The International Monetary Fund (IMF) has warned that Nepal’s economy, still reeling from subdued domestic demand and post‑pandemic balance sheet repairs, may face an increasingly gloomy and uncertain outlook, mainly due to fragile political stability and cooperatives failure.

The global lender, which provides policy advice and financing to its members to foster growth and financial stability, said Nepal’s fragile political stability could disrupt policy continuity and reform implementation.

Nepal is set to elect the new prime minister next week. Prime Minister Pushpa Kamal Dahal is almost certain to fail the trust vote. This will be his fifth trust vote in a year and a half.

The CPN-UML withdrew its support to the government on July 3 after it ditched its coalition with the CPN (Maoist Centre) and joined hands with the Nepali Congress to form a new government.

This is the fourth time in Nepal’s political history that two major parties are forming a government without a powerful opposition, which observers say weakens democracy's effective functioning.

On Tuesday, the IMF completed the fourth review under its four‑year extended credit facility, allowing Nepal to withdraw $41.3 million to help the country's economic recovery.

This brings total disbursements under the extended credit facility for budget support to $247.7 million.

The IMF executive board approved the extended credit facility arrangement for Nepal on January 12, 2022. The approved amount totals $371.6 million, which is 180 percent of Nepal’s special drawing rights quota (SDR) of 282.42 million.

“Nepal’s economy continues to face challenges,” said the statement issued by the IMF on Thursday.

It said that Nepal’s growth projected at 3 percent in the fiscal year 2023-24 remains below potential due to subdued domestic demand and post‑pandemic balance sheet repairs.

The IMF has talked about Nepal’s cooperatives sector for the first time.

In the statement, the IMF warned about the intensification of financial sector vulnerabilities, such as a further rise in non-performing loans. In this context, “more failures of cooperative lenders could endanger the banking system's soundness,” the IMF said.

According to experts and bankers interviewed by the Post, cooperatives, which the government once embraced as one of the three pillars of the economy, are now threatening the economy.

In Nepal, millions of small- and medium-sized enterprises (SMEs) are heavily involved in cooperatives, and their failure could not only damage the fragile economy, but also harm social harmony, say experts.

Cooperatives are involved in sectors ranging from dairy and livestock to tailoring and retail.

Recently, thousands of victims of cooperatives fraud have staged protests in various parts of the country, demanding the return of deposits embezzled by cooperative operators. Hundreds of such depositors came to Kathmandu and staged protests.

The government recently signed an agreement with them, promising to solve their problems as soon as possible.

“The problem in the cooperative sector will shake up the banking sector. But if there is a wise move, the banking sector can absorb the shock,” said Upendra Poudyal, president of the Confederation of Banks and Financial Institutions Nepal.

He said that the regulation of cooperatives has already been delayed. “We have seen that cooperatives are being operated for personal gains. A limited number of people took the benefit.”

“Now, the central bank should begin with a single threshold. Limit the number and start supervision.”

As of mid-March, there are 31,450 cooperatives in Nepal, with 7.38 million members. The deposit mobilisation in cooperatives amounted to Rs478 billion, while credit mobilisation stood at Rs405 billion. They currently employ 94,000 people.

In a recent interview, Kashi Raj Dahal, immediate past chairman of the Crisis-ridden Cooperatives Management Committee, a government agency, told the Post that globally, most cooperatives work in productive sectors like food production, dairy, fruits and other agricultural activities.

“But in Nepal, around 25,000 cooperatives are involved only in financial activities, mainly collecting deposits and issuing loans. Such cooperatives are now in crisis. Over 15,000 are registered to collect deposits. Even others registered as multi-purpose cooperatives primarily engage in savings and credits. Around 500 cooperatives are currently in trouble.”

The Dahal-led government has promised the return of at least Rs500,000 to each depositor by recovering it from the directors' assets. Yet doubts persist about whether depositors will get back their money.

Some economists have warned about potential mass protests if the cooperatives issue is not taken seriously.

The IMF has also warned that the failure to raise the execution rate of large-scale projects would deprive the economy of much-needed stimulus and weigh on growth.

On the pessimistic side, the IMF said that economic activity is expected to increase, reaching 4.9 percent in 2024-25, supported by more robust domestic demand.

The statement reads that the cautiously accommodative monetary policy stance, the planned increase in capital expenditures in the 2024-25 budget, additional hydropower generation, and a continued rise in tourist arrivals are expected to boost domestic demand and growth.

Inflation is expected to remain within the Nepal Rastra Bank’s (NRB) target ceiling of 5.5 percent.

“Nepal has made important strides on its economic reform agenda. Decisive actions in monetary policy, bank regulation and rolling off Covid support policies played a major role in overcoming urgent balance of payments pressure in 2021-22,” said Bo Li, deputy managing director of IMF.

“Reserves continue to rise without the need to use distortive import restrictions. Despite revenue shortfalls, fiscal discipline was maintained in 2022-23 and 2023-24. Bank supervision and regulation have improved by rolling out new supervisory information systems. Nepal’s medium-term outlook remains favourable as strategic investments in infrastructure, especially in the energy sector, are expected to support potential growth.”

The IMF said that strengthening public investment management would support the needed boost to capital spending. Enhancing fiscal transparency will help contain fiscal risks and strengthen medium-term fiscal sustainability.

“As monetary policy transmission is still weak in a context of balance sheet repair, a cautious and data-dependent monetary policy remains appropriate to preserve price and external stability,” the IMF said.