The Executive Board of the International Monetary Fund (IMF) approved a disbursement of USD 41 million for Nepal on Tuesday.
This decision concludes the fourth review under the four-year Extended Credit Facility (ECF), allowing Nepalese authorities to withdraw the equivalent of USD 41.3 million. This brings the total financial support provided to Nepal under the program to USD 247.7 million.
“Nepal has made good progress with the implementation of the programme, which has helped mitigate the impact of the pandemic and global shocks on economic activity, protect vulnerable groups, and preserve macroeconomic and financial stability,” the IMF stated.
Despite this progress, Nepal’s projected economic growth for fiscal 2023/24 is around 3 percent, below potential due to subdued domestic demand and ongoing post-pandemic balance sheet repairs. However, economic activity is expected to pick up, with growth projected to reach 4.9 percent in FY2024/25, driven by stronger domestic demand.
“The cautiously accommodative monetary policy stance, planned increase in capital expenditure in the FY2024/25 budget, additional hydropower generation, and a continued increase in tourist arrivals are expected to boost domestic demand and growth,” the IMF added.
Inflation is anticipated to stay within the Nepal Rastra Bank’s (NRB) target ceiling of 5.5 percent.
The IMF also cautioned that failing to increase the execution rate of capital projects would deprive the economy of essential stimulus and negatively impact growth, as domestic risks dominate the outlook.
Despite Nepal’s cautiously accommodative monetary policy, the country’s fragile political stability could disrupt policy continuity and reform implementation.
“Intensification of financial sector vulnerabilities, such as a further rise in non-performing loans (NPL) or more failures of cooperative lenders, could endanger banking system soundness,” the IMF warned, adding that “high commodity prices could slow the recovery in energy-intensive sectors.”
Bo Li, deputy managing director and acting chair of the IMF’s executive board, emphasized that a cautious and data-dependent monetary policy is necessary to preserve price and external stability, given the weak monetary policy transmission in the context of balance sheet repair.
“Continuing to strengthen Nepal’s financial system remains a top priority. Financial policy should remain vigilant and focused on building regulatory frameworks that promote sustainable credit growth while proactively addressing emerging vulnerabilities in the savings and credit cooperatives sector,” Li stated.
He also highlighted the importance of progress on the structural front, such as improving the business climate, building human capital, and enhancing social safety nets to foster investment and inclusive growth. Additionally, Li suggested that Nepal should fully execute the child grant budget and expand the program to all districts in the country.
