January 19: The International Monetary Fund has projected Nepal’s economic growth to hover around 6 percent in the current fiscal year 2019/20. A delegation of IMF made this announcement during a press conference organized in the capital on Friday (January 17) to unveil the findings of ‘Article IV Consultation’ on Nepal.
The mission said Nepal’s economy has been growing well above its long-term average in the last few years, supported by greater political stability, improved electricity supply, and reconstruction activity following the devastating earthquake in 2015.
The IMF said in a statement that economic growth is expected to remain healthy but moderate to around 6 percent in FY 2019/20 amid slower growth in India, sluggish remittances, and weaker agricultural production. In this context, there has been a welcome narrowing of the current account deficit, stabilization of gross official reserves, and slower credit growth.
“In this fiscal year (FY19/20), there are signs of moderation, and the IMF team projects economic growth around 6 percent, because of slower growth in India (a main trading partner), sluggish remittance inflows, and weaker agricultural production,” the statement quoted Laura Jaramillo, who led the mission to Nepal, as saying.
According to the IMF, inflation is expected at 6 percent due to persistent high food inflation. In the context of more moderate growth, there has been a welcome narrowing of the current account deficit, stabilization of gross official reserves, and slower credit growth.
The mission stated that additional policies are needed to continue to support inclusive growth, while safeguarding macroeconomic and financial stability.
The IMF mission headed by Laura Jaramillo noted that the country’s transition to fiscal federalism is a monumental challenge and needs to be carefully managed.
“To protect fiscal sustainability, the overall expenditure envelope of sub-national governments needs to be aligned with available funding, with tight limits on any sub-national borrowing. While important steps have been taken to improve public financial management, further efforts are needed to ensure that spending is of high quality and executed in a timely manner,” she said.
According to the IMF, fiscal policy should remain prudent, and the transition to fiscal federalism carefully managed. Macroprudential measures should remain in place to limit the buildup of financial sector risk. Recent reforms to boost foreign investment need a supportive implementation environment, the statement added.
The recent regulatory requirement for banks to cross-check corporate borrowers’ financial information against the recently launched Integrated Tax System is expected to facilitate more prudent risk assessment by banks.
The IMF mission also pointed out that foreign direct investment can contribute to the authorities’ development objectives by supporting economic activity and creating jobs. Reform efforts in recent years have helped improve the investment climate. To boost foreign investment, new legislation and regulations need to be supported by an enabling implementation environment.
According to officials at Nepal Rastra Bank, the IMF mission also expressed its concerns regarding evergreen funds. The mission said lack of growth in deposits but continued funding by banks pose risk of evergreen funding.
The IMF team led by Laura Jaramillo had visited Kathmandu during January 5-17 to hold discussions for the 2020 Article IV consultation. The team met Minister of Finance Dr Yuba Raj Khatiwada, Nepal Rastra Bank Governor Dr Chiranjibi Nepal and other high-level government officials, as well as representatives from the private sector and development partners.