IMF completes 5th review under ECF for Nepal, approves $41.8m disbursement
KATHMANDU: International Monetary Fund (IMF) executive board has completed the fifth review under the Extended Credit Facility (ECF) Arrangement for Nepal, granting the country access to SDR 31.4 million (approximately $41.8 million).
This brings total disbursements under the ECF for budget support to date to SDR 219.7 million (around $289.1 million).
"Nepal has made tangible progress in implementing reforms under the programme, which has supported early signs of economic recovery while preserving macroeconomic and financial stability and protecting the vulnerable," stated the IMF in a press statement.
Nepal’s economy continues to face challenges due to subdued domestic demand. Economic activity is projected to recover moderately in fiscal year 2024/25, following disruptions caused by the September 2024 floods. Growth is expected to reach 4.2% in fiscal year 2024/25, supported by planned increases in capital spending on reconstruction, an accommodative monetary policy stance, and additional hydropower generation, according to the IMF.
Post-flood supply-side pressures are anticipated to be temporary, with average inflation forecasted to remain near the Nepal Rastra Bank’s target of approximately 5%.
Efforts to enhance revenue mobilisation are expected to support development spending and fiscal sustainability. However, the outlook is subject to significant downside risks, including the potential under-execution of capital spending, financial sector vulnerabilities, and political instability.
The IMF’s executive directors recommended a continued gradual, growth-friendly fiscal consolidation to stabilise debt levels. Highlighting the importance of mobilising revenue to increase capital spending and safeguard the vulnerable, they welcomed Nepal’s adoption of the Domestic Revenue Mobilisation Strategy.
The directors also stressed the need to strengthen public investment management to improve capital spending execution. Enhanced fiscal transparency was noted as crucial for mitigating fiscal risks and ensuring fiscal sustainability. Additionally, they underlined the importance of expanding child grants to support the most vulnerable.
Directors advised that monetary policy should remain cautious and data-driven to maintain price and external stability. They recommended amending the Nepal Rastra Bank Act to bolster its governance, independence, and accountability.
The discussions highlighted that rising financial sector vulnerabilities require a proactive approach. The directors encouraged aligning financial sector regulations with international standards, implementing the planned Loan Portfolio Review, and developing a comprehensive strategy to address issues in savings and credit cooperatives. Noting Nepal’s recent inclusion on the FATF grey list, they emphasised the urgent need to strengthen the AML/CFT framework through reforms aimed at enhancing legal, regulatory, and supervisory mechanisms.
"Directors called for ambitious structural reforms to enable more sustainable and inclusive growth. They suggested efforts to lower the cost of doing business, improve the investment climate, enhance governance, and strengthen anti-corruption institutions. Nepal’s high vulnerability to natural disasters underscores the critical importance of building resilience to climate shocks," the statement concluded.
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