IMF and Nepal Reach Staff-Level Agreement on a Three-Year US$400 million Financing Package

IMF and Nepal Reach Staff-Level Agreement on a Three-Year US0 million Financing Package

F.P. Report

Washington, DC: A staff team from the International Monetary Fund (IMF) led by Robert Gregory conducted hybrid missions to Kathmandu, Nepal from October 20-29, November 17-18, and November 30-December 2, 2021 to discuss a 38-month program under the Extended Credit Facility (ECF).

At the conclusion of the mission, Mr. Gregory issued the following statement:

“IMF staff have reached agreement with the Nepali authorities on a 38-month program that could be supported by IMF resources of about US$400 million under the Extended Credit Facility (ECF). The staff-level agreement is subject to IMF management approval and Executive Board endorsement, which is expected in the coming weeks, and which is contingent on the implementation by the authorities of prior actions and fulfillment of all relevant Fund policies.

“The COVID-19 pandemic has taken a heavy toll on Nepal’s economy, severely impacting people’s heath and livelihoods. GDP contracted in 2019-20, and Nepal suffered a devastating second wave in 2021, which interrupted a gradual recovery in economy activity. The authorities responded proactively, with polices to strengthen prevention, containment, and health management as well as measures help the poorest, mitigate job losses, and support businesses. Emergency financial assistance from the IMF and other development partners helped close financing gaps and supported mitigation measures, but important fiscal and external financing needs remain over the next few years.

“The IMF-supported program has three main objectives:

Mitigate the COVID-19 impact on health and economic activity, and protect vulnerable groups, including by making room in the budget for health, social assistance, and job support, while enhancing fiscal transparency and governance.

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

Support 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.

“Fiscal policy in the early part of the program would accommodate spending to address health needs, support the economy, and protect the most vulnerable, but fiscal deficits would gradually decline once the health crisis wanes. The fiscal deficit trajectory under the program will help stabilize public debt, while also accommodating the authorities’ commitment to further enhance social safety nets to support poverty alleviation. The program supports a comprehensive fiscal structural reform agenda—with both revenue mobilization and public financial management reforms—as well as measures to increase fiscal transparency.

“Recognizing the importance of preserving the stability of the financial system to help support growth and mitigate economic scarring from Covid-19, the program follows a carefully sequenced strategy to further strengthen financial sector regulation and supervision, while also enhancing the autonomy and accountability framework of the Nepal Rastra Bank (NRB).

“The trajectory of the COVID-19 pandemic in Nepal and globally is extremely uncertain and will continue to weigh on the economic outlook. As projections remain subject to significant uncertainty, it will be important to identify contingency strategies in case these risks materialize. The IMF staff team looks forward to continuing the close engagement with the Nepali authorities and support their efforts in achieving the program’s objectives.

“The staff team met with the Minister of Finance, Mr. Sharma, Finance Secretary, Mr. Marasini; Governor of the Nepal Rastra Bank (NRB), Mr. Adhikari; and other NRB and senior government officials. Staff also had productive discussions with representatives of the private sector, and development partners. The IMF staff team is grateful to the authorities for the candid and constructive discussions and their hospitality while in Kathmandu.”

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