Kathmandu: The International Monetary Fund (IMF) Executive Board has completed the fifth review of Nepal’s economic reform program under the Extended Credit Facility (ECF) Arrangement. Following the review, Nepal will receive SDR 31.4 million (approximately US$41.8 million) in budget support.

With this disbursement, the total funds provided to Nepal under the ECF have reached SDR 219.7 million (about US$289.1 million), according to a press statement issued by the IMF on March 14.

Tangible Progress on Reforms
The IMF noted that Nepal has made “tangible progress” in implementing reforms under the ECF program. These efforts have contributed to early signs of economic recovery while maintaining macroeconomic and financial stability and extending protections to vulnerable groups.

However, the economy continues to face challenges, with subdued domestic demand and the aftermath of the September 2024 floods disrupting economic activity. Growth is expected to rebound moderately in fiscal year 2024/25, with the IMF projecting economic expansion at 4.2 percent. This growth is anticipated to be driven by increased capital spending—particularly on reconstruction—accommodative monetary policy, and additional hydropower generation.

Inflation and Fiscal Outlook
The IMF projects that post-flood supply-side pressures will be short-lived, with average inflation remaining close to the Nepal Rastra Bank’s (NRB) target of 5 percent.

Efforts to mobilize revenue are expected to support higher development spending and fiscal sustainability. However, the IMF warned of downside risks, including potential under-execution of capital projects, financial sector vulnerabilities, and political instability.

Recommendations for Fiscal and Monetary Policy
The IMF Executive Directors recommended a continued gradual and growth-friendly fiscal consolidation to stabilize public debt. They welcomed Nepal’s newly adopted Domestic Revenue Mobilization Strategy, aimed at boosting government revenues to support capital spending and protect vulnerable populations.

The Directors also emphasized the need for improved public investment management to ensure better execution of capital projects. They encouraged further advances in fiscal transparency to contain risks and strengthen fiscal sustainability.

On monetary policy, the IMF advised the NRB to remain cautious and data-driven to preserve price and external sector stability. The Directors highlighted the importance of amending the NRB Act to enhance its governance, independence, and accountability.

Financial Sector Reforms and FATF Grey Listing
The IMF expressed concern over increasing vulnerabilities in Nepal’s financial sector, calling for a proactive approach. It encouraged Nepal to align its financial regulations with international standards, complete the planned Loan Portfolio Review, and develop a comprehensive strategy to address issues in savings and credit cooperatives.

In light of Nepal’s recent grey listing by the Financial Action Task Force (FATF), the IMF stressed the urgency of strengthening the country’s anti-money laundering and counter-financing of terrorism (AML/CFT) framework. This includes reforms to enhance legal, regulatory, and supervisory systems.

Call for Structural Reforms
The Directors underscored the need for ambitious structural reforms to support sustainable and inclusive economic growth. They recommended efforts to lower the high cost of doing business, improve the investment climate, strengthen governance, and enhance anti-corruption institutions.

Given Nepal’s high vulnerability to natural disasters, the IMF highlighted the importance of improving resilience to climate shocks as part of the country’s long-term development strategy.

The IMF Executive Board’s latest review underscores the importance of continued reform implementation to support Nepal’s economic recovery and long-term growth prospects.