Kathmandu, December 13

Owing to greater political stability and reliable supply of electricity in recent months, the International Monetary Fund (IMF) has revised up Nepal’s economic growth to 6.5 per cent for the ongoing fiscal year.

The World Economic Outlook published by IMF earlier had projected Nepal’s GDP growth to remain at five per cent in 2018-19, far below the government’s target to achieve eight per cent economic growth.

“Following a prolonged period of subdued growth, economic activities in Nepal have picked up in recent years. Supported by greater political stability and reliable supply of electricity, the growth is expected to reach 6.5 per cent in 2018-19, on expanding post-earthquake reconstruction activity, services and manufacturing,” reads the Article IV Consultation Report of IMF released today.

An IMF team led by Geert Almekinders had visited Nepal on December 2 to hold discussions for the 2018 Article IV consultation.

Though the improved outlook provides an opening to address deep-seated structural weaknesses and boost long-term growth, the IMF report has insisted on careful handling of the current economic expansion against the backdrop of substantial rise in fiscal deficit and sharp increase in Nepal’s current account deficit, which has led to the increasing outflow of foreign reserves.

Similarly, the IMF has also assessed that a measured tightening of policies is warranted — higher interest rates, tighter macro prudential policies and a smaller fiscal deficit than the currently budgeted would be more suited to current economic circumstances of Nepal to manage the fiscal and external sector pressure and promote a more durable economic expansion.

Likewise, the IMF has also suggested that the general government budget envelope must not expand unduly while the country is implementing fiscal federalism. Citing that the central government will need to shrink with substantial devolution of responsibilities and resources to the local and provincial governments, the report has welcomed the government’s efforts to reform the tax system and review options to consolidate the central government’s expenditure by forming the Public Expenditure Review Commission.

The IMF report has also suggested the government to control the rapid pace of expansion of credit growth. “While credit growth has helped spur growth over the past several years, high pace of expansion raises stability concerns,” states the report.

Applauding the government’s intention to maintain the 80 per cent limit on credit-to-core capital cum deposit (CCD) ratio, the IMF mission has also urged the government to resist pressures to make changes to the calculation of the CCD ratio to expand the room for credit growth.