Kathmandu, January 23

The International Monetary Fund (IMF) has projected that the country’s economy will grow by 5.5 per cent in this fiscal. The outlook given by the international organisation is, however, a full percentage point lower than the government’s target of 6.5 per cent growth in 2016-17.

The IMF mission led by Geert Almekinders today said that Nepali economy will bounce back in this fiscal owing to normalisation of economic activities, increased agriculture output due to favourable monsoon, accommodative monetary policy and accelerated post-earthquake reconstruction. Most importantly, the base-effect (low base of economy due to low growth) of last fiscal will be supportive for the economy to achieve the aforesaid growth rate, as per IMF.

The country had achieved economic growth of 5.1 per cent in 2013-14, but the growth had retarded in the following years and stood at mere 0.77 per cent in the last fiscal. The country’s economy suffered a major blow due to the devastating earthquake of April 25, 2015. The cascading effects of the earthquake coupled with trade disruptions in the last fiscal had shattered the country’s economy.

Taking into account the reform initiatives taken by the government to revitalise the economy, the IMF mission said that the key challenge for the government now is to put the policies in place. This would extend the cyclical recovery into a sustained period of a high and inclusive growth. The main risk to the outlook pertains to failure of the capital budget implementation, according to IMF.

“The medium-term outlook for Nepal critically depends on authorities’ effort to sustain and deepen the nascent reform momentum. Strong policies are needed to enhance confidence amid ongoing political uncertainty.”

The IMF also suggested refurbishing institutional capacity of key institutions, which is ‘critical for overcoming the under-implementation of the budget and boosting private investment and growth’.

IMF stressed on the need to introduce a realistic budget that effectively prioritises spending with the largest growth dividends, including in social spending areas of highest importance, for inclusive growth.

“In scaling up public spending, care should also be taken not to exceed the economy’s aggregate absorptive capacity.”

Here are some other major issues that the IMF mission highlighted during a press briefing held here today:

Impact of demonetisation

The IMF mission has said that it is unlikely there will not be significant impact of demonetisation of Indian high-value banknotes on the Nepali economy.

“India’s sudden withdrawal of the high denomination Indian currency is expected to have a limited impact on the overall economy,” the mission shared in its conclusion.

“While the financial system is holding a small amount of the demonetised notes, some corporates and households who hold such notes have seen their purchasing power affected.”

Inflation target

The mission has suggested the Nepal Rastra Bank (NRB) to fix the medium-term target for inflation and focus on narrowing down the inflation wedge between India and Nepal. The inflation wedge is an indicator that reflects the disparity in hike in prices of goods and services in Nepal and India. As import from India has predominant share in the country’s total import, Indian inflation automatically affects Nepal as well.

“Maintaining competitiveness and external balance will require closing the inflation wedge with India on a sustained basis — through a tightening of monetary policy, facilitated by a strengthening of the monetary policy framework.”

The IMF mission further said that the NRB will be able to tame the inflation at the targeted level due to normalisation of supply situation after last year’s trade disruption.

NRB’s regulatory, supervisory capacity

The mission stressed on the need for accelerated financial sector reforms and strong supervision of the financial sector to mitigate macro financial risks and increase access to finance. It also emphasised on enhancing the regulatory capacity of the central bank through strengthening several aspects of the regulatory framework.

“This would include enhancing loan classification and provisioning and upgrading banks’ risk management.”

In the context of recent lobbying by bankers seeking NRB to revise the existing credit-to-deposit ratio, which is 80:20 at present, the IMF mission showed strong reservations.

“The ceiling on the loan-to-deposit ratio should be maintained as this alone can contribute in moderation of credit growth and normalisation of interest rates.”