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Nepal: Staff Report for the 2008 Article IV Consultation—Informational Annexes

Author(s):
International Monetary Fund
Published Date:
June 2008
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Annex I. Nepal—Fund Relations

(As of March 31, 2008)

I. Membership Status: Joined 9/06/61; Article VIII, Sections 2, 3, and 4 on May 30, 1994.

II. General Resources Account:

SDR MillionPercent Quota
Quota71.30100.00
Fund holdings of currency71.31100.02
Reserve position in Fund0.000.00

III. SDR Department:

SDR MillionPercent Allocation
Net cumulative allocation8.10100.00
Holdings5.7170.48

IV. Outstanding Purchases and Loans:

SDR MillionPercent Quota
PRGF arrangements49.9069.99

V. Financial Arrangements:

TypeApproval

Date
Expiration

Date
Amount

Approved

(SDR Million)
Amount

Drawn

(SDR Million)
PRGF11/19/0311/18/0749.9049.90
PRGF10/05/9210/04/9533.5716.79
SAF10/14/8710/13/9026.1126.11

VI. Projected Obligations to Fund (in millions of SDRs; based on existing use of resources and present holdings of SDRs):

Forthcoming
20082009201020112012
Principal1.432.852.856.77
Charges/interest0.300.310.300.290.27
Total0.301.743.153.147.04

VII. Exchange Rate Arrangement

In February 1993, Nepal unified its exchange rate and eliminated the multiple currency practice associated with the previous dual exchange rate arrangement. In October 1997, the exchange arrangement of Nepal was reclassified as that pegged to a single currency unit from pegged to a currency composite. Currently, all merchandise imports (except for a few goods restricted for security or related reasons) are freely available through an open general license system, with foreign exchange provided through the banking system at the market exchange rate. Nepal’s exchange system is free of restrictions on the making of payments and transfers for current international transactions. As of July 31, 2007, the exchange rate for the Nepalese rupee (Nr) was US$1=Nrs. 65.2.

VIII. Safeguards Assessments

A safeguards assessment of the Nepal Rastra Bank (NRB) was completed on September 2, 2002. The assessment concluded that substantial risks exist in the area of external and internal audits, and the internal control system of the NRB. A safeguards monitoring assessment was completed in October 2004. Staff findings and recommendations were reported in IMF Country Report No. 02/205. The NRB has made limited progress in the implementation of these recommendations, particularly with respect to the use of international standards in financial reporting and external audit and strengthening of internal controls in the NRB.

IX. 2005 Article IV Consultation

The Executive Board discussed the staff report for the 2005 Article IV consultation (IMF Country Report No. 06/44) on January 18, 2006. Until 2008, Nepal was on a 24-month consultation cycle, subject to the provisions of the July 15, 2002 decision on consultation cycles (Decision No. 129794-(02/76) as amended). It is proposed that the next Article IV consultation take place on the 12-month cycle.

X. Technical Assistance Since 2001

Department PurposeDate
MCMAccounting10/04, 4/05, 9/05, 11/05, 7/06
Central bank and banking reform12/01–3/02
Internal Audit10/04, 1/05, 4/05, 9/05, 1/07, 7/07, 11/05, 7/06
Monetary policy6/03
Monetary operationsContinuous
Strengthening central bank accounting and controls4/05
Foreign exchange reserves management5/03, 8/04, 10/04, 11/05, 7/06
Financial Sector Supervision12/06,1/07, 4/07
Liquidity management6/03
FADImplementation of a large tax payer unit10/03
Review of tax policy and VAT administration5/03
Tax and customs administration reform10/03, 7/04, 6/06, 6/07
Follow up on the LTO and customs administration reform8/04, 6/06, 4/07
Tax/customs policy (fiscal reform)4/03
Revenue Administration4/07
Fiscal Transparency Legislation5/07
LEGRedrafting of income tax laws3/00, 7/01, 1/07
Income Tax Act4/03
Banking Law6/04, 10/05
Fiscal Law5/07
Fiscal Transparency5/07
STAMultisector statistics1/01, 7/03
Balance of payments statistics4/02, 11/02, 5/03, 10/03, 4/04
Producer prices statistics1/02, 1/03, 4/04, 1/05
Monetary statistics7/03
National accounts5/03, 4/05, 7/06

XI. Resident Representative/Advisor

Mr. Alexander Pitt has been the Resident Representative since August 2006.

Annex II. Nepal—Relations with the World Bank Group

(As of April 30, 2008)

I. Partnership in Nepal’s Development Strategy

Since the late 1990s, Nepal’s poverty reduction agenda was held back by formidable challenges—that is, persistent political instability, the escalation of the Maoist insurgency and the global economic slowdown. Nevertheless, amidst the turbulence, a group of committed, reform-minded government officials and technocrats began implementing reforms in earnest in late 2001. These initiatives formed the basis for the first Immediate Action Plan (IAP) adopted by the Government in June 2002. For a while, reform efforts flourished in a number of areas, including the financial sector, public expenditures, the fight against corruption, infrastructure regulatory environment, and decentralized delivery of public services.

The reform group had been building on the successful experience with the IAP in moving the reform process forward. In developing the 2003 Poverty Reduction Strategy (PRS)—formally sent to the World Bank and IMF in July 2003—the scope of reform was broadened and a more integrated approach was adopted within a medium-term perspective.1 The PRS spells out specific development targets, foremost among which is the reduction of the overall poverty ratio from about 40 percent to 30 percent by the end of FY07.2 The PRS contains four pillars: (i) achieving sustainable and broad-based economic growth with an emphasis on the rural economy; (ii) accelerating human development through improved delivery of basic social services and economic infrastructure; (iii) ensuring social and economic inclusion of the poor, marginalized groups and less developed regions; and (iv) pursuing good governance to achieve better development results, and ensure social and economic justice. The technical elements of the government are trying to set their own development framework (Three-Year Interim Plan) and take back the development agenda from donors. Despite an extremely adverse political and economic environment, a PRS progress report by the National Planning Commission (NPC) prepared over a year ago notes that implementation of the PRS has been broadly satisfactory and measurable results are being achieved.

With the successful Constituent Assembly elections on April 10, 2008, the Bank is preparing policy note presentations on key issues to present to the new government.

II. IMF-World Bank Collaboration in Specific Areas

A. Areas in Which the Bank Leads and There is No Direct IMF Involvement

The areas in which the Bank leads the policy dialogue and there is no direct IMF involvement are the social sectors, infrastructure, and environment. In the social sphere, the Bank provided technical assistance (TA) in conducting the Nepal Living Standards Survey II (NLSS II) during 2003/04 that updated household level information on trends in consumption, poverty, and their determinants. The TA also helped to strengthen the country’s capacity to undertake regular household surveys that will facilitate poverty comparisons over time and to conduct social impact analyses. The NLSS II has been a key input into the three annual PRS progress reports, as well as the Bank’s comprehensive poverty report—Nepal: Resilience Amidst Conflict—An Assessment of Poverty in Nepal, 1995–96 and 2003–04.

In education, the Bank and numerous other donors are actively supporting Nepal’s well-formulated, ten-year primary education reform program. IDA along with Denmark, Finland, Norway, EC, ADB, UNICEF and the United Kingdom have established a joint financing arrangement whereby donor funds are pooled with public sector budgetary resources to support implementation of the program. IDA resources are provided through the Education for All project—which employs a sector-wide approach (“SWAp”)—and the Second Higher Education.

The Bank has encouraged Nepal’s decentralization efforts to achieve more effective delivery of public services and is playing a pivotal role in supporting the transfer of public schools to community management. The Community School Support Learning and Innovation Loan (LIL) aims to improve accountability of primary schools, build capacity of communities to manage schools and develop the roles of teachers, local officials, and education offices within the devolved framework.

In health, the Bank has been supporting the devolution of sub-health posts to local communities, and the development of a sector-wide reform strategy. A Health Sector Operation supports the program. Key reform priorities include addressing the problems of inadequate financing and inefficient public spending, weak institutional capacity, and over-centralized planning and management, weak delivery mechanisms and inequitable access to services. To support both human health and animal health, an Avian Influenza Control Project is under operation.

To support broad-based growth, the Bank supports investments in several key infrastructure sectors. The Power Development Project (PDP) is helping to develop the country’s hydropower potential to meet electricity demand, improve access of rural areas to electricity services and promote private sector participation. The Telecommunications Sector Reform Project supports sectoral policy reforms in addition to the provision of greater rural access to telecommunications services through the introduction of a private operator. The Road Sector Development Project provides all-season road access in select hill districts.

To support rural development, the Nepal Irrigation and Water Resources Management Project aims to improve irrigated agriculture productivity and management of selected irrigation schemes, and enhance institutional capacity for integrated water resources management. At the same time, project finance is supporting decentralization to improve service delivery by promoting grassroots-driven, bottom-up planning and community-based management. The Rural Access Improvement and Decentralization Project (RAIDP) helps to improve governance and service delivery for rural infrastructure, while at the same time promoting agricultural and rural economic growth, and generating employment through direct project investments in rural transport infrastructure.

While many of the Bank’s investment/sector operations mentioned above also support social inclusion, a more direct initiative in this area that received Bank support is the Poverty Alleviation Fund (PAF I and II). PAF channels resources to the poorest groups in rural communities by creating infrastructure, employment and income-generating opportunities. Bank financing through the PAF project supports implementation of the fund in 75 districts. In addition, the Bank – with DFID funding – is assisting Nepal in gaining a better understanding of the institutional underpinnings of caste, ethnic and gender-based social and economic exclusion and how these affect poverty outcomes and the options for policy and institutional reform through a completed social and gender analysis: Unequal Citizens: Gender, Caste and Ethnic Exclusion in Nepal.

In responding to environmental management, Bank assistance is focused on helping Nepal articulate an effective strategy for environmental conservation, management and capacity building. A Country Environmental Analysis was completed in FY07 and a study is underway on Adapting to Climate Change.

B. Areas in Which the Bank Leads and Its Analysis Serves as Input into the IMF Program

The Bank takes the lead in assisting Nepal with public expenditure analysis. The Bank’s FY00 Public Expenditure Review (PER) provided analytical support for developing the strategy on public expenditure reform. Together with DfID, the Bank’s intensive dialogue and technical assistance have been supporting the reforms, including the development of a credible Medium Term Expenditure Framework (MTEF). This framework has applied since FY04 to the prioritization of the development budget to ensure efficient budget allocations for priority projects. As Nepal implements its PRS, the MTEF will help the public sector translate the PRS priorities into fiscal realities.

Public expenditure analysis remains an integral part of the Bank’s analytical and advisory (AAA) work program, consisting of (i) PER that focuses on evaluating the implementation of the MTEF; (ii) Public Finance Management (PFM) Review that examined the fiscal space for development activities and cross-sectoral allocation of public spending and service delivery; and (iii) Public Expenditure Financial Accountability (PEFA) assessment was recently completed and has established PFM benchmarks using the PEFA framework. The government is now seeking the continued cooperation of the WB and other development partners to implement the Action Plan to improve PFM.

To complement the economic analysis, studies on the public sector’s framework for financial accountability and procurement—the Country Procurement Assessment Review (CPAR) and the Country Financial Accountability Assessment (CFAA)—were conducted jointly by the Bank and the Government. Additionally, in response to technical assistance and training needs on public expenditure management, decentralization and enhancement of financial accountability, the Bank is providing support through Institutional Development Fund (IDF) grants or other sources.

In the future, the Bank could provide additional support through development policy lending linked to (i) financing of a post-conflict program; (ii) supporting the transition to a more stable environment; and (iii) supporting reform implementation. In the meantime, to assist in the reform efforts the Economic Reform Technical Assistance (ERTA) Project is providing TA to help implement aspects of all the PRS pillars. The Bank’s AAA program places emphasis on the need to address the challenges and bottlenecks to broad-based growth.

With respect to governance, in implementing both the 1998 and 2003 CASes, the Bank has consistently and firmly focused on helping Nepal address its fundamental constraint to development—poor governance. Albeit accompanied by intensive dialogue, the Bank’s strong limited lending stance during FY99–FY02 (less than US$25 million per year) may have provided some impetus to the wave of reforms initiated in the early 2000s. The public expenditure reform program which has benefited from the Bank’s analytical work and policy dialogue is facing up to the challenge of improving not only efficiency but also governance. The program includes measures to fight corruption, ensure civil service accountability, and enhance transparency of public financial management and the procurement framework. Bank support for decentralization includes analytical assistance on the fiscal decentralization framework and promotion of the expanded roles of local bodies. Following the completion of the CPAR and CFAA, IDF grants are providing the means for strengthening relevant public sector institutions and implementing main policy recommendations. Nepal has been selected as a pilot country for the Bank’s Governance and Anti-Corruption Plan (CGAC) and a Governance Assessment Note is under preparation.

C. Areas of Shared Responsibility

The Bank and the IMF—together with other external development partners—provided assistance during the preparation of the PRS and the subsequent PRS Progress Reports. In addressing the PRS pillar on good governance, the Bank and the IMF are assisting in the area of civil service reform through policy dialogue and TA towards ensuring an autonomous and professional civil service as well as fiscal sustainability.

The Bank and the IMF are partners in providing analytical support to Nepal on international trade, which is key to attaining broad-based growth. The Bank led the work with a Trade and Competitiveness Study which helped identify major constraints to further integrating the country into the multilateral trading system in a manner that is supportive of the PRS. The IMF contributed to the study by assessing macroeconomic policy and its potential impact on trade performance. In turn, the study is helping the IMF design its technical assistance program on tax policy, including import tariffs taking into account Nepal’s WTO accession.

Financial sector reform is a fundamental area for Bank/IMF involvement. Since the mismanagement of key financial institutions was a major element of poor governance, progress in implementing financial sector reform has been the litmus test of political commitment to governance reform. The Bank and the IMF are helping to strengthen the central bank’s authority and regulatory capacity, improve the financial health and restructure of the two largest state banks, and upgrade the legislative and institutional framework for the financial sector. Building on a comprehensive Financial Sector Study carried out in 2002, the Financial Sector Technical Assistance project supports (i) the restructuring and reengineering of the Central Bank; (ii) introduction of professional management teams into the two large ailing commercial banks (the first step toward eventual restructuring); (iii) capacity building towards enhanced credit information; and (iv) upgrading of staff training in financial institutions. The Financial Sector Restructuring project supports further strengthening of the Central Bank and deepening the reform process within the two banks. In FY05, a Legal Financial Review was completed providing a snapshot of the legal and judicial environment for financial sector growth and development. In addition, a recently completed study on Access to Finance helps to gain a better understanding of (i) the financial performance of the microfinance sector; and (ii) whether the current legal and regulatory framework is an obstacle to the sector’s growth. Another study, Technology in Microfinance, is underway to examine how the use of technology in microfinance can improve access to financial services to the Nepalese majority. An Investment Climate Assessment is underway and will be completed in late FY09.

III. World Bank Group Strategy and Lending Operations

The Country Assistance Strategy (CAS): In November 2003, a CAS was presented to the Bank’s Board of Directors, which discussed the rationale for implementing a ‘base case’ lending program equivalent to approximately US$190 million annually. Given the nature of the country’s ongoing reforms, the CAS Progress Report (CAS PR) prepared in 2002 had already presented the justification for moving to a base case scenario that included implementing a programmatic approach to financial assistance. An Interim Strategy Note (ISN) was presented to the Board in February 2007 and a note on the implementation of the ISN was circulated in August 2007. A new CAS will be prepared and presented to the Board in late FY09.

The Lending Program: So far, in FY08, four projects (of which one is for additional financing) have been approved for US$252.6 million and three more projects are scheduled to be presented to the Board on May 6 for another US$127 million, bringing the total FY08 lending to US$379.6 million.

Bank Assistance Program in Nepal: As of March 31, 2008, IDA’s lending portfolio consisted of sixteen projects with a total commitment of US$782.8 million and a total undisbursed balance of US$583 million (Table II.1).

Table II.1.World Bank Operations(as of March 31, 2008)
FYProjectIDA

(US$mln)
Undisb.
2008PAF II100.00100.00
2008Irrigation & Water Rural50.0050.00
2008Road Sector Development42.6042.60
2008Education For All Additional Financing60.0060.00
2007Second Higher Education60.0060.00
2007Avian Influenza Control18.2017.00
2005Education for All Project110.0072.30
2005NP. Economic Reform TA3.001.60
2005Nepal Health Sector Program Project50.0018.20
2005Rural Access Improve. & Decentralization32.0027.30
2004NP Fin Sector Restructuring (Phase II)75.5020.50
2004Poverty Alleviation Fund40.0015.90
2004Rural Water Supply & Sanitation Project25.308.70
2003NP Financial Sector Technical Assistance16.007.90
2003POWER DEVELOPMENT PROJECT74.8068.60
2003Community School Support Project5.003.77
2002NP: Telecommunications Sector Reform20.408.70
Total:782.80583.07

Economic and Sector Work: The 2003 Country Assistance Strategy (Report No. 26509–NEP, 11/24/2003) was discussed by the Bank’s Board in November 2003. Recently completed economic and sector work includes Nepal Development Policy Review: Restarting Growth and Poverty Reduction (June 2004), Unequal Citizens: Gender, Caste and Ethnic Exclusion in Nepal (June 2005), Nepal Decentralized Organizations Study (March 2004), Urbanization and Service Delivery in the Context of Decentralization: A Review of the Issues for the Kathmandu Valley (December 2004), Legal Financial Review (February 2005), North South Transport Corridor Options (August 2004), Nepal: Resilience Amidst Conflict: An Assessment of Poverty in Nepal, 1995–96 and 2003–04 (June 2006) and Managing Public Finances for a New Nepal (June 2007).

A. Activities of the International Finance Corporation (IFC) in Nepal

Investment Services: As of end January 2008, the IFC’s outstanding balance portfolio in Nepal is US$39.93 million in two power generation projects, one tourism project, and one leasing company. Given the security situation, opportunities for new investments had been limited. More recently, as the peace process continues and the security situation improves, IFC is considering new investment opportunities in cement, hydropower and the financial sector. In 2005, IFC launched the Global Trade Finance Program (GTFP) which offers confirming banks partial or full guarantees on issuing banks’ payment risk. In FY07, IFC signed two Nepali Banks, Bank of Kathmandu and Nepal Industrial and Commercial Bank, to the Global Trade Finance Program (US$2 million each). IFC is in discussion with Himalayan Bank for participation in the GTFP. The IFC is also considering equity investments with Bank of Kathmandu and Himalayan Bank.

B. IFC Advisory Services

Privatization/Corporate Advisory Services: IFC has initiated discussions with the GoN on providing advisory services for a possible privatization/restructuring of Nepal Airlines and Nepal Telecom. IFC’s main delivery mechanism for technical assistance for small and medium enterprises (SMEs) in Nepal is through the Dhaka-based South Asia Enterprise Development Facility (IFC-SEDF). This facility—funded by IFC in partnership with Canada, Netherlands, Norway, the United Kingdom, Asian Development Bank, and the European Union—delivers TA programs to increase access for SMEs to financing and business development services, improve the business environment for SMEs and develop linkages with larger enterprises.

Access to Finance: IFC-SEDF has signed a Partner Financial Institution MOU with the Himalayan Bank and the Bank of Katmandu and hopes to sign another MOU with the NIC Bank very shortly. The MOUs outline specific programs to assist the banks with institutional capacity building that will help enhance the quality of service to the bank’s SME clients. By comparing the FIs to best practice banks in this sector, the diagnostics provide a needs-gap analysis of the Banks’ strengths, weaknesses, opportunities and threats within the overall structure of the bank. The road-map for future interventions is based on these findings. Diagnostic of NIC Bank is scheduled for mid-June. Future work will include a Credit Bureau Strengthening Project aimed at making the newly privatized Credit Bureaus commercially viable.

Future Advisory Services (AS) to the banks will include developing appropriate SME banking products and services and building their institutional capacity through training. These activities will involve assisting the Bank to transition to a more industrialized form of banking and would involve a cultural change in mindset from traditional corporate banking. AS will be provided to develop more standardized products, streamlined processes and for effective use of technologies to derive more cost-effective delivery channels. Targeted AS will be provided to assist the banks formulate a holistic SME strategy, including human resources policy, and implementing this strategy in an effective manner.

Business Enabling Environment: At the request of the Ministry of Industry, Commerce, and Supplies (MoICS), IFC-SEDF and FIAS jointly undertook a detailed review of the draft Special Economic Zone (SEZ) legislation in September 2006. This was followed by an Investment Climate Mini Diagnostic (February-March 2007) which uncovered constraints to investment in terms of excessively rigid labor regulations, inefficient customs administration, non-transparent and inconsistent tax administration, inappropriate and uncoordinated licensing and certification regimes, lack of inspections capacity, and barriers to exit.

The proposed SEZ regime presents an important opportunity for Nepal to offer a stable and efficient environment for investors to do business in the short term while building up the support for scaling up reforms to the national level through demonstration effects. FIAS and IFC-SEDF are currently developing a four year US$6 million Nepal Investment Climate Reform Program (NICRP) – focused on helping the SEZs meet international best practice.

Questions on IDA may be referred to Ms. Paralkar (458-9050) or on the IFC to Mr. Paul Barbour (473–7349).

The PRS was discussed by the Boards in November 2003 following a joint staff assessment carried out by the two institutions. Subsequently, four PRS Progress Reports have been issued by the authorities.

This target has nearly been met with recent analysis showing that the incidence of poverty in Nepal fell from 42 percent (1995–96) to 31 percent (2003–04), with urban areas experiencing greater reductions than rural areas in the depth and severity of poverty.

Annex III. Nepal—Relations with the Asian Development Bank

Country Program

As of 31 December 2007, cumulative lending to Nepal was $2.25 billion, comprising 111 loans and six grant projects amounting to $183.9 million. Sectors covered through AsDB loans and grants are agriculture and natural resources, education, energy, finance, industry and trade, law, economic management and public policy, transport and communication, and water supply, sanitation, and waste management. AsDB’s total country program for Nepal in 2008 amounts to $106.7 million—Education Sector Cluster Program ($8 million, subprogram 2), Information and Communications Development Project ($25 million), Power Sector Development Project I ($30 million) and Local Governance and Community Development Support Program I ($43.7 million).

Undisbursed funds of $588 million represent 69 percent of the total portfolio amount as of 31 December 2007.

Loans and Grants by the Asian Development Bank, 1969–2007(As of 31 December 2007)
1968–20002001200220032004200520062007
(In millions of U.S. dollars)
Loans
Agriculture and natural resources656.23002070000
Education61.119.6300200300
Energy364.40000000
Finance7.300000560
Industry and trade129.180000000
Law, economic and public policy30350000
Transport and communication236.86460020000
Water supply, sanitation and waste management22400390000
Multisector127.0603000000
Grant
Agriculture and natural resources180
Education20
Finance8.70
Transport and communication55.20
Multisector100
Total grants83.9100
Total approved (loan and grant)1,806.1395.660941100169.9100
Gross disbursements1,220.6057.328.233.52243.7108.0102.3
Technical assistance
Total approved98.034.034.024.173.162.055.827.22
Gross disbursements54.153.94.174.23.62.044.6

Technical Assistance

Since 1968, AsDB has provided Nepal with technical assistance in most sectors. As of 31 December 2007, ADB approved 270 technical assistance projects totaling $127.8 million. There are currently 33 ongoing TAs, including 2 JFPR projects

Private Sector Operations

  • Developing a strong and dynamic private sector is essential to the long-term economic growth of Nepal. AsDB aims to strengthen the role of the private sector in Nepal through prudent investments in its infrastructure sector. The AsDB’s public sector lending and technical assistance program have also been helping Nepal to create a more conducive policy and legal environment for private sector development. At the end of 2007, cumulative approvals for 4 private sector projects in Nepal amounted to $58.64 million while ADB’s outstanding exposure to non-sovereign projects totaled $24.4 million, representing 1.4 percent of ADB’s total non-sovereign portfolio.

  • Currently AsDB is looking into the possibility of financing the proposed 750 MW West Seti Hydropower project.

Annex IV. Nepal—Statistical Issues

Economic and financial data are generally adequate for surveillance, with scope for improvement, in particular in the timeliness and coverage of fiscal data, and in balance of payments compilation of remittances, and official and private financial flows. Nepal provides core data to the Fund and releases data in government and central bank publications. It has been a participant in the General Data Dissemination System (GDDS) since May 2001. Metadata were initially posted on the Dissemination Standards Bulletin Board in May 2001 and last updated in January 2007. A multisector statistics mission visited Kathmandu in January 2001.

Real Sector Statistics

The Central Bureau of Statistics (CBS) compiles national accounts using the dated methodology of the 1968 SNA. Key estimates include GDP by industry (in current and constant prices) and by expenditure categories (current prices), and gross national income and savings. There are shortcomings due to lack of comprehensive and regular data sources. The limited source data suffer from inconsistencies, lags in availability, and insufficient detail. There are also shortcomings in record keeping by agencies, and access to records is not timely due to processing lags. Reflecting source data problems, compilation methods rely heavily on fixed ratios derived from surveys or ad hoc assumptions—for example, household consumption expenditure estimates are based on extrapolations of the 1995/96 benchmark living standard survey. STA missions in April 2005 and July 2006 provided support to the development of quarterly national accounts (QNA) and the rebasing of the annual national accounts to 2000/01 from 1994/95. These missions and other developments are within the context of a broader Asian Development Bank (AsDB) project aimed at strengthening the national accounts. A STA expert is scheduled to provide further assistance with development of QNA later in 2008.

The consumer price index (CPI) offers limited coverage based on dated expenditure weights derived from a 1995/96 household expenditure survey. Coverage is limited to urban areas while the consumption basket refers to a subset of the population, excluding the upper and lower two income deciles; single person households; households with more than eight persons; and households obtaining more than 50 percent of their consumption from own production or less than 50 percent of their income in cash. The national index aggregates regional indices using population weights rather than recommended expenditure weights.

The wholesale price index (WPI) was developed by the Nepal Rastra Bank (NRB) and first published in July 2001. The weights for the WPI, based on 1999/2000 data, are derived using a commodity flow approach with prices related to the first commercial transaction point. CBS compilation methods need improvement to implement weekly or bi-weekly price collection; the number of price quotations should be increased; and procedures for adjusting for quality differences require implementation. The CBS, with STA assistance, is developing a monthly producer price index (PPI) series, to replace the manufacturing price index, which is based on unit values rather than actual transaction prices. The PPI is expected to more accurately measure industrial sector inflation and improve deflation in the national accounts..

Government Finance Statistics

A revised budget classification system, introduced in 1996/97 and subsequently refined, has substantially improved fiscal statistics, in particular the division between current and capital spending. However, fiscal data by functional and economic classification are provided on an irregular basis with varying degrees of coverage. In addition, large amounts are still allocated to the contingency account, and monthly reporting of development spending excludes amounts directly paid by donors. Moreover, a number of fees collected outside the budget and the operations of local governments are not reported in the annual budget.

More timely data on revenue and expenditure are needed for effective fiscal control. A financial management project is underway and a system of ‘flash’ reporting covering selected districts that account for the bulk of expenditure is being developed. Further improvement of fiscal data collected by the Financial Comptroller General’s Office would permit the Ministry of Finance (MoF) to monitor more effectively actual revenue collections and expenditures, and to provide assessments during the course of the fiscal year. Such improvements will require further computerization in MoF regional offices, as well as donor financing and additional TA.

Consolidated accounts for the public enterprise sector are not compiled on a regular basis, and financial reporting by many individual enterprises is subject to long delays. Fund staff has assisted the authorities in processing surveys of public enterprises.

Government finance statistics are regularly reported for publication in the Government Finance Statistics Yearbook, but not the International Finance Statistics.

Monetary and Financial Statistics

Monetary data provided to the Fund by the NRB have been subject to revisions with lags of up to 12 months, complicating program monitoring. Monetary and financial statistics are compiled under the methodology of the IMF’s 1984 Guide to Monetary and Financial Statistics. To update the NRB’s compilation methods to the framework of Monetary and Financial Statistics Manual, 2000 (MFSM), a 2008 STA mission recommended to (i) include development banks and finance companies in the institutional coverage of monthly monetary statistics1 and, based on this expanded coverage, compile a monthly broad money/depository corporations survey; (ii) adopt center of economic interest criteria for classifying residents and nonresidents and for distinguishing resident/nonresident positions of the financial institutions, instead of the currently used criteria based on citizenship and currency of denomination; (iii) adopt the principle of effective control for distinguishing between public and private nonfinancial corporations; (iv) ensure that the IMF-related accounts are fully reflected in the NRB’s balance sheet in accordance with the IMF Finance Department’s instructions; (v) value monetary gold, SDR holdings, securities, and holdings of shares/equities based on the end-period fair value/market price; (vi) incorporate accruals in the outstanding amount of financial asset or liability instead of maintaining them on separate accounts; (vii) monitor activities of other, smaller deposit-taking institutions (namely, Postal Savings Bank, Micro Credit Development Banks, Savings and Credit Cooperatives, Citizens’ Investment Trust) and include them in the institutional coverage of broad money/depository corporations survey when their deposit-taking activities become more significant; (viii) use Statement of Assets and Liabilities (Form No. 1), instead of the more aggregated set of data currently used, as the basis for compiling monetary accounts for commercial banks, development banks and finance companies; and (ix) start regular monthly reporting of monetary data in the SRF format for the NRB (SRF-1SR) and other depository corporations (SRF-2SR) based on the compilation system agreed with the mission.

External Sector Statistics

The NRB compiles and disseminates balance of payments statistics in conformity with the fifth edition of the Balance of Payments Statistics Manuel (BPM5), but does not compile statistics on the international investment position. Nepal has benefited from five STA balance of payments missions since the multisector statistics mission of 2001. Staffing has been increased and in September 2003, the authorities began disseminating balance of payments in BPM5 format. Nevertheless, other STA recommendations have not yet been fully implemented and net errors and omissions remain large. Work is still underway to improve the estimation of workers’ remittances and the source data for private capital flows, but further work is needed to improve the recording of oil transactions, grants, foreign direct investment, short-term inflows, and other private capital flows.

Trade data compiled separately by the NRB, the Customs Department, and the Trade Promotion Center (overseas trade only) exhibit discrepancies. Export and import price indices are not compiled.

Incomplete and conflicting data on government external grants and loans complicate the estimation of foreign financing. The NRB monitors cash disbursements and repayments, but most commodity aid and direct payment are excluded. MoF reporting is also incomplete and not timely. With technical assistance from the United Kingdom’s DFID, a new database with comprehensive data on disbursements, repayments, and the stock of outstanding government debt has been developed and is currently being refined. However, reporting of direct external grants remains problematic.

Nepal—Table of Common Indicators Required for Surveillance(As of April 18, 2008)
Date of Latest ObservationDate ReceivedFrequency of Data6Frequency of Reporting6Frequency of Publication6
Exchange ratesMar. 2008Apr. 2008D and MW and MD and M
International reserve assets and reserve liabilities of the Monetary Authorities1Nov. 2007Feb. 2008WWM
Reserve/base moneyNov. 2007Jan. 2008MMM
Broad moneyNov. 2007Jan. 2008MMM
Central bank balance sheetNov. 2007Jan. 2008MMM
Consolidated balance sheet of the banking systemNov. 2007Mar. 2008MMM
Interest rates2Nov. 2007Jan. 2008W and MW and MW and M
Consumer price indexJan. 2008Apr. 2008MMM
Revenue, expenditure, balance and composition of financing3 – general government4Jun. 2007Jul. 2007WWW
Stocks of central government and central government-guaranteed debt52004/05Jun. 2006AAA
External current account balance2006/07Jun. 2007Q/AQ/AA
Exports and imports of goods and services2006/07Jun. 2007MMM
GDP/GNP2007Jan. 2008AAA
Gross external debt2004/05Jun. 2007AAA

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), weekly (W), monthly (M), quarterly (Q), annually (A), irregular (I); and not available (NA).

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D), weekly (W), monthly (M), quarterly (Q), annually (A), irregular (I); and not available (NA).

Data provided to the mission indicate that the ratio of deposits at development banks and finance companies relative to total deposits at deposit-taking institutions was approximately 13 percent at end-2006/2007.

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