflation.
"On the fiscal front, lower than expected revenue collections owing to earlier slowdown in imports has resulted in near-term fiscal pressures and led to rationalised government spending, which are being addressed through the mid-year budget review. Overall these policies are helping to moderate inflation and strengthen Nepal's international foreign exchange reserves as well as preserve a sustainable level of government debt," he added.
According to the IMF, global developments have impacted Nepal's import-dependent economy - particularly through higher commodity prices, weakening current account and declining reserves in the first half of 2022. While the pressure on reserves has subsided since then, inflation remains elevated. As the fiscal policy was less expansionary than projected, a recent fall in revenues is adding to nearterm fiscal pressures.
Non-performing loans are increasing, while capital adequacy ratios remain above regulatory minima.
In terms of fiscal policy, the IMF has recommended authorities to focus on promptly addressing near-term fiscal pressures, while supporting the most vulnerable against elevated food and energy prices, make further structural reforms to advance fiscal federalism and address fiscal risks and strengthen public investment management, to support medium-term fiscal sustainability.
Likewise, IMF has requested authorities to take a cautious data-driven approach to maintain external stability and address inflation in relation to monetary policies. The NRB is recommended to prioritise asset quality of banks through regulatory initiatives to ensure appropriate classification of loans, and progress towards advancing the financial sector reform agenda in addition to advancing digitisation to improve financial inclusion.
Also, an ambitious structural reform agenda is recommended to establish a longrun sustainable growth following the pandemic. Reform priorities include lowering cost of doing business and removing barriers for foreign investment, and improving governance and strengthening anticorruption institutions. Introducing policies in reducing vulnerability to climate change impacts, through better-targeted social assistance, investment in climate-resilient infrastructure and boosting agricultural productivity are also recommended.
A version of this article appears in the print on May 10, 2023, of The Himalayan Times.
