Low capital spending, financial sector vulnerability and political instability could weigh on Nepal’s economic recovery: IMF

KATHMANDU, July 12: The International Monetary Fund (IMF) has expressed serious concerns over Nepal’s low capital expenditure, weaknesses in its financial sector, cooperative problems and political instability, saying these factors are likely to affect the pace of the country’s economic recovery.

Following the IMF Executive Board meeting on the fourth review of the Extended Credit Facility (ECF) Arrangement for Nepal on Tuesday, the international monetary watchdog expressed its concerns, citing the issues as major obstacles to implementing economic reform measures. The meeting also approved allowing Nepal to use Special Drawing Right (SDR) of 31.4 million, equivalent to $41.3 million.

With the approved amount, total disbursements under the ECF reached about $247.7 million. These amounts were provided as budget support to the government of Nepal, according to a press release issued by the IMF.

On January 12, 2022, the IMF approved a total of $371.6 million for Nepal under the ECF. According to the international organization, Nepal has made significant progress in implementing the program during this period.

The programme helped cushion the impact of the pandemic and global shocks on economic activity, protect vulnerable groups and preserve macroeconomic and financial stability. The economy continued to face challenges as growth, projected at around 3 per cent in fiscal 2023/24, fell short of potential amid subdued domestic demand and a post-pandemic balance sheet repair. “With the programme now in place, economic activity is expected to pick up, with growth reaching 4.9 per cent in fiscal 2024/25, supported by stronger domestic demand.”

However, the IMF raised several issues that could hamper the pace of economic recovery in the landlocked country.

Domestic risks continue to dominate the brighter outlook. Failure to accelerate capital projects would deprive the economy of much-needed stimulus and weigh on growth. Fragile political stability could disrupt policy continuity and reform implementation.

In the recent political developments, the formation of a new alliance between the Nepali Congress and the CPN-UML has brought down the government led by Pushpa Kamal Dahal. Prime Minister Dahal is trying to win a vote of confidence for the fifth time in just one and a half years. Similarly, the government has spent only 57 percent of the development budget for the fiscal year 2023-24 with just one week left in the fiscal year.

The IMF in its report mentioned that worsening financial sector vulnerabilities, such as further growth in NPLs or more bankruptcies of cooperative lenders, could threaten the stability of the banking system. Externally, high commodity prices could slow the recovery in energy-intensive sectors. Nepal also remains vulnerable to natural disasters.

On the brighter side highlighted by the IMF, Nepal has made important progress in implementing its economic reform agenda. Decisive actions on monetary policy, banking regulation and the withdrawal of COVID-support policies played a major role in overcoming the pressing pressure on the balance of payments in fiscal year 2021/22. Reserves have continued to grow without the need for distorting import restrictions.

Banking supervision and regulation have improved with the introduction of new supervisory information systems, Working Capital Loan Guidelines and Asset Classification Regulations. Nepal’s medium-term outlook remains favorable as strategic infrastructure investments, especially in the energy sector, are expected to support potential growth.