Since almost all the low-income countries were facing a vicious circle of low growth and pervasive poverty, International Monetary Fund (IMF) introduced the Poverty Reduction and Growth Facility (PRGF), a concessional credit scheme with special focus on sustainable growth and poverty reduction, thus replacing the Enhanced Structural Adjustment Facility (ESAF) in 1999. Under this scheme, the countries can borrow up to 70 per cent of its quota in the IMF at 0.5 per cent interest rate to be repayable in 10 years time with the grace period of 5.5 years. The PRGF supports the economic reform programme directed at strengthening the balance of payments to foster sustainable economic growth leading to higher living standards and poverty reduction.

After the restoration of multiparty democracy in 1990, Nepal adopted a liberal economic policy and reform programme along with the introduction of the ESAF in early 1990s and recorded an encouraging macroeconomic performance in this period. But the growth and reform process slowed in the late 1990s due to political instability. However, in order to address the problems of low growth, and poverty and insurgency, the government prepared the Poverty Reduction Strategy Paper (PRSP), which is also included in the Tenth Plan (2002-07). This strategy consists of four pillars of broad-based growth, social sector development, target programmes for the poor and improved governance in 2002. As a result, Nepal entered into a three-year PRGF arrangement for the first time in November 2003, following the IMF’s approval of Special Drawing Rights, for which Nepal obtained $72 million. Each instalment was made subject to the completion of each six and a half yearly performance reviews.

The PRGF-supported programmes aim at improving the conditions for sustainable growth and poverty reduction through better expenditure prioritisation, structural reforms and improvement in governance. It opens the door to World Bank credit programme, including the Poverty Reduction Support Credit (PRSC), which amounts to about $70 million every year and provides ground to other donor agencies. Hence, this programme is important for making available the resources for development.

The IMF completed the first performance review in October 2004. The second instalment of $10.3 million was then released. During the pre-PRGF period and one year PRGF period, the economy was strengthened. But much had to be done on the reform side and poverty reduction.

The country, unfortunately, came under the King’s direct rule, leading not only to political but economic dark era. Although continuation of reform was mentioned in the King’s proclamation, the direct rule not only brought the economic reform process to a halt but also backtracked it. Macroeconomic policies were started erratically.

The World Bank suspended the PRSC while the IMF withheld the PRGF. During the 14-month period, macroeconomic policies were affected, and physical infrastructure continued to be destroyed by the insurgents. Huge non-budgetary expenses, which amounted to Rs 3.2 billion during the first nine months of the current fiscal year and other unproductive expenditure, and negative revenue growth, resulted in high deficit, while inflation rose to eight per cent.

The changed scenario could now pave the way for peace and development. But the economy is in a critical stage with lot of challenges like reducing huge fiscal deficit to a manageable level, controlling accelerating inflation, reducing poverty level as well as enhancing economic activities. As per the Ministry of Finance’s rough estimate, Nepal needs $1.2 billion for the rehabilitation and reconstruction of the infrastructure alone. In this context, the Finance Minister’s meet with the donor community, which has asked the government for the economic programme/action plan for which they are ready to aid Nepal, is significant. The people cannot be made to wait during the transitional period, which could take three to four years, for development activities. The economic programmes have to be carried out parallel to the political problem resolution process.

In such a situation, instead of preparing a new economic programme, the government should ask the IMF to revive the PRGF, which expires on November 18, and revise the PRGF-supported programme in line with the rehabilitation and reconstruction needs. In such a transitional period, the donor community, including the IMF and World Bank, should consider making the conditions more flexible. Once the PRGF-supported programmes continue, it will open the door to all the donor agencies. Hence, there would be no problem for mobilising the amount needed for reconstruction process and accelerating other development activities. Nonetheless, enhancing implementation capacity remains a major challenge.

Karki is ex-economic advisor, NRB and IMF