Journal Issue

Nepal: Request for Disbursement Under the Rapid Credit Facility

International Monetary Fund. Asia and Pacific Dept
Published Date:
August 2015
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Background and Recent Developments

1. Around midday on April 25, a magnitude 7.8 earthquake struck Nepal, causing widespread damage and devastation. A second earthquake on May 12 (magnitude 7.3) claimed additional lives and caused more damage to already weakened structures. According to the latest official estimates, over 8,800 lives were lost and 8 million people—nearly a third of Nepal’s population—have been affected by the earthquake. Half a million homes were destroyed and another 250,000 were damaged (Box 1). Many cultural and architectural heritage sites have been reduced to rubble.

2. The authorities acted quickly to minimize disruptions to government and central bank operations, despite the serious physical damage to the central bank’s main cash distribution facilities and to its headquarters and the absence of a disaster recovery site. This was key to maintaining public confidence in the financial sector. Effective collaboration and cooperation, both within the government and among the government and its development partners, was instrumental in completing the Post-Disaster Needs Assessment (PDNA) and presenting it at an international donor conference within two months of the disaster.

3. The total cost of the earthquake is estimated at about US$7 billion, or ⅓ of GDP. The damage to buildings and infrastructure is estimated at about 24 percent of GDP. In addition, economic losses (e.g. foregone revenue in agriculture and tourism) are estimated at 9 percent of GDP.1 The necessary spending on recovery and reconstruction will require a significant increase in government expenditure, push the current account to a deficit, and open fiscal and balance of payments gaps in the coming years.

4. The authorities are requesting financial assistance from the Fund under the shocks window of the Rapid Credit Facility (RCF) to ease the pressure on official foreign reserves once reconstruction starts in earnest. In the attached letter, they request a disbursement in the equivalent of SDR35.65 million (50 percent of quota) (Appendix 1). Staff supports the authorities’ request. The funds will be used for budget support. Because the Central Bank Law does not permit central bank lending to the government (beyond short-term overdrafts to bridge cash-flow fluctuations), they have asked the funds to be transferred to the Ministry of Finance’s account at the central bank. Staff assesses that the authorities have sufficient capacity and commitment to implement policies adequate to address the shock caused by the disaster. In the context of a June 25 donor conference, multilateral and bilateral donors pledged about US$4 billion worth of grants and concessional loans to be disbursed over five years, to cover the remaining financing needs.

Aid Pledged by Key Donors for next 5 years
(in millions

of U.S. dollars)



Of which:

New Pledges
1. Bilateral9581,9722,9292,143
2. Multilateral1,130201,150600
Sources: Nepali authorities; and IMF staff projections.
Sources: Nepali authorities; and IMF staff projections.

5. Nepal remains Asia’s poorest country, despite progress in reducing poverty. After a decade-long civil war and the abolition of the monarchy in 2008, the country is undergoing a gradual transition to a federal democratic state. Poverty has been declining, from over 50 percent of the population in 2003/04 to just under 25 percent in 2010/11, thanks in part to rising remittances sent home by the growing number of Nepalese working mostly in GCC countries and Malaysia. Nevertheless, output per capita remains the lowest in the region, and further efforts are needed to improve living standards. The economy is primarily based on agriculture and services, the latter increasingly fuelled by remittances.

Per Capita GDP (PPP)

(In U.S. dollars)

Sources: World Bank, WDI Database.

Human Development Index (HDI)


Source: UNDP, Human Development Report 2014.

6. Before the earthquake, Nepal’s macroeconomic performance was broadly favorable but the government’s weak budget implementation capacity held back growth and propped up the external position (Figures 1 and 2):

  • Growth accelerated to 5.5 percent in 2013/14, thanks largely to a favorable monsoon. Average growth of 4 percent in the three previous years lagged neighboring countries.

  • Inflation had been moderating, in line with developments in India, but at 6.8 percent (y/y) in mid-April 2015, a wedge of about 2 percentage points remained over Indian CPI.

  • The fiscal position was in surplus the past two fiscal years, on account of under-execution of spending. As a result, public debt fell to 28 percent of GDP by mid-2014. The trend of budget under-execution has continued, indicating that a small fiscal surplus looks again likely in 2014/15 (mid-July 2014 to mid-July 2015).

  • The external position remained strong. The current account surplus reached 4.6 percent of GDP in 2013/14, as remittances continued to grow rapidly, reaching a record-high 28 percent of GDP. Net of remittances, however, Nepal ran a current account deficit of 23.6 percent of GDP in 2013/14. Reserves rose to US$6.3 billion by mid-April 2015, equal to 29 percent of GDP and covering almost eight months of prospective imports.

Figure 1.Recent Macroeconomic Developments

Figure 2.Recent Fiscal and Monetary Developments

Public Debt and Current Account Balance

(In percent of GDP)

Sources: Nepali authorities; and IMF staff estimates

The Impact of the Earthquake

7. The disaster’s impact is likely to be severe, both in the short and medium run (Figure 3):

  • Growth is expected to slow. On June 8, Nepal’s Central Bureau of Statistics released a revised GDP projection for 2014/15 with growth falling to 3.4 percent in the year to mid-July 2015, compared to staff’s pre-earthquake baseline forecast of 5.0 percent. The tourism sector which generated about 2½ percent of GDP in foreign currency earnings last year has been particularly affected. As economic activity recovers and reconstruction gains momentum, growth is expected to gradually rebound to around 5.5 percent in 2016/17. Based also on experience in other fragile countries struck by natural disasters, potential growth is projected to be adversely affected by the earthquake, falling to around 4 percent over the medium term.

  • Inflation pressures are likely to rise. Losses in agricultural production and damage to transport systems will lead to reduced supply of agricultural products, which account for some 40 percent of the CPI basket. Stepped-up foreign aid and higher inflows of remittances would further boost the liquidity in the financial system, putting pressure on the central bank which has been reluctant to sterilize foreign inflows. Over time, however, as agricultural production recovers and transportation infrastructure improves, inflation pressure should ease.

  • The fiscal impact of the earthquake will also be significant. Revenue losses are unlikely to be fully offset by higher duty collection from increased reconstruction-related imports (to the extent these are ODA-financed, they may enter duty free). The much greater impact on the budget will be on the expenditure side because of damage to infrastructure and government properties. In addition to the reconstruction cost in the public sector, the government will likely have to provide financial assistance for the recovery of the business sector and to households, particularly for housing. Financial institutions may also need assistance to help overcome the effects of the earthquake (see last bullet). Donor support is expected to help fund a large part of the recovery and reconstruction expenses, but the government may also need to borrow more to meet the increased spending needs. Thus, both the fiscal deficit and public debt could likely increase in the medium-term.

  • The external current account will likely be pushed into deficit. Imports of reconstruction-related materials will rise. Tourism receipts, a key source of Nepal’s foreign exchange earnings, could fall by some 1½ percent of GDP in 2015/16 compared with 2013/14, and experience in other countries suggests that recovery could take several years. A temporary surge of remittances is likely as the Nepalese diaspora and migrant workers send more money home to support the reconstruction efforts. However, these one-off higher inflows will be more than offset by higher imports, pushing the current account to a deficit of about 4 percent of GDP on average during the next 5 years.

  • An urgent balance of payments has arisen, reflected in a financing gap. Without the mobilization of substantial exceptional donor financing, the deterioration in the external current account would cause the central bank’s foreign reserves to fall significantly in 2015/16 and over the medium term. As illustrated in Table 6, without the RCF disbursement and exceptional support from other donors—which could in part be catalyzed by the RCF disbursement—central bank reserves would fall to about 5 months of imports. This is well below Nepal’s reserve adequacy metric suggesting that reserves should be maintained at the current level of about 7 months of imports (Box 2). It is envisaged that with concerted support from the Fund and development partners, Nepal’s official reserves could be maintained at about 7 months of prospective imports (excluding construction-related imports) over the next few years.

  • The financial sector’s asset quality would be expected to deteriorate. The damages and economic disruption caused by the earthquake could affect the loan portfolio of banks, microfinance institutions and cooperatives, particularly in rural areas where borrowers lost lives and livelihoods. Initial estimates of the financial hit to the banks (NR 38 billion or about 1.8 percent of GDP) and the insurance sector (NR 3 billion, net of reinsurance provided by foreign reinsurers) seem manageable. However, more data and diagnostics are needed to allow accurate assessments of the impact of damage to real estate and there could still be a need for budgetary support for the financial sector.

Figure 3.Earthquake Impact on Key Macro-Variables

Table 1.Nepal: Selected Economic Indicators, 2010/11–2015/16 1/
Output and prices (annual percent change)
Real GDP3.
CPI (period average)
CPI (end of period)9.711.
Nonfood CPI (end of period)7.611.27.26.8
Fiscal Indicators (in percent of GDP)
Total revenue and grants17.718.719.320.821.320.321.621.8
Net acquisition of nonfinancial assets3.
Net lending/borrowing−1.0−−2.3
Net acquisition of financial assets1.
Net incurrence of liabilities2.02.2−1.0−
Money and credit (annual percent change)
Broad money12.322.716.319.115.513.116.518.3
Domestic credit13.78.016.913.914.511.618.025.7
Private sector credit13.111.320.218.318.214.620.226.4
Balance of Payments
Current account (in millions of U.S. dollars)−181909635908880585594−809
In percent of GDP−−3.4
Trade balance (in millions of U.S. dollars)−4,470−4,605−5,247−6,082−6,412−6,575−7,230−8,361
In percent of GDP−23.5−24.4−27.2−30.8−29.6−31.0−30.4−35.4
Exports value growth (y/y percent change)13.25.0−−
Imports value growth (y/y percent change)10.23.410.914.
Workers’ remittances (in millions of U.S. dollars)3,5454,4144,9315,5435,8266,1636,2516,700
In percent of GDP18.623.425.628.026.929.026.328.4
Gross official reserves (in millions of U.S. dollars)3,0854,3074,9726,1726,7376,6657,4016,622
In months of prospective GNFS imports5.
Memorandum items
Public debt (in percent of GDP)14.713.732.328.324.425.123.026.5
GDP at market prices (in billions of Nepalese rupees)1,3671,5271,6951,9422,1702,1252,4232,409
GDP at market prices (in billions of U.S. dollars)19.018.919.319.8
Exchange rate (NRs/US$; period average)71.981.088.098.2
Real effective exchange rate (eop, y/y percent change)1.2−4.6−2.3−9.3
Sources: Nepalese authorities; and IMF staff estimates and projections.

Fiscal year ends in mid-July.

Sources: Nepalese authorities; and IMF staff estimates and projections.

Fiscal year ends in mid-July.

Table 2.Nepal: Summary of Government Operations, 2010/11–2015/16 1/
(In billions of Nepalese rupees)
Total revenue and grants242285327404496463430523620526
Total revenue197244296357423408391460510459
Tax revenue172207260312375360342406460405
Non-tax revenue26383645484848545055
Of which: Interest payments13151412232323153411
Salaries and allowances45535168908181107109108
Net acquisition of nonfinancial assets475152641178582102168158
Operating balance344286106971099012158102
Net lending/borrowing−13−103542−1924820−110−56
Net financial transactions1310−35−4219−24−8−2013456
Net acquisition of financial assets14241818503321363636
Net incurrence of liabilities2734−16−25698131717092
(In percent of GDP, unless otherwise indicated)
Total revenue and grants17.718.719.320.823.421.320.321.625.421.8
Total revenue14.416.017.518.419.918.818.419.020.919.1
Tax revenue12.613.515.316.117.616.616.116.718.916.8
Non-tax revenue1.
Of which: Interest payments0.
Salaries and allowances3.
Net acquisition of nonfinancial assets3.
Operating balance2.
Net lending/borrowing−1.0−−−4.5−2.3
Net financial transactions1.00.6−2.1−2.20.9−1.1−0.4−
Net acquisition of financial assets1.
Net incurrence of liabilities2.02.2−1.0−
Memorandum items
Primary balance0.−3.1−1.9
Reconstruction-related expenditure3.0
Public debt14.713.732.328.324.425.123.026.5
GDP (in billion of Nepalese rupees)1,3671,5271,6951,9422,1252,1702,1252,4232,4392,409
Sources: Data provided by the Nepalese authorities, and Fund staff estimates and projections.

Fiscal year ends in mid-July. Table refers to central government operations as contained in the budget.

Based on the authorities’ data and Fund staff assumptions.

Based on the authorities’ data from Post-Disaster Needs Assessment (PDNA) and Fund staff assumptions.

Sources: Data provided by the Nepalese authorities, and Fund staff estimates and projections.

Fiscal year ends in mid-July. Table refers to central government operations as contained in the budget.

Based on the authorities’ data and Fund staff assumptions.

Based on the authorities’ data from Post-Disaster Needs Assessment (PDNA) and Fund staff assumptions.

Table 3.Nepal: Monetary Indicators, 2011/12–2015/16 1/
2011/122012/132013/14May 20152014/152015/16
Nepal Rastra Bank(In billions of Nepalese rupees, end-period)
Reserve money319354437463495485582571
Net domestic assets−54−111−150−214−179−182−182−112
Claims on public sector172−1−6617181622
Claims on private sector55455555
Claims on banks & financial institutions032347522
Other items (net)−77−121−154−155−204−212−208−161
Net foreign assets374465586676674667764683
Monetary Survey
Broad money1,1311,3151,5661,7631,8081,7712,1072,095
Narrow money264302355390551539642638
Net domestic assets7568479671,0551,1231,0931,3311,401
Domestic credit9861,1531,3131,4201,5031,4651,7731,841
Credit to public sector17617916293143145139174
of which: Credit to central government15415414057119121114146
Credit to private sector8109731,1511,3281,3601,3191,6341,667
Other items(net)−230−305−346−365−380−372−442−440
Net foreign assets375468599707685678776694
(Twelve-month percent change)
Reserve money36.410.923.319.413.511.117.517.7
Broad money22.716.319.119.015.513.116.518.3
Net domestic assets7.
Domestic credit8.016.913.915.814.511.618.025.7
Credit to public sector−4.91.9−9.9−16.3−11.9−10.1−2.619.4
Credit to private sector11.320.218.319.018.214.620.226.4
Net foreign assets73.425.028.020.514.313.113.32.4
Memorandum items
Private credit (in percent of GDP)53.057.459.363.462.762.167.469.2
GDP at market prices (in billions of NR)1,5271,6951,9422,0942,1702,1252,4232,409
Source: Nepalese authorities; and IMF staff estimates and projections.

Prior to July 2010, broad money survey consists of central bank and commercial banks only. After July 2010, broad money survey includes development banks and finance companies as well.

Source: Nepalese authorities; and IMF staff estimates and projections.

Prior to July 2010, broad money survey consists of central bank and commercial banks only. After July 2010, broad money survey includes development banks and finance companies as well.

Table 4.Nepal: Balance of Payments, 2011/12–2019/2
(in million US dollars)
Current account909635908880585594−809267−664−44−648−313−382−587−121
Current account (excluding official transfers)515378547487309179−1,328−161−1,140−486−1,150−765−883−1,089−636
Trade balance−4,605−5,247−6,082−6,412−6,575−7,230−8,361−8,099−9,078−9,002−9,849−9,888−10,416−10,863−11,046
Exports, f.o.b.1,0089771,0301,0509681,1039781,1641,0311,2331,0931,3071,1581,3851,227
Imports, f.o.b.−5,613−6,224−7,112−7,462−7,543−8,333−9,339−9,263−10,109−10,236−10,942−11,195−11,574−12,249−12,273
Services (net)17587214207−139221−610225−367233−313239−211244−130
Of which: tourism380390473521319570118610130655226698359744475
Current transfers5,1925,6486,4426,7396,9597,2357,7977,7468,3788,3039,0768,8859,7819,55110,563
Credit, of which:5,2545,7326,4776,8347,0527,3397,9007,8588,4918,4229,2009,0139,9129,68710,702
General government394257362393288415532428491442517452518501533
Workers’ remittances4,4144,9315,5435,8266,1636,2516,7006,7107,2657,2087,8847,7378,5488,3079,273
Capital account221117173205149216295222199229198234213260209
Financial account303−50−19−51532−137431100601334865321867597910
Direct investment112102334848636378789393108108226231
Portfolio investment000000000000000
Other investment (net)191−152−51−563−16−20036822524242773213760371679
MT debt (net)11−1345102152127683164573265623331544371444
Other (net)180−139−96−665−168−326−315−141−49−23150−1182160235
Errors and omissions2283712601270000000000
Overall balance1,6617391,189570893673−84589136520415242698270998
Change in reserve assets (- =increase)−1,222−665−1,200−565−888−66443−581−128−514−410−238−694−270−994
Use of IMF resources (net)−3−5−6−5−5−941−8−8−5−5−4−4−4−4
IMF Disbursements0000005000000000
IMF Repayment356559988554444
Memorandum items
Current account (in percent of GDP)−3.41.0−2.6−0.2−2.3−1.1−1.3−1.9−0.4
Current account, excl. grants (in percent of GDP)−5.6−0.6−4.4−1.8−4.1−2.6−2.9−3.5−2.0
Trade balance (in percent of GDP)−24.4−27.2−30.8−29.6−31.0−30.4−35.4−31.9−34.9−33.0−34.9−34.0−34.8−35.0−34.9
Exports (in percent of GDP)
Imports (in percent of GDP)29.832.336.034.435.535.139.536.438.937.538.838.538.739.538.8
Exports (y/y percent change)5.0−−
Imports (y/y percent change)3.410.914.
Remittances (in percent of GDP)23.425.628.026.929.026.328.426.427.926.427.926.628.626.829.3
Remittances (y/y percent change)24.511.712.
Total external debt (in percent of GDP)
Debt service (in percent of current account receipts)
Gross official reserves (in millions of U.S. dollars)4,3074,9726,1726,7376,6657,4016,6227,9826,7508,4967,1598,7347,8539,0048,847
In months of prospective GNFS imports7.
excluding reconstruction-related imports8.
As a share of broad money (in percent)33.936.037.9
Nominal GDP (in millions of U.S. dollars)18,85219,27019,77021,239
Sources: Nepalese authorities; and IMF staff estimates and projections.
Sources: Nepalese authorities; and IMF staff estimates and projections.
Table 5.Nepal: Macroeconomic Framework, 2011/12–2019/20 1/
Output and prices (annual percent change)
Real GDP4.
CPI (period average)
CPI (end of period)
Nonfood CPI (end of period)
Fiscal Indicators (in percent of GDP)
Total revenue and grants18.719.320.821.320.321.621.821.821.922.
Net acquisition of nonfinancial assets3.
Net lending/borrowing−−2.30.5−2.10.4−1.50.1−0.10.1−0.3
Net acquisition of financial assets1.
Net incurrence of liabilities2.2−1.0−
Money and credit (annual percent change)
Broad money22.716.319.115.513.1
Domestic credit8.016.913.914.511.6
Private sector credit11.320.218.318.214.6
Balance of Payments
Current account (in millions of U.S. dollars)909635908880585594−809267−664−44−648−313−382−587−121
In percent of GDP4.−3.41.0−2.6−0.2−2.3−1.1−1.3−1.9−0.4
Trade balance (in millions of U.S. dollars)−4,605−5,247−6,082−6,412−6,575−7,230−8,361−8,099−9,078−9,002−9,849−9,888−10,416−10,863−11,046
In percent of GDP−24.4−27.2−30.8−29.6−31.0−30.4−35.4−31.9−34.9−33.0−34.9−34.0−34.8−35.0−34.9
Exports value growth (y/y percent change)5.0−−
Imports value growth (y/y percent change)3.410.914.
Workers’ remittances (in millions of U.S. dollars)4,4144,9315,5435,8266,1636,2516,7006,7107,2657,2087,8847,7378,5488,3079,273
In percent of GDP23.425.628.026.929.026.328.426.427.926.427.926.628.626.829.3
Gross official reserves (in millions of U.S. dollars)4,3074,9726,1726,7376,6657,4016,6227,9826,7508,4967,1598,7347,8539,0048,847
In months of prospective GNFS imports7.
Memorandum items
Reconstruction-related expenditure (in percent of GDP)
Public debt (in percent of GDP)13.732.328.324.425.123.026.522.327.522.028.422.128.422.628.8
GDP at market prices (in billions of Nepalese rupees)1,5271,6951,9422,1702,1252,4232,4092,6862,7482,9743,0773,2773,3693,5953,671
GDP at market prices (in billions of U.S. dollars)18.919.319.8
Exchange rate (NRs/US$; period average)
Real effective exchange rate (eop, y/y percent change)−4.6−2.3−9.3
Sources: Nepalese authorities; and IMF staff estimates and projections.

Fiscal year ends in mid-July.

Sources: Nepalese authorities; and IMF staff estimates and projections.

Fiscal year ends in mid-July.

Table 6.Nepal: External Financing Requirements and Sources, 2013/14–2019/20(In millions of U.S. dollars)
Gross external financing requirements−296171179313521164843580
Current account excluding official transfers (+ = deficit)−563−309132811401150883636
Amortization of medium- and long-term debt171185150163165177178
Of which: Asian Development Bank64788384848787
Of which: World Bank45525555565757
Of which: Paris Club12212222232323
Other net capital outflows9629531549−150−216−235
Available financing−439312904812631394250
Current and capital grants excluding exceptional financing518425413455494524554
Medium- and long-term borrowing216338394416458460462
Of which: Asian Development Bank190190190190190190
Of which: World Bank115170190230230230
FDI, net3348637893108231
Portfolio investment, net0000000
Gross reserves accumulation (+ = decrease)−1206−49834−136−414−698−998
Exceptional financing00889539534450330
IMF: Prospective arrangement00500000
Asian Development Bank007050606010
World Bank001505050500
Other development partners00619439424340320
Of which: current and capital grants00400220205190170
Of which: loans00219219219150150
Memorandum items
Gross official reserves (in millions of U.S. dollars)6172666566226750715978538847
In months of prospective imports excl. reconstruction-related imports8.
Gross official reserves without exceptional financing6172666557335322519654406104
In months of prospective imports excl. reconstruction-related imports8.
Sources: Nepalese authorities; and IMF staff estimates and projections.
Sources: Nepalese authorities; and IMF staff estimates and projections.

8. The impact of the earthquake is subject to considerable margins of error:

  • The Post-Disaster Needs Assessment (PDNA) was put together within 2 months after the first earthquake. Experience in other cases has shown that it is more important to get an earlier start to the reconstruction effort than to spend more time, aiming to obtain a more precise damage assessment.

  • It remains to be seen how rapidly the private sector (e.g., tourist operators, farmers, and SMEs) can recover from the disaster. For instance, it could take some time for the tourism sector to regain the momentum of the last few years. In that case, the cumulative loss from the earthquake could be larger. The impact on remittances is also uncertain. Crosscountry research has shown that remittances have typically increased in response to disasters, especially for countries that have large numbers of migrants living abroad, such as Nepal.2 The inflow of remittances did indeed set a new record in the month after the disaster. But Nepal’s case could be somewhat different. The bulk of its migrants move abroad alone, on a temporary basis. They have already been sending most of their earnings to their families back home and might not be able to provide a sustained higher flow of remittances in response to the disaster. There are also some indications that some migrants returned home to help with reconstruction.

  • In addition to the amount of external financing received, the speed of Nepal’s recovery will depend on the extent to which Nepal’s absorptive capacity is increased by addressing implementation bottlenecks, as well as effective coordination among donors and implementing agencies within the government.

Policy Issues and Discussions

Experience in other countries has shown that the recovery and reconstruction after a natural disaster such as the recent earthquake takes considerable time, especially in low-income countries with weak implementation capacity. In light of this, discussions focused on policy measures to support Nepal’s recovery while maintaining macroeconomic and financial stability.

9. The aid pledges received from donors exceeded the authorities’ expectations. Mobilizing sufficient fiscal resources for reconstruction had been considered a critical challenge. Immediately after the earthquake, before comprehensive estimates of the damage were available, Nepal’s Cabinet called on donors to fund a NR 200 billion (equivalent to US$2 billion or about 10 percent of GDP) Earthquake Relief Fund for Reconstruction and Rehabilitation. Pledges of grants and loans totaling US$4 billion over the next 5 years will allow the government to scale up capital spending while keeping domestic government borrowing to a minimum and hence preventing crowding out domestic banks’ financing of private sector reconstruction.

10. Thanks to the concessionality of the aid, Nepal’s risk of debt distress remains low. In the context of the 2014 Article IV consultation the risk of debt distress was assessed to have improved from “moderate” to “low.” Since then, public debt moderated more than projected, to 28 percent of GDP by mid-2014. An updated joint IMF/World Bank Debt Sustainability Analysis which takes into account the concessional loans offered by Nepal’s development partners at the donor conference, concludes that Nepal’s risk of debt distress remains low.

11. The authorities agreed that strengthening public financial management (PFM) will be key to the swift and efficient implementation of reconstruction efforts and enhance the quality of public investment both in the near- and longer-term. The earthquake has added urgency to the need to improve capital budget execution. Recent technical assistance by the IMF’s Fiscal Affairs Department proposed practical measures that can be implemented by the authorities in the short-run (Box 3). These measures are aimed at strengthening medium-term budget planning, establishment of a robust appraisal function, development of targeted selection and prioritization criteria as well as improved use of the monitoring processes in project implementation. The authorities have taken steps in two areas:

  • To speed up reconstruction in the country’s districts most affected by the earthquake, the government announced the creation of the National Reconstruction Authority:

    • ✓ The authorities note that this is an Extra-Ordinary Mechanism informed by international practices and is grounded on past experience in Nepal in dealing with natural disasters and shocks. The authority will be subject to a sunset clause of a maximum of six years.

    • ✓ The Authority, which will have its own staff, will be led by the Prime Minister. A chief executive officer will be appointed to implement the reconstruction work, benefitting from the ability to fast-track public procurement, land acquisition and environmental impact assessments—steps that have emerged as stumbling blocks in recent years for speedy completion of projects.

    • ✓ To allay concerns about transparency, accountability and the effective use of the earthquake relief funds, the authorities have committed to provide a substantial role for scrutiny and shared responsibility assigned to domestic civil society and international development partners.

  • With regard to the implementation of the “regular” capital budget, steps are being taken to prevent delays and shortfalls. For instance, for spending items included in the approved budget, government bodies will no longer be required to obtain authorization from the District Development Committee, the line ministry and the NPC, a process that could take up to six months. As a result, after the adoption of the budget, government bodies should henceforth be able to immediately start the tendering process. Similarly, multi-year projects included in the approved budget in one year no longer need to be reauthorized at the start of each fiscal year. Moreover, going forward, a project will only be included in the budget if a feasibility study has been done, and if environmental assessment and land acquisition requirements have been completed.

  • The recently secured consensus among major political parties to promulgate a new constitution and to hold elections for local governments as early as possible is expected to boost accountability with regard to the pace and quality of local government spending.

12. Staff recommended protecting priority social spending—including spending on health and education which has increased significantly in recent years—to mitigate the negative impact of the earthquake on poverty. Experience in other low-income countries has shown that the impact from natural disasters is more pronounced on poverty and social welfare as divestment of limited physical capital by the poor—such as the sale of livestock to fund current consumption—can lead to a long-term decline in productive capacity. A contingency plan should be developed in case the earthquake-related damage and cost to the budget turns out much larger than currently expected. Early estimates suggest that an additional 3 percent of Nepal’s population has been pushed into poverty as a direct result of the earthquakes. This translates into as many as a million more poor people. In this context, it should be noted that Nepal’s 13th Development Plan (2013-16) aims at graduating from least-developed country status by 2022. Key objectives of the Plan are to achieve an annual growth rate of 6 percent and bring down the percentage of the population living below the poverty line to 18 percent by FY2016.

13. The authorities agreed that monetary policy should remain accommodative, at least initially. Post-quake recovery and reconstruction will increase the private sector’s financing needs. At the same time, larger aid inflows (on top of surging remittances) could lead to more excess liquidity available in the banking system. Against this background, monetary policy would aim at controlling the level and volatility of excess liquidity, but given the economic disruption, some increase in inflation is inevitable (due to higher transportation and business costs) and would be accommodated. As the economy recovers, however, the Nepal Rastra Bank (NRB) would closely monitor price developments and aim to keep Nepalese inflation close to that in India.

14. The authorities will continue to carry out reforms designed to mitigate financial sector risks which have been amplified by the earthquake. The 2014 FSAP—Nepal’s first—identified a number of financial sector weaknesses, including asset quality issues, interconnections in the financial system, as well as in financial sector infrastructure—including the legal framework—and supervision and crisis preparedness. The NRB has in recent years taken a number of macro-prudential measures to curb risks, and improved its supervision, including with assistance of an MCM resident advisor. These efforts will continue as the NRB looks to build a new headquarters. DFID has restructured its ongoing TA program to respond to the impact of the earthquake and is working with the NRB to establish a disaster recovery centre. On June 29, the Executive Board of the World Bank approved a US$100 million Post Disaster Second Financial Sector Stability Credit. In this context, the authorities reiterated their commitment to a 2014–16 program of financial sector reforms focused on achieving two over-arching objectives; (i) to ensure the stability of the financial system by improving the quality of regulation, supervision, and transparency to levels closer to international norms; and, (ii) to start improving access to formal financial services. These objectives will be supplemented by measures designed to support the financial sector’s recovery from the impact of the earthquake and put in place measures to ensure the operational resilience of the sector in the face of natural disasters.

15. A contingency strategy should be developed in case the earthquake-related damage to property results in much larger non-performing loans. So far, the estimates of the impact on banks’ balance sheets seem manageable and the NRB’s policy response—described in the PDNA as “carefully designed regulatory forbearance [allowing banks] to restructure the debts of viable SMEs and other borrowers for a limited period of time”—appropriate. However, it may take several more months before the true extent of the impact on the banks will be clear. If the impact is considerably larger than currently estimated, banks’ ability to lend to the private sector might be severely constricted. In that case, the NRB might need to respond decisively within a well structured bank restructuring strategy that would need to be designed and implemented urgently. In this regard, the in-depth special inspections of 54 banks started in 2014 can provide important information and should therefore be completed.

16. Nepal’s pegged exchange regime has generally served the country well and will be maintained. The country’s competitiveness has weakened in recent years as external shocks, under-implementation of the government’s capital budget and the slow pace of reforms stifled productive capacity, while loose monetary policies generated higher inflation than in trading partners (including India). Nevertheless, taking into account Nepal’s unique dependence on large remittances inflows, the staff report for the 2014 Article IV consultation concluded that the real exchange rate of the Nepalese rupee is broadly in line with fundamentals.

17. Structural reforms will be crucial to improving competitiveness. Faster growth from improved competitiveness will be critical to support the recovery from the earthquake and reduce Nepal’s vulnerabilities. While better public infrastructure would provide a significant impetus to inclusive growth, reforms to reduce the regulatory burden are a necessary complement. Accelerating the development of Nepal’s vast hydropower potential and large privately-financed infrastructure projects would also provide a boost to confidence. The World Bank and the ADB have committed substantial funds to support a broad range of sectoral reforms. However, owing to slow project implementation and uptake of reforms, undisbursed project loan commitments from these two organizations now exceed 7 percent of GDP.

18. The authorities expressed interest in longer-term Fund engagement, possibly through the Extended Credit Facility (ECF). They agreed that an ECF-supported program aimed at improving governance and public financial management and addressing some of Nepal’s entrenched structural challenges, including financial system weaknesses, could help speed up the recovery from the earthquake and set the stage for the next phase of Nepal’s growth and development. Discussions will commence in the coming months.

Access and Capacity to Repay

19. The Nepalese authorities have requested a disbursement under the Fund’s Rapid Credit Facility in the equivalent of SDR 35.65 million (US$50 million), equivalent to 50 percent of quota. The disbursement, which amounts to ¼ percent of GDP, will provide much needed financial support to address urgent balance of payments and fiscal needs resulting from the April 25, 2015 earthquake. The amount represents only a small share of the earthquake’s cumulative impact on the budget and balance of payments over the coming years. The Fund’s support complements financing from other multilateral institutions, most notably the Asian Development Bank and the World Bank, as well as bilateral development partners. Along with the macroeconomic framework provided by the Fund to help identify Nepal’s financing needs, the Fund’s financial support is also expected to play a catalytic role in firming up the generous aid pledged by other development partners and donors.

20. Nepal has adequate capacity to repay the Fund despite outstanding RCF and ECF disbursements. As most of Nepal’s public debt is concessional, its debt service is low relative to projected foreign reserves and government revenue. Nepal’s debt to GDP ratio has decreased in recent years and the bulk of its debt is long term and owed to the World Bank and ADB.

21. The authorities are committed to undertake an update of the safeguards assessment. A safeguards assessment was undertaken in May 2011 in connection with the 2010 RCF disbursement. The assessment noted that the external audit mechanism needed improvement, since the audit procedures did not meet international standards. Also, the NRB’s financial reporting would be strengthened by resolving the many qualifications raised by the external auditors each year.

Staff Appraisal

22. Nepal was hit by a powerful earthquake. Many lives were lost and the damage to houses, government buildings and infrastructure is large. Reconstruction will take time and will require the assistance of the international community. In this context, as outlined in their letter accompanying this staff report, the authorities have requested a disbursement of Fund resources equivalent to 50 percent of quota under the shocks window of the Rapid Credit Facility. Before the earthquake, Nepal’s macroeconomic performance was broadly favorable but the government’s weak budget implementation capacity held back growth and propped up the external position.

23. The authorities’ main challenge has been to boost their capacity to plan, prioritize, and implement capital spending. To address the persistent under-implementation of the capital budget notwithstanding strong revenue performance, the authorities are simplifying administrative procedures for capital spending and they have established a National Reconstruction Authority to speed up reconstruction in the country’s districts that were affected the most by the earthquake. Coordination between the National Reconstruction Authority and the annual budget process is crucial to ensure the transparent, accountable, and effective use of the earthquake relief funds.

24. The authorities remain committed to medium term fiscal and debt sustainability. The fiscal balance is expected to turn into a deficit in 2015/16, owing to earthquake-related spending, but the authorities have sought, and obtained pledges for, grants and concessional resources to finance capital expenditure related to the rehabilitation and reconstruction and safeguard debt sustainability.

25. The authorities are also committed to maintain financial sector stability. So far, the estimates of the impact on banks’ balance sheets seem manageable and the central bank’s policy response of temporary limited regulatory flexibility with regard to the restructuring of the debts of viable SMEs and other borrowers appropriate. A contingency strategy should be developed in case the earthquake-related damage to property results in much larger non-performing loans.

26. Staff supports the authorities’ request for a disbursement under the Rapid Credit Facility in the amount of SDR 35.65 million (50 percent of quota, equivalent to US$50 million). Staff support is based on the severity of the damages, the urgent balance of payments need, and the authorities’ policy commitments, including seeking grants and concessional resources to finance earthquake-related capital expenditures. The latter, along with the authorities’ track record and commitment to fiscal prudence, mitigate risks for the Fund.

Box 1.Nepal: Damage from the 2015 Earthquake

A Massive earthquake and hundreds of aftershocks caused widespread damage. The Post Disaster Needs Assessment (PDNA) estimates recovery and reconstruction costs at US$7 billion over the next five years.

On April 25, 2015, a magnitude 7.8 earthquake struck the historic district of Gorkha in Nepal, about 76 km northwest of Kathmandu. This was the most severe earthquake that Nepal, an earthquake prone country, has experienced since the magnitude 8.4 earthquake that hit in 1934, killing more than 10,000 people. The April 25 earthquake was followed by more than 300 aftershocks greater than magnitude 4.0, including one measuring 7.3 on May 12. To date, there are more than 8,800 casualties and 22,300 injuries. An estimated 8 million people have been affected. Fourteen of the country’s 75 districts were declared ‘crisis-hit’ (see Figure 1) for the purpose of prioritizing rescue and relief operations, and another 17 neighbouring districts are partially affected. Poorer, rural areas have been more adversely affected than towns and cities due to their inferior quality of houses, and more females died than males because of roles that assign indoor chores to women. The loss of life could have been much higher were in not for the fact that the first earthquake took place on a Saturday, the weekly holiday, and during the daytime.

Figure 1.Categories of Earthquake-Affected Districts

Source: GoN/MoHA as of 21 May 2015

Days after the May 12 aftershock, the government of Nepal called for a Post Disaster Needs Assessment (PDNA) to be carried out under the leadership of the National Planning Commission (NPC), with the purpose of assessing the impact of the disaster and defining a recover strategy, including funding implications, for the restoration of livelihoods, economy and services, rehabilitation and reconstruction of housing and infrastructure. Over 250 officials and experts from the government and 30 development partner agencies were organized into 23 thematic groups. Each group had a dedicated Joint Secretary assigned from the directly relevant line ministry and the NPC to work together with a lead agency on the part of development partners. These joint teams undertook an intensive exercise of data collection, field visits and verification, from May 22 to June 10.2 The key findings of the PDNA were presented at the International Conference on Nepal’s Reconstruction (ICNR) on 25 June.

The PDNA follows a methodology developed by the European Union, the World Bank and the UN system for post-disaster assessments and recovery planning to ensure sector-to-sector comparability and homogeneity in the definition of basic concepts of damages, losses and post-disaster recovery needs. The assessment builds on the initial and detailed sector damage assessments undertaken by central and local governments and the clusters established by the government with support from development partners. For each sector or thematic group, the PDNA works with three main concepts: (i) damage, (ii) losses, and (iii) recovery needs. Damage represents the value of destroyed physical assets, and losses represents the losses and higher costs of production of goods and services arising from the disaster. The recovery needs estimates do not not simply consider the replacement value (particularly with respect to the housing sector), but take into account the cost of reconstruction with better specifications, equipment, improved governance and risk reduction while maintaining fiscal prudence and acceptable levels of recovery.

The total value of disaster effects (damages and losses) caused by the earthquake is estimated at NR 706 billion (US$ 7 billion). Of that amount, NR 517 billion (or 76 percent) represents the value of destroyed physical assets, and NR 189 billion (24 percent) reflects economic losses from the disaster (see Table 1). Disaster effects are spread unevenly between public and private sectors, with the private sector sustaining about 3.3 times the value of damages and losses of the public sector.

Table 1.Disaster Effects(NR billions)
Damage + LossesShare
Social Sectors57.8
Housing and human settlements350.549.6
Health and Education38.95.5
Cultural heritage19.22.7
Productive Sectors25.2
Infrastructure Sectors9.5
Community Infrastructure3.30.5
Water and Sanitation11.41.6
Cross-cutting Issues7.5
Disaster Risk Reduction0.20.0
Environment and Forestry34.04.8

Almost fifty percent of the damage and loss occurred in the housing and human settlements sector: 498,852 houses were destroyed and 256,697 houses were partially damaged as of May 28. Healthcare infrastructure, including health facilities, toilets, and water systems have been destroyed and nearly 7,000 schools were completely or significantly damaged. Among the productive sectors, tourism has been severly affected and the overall impact of the earthquake will go beyond the 14 most affected districts, with tourist arrivals likely staying low for a few years. Aside from the Kathmandu Valley, the central and western regions that have been affected by the earthquake are essentially rural and dependent on agriculture for livelihood. The widespread loss of livestock in these areas, a main source of income for households, will potentially cause a severe income shock in the short term.

Box 2.Nepal: Assessing Reserve Adequacy

Nepal’s reserves have risen in recent years and now exceed standard “rules of thumb” thresholds for adequacy. In view of the peg to the Indian rupee, the need to be able to absorb external shocks and the low opportunity cost of holding reserves, Nepal’s reserves should be maintained at the current level of about 7 months of imports.

Nepal’s international reserves have grown steadily over the last five years, driven in large part by remittance inflows. At the end of 2013/14 reserve holdings (including the central bank’s holdings of Indian rupees) stood at US$6.17 billion, corresponding to 8.3 months of prospective import cover (Figure 1).1 As of May 2015, reserve holdings peaked at US$6.7 billion. Nepal’s reserve position is higher than suggested by standard “rules of thumb,” such as coverage of 3 months of imports of goods and services, 100 percent of short-term debt and 20 percent of broad money in the economy (Table 1).

Table 1.Rules of Thumb: Reserves Coverage in 2013/14
Reserves coverage in months of imports8.3
Reserves as a share of short term external debt3333%
Reserves as a share of broad money (M2)38%

IMF WP/11/249 develops a framework to determine the optimal levels of reserves specifically in low income countries. Taking into account the exchange rate regime, it assumes that countries try to maximize the net benefit of holding international reserves by balancing the cost of holding reserves against the benefits of precautionary reserve holdings as insurance against adverse external shocks.

Calibrating the model for Nepal yields optimal levels of reserves of about 7 months of import cover depending on assumptions about the cost of holding reserves (Figure 2):

  • The opportunity cost of holding reserves can be seen as the sterilization cost incurred by the central bank when it purchases foreign exchange (see IMF 2013).1 This is proxied using the return on 364 day T-bills adjusted for an exchange rate risk premium, resulting in an opportunity cost of 1.9 percent. This implies optimal reserve holdings equivalent to 10 months of imports coverage.

  • The opportunity costs could also be approximated by the return on investing the funds in Nepal’s economy. For instance, the government could decide to invest more in transportation infrastructure. This would likely provide for good economic returns. However, at the moment bottlenecks in capital budget execution prevent Nepal from reaping the full benefits from such additional investment.

Figure 2.Optimal Levels of Reserves

(Months of current imports)

Sources: IMF staff calculations.

Gross Official Reserves

Sources: Nepali authorities; and IMF staff estimates.

1 IMF (2013), “Assessing Reserve Adequacy –Further Considerations,” IMF Policy Paper, November 13, 2013.

Box 3.Raising Capital Budget Execution in Post-Earthquake Nepal

Capital budget execution has remained weak. Over the past three fiscal years, about 20 percent of the national budget (or some 4.3 percent of GDP) was allocated to capital spending annually. However, about a quarter of the capital budget remained unspent each year and capital spending averaged only 3¼ percent of GDP per annum, notwithstanding the large infrastructure gaps and slight revenue over-performance.

The execution of capital expenditure also lags behind recurrent expenditure and is concentrated towards the end of the fiscal year. In 2012/13 and 2013/14 more than a third of actual capital expenditure was realized during the final month of the fiscal year. Furthermore, despite an increase in the year-on-year growth of capital expenditure from 5 to 20 percent, budget execution actually fell from 80 to 72 percent between 2012/13 and 2013/14.

Nepal’s arrangements for capital budget management require fundamental changes in order to increase the efficiency of capital expenditure. Recent FAD PFM technical assistance missions1 have concluded that Nepal falls short in many aspects of good international practices in capital budget management, and have identified several issues in the areas of planning, allocation and delivery, including:

  • Planning. The government’s 13th Development Plan provides limited guidance to the capital budget planning and prioritization. Furthermore, the guidelines for project preparation and approvals are not strictly observed and the approval process is not obvious.

  • Allocation. The share of “priority projects” is too high. This places undue pressure on the allocation of available resources; results in underfunding; stretches the delivery period; and leads to cost overruns. The capital budget process also has a short-term focus and planning is poorly matched with the budget allocation process.

  • Delivery. Resource allocation issues lead to uncertainty and thus hamper project implementation. Monitoring practices are ineffective although a number of institutions are involved (including NPC and MOF), and little attention is given to implementation plans and management of project adjustments.

Capital Budget

(In percent of budget target)

Sources: Nepali Authorities; and IMF Staff Estimates

Summary of Fiscal Developments


Growth (y/y, %)
Tax revenue26201915
Total Revenues21211912
Execution (%)
% of budget1021017974
% of projected1031028179
Growth (% y/y)
Execution (% budget)

Expenditure figures based on treasury data

Sources: Nepali authorities; and IMF staff estimates.

Expenditure figures based on treasury data

Sources: Nepali authorities; and IMF staff estimates.

Budget Execution Rate

(In percent)

Sources: Nepali authorities; and IMF staff estimates.

Establishing proper and transparent planning, selection and implementation for major capital projects is a priority. Among other recommendations, the FAD PFM technical assistance mission proposed that a specialized organizational unit be established in the NPC to manage the appraisal, approval and monitoring of the preparation of the capital budget projects. Furthermore, the mission recommended that responsibilities of the MOF and NPC be clearly defined, with the MOF focusing on the budget formulation process and NPC making sure that the government’s development strategy is reflected in the budget. Should the authorities be interested in implementing the mission’s recommendation, then the Fund (FAD) can respond by providing resources to assist the establishment of improved planning, selection and implementation for major capital projects. This could consist of the provision of intensive technical assistance in various modalities ranging from an HQ mission to a resident long-term advisor.

Past FAD PFM technical assistance has already identified some practical measures that can improve capital budget execution and that are implementable in the short run. These include but are not limited to:

  • Planning. The medium-term expenditure framework should be reestablished and strengthened to complement medium-term budget planning. In addition, a robust and competent function for appraisal of major capital projects should be established, preferably in the NPC. This function should also be responsible for developing the appraisal system and for preparing and streamlining relevant regulations and guidelines. Finally, mechanisms for independent review of major projects should be introduced as soon as possible to carry out obligatory reviews of all major projects based on the terms of reference provided by the NPC project appraisal office.

  • Allocation. Better targeted selection and prioritization criteria should be developed based on cost benefit analyses, project life cycle and future recurrent costs, project readiness for implementation, as well as associated risks. Consolidated information should be presented to decision-makers, including priority ratings and future maintenance and operational costs.

  • Delivery. Efforts should be directed to refine, streamline and enforce rules and procedures for project implementation, adjustments and completion, Evaluations of major projects should be continued and the findings of these evaluations should be used to readjust projects and inform future project design

The damage wrought by the earthquake has made addressing Nepal’s infrastructure gap more urgent, thus underscoring the importance of boosting the government’s ability to manage capital expenditure as well as complex reconstruction projects. The authorities’ plan to establish the National Reconstruction and Rehabilitation Implementation Committee is comparable to reconstruction efforts of other countries that have experienced natural disasters.2 However, international experience shows that what is crucial for an effective and rapid post-disaster recovery is a comprehensive reconstruction plan that clearly outlines recovery objectives and implementation strategies. In the case of Nepal, such a plan should be underpinned by effective coordination mechanisms that will enhance the ability of line ministries to execute their capital and reconstruction budgets.

1 More details are contained in the following reports:Strengthening the Budget Formulation Process: The Way Forward, IMF Fiscal Affairs Department Technical Assistance Report, May 2014.Strengthening Capital Budget Management to Support Stronger Economic Growth, IMF Fiscal Affairs Department Technical Assistance Report, November 2014.2 For example, Pakistan (Earthquake Reconstruction and Rehabilitation Authority), Chile (Reconstruction Committee), and China (Committee for Restoration and Reconstruction) among others.
Appendix I. Letter of Intent

Ms. Christine Lagarde

Managing Director

International Monetary Fund

700 19th Street, N.W.

Washington, D.C. 20431, USA

July 17, 2015

Dear Ms. Lagarde:

1. The April 25 devastating earthquake and repeated aftershocks have taken a big toll on life, property, cultural heritage and the ambient natural environment. More than 8,800 people have been killed and 22,300 injured, over half a million houses destroyed and another quarter million damaged and three million people rendered homeless. Early estimates suggest that an additional 3 percent of Nepal’s population has been pushed into poverty as a direct result of the earthquakes. This translates into as many as a million more poor people.

2. The recently completed Post-Disaster Needs Assessment (PDNA) estimates the total value of the damages to properties at NR 517 billion or US$ 5.15 billion. Together with estimated economic losses of NR 189 billion or US$ 1.89 billion the total estimated cost of the earthquake amounts to NR 706 billion or US$ 7 billion, equivalent to nearly one third of the Gross Domestic Product (GDP).

3. The disaster has set back Nepal’s efforts to graduate from least developed country status. The agriculture and tourism sectors have been hit hard. We expect economic growth to slow to around 3.04 percent in 2014/15, considerably slower than anticipated prior to the earthquake even though the disaster struck when nine months of the fiscal year had already passed. The total recovery and reconstruction need to be borne by the budget will amount to NR 670 billion or US$ 6.7 billion, or about 31 percent of GDP over the period 2015/16–2020/21. Borrowing such a large amount in the domestic market would reduce the availability of domestic funds for the private sector. In addition to “crowding out” much-needed private sector activity, domestic government borrowing would undo Nepal’s sustained efforts to bring down the public debt. There is also an important external stability aspect to the necessary reconstruction effort as it is expected to boost imports of reconstruction-related materials. Together with shortfalls in foreign currency earnings from tourism and export, this is expected to push the external current account into deficit and lead to a decline in Nepal’s foreign reserves, even after taking into account an increase in remittances from migrant workers to help their families’ rebuilding efforts.

4. In mobilizing fiscal resources for recovery and reconstruction, Nepal will seek external grants and concessional loans as much as possible before resorting to domestic borrowing. So far, including in the context of the June 25 International Conference on Nepal’s Reconstruction (ICNR), we have secured indicative support of about NR 408 billion or US$ 4.08 billion for reconstruction from development partners for the period 2015/16-2019/20. We intend to review development projects that had been in the pipeline before the earthquake and reprioritize them to exploit synergies with reconstruction projects.

5. Nepal’s external position has remained strong. The current account surplus reached 4.6 percent of GDP in 2013/14 as remittances continued to grow rapidly. By mid-April 2015, on the eve of the earthquake, central bank reserves reached US$6.3 billion, equal to 29 percent of GDP and covering almost 8 months of prospective imports of goods and service. However, in view of the very large reconstruction needs, the Government of Nepal would like to request financial assistance from the International Monetary Fund to address Nepal’s urgent balance of payments need and prevent an immediate and severe economic disruption as reconstruction activity gets under way in earnest. The assistance would be a disbursement of SDR 35.65 million (approximately US$ 50 million) under the Rapid Credit Facility (RCF) to ease the pressure on our fiscal resources and official foreign reserves. We would request that the funds be disbursed as direct budget support to the Ministry of Finance’s account at the Nepal Rastra Bank (NRB, Nepal’s central bank). We have been holding extensive discussions with our key development partners on possible financial support and we expect that Fund assistance would help catalyze additional inflows of external resources. Strong support from development partners will allow us to maintain official foreign reserves at about 7 months of prospective non-reconstruction-related imports over the next three years, which will give us an adequate buffer to protect against external shocks and to maintain the exchange rate peg to the Indian rupee.

6. One of the key challenges has been to effectively and efficiently implement the government’s capital budget. This was the case even before the earthquake. We recognize that addressing bottlenecks in capital spending implementation has become even more important in view of the high post-disaster reconstruction needs. To speed up reconstruction in the districts most affected by the earthquake, a law has been already enacted that establishes a Reconstruction Authority whose operations are closely coordinated with the annual budget process. In addition, as part of a broader push to improve capital budget execution we will implement measures aimed at strengthening budget planning, establishment of a robust appraisal function, development of targeted selection and prioritization criteria as well as improved use of monitoring processes in project implementation. In this regard, Nepal intends to take advantage of the recommendations made by a recent technical assistance mission from the IMF’s Fiscal Affairs Department. With the successful mobilization of funds and implementation of reconstruction projects, the fiscal balance is expected to turn into a deficit and public debt is expected to rise. Nevertheless, we remain committed to maintain public debt levels consistent with a “low” risk of debt distress rating.

7. We intend to maintain an accommodative monetary policy stance to support economic recovery and ensure that banks have sufficient liquidity. Given the economic disruption, some increase in inflation may be inevitable. Once economic conditions normalize, we will aim to keep inflation in the neighborhood of that in India. Nepal will continue to implement the financial sector reform program. In fact, the earthquake has raised the stakes for our efforts to strengthen the legal framework and institutional capacity for bank supervision and regulation and for financial crisis management and bank resolution.

8. Nepal will continue to peg the Nepalese Rupee to the Indian Rupee. This arrangement has served Nepal well in minimizing market volatility. Our country’s competitiveness should benefit from our efforts to improve implementation of the government’s capital budget which we expect to encourage private sector investment.

9. The government attaches great importance to implementing its agenda of structural reforms aimed at fostering macroeconomic stability and growth and reducing poverty as laid out in Nepal’s 13th Development Plan (2013-16) which aims at graduating from least-developed country status by 2022. Over the past few years, the treasury single account (TSA) has been rolled out to all 75 districts. Reforms in revenue administration have been pushing up the revenue to GDP ratio. The overall business climate has improved. And we are looking to accelerate the development of Nepal’s vast hydropower potential.

10. The Government of Nepal values its cooperation with the IMF and takes its obligations seriously. We will not introduce measures or policies that would compound balance of payments difficulties. We do not intend to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions, trade restrictions for balance of payments purposes, or multiple currency practices, or to enter into bilateral payments agreements which are inconsistent with Article VIII of the Fund’s Articles of Agreement. Furthermore, we are committed to undergo an update of the safeguards assessment made by the Fund in 2011 in connection with Nepal’s request for assistance under the Rapid Credit Facility in 2010. The audited financial statement for the year ended July 16, 2014 has been published on the NRB website. In addition, we have already authorized the external auditor of the NRB to share relevant documents and hold discussions with Fund staff. Given that financing from the IMF will be used for budget support, a memorandum of understanding will be established between the Government of Nepal and the NRB on their respective responsibilities for servicing financial obligations to the IMF.

11. We authorize the Fund to publish this Letter of Intent and the staff report for the request for disbursement under the RCF.

Sincerely yours,

The Hon. Ram Sharan MahatChiranjibi Nepal
Minister of FinanceGovernor
Government of NepalNepal Rastra Bank

The Post-Disaster Needs Assessment’s estimates for total damage (25 percent of GDP) and economic losses (9 percent of GDP) are considerably less that the relevant thresholds (100 percent of GDP and 25 percent of GDP, respectively) to qualify for IMF debt relief from the Catastrophe Containment and Relief (CCR) Trust.

World Bank Policy Research Working Paper 4972 analyzed a sample of disaster-struck low-income countries and found that for every US$1 of disaster cost, remittances would increase by US$0.5 for a country where the emigrant stock is about 10 percent of the origin country population, such as Nepal. In the subsequent year, the increase would be an additional US$1. Over a period of two years, remittances for such a country would increase by US$1.5.

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