IMF approves USD 395.9 million extended credit facility arrangement for Nepal

KATHMANDU: The Executive Board of the International Monetary Fund (IMF) approved a 38-month arrangement under the Extended Credit Facility (ECF) for Nepal in an amount equivalent to SDR 282.42 million (180 percent of quota or about US$395.9million).

The ECF arrangement will assist the authorities’ Covid-19 response in mitigating the pandemic’s impact on health and economic activity, protect vulnerable groups, preserve macroeconomic and financial stability, and support sustained growth and poverty reduction. The program will help fill financing gaps and will catalyze additional financing from Nepal’s development partners.

Approval of the ECF arrangement enables immediate disbursement of SDR78.5 million (50 percent of quota, about US$110 million, usable for budget financing. This follows Fund emergency support to Nepal in May 2020 under the Rapid Credit Facility (100 percent of quota, SDR 156.9 million, equivalent to US$214 million at the time of approval).

The Covid-19 pandemic is taking a heavy toll on Nepal’s economy. From April to July 2021, Nepal suffered a devastating second wave of Covid-19, interrupting a gradual recovery in economic activity. GDP contracted by 2.1 percent in FY2019/20, staff estimate a partial recovery of growth at 2.7 percent for FY2020/21 and forecast growth of 4.4 percent in FY2021/22.

The collapse of the tourism and service sectors, which are key drivers for growth, will take time to recover. After a sharp drop in 2020, imports have rapidly grown, fueling a large current account deficit (8.3 percent of GDP in FY2020/21).

Gross international reserves remain adequate but have begun to decline in recent months. The Covid-19 shock affected both revenues and expenditures with the fiscal deficit expected to widen from 4.2 percent of GDP in FY2020/21 to 6.3 percent of GDP in FY2021/22.

The Fund-supported program under the ECF has three main objectives, aligned with the government’s Relief, Restructuring, and Resilience plan. First, mitigating the Covid-19 impact on health and economic activity, and protecting vulnerable groups, including by making room in the budget for health, social assistance, and job support, while enhancing fiscal transparency and governance.

Second, preserving macroeconomic and financial stability, including by maintaining a prudent fiscal stance, preserving reserve adequacy, and strengthening financial sector regulation and supervision.

Third, supporting a reform agenda that leads to sustained growth and poverty reduction over the medium term, including by implementing cross-cutting institutional reforms that improve governance and reduce corruption vulnerability.

At the conclusion of the Executive Board’s discussion, Bo Li, Deputy Managing Director and Acting Chair, made the following statement:

“The COVID-19 pandemic severely impacted Nepal’s economy, including through a decline in tourism and domestic activity and volatile remittances. Households are experiencing an ongoing shock to income and social assistance programs have limited coverage, implying a likely setback to poverty alleviation gains in recent years. Further, important fiscal and external financing needs remain to support the COVID-19 response, facilitate a continued recovery, and maintain a comfortable level of reserves.

“The Extended Credit Facility arrangement will support the government’s priorities, to mitigate the pandemic’s impact on health and economic activity and protect vulnerable groups; preserve macroeconomic and financial stability; support sustained growth and poverty reduction; and catalyze additional external financing. It will also help anchor and leverage the Fund’s capacity development strategy in Nepal.

“Fiscal policy in the early part of the program accommodates priority spending to address health needs, support the economy, and protect the most vulnerable. Fiscal deficits would gradually decline once the health crisis wanes, helping to ensure debt sustainability, while also accommodating the authorities’ commitment to further enhance social safety nets.

A comprehensive fiscal structural reform agenda underpins the program, with both revenue mobilization and public financial management reforms to address the public investment efficiency gaps, strengthen fiscal risk management, improve public debt and cash management, and help advance fiscal federalism in a fiscally prudent manner. Moving ahead with reforms to further enhance fiscal transparency and reporting will be important.

“The gradual unwinding of accommodative monetary policy and the authorities’ commitment to remain vigilant toward emerging risks in the external and financial sectors are welcome.”

“Financial sector regulation and supervision needs to be strengthened. Progress is needed on policies that preserve the stability of the financial system while supporting growth through ensuring the availability of adequate and timely supervisory data, updating the regulatory framework to better capture risks including to banks’ asset quality, and enhancing the quality of supervision. Measures set out under the program to further improve the autonomy and accountability framework of the central bank would support this agenda.