The Executive Board of the International Monetary Fund (IMF) has completed the fifth review under Nepal’s four-year Extended Credit Facility (ECF), approving the withdrawal of approximately $41.8 million. This brings the total disbursements under the ECF for budget support to $289.1 million.

The IMF initially approved the ECF arrangement for Nepal on January 12, 2022.

The organisation noted Nepal’s tangible progress in implementing reforms, contributing to early signs of economic recovery while maintaining macroeconomic and financial stability and safeguarding vulnerable groups.

Despite these improvements, the economy continues to face challenges due to subdued domestic demand. Economic activity is expected to rise moderately in the 2024-25 fiscal year, which ends in mid-July, although the September 2024 floods have caused disruptions. Growth is projected to reach 4.2 percent, driven by increased capital spending on reconstruction, an accommodative monetary policy stance, and additional hydropower generation.

Post-flood supply-side pressures are expected to be temporary, with inflation approaching the Nepal Rastra Bank’s target of around 5 percent.

The IMF emphasised the importance of revenue mobilisation to support development spending and fiscal sustainability. However, the outlook remains uncertain due to potential risks such as under-execution of capital spending, financial sector vulnerabilities, and political instability.

IMF Deputy Managing Director Bo Li acknowledged Nepal’s continued recovery and overall performance under the programme, despite political uncertainties and flood-related disruptions.

The Executive Board encouraged the government to pursue prudent policies to maintain macroeconomic stability and implement structural reforms for sustainable and inclusive growth.

The IMF directors recommended gradual, growth-friendly fiscal consolidation to stabilise debt while ensuring sufficient revenue mobilisation for higher capital spending and social protection.

They welcomed Nepal’s newly adopted Domestic Revenue Mobilisation Strategy and stressed the need for improved public investment management to enhance capital spending execution. Strengthening fiscal transparency would also help mitigate budgetary risks and sustain fiscal stability.

To support the most vulnerable populations, directors highlighted the importance of expanding child grants.

They also emphasised that monetary policy should remain cautious and data-driven to preserve price and external stability. Another key recommendation was strengthening the Nepal Rastra Bank’s governance, independence, and accountability through amendments to its governing act.

Financial sector vulnerabilities remain a concern, prompting calls for proactive measures. The IMF encouraged aligning financial sector regulations with international standards, conducting the planned Loan Portfolio Review, and formulating a comprehensive strategy to address issues within savings and credit cooperatives.

In light of Nepal’s recent greylisting by the Financial Action Task Force (FATF), directors stressed the urgency of strengthening the anti-money laundering and counter-financing of terrorism (AML/CFT) framework. They recommended reforms to enhance legal, regulatory, and supervisory mechanisms.

The IMF further urged Nepal to undertake ambitious structural reforms to promote sustainable and inclusive growth. Efforts should focus on reducing the high cost of doing business, improving the investment climate, strengthening governance, and bolstering anti-corruption institutions.