Political turmoil and conflict in Nepal reduced growth in 2005, but, according to the IMF’s annual economic review, inflation was moderate, the overall fiscal deficit was significantly lower than budgeted, the current account and overall balance of payments remained in surplus, and international reserves were adequate. Financial soundness indicators also improved somewhat, thanks to banking sector reforms.
The IMF’s Executive Board commended the authorities for maintaining macroeconomic stability in a difficult environment but noted that the country is at a critical juncture, as political uncertainties and the ongoing insurgency continue to dampen economic growth. Executive Directors encouraged the authorities to address key constraints on growth, maintain macroeconomic stability, and reduce poverty.
|Real GDP (percent change)||–0.6||3.4||3.4||2.5||2½–3½|
|Consumer price index|
|(end of period, percent change|
|from 12 months earlier)||3.5||6.1||2.0||6.6||7–9|
|(after grants, percent of GDP)||4.3||1.6||1.0||0.9||1.2|
|Overall balance of payments|
|(million U.S. dollars)||–39||93||235||24||–2.4|
|Gross official reserves|
|Million U.S. dollars||1,048||1,178||1,471||1,507||1,551|
|Months of imports of goods|
Directors welcomed efforts to mobilize revenue, prioritize expenditure, increase social sector spending, and limit domestic budget financing. They encouraged the authorities to improve tax administration further. Directors also emphasized the need to increase fiscal transparency, improve public expenditure management, and address donor concerns about the quality of spending. To these ends, they suggested broader coverage of off-budget activities and more comprehensive reporting of security-related spending.
Directors called on Nepal to improve the legal framework for financial sector activity and to make progress with loan recovery from large, willful defaulters. Given the importance of remittances for Nepal, Directors also urged that steps be taken to reduce transaction costs.
Also recommended were stepped-up measures to reform public enterprises and governance, with greater attention paid to prominent offenders. Liquidation of unviable loss-making enterprises should also proceed decisively. To encourage private sector activity, Directors called for an upgrading of the regulatory framework and more flexible labor markets. Given the importance of agriculture and the high level of rural poverty, they also encouraged the implementation of policies to raise agricultural productivity, including upgrading rural infrastructure to promote market access for agricultural products.