May 8: At a time when the Government of Nepal has banned imports of luxury goods in order to maintain the Balance of Payments (BoP) and declining foreign exchange reserves, the International Monetary Fund (IMF) has suggested the government to address the issue through monetary policy.
The IMF made such suggestion after its team led by Robert Gregory visited Kathmandu from April 24 to May 2 to conduct discussions on the first review under Nepal’s Extended Credit Facility (ECF) with the IMF.
Following the visit of Gregory’s team, IMF issued a statement on May 4 saying that economic activities has strengthened in Nepal against the background of declining Covid-19 cases and a very successful public vaccination drive.
According to the IMF, reopening of the economy reflected rapid credit growth, a gradual recovery in tourism and sustained remittances.
“Inflation has however increased, and imports have continued to rise rapidly, with existing imbalances exacerbated by the impact of the war in Ukraine on commodity prices, raising the cost of oil imports in particular,” the statement said adding, “Although they currently remain adequate, international reserves have declined more than anticipated when the ECF was approved.”
The team welcomed the authorities’ determination to take measures to address decreasing international reserves and higher inflation. The increase in policy rates implemented in February was a welcome first step towards unwinding the current accommodative monetary policy stance. The team emphasized the need to further tighten monetary policy, including by increasing interest rates.
“Taken together with the gradual unwinding of COVID support measures in the banking system, this approach is expected to address decreasing international reserves without the need to resort to import restrictions that could exacerbate inflation and hamper economic growth,” the statement added.
The team also discussed the need for a prudent FY2023 budget, consistent with that envisaged under the IMF-supported programme. “Taken together with a tighter monetary policy, this policy mix would help address inflationary pressures and growing external imbalances, while safeguarding the economic recovery and debt sustainability.”
IMF said discussions will continue in the coming weeks towards reaching a staff-level agreement for the IMF Executive Board's consideration of the first review under the ECF.
According to the IMF, the Extended Credit Facility (ECF) provides financial assistance to countries with protracted Balance of Payments problems. It supports countries’ economic programs aimed at moving toward a stable and sustainable macroeconomic position consistent with strong and durable poverty reduction and growth.