Kathmandu, November 19. The recent spate of quakes and unrest and disruptions to transportation and trade routes have held back Nepal’s macroeconomic performance, though macroeconomic management has been broadly satisfactory, the IMF Executive Board said in a report based on its 2015 Article IV Consultation with Nepal.
Growth is expected to gradually rebound as reconstruction gains momentum, the outlook is subject to downside risks, International Monetary Fund’s Executive Directors noted.
They called for policy action to boost capital spending, maintain macroeconomic stability, and lift potential growth.
Fiscal policy needs to support post-earthquake reconstruction spending and medium-term growth through higher public investment, the directors pointed. Swiftly operationalising the National Reconstruction Authority and strengthening the government’s capital budget implementation capacity by establishing proper and transparent planning, selection, and implementation for major capital projects remain priorities.
Fiscal policy needs to support post-earthquake reconstruction spending and medium-term growth through higher public investment, the directors pointed. Swiftly operationalising the National Reconstruction Authority and strengthening the government’s capital budget implementation capacity by establishing proper and transparent planning, selection, and implementation for major capital projects remain priorities.
Continued improvements in revenue performance and anchoring fiscal policy by a ceiling on net domestic financing of the budget would help to maintain a strong fiscal position, they said. They noted that concessional external financing can finance the bulk of a sustained increase in capital spending needed to address infrastructure gaps.
The directors concurred that the peg to the Indian rupee continues to serve as a transparent anchor and that monetary policy should be geared towards supporting the peg. While a temporary increase in inflation as a result of the recent supply shocks should be accommodated, directors recommended that, as conditions normalise, monetary policy be reoriented to keeping Nepali inflation close to that in India. Strengthening the central bank’s liquidity management capacity will be important in this regard.
“Directors stressed the need to unlock Nepal’s hydropower generation potential and sustained reforms to improve the investment climate to help achieve Nepal’s goal of becoming a middle-income country by 2030”
Directors called for intensified efforts to safeguard the financial sector’s stability and resilience. They looked forward to the implementation of the high-priority FSAP recommendations, including a further strengthening of bank supervision and the development of a bank resolution framework. Noting that financial sector risks may have been amplified by the earthquakes and the recent disruption to economic activity, they welcomed the authorities’ intention to conduct a diagnostic of these events’ impact on banks and insurance companies. Directors also encouraged the authorities to enhance the quality of the central bank’s external audit and legal framework to further support its autonomy and governance.
They stressed the importance of unlocking the country’s hydropower generation potential and sustained reforms to improve the investment climate to help achieve Nepal’s goal of becoming a middle-income country by 2030. They also recommended that state-owned enterprises in the energy sector be put on a sound financial footing to reduce losses and contingent liabilities.
Directors encouraged the authorities to continue to collaborate closely with the fund, including on capacity development. They welcomed the authorities’ interest in discussing a longer-term engagement, possibly through the Extended Credit Facility, which could support macroeconomic and structural reforms to accelerate the post-earthquake recovery and foster sustainable and inclusive growth.
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