IMF delays review of Nepal’s extended credit facility, withholding crucial funding over policy concerns

KATHMANDU: The International Monetary Fund (IMF) has postponed its fifth review of Nepal’s Extended Credit Facility (ECF), initially scheduled for November. This delay in the ECF review process has resulted in the withholding of the sixth tranche, a significant financial setback for Nepal, as the country faces economic challenges and rising inflation. The IMF reportedly paused the review over Nepal’s perceived failure to implement specific loan agreement conditions that would improve the transparency and stability of Nepal’s financial sector.

The ECF, a financial support program designed to help countries manage their economic challenges, has been a critical source of concessional financing for Nepal. However, Nepal’s failure to meet certain requirements set by the IMF has led to delays in the ECF’s review process, which jeopardizes the country’s economic stability and budget planning.

IMF’s Policy Concerns: Lack of Financial Sector Reforms

The IMF has expressed concerns regarding the Nepal Rastra Bank’s (NRB) financial policies and independence. Among its primary conditions, the IMF has stipulated that financial institutions in Nepal must undergo audits by international auditors to ensure transparency and credibility. Additionally, the IMF has urged the Nepalese government to amend the NRB Act, advocating for autonomy in the central bank’s operations, which they believe is crucial for strengthening Nepal’s economy and attracting foreign investment.

Sources indicate that the IMF is dissatisfied with the NRB’s recent decision to suspend the review of the loan portfolios of the country’s ten largest commercial banks. The IMF reportedly sees this postponement as a failure to uphold transparency standards within the banking sector, which has further delayed the ECF review and the release of the much-needed sixth tranche.

Pressure on the Nepal Rastra Bank Act and Governance Structure

The IMF has pressed the NRB to implement critical changes in its governance structure, focusing on three key areas: the appointment process for the NRB governor, the number of deputy governors, and the Finance Secretary’s role on the NRB board. The IMF insists that the appointment of the NRB governor should be conducted through a transparent parliamentary process rather than government intervention.

Additionally, the IMF has urged Nepal to limit the number of deputy governors to three and remove the Finance Secretary from the NRB’s board, asserting that this would reduce political influence in central banking decisions. Currently, the NRB Act mandates that the Finance Secretary be an ex-officio member of the NRB Board, which the IMF argues limits the NRB’s independence. The IMF has recommended that this provision be revised, aiming for a more autonomous central bank that could manage monetary policies independently.

Implications of Delayed ECF Funding on Nepal’s Economy

The delay in the ECF review and the withholding of the sixth tranche may impact Nepal’s economic development plans and budget execution for the fiscal year. Nepal initially received $78.5 million in January 2022 as part of the first tranche, and since then, the IMF has disbursed a total of $247.7 million. However, each subsequent tranche release requires adherence to the IMF’s policy reforms. Without additional financial support, Nepal’s government may struggle to fund essential projects in infrastructure, education, and health services, which are central to Nepal’s economic growth and long-term stability.

Officials at Nepal’s Ministry of Finance downplayed the potential economic consequences of the delay, attributing it to the recent World Bank and IMF joint meetings in Washington, D.C., which have impacted the timing of the ECF review. “The evaluation for the fifth tranche under the ECF was initially scheduled for November. Due to the recent joint meetings at the World Bank and IMF, the review process may be slightly delayed, but it will resume soon. As the ECF is already incorporated in the current fiscal year’s budget, the delay won’t cause any significant disruption,” stated an official from the International Economic Assistance Coordination Division of the Ministry of Finance.

Rising Concerns Over Nepal’s Economic Stability and Financial Transparency

The IMF’s delay in approving the fifth review has raised questions about Nepal’s commitment to financial transparency and its ability to implement key reforms that could help bolster investor confidence. The IMF has continually stressed the need for Nepal to align its financial policies with international standards to create a more resilient economy capable of weathering economic challenges.

The NRB’s recent decision to halt the loan portfolio review of major commercial banks has particularly sparked debate among economic analysts, who believe this decision contradicts the IMF’s call for greater transparency in Nepal’s financial sector. As Nepal seeks to attract foreign investment and bolster its economic growth, these delays and ongoing policy disagreements could impact the country’s investment environment.

Moving Forward: IMF and Nepal’s Economic Reform Challenges

As Nepal works to secure the remaining ECF tranches and meet IMF requirements, the government and the NRB face significant challenges in implementing financial reforms. The IMF’s push for an autonomous central bank and greater transparency in Nepal’s financial institutions reflects the organization’s commitment to improving Nepal’s economic stability and resilience.

The coming months will be crucial as Nepal navigates these policy reforms to address the IMF’s concerns and unlock the remaining funds under the ECF. With increased pressure on the NRB to adopt more stringent governance policies, Nepal’s financial sector will need to make strategic adjustments that align with international standards while balancing domestic economic interests. The outcome of these reforms could shape Nepal’s financial future, determining the country’s ability to build a more stable economy and attract sustainable foreign investment.

As Nepal awaits the IMF’s next steps, the government’s ability to meet these conditions remains essential for ensuring continued financial support and fostering long-term economic resilience.