Nepal and the International Monetary Fund (IMF) have reached a staff-level agreement on the policies and reforms necessary to complete the sixth review under the Extended Credit Facility (ECF), paving the way for the disbursement of $42.7 million in financial support, subject to approval by the IMF’s Executive Board.

The latest tranche would bring total disbursements under the ECF programme to $331.8 million.

An IMF mission led by Sarwat Jahan concluded a two-week visit to Kathmandu on June 10.

During the visit, the IMF team discussed recent economic developments, fiscal and monetary policy, and ongoing structural reforms with Nepali officials.

“Nepal continues to make progress with the implementation of the ECF-supported programme. Programme performance has been satisfactory, with all quantitative performance metrics for mid‑January 2025 met, except for the indicative target on child welfare grants,” the IMF said in a statement.

“Implementing structural benchmarks has gained momentum while reforms in some areas are still ongoing.”

Key measures completed or nearing completion include preparing a tax expenditure report, publishing updated National Project Bank guidelines, and finalising a roadmap following the Loan Portfolio Review. Notably, draft amendments to the Nepal Rastra Bank (NRB) Act now incorporate major recommendations from the IMF’s 2021 Safeguard Assessment and 2023 Financial Sector Stability Report, setting the stage for submission to Parliament.

The IMF observed that Nepal’s economy is gradually recovering, supported by improved construction, manufacturing, and agriculture performance. Expansion in hydropower capacity and a good harvest have helped offset losses caused by the September 2024 floods.

For the ongoing fiscal year 2024-25, the IMF projects GDP growth to exceed 4 percent—an improvement, though still below Nepal’s potential. Inflation, which spiked following the floods, has moderated to 3.4 percent year-on-year as of April 2025.

Nepal’s external position remains strong, with rising exports, tourism receipts, and remittance inflows outpacing import growth. However, financial sector challenges persist.

“Financial sector vulnerabilities have not yet eased,” the IMF warned. Non-performing loans rose to 5.2 percent as of April 2025, eroding bank capital buffers. The financial condition of savings and credit cooperatives (SACCOs) also remains concerning.

The IMF anticipates stronger growth in fiscal year 2025-26 and inflation remaining within the central bank’s target range. However, the economic outlook is clouded by multiple risks. These include under-execution of capital projects, lingering financial sector fragilities, elevated global trade tensions, and potential disruptions in domestic policy continuity and reform momentum.

The upcoming national budget has been broadly aligned with the ECF programme’s goals. It aims to maintain fiscal and debt sustainability while prioritising higher capital expenditure, increased incentives for private sector investment, and the expansion of social programmes, including the public school midday meal scheme.

Monetary policy is expected to continue following a cautious, data-driven course, maintaining focus on price and external sector stability, critical to supporting growth.

The IMF has welcomed efforts to enhance the NRB's independence and governance through proposed legal reforms. It has urged authorities to remain vigilant in managing financial sector risks.

“In this context, it is essential to launch the Loan Portfolio Review promptly and prioritise measures to address problematic SACCOs,” the Fund said. “Creating an Asset Management Company should proceed only after careful analysis and be contingent on improving the debt recovery framework, including insolvency legislation.”

The IMF also noted progress in enhancing Nepal’s anti-money laundering and counter-terrorist financing (AML/CFT) framework. Authorities are now shifting from legal reform to implementation of the AML/CFT Action Plan, a key step toward strengthening the country’s financial integrity and global compliance.

The staff-level agreement now awaits approval by the IMF’s Executive Board. If approved, the $42.7 million disbursement would offer Nepal continued access to concessional financing, while reinforcing ongoing macroeconomic and structural reforms under the ECF-supported programme.