Nepal and IMF Reach Staff-Level Agreement to Review Extended Credit Facility

Government authorities of Nepal and a delegation of the International Monetary Fund (IMF) have reached a staff-level agreement for the fifth review of Nepal’s economic reform program supported by the IMF’s Extended Credit Facility (ECF) arrangement.

Issuing a recent statement, the IMF said that the staff-level agreement is subject to approval by the IMF Executive Board which will give Nepal access to about $40.6 million in financing.

The IMF, however, has put forth a condition that the completion of the review by the IMF’s Executive Board requires progress in key steps for launching the loan portfolio review and maintaining reform momentum.

The recent staff-level agreement was reached following a visit by a team of IMF led by Sarwat Jahan from January 8 to 19.

After constructive discussions with the Nepali authorities, Jahan issued a statement confirming the agreement adding that policies and reforms are needed to complete the 5th review under the ECF.

“Upon completion of the Executive Board Review, Nepal would have access to Special Drawing Rights (SDR) of 31.4 million (about US$40.6 million), bringing the total IMF financial support disbursed under the ECF to SDR 219.7 million (about US$283.9 million), from a total of SDR 282.42 million,” reads the statement.

The IMF delegation noted that Nepal continues to make progress with the implementation of the ECF-supported program.

According to the IMF statement, Nepal’s program performance was satisfactory, with all quantitative performance criteria and indicative targets for end-July 2024 met except for the indicative targets on revenue collection and child welfare grants.

Key reforms accomplished as a part of the fifth review include amendment of Nepal’s anti-money laundering (AML) law, strengthening the financial oversight of public enterprises, and completing an audit of the FY2023/24 financial statement of the Nepal Rastra Bank (NRB) involving the service of experts with international experience in auditing other central banks, added the statement.

The IMF team acknowledged that the NRB remains committed to completing the Loan Portfolio Review (LPR) of the 10 largest banks despite the cancellation of the initial process of the review and has restarted the process to hire an independent international consultant to assist with the LPR.

The IMF delegation said that the country’s economic recovery that began in FY2023/24 was disrupted by the severe floods in September 2024, which caused widespread damage across critical sectors and further dampened the still-weak domestic demand.

According to the statement issued by IMF, inflation accelerated to 6.1 percent in December 2024 due to spike in food prices following the floods.

“Nepal’s external position continued to strengthen, bolstered by robust remittances and subdued imports. Accordingly, revenue growth remained modest,” the statement added.

Amid the ongoing correction from the post-pandemic credit boom, vulnerabilities in the financial sector are increasing, with the banking sector's non-performing loans reaching 4.4 percent in October 2024, and the financial health of the savings and credit cooperatives (SACCOs) sector deteriorating, the IMF warned.

“Growth is expected to gather pace, exceeding 4 percent in FY2024/25, supported by stronger public capital expenditure, including on post-flood recovery and reconstruction efforts.”

According to the IMF delegation, imports are expected to rebound in the second half of the year. Flood-driven food inflation is expected to ease as transport networks are repaired and agricultural output recovers improving the food supply, added the statement. However, the outlook is subject to important downside risks, including under-execution of growth-enhancing capital projects, an increase in financial sector vulnerabilities, and potential disruption to policy continuity and reform implementation.

“Against this background, policies and reforms envisaged under the ECF-supported program remain well-placed to help preserve macroeconomic stability and strengthen Nepal’s policy framework,” reads the IMF statement.

According to the IMF delegation, growth-friendly fiscal consolidation—by accelerating capital expenditure coupled with stronger revenue mobilization—is critical to boost sustainable and inclusive economic growth.

The IMF suggested timely execution of spending to further support this effort.

According to the IMF delegation, monetary policy should continue to follow a data-driven approach to maintain price and external stability while supporting growth.

“With amendments to the AML Law enacted, the next steps would be to focus on the effectiveness and application of the new legal framework.”

The IMF delegation noted that rising financial sector vulnerabilities warrant increased vigilance and urged Nepal in this context to launch the LPR in a timely manner.

According to the statement, the IMF team held meetings with Deputy Prime Minister and Finance Minister Bishnu Prasad Paudel, National Planning Commission Vice-Chairman Dr Shiva Raj Adhikari, Nepal Rastra Bank Governor Maha Prasad Adhikari, and other senior government and central bank officials. The IMF team also met with representatives from the private sector and development partners.”