Nepal: Staff Report for the 2002 Article IV Consultation
Author: International Monetary Fund
Publication Date:
24 Sep 2002
eISBN:
9781451829907
ISBN:
9781451829907
Language:
English
Keywords:
ISCR; CR; government; authorities' poverty reduction objective; anti-money laundering regime; regime; poverty; monetary policy; broad money; private sector; foreign aid; debt service
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This 2002 Article IV Consultation highlights that Nepal’s real GDP growth is estimated to have slowed to 0.8 percent in 2001/02 from 5 percent in the previous year (fiscal year ending mid-July). Agricultural growth slowed to less than 2 percent from more than 4 percent, reflecting irregular rainfall. The output of nonagricultural sectors was largely stagnant, with manufacturing and tourism sectors particularly hit hard by the domestic security situation as well as the global slowdown. Inflation was subdued at about 3 percent, reflecting weak domestic demand and stable Indian prices for most of the year.

Abstract

This 2002 Article IV Consultation highlights that Nepal’s real GDP growth is estimated to have slowed to 0.8 percent in 2001/02 from 5 percent in the previous year (fiscal year ending mid-July). Agricultural growth slowed to less than 2 percent from more than 4 percent, reflecting irregular rainfall. The output of nonagricultural sectors was largely stagnant, with manufacturing and tourism sectors particularly hit hard by the domestic security situation as well as the global slowdown. Inflation was subdued at about 3 percent, reflecting weak domestic demand and stable Indian prices for most of the year.

Executive Summary

Nepal’s main economic problem is poverty reflecting low growth, and the economy has paid a high economic and social price over the years. Pervasive poverty is considered to be among key causes of the six-year old Maoist insurgency. Violence has recently intensified resulting in high human and economic costs. The political environment has also deteriorated as debates on security turned into leadership disputes within the ruling party and resulted in the dissolution of Parliament, a split of the party, and the scheduling of general elections for November. The current government became a caretaker in the interim.

The insurgency and adverse external developments have slowed growth and complicated economic management. Social instability together with the global economic slowdown lowered exports and tourism receipts. GDP growth in 2001/02 slowed to less than 1 percent from about 5 percent a year earlier. The insurgency has also required higher security spending and reduced tax collection. While capital spending was cut back sharply to contain the deficit, domestic financing of the budget was higher than budgeted as foreign financing also declined.

Given the uncertainties related to the security situation and the need to contain domestic financing, the key challenge for fiscal policy is to prioritize spending. Spending needs to be channeled into improvements in basic infrastructure and social service provisions and focus on projects that can be completed so as to enhance growth and reduce poverty. The government is committed to this course of action in its 2002/03 budget. Its efforts need to be accompanied by higher revenue mobilization in the medium run.

The currency’s peg to the Indian rupee has served Nepal well given its close ties with India. To protect the peg, monetary policy should be consistent with a domestic inflation rate similar to that in India.

Structural reforms should focus on financial and public sector reforms. Priority financial sector reforms are to address the weaknesses of the two largest and insolvent commercial banks and strengthen the supervisory capacity of the Nepal Rastra Bank (NRB). Public sector reforms include civil service and public enterprise reforms. Specifically, stronger efforts are needed to reduce overstaffing among lower skill workers and enhance performance incentives for professional staff. The process of privatization of public enterprises, which has stalled for the last three years, needs to be revived.

The authorities have expressed their interest in a PRGF-supported program. The staff has indicated that a more settled political and security situation and satisfactory implementation of the policies outlined above are needed to lay the basis for a new PRGF arrangement. The staff is maintaining a close dialogue with the authorities.

I. Introduction

1. Despite decades of development efforts supported by substantial foreign aid, Nepal remains among the poorest countries in the world. Forty percent of the population lives in poverty. Slow growth (especially of agriculture, which employs 80 percent of labor force) and poor infrastructure and social service delivery reflecting a weak and inefficient public sector are widely recognized as key causes of poverty. In concluding the last Article IV consultation in August 2001, Executive Directors agreed that the primary economic policy challenge was to achieve sustainable strong growth in order to reduce poverty through the adoption of a reform agenda focusing on removing structural impediments to growth while maintaining macroeconomic stability. Directors looked forward to seeing this agenda addressed in a full Poverty Reduction Strategy Paper (PRSP)—expected to be finalized in August—that could be supported by a Poverty Reduction and Growth Facility (PRGF) program.

2. An already difficult economic situation has been complicated in recent months by an intensification of the Maoist insurgency, adverse external developments, and political uncertainties. The insurgency, which started six years ago against the constitutional monarchy, has intensified. Poverty, inequitable access to economic opportunities, and a perception of widespread corruption are considered to be among the root causes of the insurgency (Box 1). Violence has intensified since November 2001 when the insurgents walked away from peace talks and a state of emergency was declared. The economy was further affected by the events of September 11 and the global economic slowdown. Near-term political uncertainty has risen as leadership disputes within the ruling party resulted in the dissolution of Parliament on May 22 and a split of the party. The government has assumed caretaker status pending general elections scheduled for November.

3. Nepal’s deteriorating security situation is attracting international attention. The United States and India are offering limited military assistance. The World Bank and Asian Development Bank (AsDB) together with some bilateral donors are considering budget support to encourage improved governance and service delivery to the poor, although the exact timing of such assistance has not been decided.1 The United Kingdom organized a workshop in June among donors and strategic neighbors (India, China and Russia) to discuss linkages between economic and political developments and security.

II. Recent Economic and Policy Developments

4. Real GDP growth is estimated to have slowed to 0.8 percent in 2001/02 from 5 percent in the previous year due to the deteriorating security situation and adverse exogenous shocks (fiscal year ending mid-July). Agricultural growth slowed to less than 2 percent from over 4 percent, reflecting irregular rainfall. The output of nonagricultural sectors was largely stagnant, down from 5 percent last year. Manufacturing and tourism have been particularly hit hard by the insurgency as well as the global slowdown. Inflation was subdued at around 3 percent (12-month basis), reflecting weak domestic demand and stable Indian prices for most of the year. But with slightly higher food prices in India towards the end of the fiscal year, inflation has recently edged up close to 4 percent by July (Box 2).

Poverty and the Maoist Insurgency1/

Pervasive poverty and a perception of unfairness are considered to be among the root causes of the six-year old Maoist conflict. The population living in poverty increased from 5.7 million in 1976 to an estimated 9.2 million in 1996 accounting for 40 percent of the total population—unchanged during the last two decades. Most of the poor live in rural area—many based on subsistence agriculture—and income disparities between them and those in Katmandu valley are large and widening. Within the rest of the country, mid- and far-western hills/mountains regions fare much worse in terms of poverty and illiteracy, the same regions where Maoist presence is the strongest (where poverty incidence is 72 percent as compared with Kathmandu Valley’s 4 percent). The poor feel disillusioned particularly by failure of development efforts to make headway against poverty, perceived widespread corruption in the government and among elites, and the entrenched inequalities across caste, ethnic, and gender lines in terms of access to social services and economic opportunities—making them more susceptible to Maoist influence.

Development efforts have been ineffective in reducing poverty. Failure to sustain high growth in general and in agriculture in particular has been a major reason for persistent poverty. While the government has tried to provide agricultural credit and subsidized inputs and services to the poor, the very poor seem to have been largely left out of the process. Only 8 percent of the poor borrow from formal and semi-formal institutions, half the rate for other households while fertilizer, veterinary, and other subsidies disproportionately benefit large and rich farmers. Similarly, past attempts at land reform were mostly unsuccessful as large landowners were able to parcel off ownership to relatives and land redistributed to the landless ended up in the hands of the non-poor as the poor are often forced to sell the land to pay off past debts.

The protracted insurgency has also hurt the poor. It accelerates outflow of resources and rural elites along with their assets from the affected areas—further reducing economic opportunities for the poor who remain in the areas. The conflict has also caused a deterioration in transportation services. The Maoists demand higher donations from those making profits reducing incentives to produce for profit. These developments are forcing the rural poor to depend on subsistence agriculture. Implementation of development projects and service delivery have also suffered in these areas as numerous donors have closed down or moved projects to district centers due to increased security risks and Maoists’ demand for closure or forced donations. (But the Maoists are allowing projects that have local people’s support and where project managers are willing to cooperate through providing donations.) Given that as of November 2001, the Maoists had a presence in 60 out of 75 districts and in many places were the only form of government, the poverty consequences could be alarming.

Economic policy can contribute to resolution of the conflict by focusing on its root causes. Measures to improve the poor’s access to social services and economic opportunities are critical as well as overall economic policy that is geared to support higher growth through sustained macroeconomic stability and better private investment climate. Finally, improving governance and transparency in economic decision making are an important part of the envisaged reform process.

1/ Based on background papers prepared for the London Meeting of donors on security and development held on June 19–20, 2002, and “Nepal: Poverty at the Turn of the Twenty-First Century” World Bank (1998).

5. Notwithstanding slowing exports and tourist receipts, the external current account surplus remained at 1 percent of GDP. Exports are estimated to have declined by 15 percent (excluding re-exports) in 2001/02 after growing by 21 percent on average during the last three years. Sales to countries outside India fell by more than 40 percent as garment, carpet and pashmina exports plunged largely because of the global economic slowdown and supply disruptions caused by the insurgency (see forthcoming Selected Issues Paper). Exports to India slowed recently due to a revised bilateral trade treaty signed in March which introduced nontariff barriers on Nepalese exports (Box 3). Tourist receipts are estimated to have declined by 34 percent due to the internal security situation and September 11. Nevertheless, a drop in imports and expanding remittances from Nepalese working abroad maintained a current account surplus. Imports have declined by 11 percent due to a weaker economy and smaller aid disbursements. Remittances are estimated to have risen by 8 percent—and now exceed merchandise exports—reflecting a rapid increase in the number of workers in Malaysia and the Middle East. Nevertheless, foreign aid flows declined and contributed to turning the overall balance to a deficit of $77 million from a surplus of $38 million in 2000/01. Gross official reserves stood at over $1 billion, covering 6½ months of imports, 4½ months of which in convertible currencies. Reflecting the concessional nature of the external debt and high remittances, the debt service ratio remains at about 5 percent of current receipts.

6. The fiscal deficit (after grants) was contained to 4 percent of GDP, but domestic financing was higher than budgeted. The insurgency and a weak economy contributed to a revenue shortfall of about 1½ percent of GDP. Revenues would have been even lower had it not been for the intensified collection efforts through a voluntary disclosure of income scheme (VDIS) and special revenue measures to fund security spending, which together raised ½ percent of GDP.2 Security spending (Nr 13 billion, or 3 percent of GDP) is estimated to be 1 percent of GDP higher than the budget. The authorities cut back capital spending by 3 percent of GDP relative to the budget. However, this also affected foreign aid disbursements and financing, As a result, while the overall deficit was contained to budgeted levels, domestic financing amounted to nearly 3 percent of GDP, 1 percent of GDP higher than budgeted. Public debt rose to 66 percent of GDP of which 18 percent is domestic debt. All of the foreign debt is on highly concessionary terms.

Nepal: Summary of Fiscal Indicators

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Revised estimate in 2002/03 Budget.

Includes net lending.

Export Prospects, 2002/03-2004/05

Nepal’s export markets are limited. About half of its total exports, consisting of diverse products, are sold in India. The United States (apparel and pashmina products) and Germany (woolen carpets) absorb 75 percent of exports outside India. In the recent past, overall performance has deteriorated due to a rapid decline in exports to outside India. While economic recovery of major markets outside India offers some prospect for future exports, considerable challenges lie ahead with restricted access to India for some exports under the recently renewed trade treaty and intensified competition in the United States.

Exports to India, after growing at an average rate of 42 percent during the last 4 years, are expected to slow down in coming years. A five-year old bilateral trade treaty, whereby Nepali goods were allowed into India essentially duty- and quota-free expired last year. The renewed treaty, signed in March 2002, imposes quantitative restrictions on four of Nepal’s export items: vegetable fats (vanaspati, 100,000 tons), acrylic yarn (10,000 tons), copper products (7,500 tons) and zinc oxide (2,500 tons). The quotas are significantly below last year’s export levels. These products represented around 25 percent of Nepal’s exports to India last year. Nepalese exporters are not allowed to carry forward the unutilized quota while exports in excess of the quota are permitted under normal MFN rates. A special addition duty of 4 percent is levied on these products. India has also granted rights to Central Warehousing Corporation (CWC) for buying all vegetable fats from Nepal. CWC is currently negotiating with Nepal monopsony prices. Exports are allowed by the Indian customs authorities on the basis of a Certificate of Origin showing a minimum value addition of 25 percent in the first year and 30 percent thereafter. Exports to India are as a result expected to decline by 4 percent in 2002/03. However, as Nepal diversifies and moves away from the quota-restricted products, growth of exports to India could recover to 8–10 percent in subsequent years.

Exports to third countries are likely to grow only modestly in the range of 5–8 percent during 2002/03–2004/05, after an initial decline of more than 40 percent this year. Apparel exports to the United States decreased by 15 percent in 2001 after increasing by 30 percent the previous year. While production disruption caused by Maoist activities contributed to this decline, slow U.S. growth also played a role. Nepalese exporters will likely continue to face difficulties with internal violence and increased international competition in the near future. The industry, however, stands a chance if the insurgency is brought under control, demand picks up in the United States and aggressive marketing efforts are undertaken. Prospects for carpet and pashmina exports are more uncertain due to market saturation, absence, so far, of product diversification, and strong competition from lower cost producers. Without aggressive marketing and flexibility in responding to ever-changing consumer tastes, these industries face tough survival battles.

7. Monetary policy has accommodated fiscal needs and the authorities’ desire to bail out depressed industries. Net claims on government rose by 19 percent in 2001/02. Private sector credit grew by 8 percent compared with 16 percent a year earlier. While the weak economy kept demand for new credit down, there was sizeable demand for refinancing loans to troubled borrowers. Domestic credit grew by 10 percent which, combined with stagnant deposits (see below), created a liquidity shortage at some commercial banks. This prompted the NRB to lower cash reserve requirements (CRR) by 1.2 percentage points on average to around 9 percent in January 2002.3 Refinancing rates were also lowered by 100–200 basis points to 2–5 percent at the same time. In addition, from February 2002, the NRB provided a special refinancing facility at 3 percent interest to encourage commercial banks to provide concessional loans to “sick” industries (mostly hotels and garment industry).

8. The growth of monetary aggregates slowed sharply. Broad money growth in 2001/02 slowed to 6 percent from 15 percent a year earlier. This is because of a weaker economy and stagnant deposits linked to the VDIS and other asset verification efforts, which prompted withdrawals by depositors who feared that tax and anti-corruption authorities could trace their undeclared income by examining bank deposits. Interest rates on deposits and treasury bills (91 days) declined during 2001/02 to around 4 percent, which are about 200 basis points lower than those in India reflecting limited investment opportunities in Nepal. The heavy domestic borrowing by the government has so far not raised interest rates, because of the weak economy, but in the context of decelerating money demand, resulted in a decline in the NFA of the banking system.

uA01fig02

Interest Rates, 1995-2002

(in percent)

Citation: IMF Staff Country Reports 2002, 205; 10.5089/9781451829907.002.A001

9. The peg of the Nepalese rupee to the Indian currency has provided a suitable nominal anchor and enabled Nepal to benefit from the close economic ties with India. The real effective exchange rate has been relatively stable, and the informal market premium has been minimal. Exporters also report that they do not face significant wage pressure.

10. Structural reform has advanced in the financial sector. To provide a sound basis for strengthening the NRB’s regulatory and supervisory capacities, new banking regulations were issued and a new NRB Act was enacted in 2002, that granted the central bank greater autonomy. The authorities are preparing an action plan to “re-engineer” the NRB through reorganization, strengthening of supervision, and human resource enhancement based on stronger performance incentives for the professional staff. These efforts are supported by Fund and World Bank technical assistance. The two largest commercial banks, Rastriya Banijya Bank (RBB) and Nepal Bank Limited (NBL), accounting for over 40 percent of the banking sector assets, have a negative net worth amounting to 7–9 percent of GDP (an estimate based on 1998 data, which is the most recent study) because of large nonperforming assets. To address this issue, external managers for the two banks were selected in early 2002, with funding from the World Bank and the United Kingdom. Because lending by these banks was often politically-motivated or involved insider dealing, reform initiatives were resisted not only by the banks’ boards (and employee unions) but also by many well-connected borrowers. To take over management of the majority privately-owned NBL, the NRB invoked provisions of the new NRB Act and suspended its board. However, an international management firm that signed a contract in January to manage the RBB has decided to pull out, citing security risks and ambiguities in the contract.

11. Progress was uneven in public sector reforms. Among the positives, fiscal transparency has been improved through greater coverage, timeliness, and detail in budget reporting. Another important reform was the introduction of a medium term expenditure framework (MTEF) with assistance from the World Bank—in which fiscal resources are allocated to programs in accordance with national and sector priorities in a three-year rolling framework and a realistic revenue forecast considered as a hard budget constraint. To reduce overstaffing among lower-level employees4 and improve performance incentives for professional staff, the authorities introduced a hiring freeze, completed a civil service census, increased relative wages of higher level staff, started to eliminate temporary and vacant posts at lower levels, and implemented the first phase of a voluntary retirement scheme. Nevertheless, out of about 106,000 core civil service positions (of which 17,000 are vacant), only 1,100 temporary and 300 vacant positions have been eliminated so far and the retirement scheme resulted in about 2,000 approved separations. Finally, there has been little visible progress in public enterprise reform. Public enterprise finances continue to deteriorate but poor accounting practices prevent accurate measurement of the size of the problem (Box 4). No public enterprises were privatized during the last three years.

III. Outlook and Risks

12. Near- and medium-term prospects depend critically on how the security and political situations evolve. Discussions with the authorities have been based on a scenario and policy implementation consistent with that used in the PRSP (base case) including a return in the security threat to the level prevailing before July 2001, a move toward a negotiated solution, and the emergence of a relatively stable government after the November elections. Under such a scenario and assuming normal weather, real GDP growth of 3½–4 percent could resume in this fiscal year on account of recovery of agricultural growth to about 3 ⅓ percent and nonagricultural to 4 percent. Furthermore, medium-term growth could exceed 5 percent, making it possible to achieve sustained poverty reduction.

13. International reserves are expected to remain adequate in this scenario. Overall merchandise exports are expected to recover slowly as exports to outside India will continue to face challenges; garment exports will face growing international competition. In addition, as stated above, various nontariff barriers introduced by India under the India-Nepal trade treaty will have negative short-run consequences. But the current account is projected to remain in broad balance as import growth will also be slow and a modest recovery in tourist receipts is expected.5 Inward remittances are expected to grow steadily. With improved aid disbursements, the overall balance could turn positive from 2002/03 and gross official reserves would be around 6¼ months of imports. The debt service ratio is projected to stay at a sustainable level of 5–6 percent, assuming that future external debt will continue to be concessionary.

14. The economy, however, remains highly vulnerable to various downside risks stemming from continued intense civil conflict, adverse external developments, poor weather, and slippages in reform implementation. The irregular monsoon of this year may have already affected agricultural production negatively, especially in western regions. An additional scenario was thus discussed with the authorities to illustrate the possible macroeconomic effects of absence of early progress on the security front (Table 5 and Annex V). In such a scenario, growth would be lower, exports and tourism would stagnate, reforms would be more difficult to implement, and poverty would likely remain pervasive further complicating achievement of a negotiated solution to the insurgency. While large uncertainties surround these projections, and the two scenarios are illustrative, it is clear that, as more time passes without progress toward internal peace, the likelihood that the lower case scenario will prevail increases.

Public Enterprises—Performance and Contingent Fiscal Liabilities

Public enterprises were established in the 1960s with the aim of building industrial and manufacturing base. To date, there are 7 financial and 36 nonfinancial public enterprises (covering industrial and trading sector, service sector, and public utility sector).

The sector’s contribution to GDP, estimated by the CBS, is around 2 percent in 1999/2000 as most public enterprises are ailing with some large ones suffering from negative value added. Budgetary transfers to them (including on-lending) average 1.8 percent of GDP for the last three years. Net profits have plummeted from about Nr 3 billion in 1998/99 to Nr 240 million in 2000/01 despite continued government transfers and investment. Although the sector’s capital stock is hard to assess accurately, these profit levels indicate that return on capital has come down to less than 1 percent from around 6 percent in 1998/99. This poor performance can be attributed to lack of commercial orientation, poor management, and overstaffing with an inappropriate skill mix.

Summary Indicators of Public Enterprise Performance, 1998/99–2000/01

(In millions of Nepalese rupees)

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Targets and Performances of Public Enterprises, 2001, Ministry of Finance.

Based on the fiscal account of the Financial Controller General’s Office, excluding NRB dividend.

Restructuring and privatization has been limited, with only four small enterprises privatized since 1990 and little progress since 1996. In the meantime, contingent fiscal liabilities are accumulating and these would have to be cleared prior to privatization.1/ The known liabilities include:

  • Wage arrear have been reported but consistent records are not available. For example, wage arrears reached 16 months for the Agriculture Tools Factory, and 4 months for the Lumbini Sugar Factory.

  • Other arrears to employees. According to a recent report on eight industrial public enterprises, about Nr 15.2 billion (3-4 percent of GDP) is due for gratuity, sick and home leaves allowance, medical allowance, and insurance premium.

  • Arrears to banks and suppliers exist, but no monitoring mechanism is in place.

1/ Public enterprise accounts are of poor quality, and often inconsistent with reported fiscal transactions. This makes it extremely difficult to identify the size and nature of potential fiscal liabilities.

IV. Policy Discussions

A. Medium-Term Policy Framework

15. The discussion focused on the policies needed to maintain macroeconomic stability in the immediate future and foster growth and poverty reduction over the medium term. There was broad agreement on the assessment of the economic situation and required reform steps. The authorities acknowledged that despite the ongoing political problems and a weak economy, they needed to move ahead with implementation of reforms that would lead to efficient financial intermediation and restructuring of the public sector. In some cases, however, the authorities preferred a slower pace of implementation than recommended by the team given the current fragile political situation. The team stressed that establishment of a stable political environment and improvements in internal security would be prerequisites for sustained implementation of necessary reforms. The main elements of the discussion included:

  • Maintaining macroeconomic balance. This requires limiting bank financing of the budget to less than 1½ percent of GDP in 2002/03 and to no more than ½ percent of GDP in the medium term; maintaining reserve cover of about 6 months of imports; and keeping annual inflation to about 4½ percent consistent with projected Indian inflation;6

  • Improving private sector resource allocation through reforms in the financial sector, and establishment of an enabling business climate conducive to private investment;

  • Improving public sector resource allocation through streamlining and prioritizing government expenditures (especially to improve social services and promote agricultural growth), enhancing revenue collection, improving the civil service, and reforming public enterprises; and

  • Strengthening governance and institutional capacity.

B. Macroeconomic Policy for 2002/03

Fiscal Policy

16. In discussing the 2002/03 budget prior to its finalization, the team stressed the needs to improve revenue mobilization, prioritize spending, and contain domestic borrowing. The authorities in the past avoided domestic debt problems by raising enough revenue to cover current spending (and even generating a small current surplus) and adjusting the size of development expenditure in line with available concessionary foreign aid, Nepal has a relatively efficient tax system for its income level based on low income tax rates and a VAT. With the increased security spending, however, the current balance has turned to a deficit and domestic borrowing is on the rise. There was thus increased need to raise revenues and streamline spending. In particular, the team emphasized that the following aspects needed to be incorporated in the budget:

  • Strong efforts to improve tax and customs administration should be made to raise revenue by at least ¼ percent of GDP to reach 11.6 percent of GDP. There was agreement that the authorities needed to increase regular and field audits of large taxpayers, strengthen customs valuation of imported goods (including seizures if needed), and enhance the number and quality of staff assigned to the tax office. The team also welcomed the authorities’ plan to reduce the VAT exemption list and convert the special security surcharge on petroleum products to a permanent excise tax;

  • Spending in 2002/03 needs to be prioritized. The team stressed that the authorities should include only the highest priority projects in the capital budget to ensure that spending would be streamlined and contribute to growth and poverty alleviation. The team indicated that the authorities should move away from the practice of overestimating development spending. Given a realistic estimate of available foreign financing, the authorities’ implementation capacity, and the size of currently identified priority activities, the team suggested that capital spending should be kept at around 5 percent of GDP. While current spending depends on the security situation, it should be contained at 12¼ percent of GDP under the base case/PRSP scenario. Saving due to continued civil service reform implementation and streamlined allowances would partially offset additional demand for security-related outlays and the cost of the national elections; and

  • Domestic borrowing needs to be contained to about 2⅓ percent of GDP to sustain macroeconomic stability—of which bank financing should be 1⅓ percent of GDP. The team recommended that if more budget support became available, it should be used to reduce domestic borrowing rather than expand lower priority spending. While the domestic debt to GDP ratio was still low, it could increase if the low growth scenario became a reality especially as the government was burdened with large contingent liabilities associated with nonperforming assets of the banking sector and wage and other liabilities of public enterprises slated for privatization.

17. While agreeing that the fiscal framework outlined by the mission was appropriate, the authorities stated that spending would have to be larger. They believed that a significant contingency provision was needed given that uncertainties existed regarding the security situation. In addition, while prioritization of development projects would be undertaken, some staff assigned to projects now classified as lower priority could not be immediately removed from the payroll. They also agreed that contingent fiscal liabilities associated with banks and public enterprises were large, but hoped that a significant part of the liabilities would be covered by donor aid.

18. In the event, the 2002/03 budget announced on July 8 aimed to reduce the overall deficit (after grants) to 3½ percent of GDP. Compared with the framework discussed with the team, the budget contained nearly 1 percentage point of GDP higher spending due in part to higher contingency for security outlays. As revenues and foreign aid flows were similarly higher, domestic financing was to be contained to 2 percent of GDP. While budgeted spending was higher than the levels discussed with the team, the authorities hoped that the security contingency would not need to be fully utilized and also said that funds for high priority projects would be released first to ensure their rapid completion. With nearly a third of 550 existing projects having been canceled, the team noted that the budget was more realistic than in the past. While not disagreeing with the strategy of making some spending contingent on the security situation, the team cautioned against the diversion of these funds to other lower priority activities—a particular risk in an election year.

19. There are significant downside risks to the revenue and foreign financing forecasts in the budget. The authorities aimed to mobilize revenues amounting to nearly 12 percent of GDP based largely on intensified collection efforts—implying that buoyancy will rise to 1½ from last year’s near unitary level. This target appears optimistic given that economic recovery is expected to be modest, that the security situation is assumed to improve only slowly, and that the authorities are not modifying the tax structure to any significant extent.7 The authorities also assumed higher foreign aid inflows in the budget than discussed during the mission’s visit. In particular, projected grant disbursements of above 3 percent of GDP were significantly above the past trend. The team was concerned that if revenue and foreign aid were lower than budget targets, domestic borrowing could be substantially higher. The authorities responded that they were aware that if these targets did not materialize, they would have to prioritize spending further and make cuts rather than expand domestic borrowing.

Monetary and Exchange Rate Policy

20. Looking ahead, monetary policy should continue to be geared towards supporting the exchange rate peg. This requires monetary growth that is consistent with a domestic inflation rate broadly in line with that in India. With this in mind, broad money growth should be contained to 11–12 percent, assuming real GDP growth of 3.8 percent and a slowing of the downward trend in velocity.8 Net claims to government should be limited to 11 percent, while allowing private credit growth of around 12 percent and an NFA increase of 8 percent. The team also noted that the monetary program would need to be reviewed with the progress in restructuring of the RBB and NBL as it could affect the behavior of monetary aggregates given the large size of assets and liabilities of these banks.

21. The authorities need to remain vigilant about the quality of new credit. In August, the authorities lowered CRR further by 1 percentage point. Given the weak economy and limited investment opportunities, such an easing raises concerns that the increased liquidity could be used for refinancing existing loans, many of which are nonperforming. It is thus important that the NRB enforce newly issued prudential regulations vigorously and urge financial institutions to reschedule loans only after borrowers submit viable restructuring plans.

C. Structural Reforms

22. The structural reform agenda aims at improving allocation of resources in both private and public sectors. This involves continued financial sector reforms, notably restructuring key commercial and development banks and strengthening the supervisory capacity of the NRB (Box 5). Trade and legal reforms are also needed to improve the overall business environment. Public sector reform includes reforms of public expenditure management, civil service and public enterprises. In addition, there is a strong need to strengthen governance and institutional capacity.

Financial Sector Reforms

23. Addressing the problems of RBB and NBL tops the authorities’ agenda. With the assistance of the World Bank, the authorities are forming a new team of qualified international experts that will replace the management team for the RBB that earlier withdrew. The external managers for the banks are to prepare plans within 1–2 months which would lay out the process of (i) reviewing the banks’ assets and liabilities within six months, and (ii) preparing the banks for divesting their state assets within two years.

24. With regard to the divestment strategy, the team urged the authorities to consider all restructuring alternatives proposed by the external managers, including the banks’ liquidation or sales to strategic investors. It was also important that recapitalization of these banks should be considered only after their viable restructuring plans have been put in place. The authorities hoped that these two banks could be strengthened under external management and privatized rather than liquidated. They nonetheless stated that they would be open to all options recommended by the external managers.

25. Another focus of financial sector reforms is the restructuring of the two government-owned development banks—the Agricultural Development Bank of Nepal (ADBN) and the Nepal Industrial Development Corporation (NIDC). The AsDB is currently financing their external audits, and restructuring strategies should be adopted based on these audits—the restructuring options include rationalizing the ADBN and closing the NIDC. These banks are known to be suffering from large amounts of nonperforming loans but because they are legally established under their own statutes, the NRB had not been able to assess the exact size of the problems nor take effective measures to address them. In the immediate future, the team stressed that ADBN and NIDC needed to be brought under direct NRB supervision by enacting the Banks and Financial Institutions (BFI) Act9 as soon as a new parliamentary session was held. This Act would help the NRB to effectively oversee all banks and a wide range of financial institutions.

Status of Key Financial Sector Reforms

The government’s Financial Sector Strategy Statement—published in December 2000—focuses on:

  • Restructuring the two largest and insolvent commercial banks, the state-owned RBB and the majority privately-owned NBL. Based on 1998 data (most recent study available), these two banks are estimated to have negative net worth of 7‒9 percent of GDP. The restructuring would entail addressing the issue of nonperforming loans, reducing overstaffing, rationalizing branches, improving control mechanisms and risk assessment, and improving record-keeping. Possibilities of liquidation, merger, or sale to a strategic investor have not been ruled out. Status: Contracts have been signed with management teams for both banks. Managers for NBL took over management in July 2002. RBB managers withdrew from the contract they signed in January 2002, and a new team of experts is being assembled.

  • Identifying restructuring strategies for the two development banks, ADBN and NIDC. Status: As a first step, AsDB is funding their audits.

  • Strengthening banking sector regulation and accounting and auditing standards through introduction of internationally accepted standards and practices, including new bank prudential regulations. Also establishing regulation and supervision for nonbank deposit taking institutions. Status: New prudential regulations became effective July 2001, covering loan loss provisioning, capital adequacy, and code of ethics. Extension of the regulations to nonbanks is in progress.

  • Strengthening the central bank’s supervisory capacities and its ability to enforce compliance with prudential regulations. New NRB Act aims to enhance its autonomy, limit its role to central banking, terminate other current functions and provide legal powers to implement effective bank supervision. On-site and offsite supervision capacities are being improved by recruiting more qualified accountants, training, introducing a risk rating system, and expanding supervision to cover other financial institutions, especially development banks. Status: New NRB Act became effective February 2002. New financial reporting requirements are to be introduced and to take effect with the banks’ 2001/02 accounts, allowing for more effective supervision. Supervision staff has increased and undertaking training. An action plan to “re-engineer” the NRB is being prepared.

  • Modernizing the legislative framework to reduce the overlap and segmentation of institutions as well as strengthening corporate governance and the framework for loan recovery. Status: The new legislation (BFI Act) governing all deposit taking institutions would replace existing and overlapping laws and is expected to be submitted to Parliament’s next session. A new insolvency act is under preparation.

  • Removing NRB and commercial banks from priority lending activity. The NRB intends to divest its equity participation in microfinance institutions and development banks, and to phase out the role of commercial banks in poverty-oriented lending (priority and deprived sectors). Status: The NRB plans to gradually phase out priority sector lending requirement (which has been broadened and largely lost its original purpose), and to eliminate penalty for non-compliance. A framework for development of micro-finance is under consideration.

26. The authorities confirmed that an action plan to restructure these banks would be prepared once AsDB-funded audits were completed later this fiscal year. The authorities were also reviewing MAE comments on the draft BFI Act, and plan to submit it to parliament after the November elections. In the meantime, the NRB had already started to examine the two development banks and indicated that it would be able to supervise them fully as soon as the BFI Act was enacted.

27. The NRB needs to be strengthened urgently. The team stressed that the NRB needed to be better equipped to supervise not only the largest institutions but also 11 other commercial banks as well as smaller development banks. In this regard, the team welcomed the authorities’ efforts to “re-engineer” the central bank to enhance its supervisory, accounting and auditing, and research capacities. The team encouraged early introduction of reform in human resource management which includes reorganization, a voluntary retirement scheme, a revised incentive structure, and a comprehensive training program. The authorities indicated their interest in continued Fund technical assistance in this area.

28. The authorities intend to further liberalize the financial sector by reducing administrative control. The 5 percent interest spread limit was eliminated last year. The team welcomed this action and encouraged the authorities to eliminate requirements that commercial banks extend concessional lending to support the government’s priority sectors.10 With the significant broadening of the definition of priority sectors, the requirement was no longer serving the original purpose of poverty reduction, but it still imposed administrative costs on a number of commercial banks. The authorities agreed with the team in principle but wanted to phase out the requirements over a number of years. As a first step, they agreed to remove the penalty for a quarter of the priority sector lending requirement early in 2002/03. This action de facto lowers the priority sector lending requirement to below 7 percent. Finally, the team recommended that the public sector withdraw from equity participation and representation at the boards of financial institutions. The NRB responded that it was already in the process of doing so but the Ministry of Finance presented no immediate plan to reverse the recent expansion of its appointees to joint venture commercial bank boards.

Trade Policy and Legal Reforms

29. The authorities intend to further rationalize the import tariff structure and expedite WTO accession. Import tariffs would be further restructured from the current five standard rates to four rates with a lower maximum rate of 30–35 percent. The exceptional tariff rates on vehicles (80 percent and 130 percent) would be converted into excises as recommended by this and previous Fund missions. The authorities, however, gave no firm time schedule to implement these reforms. The team also noted that new or additional trade taxes had been levied to finance security spending, and urged the authorities to rescind them as soon as the security situation improved. On WTO accession, negotiations with trade partners were ongoing. The authorities were waiting for responses from some of their key trade partners including India, their largest trade partner.

30. There was agreement on the need for continued legal reforms to improve private business environment. The authorities had already drafted an amended Companies’ Act to separate ownership and management, better protect small shareholders, and mandate accounting and auditing based on international standards with AsDB technical assistance. Furthermore, preparations were underway to introduce an efficient insolvency law and a dispute resolution mechanism by establishing, inter alia, a commercial bench in the High Court. The team also pointed out that the Labor Act needed to be amended to allow firms to reduce labor employment in response to market forces.

Public Sector Reforms

31. The team welcomed progress in public expenditure management reform. The development budget for 2002/03 was prepared using a medium term expenditure framework (MTEF)—introduced with assistance from the World Bank—in which fiscal resources are allocated to programs in accordance with national and sector priorities. This exercise has kept the authorities focused on high priority activities and prevented them from overly inflating the budget.

32. The civil service skill mix needed to be adjusted to realize efficient public service delivery. The measures include (i) reducing the size of the lower-level nonprofessional cadre; (ii) contracting out some services to the private sector; (iii) removing duplication of functions; and (iv) introducing wages and incentives that reward performance. The authorities had maintained the hiring freeze without filling vacant posts—critical action for controlling wage growth and allowing room for future reorganization. In addition, the Ministries of Finance and General Administration contracted out some of their service work. The authorities had also nearly completed a new personnel information system based on the civil service census. This system allowed identification of some 17,000 vacant positions, and the administration proposed that the cabinet eliminate 7,500 of these positions. The team strongly urged the cabinet to act on this proposal and also pointed out that an amendment to the Civil Service Act was needed to provide a framework that allowed for the elimination of positions including those made redundant by outsourcing service work. The authorities agreed that these steps were critical to improving the public sector and announced elimination of the 7,500 vacant positions by October. They, however, stated that the amendment of the Civil Service Act needed preparation and would have to wait until the November elections.

33. Implementation of public enterprise reforms had stalled and needed to be reinvigorated. It was important that the authorities move ahead with privatizing seven public enterprises included in the “active” list as enterprise finances were deteriorating and liabilities growing rapidly. Overdue workers’ allowances for five closed (but not liquidated) small enterprises suggested that these liabilities could be substantial. The authorities responded that they could not resolve these liabilities due to the tight fiscal situation unless donors came forward with financial support. The team suggested the use of government bonds to clear these liabilities and incorporate these bonds in the fiscal planning. For all other public enterprises, there was need to assess the size of liabilities to workers, banks, and suppliers in coming months. Larger firms that were to remain in the public sector for the immediate future, such as Nepal Oil Corporation, Agricultural Inputs Corporation, Nepal Electricity Authority, Nepal Telecommunication Corporation, and Royal Nepal Airlines, should be required to adopt internationally accepted accounting standards, issue annual reports, and be subject to more extensive audits.

34. The authorities have decided to promote decentralization to improve service delivery. The team agreed that this was an important move toward effective poverty alleviation but stressed that decentralization could succeed only if administrative capacity existed and there was adequate monitoring and accountability. There was agreement that a move towards decentralization should focus on monitorable and well-defined activities—as seen in the ongoing efforts to transfer a limited number of primary schools and sub-health posts to local communities. The central government has, however, recently decided to appoint local government leaders until nationwide local elections, postponed earlier due to fighting in some districts, could be held. This action will likely reduce the effectiveness of the ongoing decentralization process significantly.

35. The team welcomed the increased attention given to improving governance Improved availability of information would be one of key prerequisites for strengthening governance. In this regard, the authorities acknowledged the need to enhance central and local government reporting and introduce international accounting and auditing practices at not only public enterprises but also large private firms (e.g., those listed at the stock exchange). The team also welcomed the quick passage of the four anti-corruption bills by Parliament in April.11 It was important that these acts are translated into effective preventive, control, and enforcement mechanisms, and address major corruption issues on the ground. There was agreement on the need to sequence measures so as not to overload the new institutions and spread their resources too thinly as was the case with the Asset Investigation Commission—it was given a broad mandate to investigate 80,000 present and previous officials. Anti-corruption measures would be much more effective if investigation began with a narrower and more visible group of senior officials.

Poverty Reduction

36. The content of the final draft of the full PRSP was discussed. The authorities are aiming to finalize the draft in August. The main elements of the poverty alleviation strategy in the draft are to: (i) achieve high rates of growth; (ii) improve agricultural productivity; (iii) promote private sector development based on improved governance; (iv) invest in and maintain priority infrastructure; (v) improve the quality of and access to education and health services; and (vi) design targeted programs for the particularly disadvantaged. The team agreed with the authorities mat the PRSP would form the basis for a prospective PRGF program.

37. The PRSP objectives have guided the authorities’ public expenditure prioritization. Greater emphasis has been placed on projects that will reap the highest return for agricultural productivity and promote private sector development. The authorities have increased per capita social sector spending emphasizing primary education and basic health care, although the recent increase in security spending has made this task a challenge. A number of programs provide income transfers targeted to the very poor, often with donor assistance, and encourage the use of micro credits to fund livestock and cash crop activities in the hill regions. The recently established Poverty Alleviation Fund (PAF), to be funded by government and donor resources, is expected to coordinate these efforts and provide grants for targeted income transfers and human capital development. It would also extend the reach of micro credit to remote areas. The PAF is, however, not yet operational pending further parliamentary approval and commitments of donor resources. The team stressed the need for accountability and transparency in the operation of the PAF, which is independent of annual budgets, and emphasized that it should be incorporated into the budget process as soon as necessary capacity is developed within the government.

D. Other Issues

PRGF Process

38. While the policies described above provide a possible framework for a PRGF program, the team stated that a more settled political and security environment was needed before concluding negotiations on a program. The staff stressed that continued implementation of strong structural reforms and maintenance of macroeconomic stability between now and the November election and movement toward a greater internal security would contribute to early completion of PRGF negotiations. The authorities responded that, even though the current government was a caretaker, its commitment to the reform program and implementation capacity had not been compromised. Furthermore, they stressed that the general thrust of economic policy of all mainstream political parties was similar.

Safeguards Assessment

39. The NRB is subject to a full safeguards assessment with respect to any new prospective PRGF arrangement. The assessment was conducted during July 3–16, 2002. A draft report, submitted to the authorities for their comments, recommends the adoption of a strong external audit mechanism, preparation of financial statements in accordance with International Accounting Standards, strengthening of the internal audit function, and improvement of the internal control structure at the NRB. Based on these recommendations, specific measures will be proposed for inclusion under the prospective new PRGF program. The final safeguards assessment report is expected to be submitted to the authorities later in August 2002.

Foreign Exchange Restrictions

40. Nepal accepted the obligations of Article VIII, Sections 2, 3 and 4 in May 1994. It maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions with the following exception. There are quantitative limits on the availability of foreign exchange for personal travel abroad and bona fide requests for amounts in excess of these limits are not granted, which constitutes a restriction subject to Fund jurisdiction under Article VIII. These limits are set at $2000 per fiscal year per person for North America, Western Europe, Australia and Japan and $1000 per fiscal year per person for all other destinations. The authorities note that these limits have been in place since Nepal accepted Article VIII status in 1994, that they increased these limits in 2001, and that all other current payments and transfers based on bona fide requests are permitted without limits. They also believe that these limits are high in light of Nepal’s low per capita income and are concerned that these payments have often been a conduit for capital flight. Nevertheless, the staff urged the authorities to remove these restrictions as soon as possible.

Data Issues

41. Severe weaknesses remain in economic statistics that impair effective policy formulation and monitoring. Particularly problematic are coverage and estimation of balance of payments data given large informal trade and unreported workers’ remittances as well as inadequate and late reporting by commercial banks and other financial institutions. The staff urged the authorities to continue to make efforts to implement recommendations of past STA missions and, in particular, ongoing STA technical assistance on compilation of balance of payments data. The team also encouraged the authorities to disseminate debt and international liquidity information as per the Fund’s benchmarks. Further improvements in fiscal data and strengthening in general of the statistical office with donor support would be needed in the medium term. It was hoped that the ongoing reform in the NRB and the commercial banking sector would also improve timely availability of accurate financial and monetary statistics.

V. Staff Appraisal

42. Despite several decades of development efforts assisted by significant foreign aid, income per capita in Nepal remains among the lowest in the world and poverty is pervasive. The full PRSP being finalized by the authorities in partnership with civil society and the donor community recognizes that the alleviation of poverty requires the maintenance of macroeconomic stability and the implementation of a comprehensive reform program to lay the foundations for sustained growth. The program appropriately focuses on improving agricultural productivity, promoting more efficient resource allocation, especially in the financial sector and public service delivery, and strengthening governance. The next challenge is implementation, which requires a more settled political and security environment.

43. Despite a deterioration in the political and security situation, the authorities have made good efforts at maintaining relatively low inflation and pushing forward with structural reforms. However, economic activity has been severely disrupted by the internal security situation, which was exacerbated by external shocks. Looking ahead, the near-term prospects for growth are vulnerable to downside risks: the impact of the insurgency on production, exports, and tourism; a weaker than expected global recovery; and the bilateral trade treaty with India which is expected to slow exports to Nepal’s key market.

44. The authorities are encouraged to build on the PRSP process to push forward the program for growth and poverty reduction. In implementing the 2002/03 budget, the focus should be on containing domestic borrowing, prioritizing spending, and mobilizing revenue. Given resource constraints, spending should be allocated to activities that contribute to enhancing growth and improving access of the poor to social services. Strict expenditure control is also needed, through linking fund release with monitoring performance. Strong collection efforts would be needed to realize the optimistic revenue forecast in the budget. Furthermore, in the event mat revenue and foreign financing assumed in the budget are not realized, lower priority spending will need to be cut further rather than relying on increased domestic borrowing.

45. In the medium term, revenue mobilization needs to be strengthened further. Nepal has a relatively robust tax system for its income level but collection is low. The focus should be on improving tax and customs administration, particularly enforcing invoicing requirements, increasing the frequency and quality of audits for large taxpayers, tighter check on import valuation, and raising the number and quality of staff assigned to the tax office.

46. The staff continues to support the peg of the Nepalese rupee to the Indian currency, given Nepal’s close economic links with India. Although export performance was weak this year, this was mainly due to supply disruptions and weak external demand, and the exchange rate remains broadly appropriate. The authorities’ monetary policy for 2002/03, which targets monetary growth consistent with a domestic inflation rate broadly in line with that in India, is appropriate.

47. Notwithstanding strong resistance, the authorities have made significant progress in financial sector reform. The highest priority remains addressing the problems of the two largest and insolvent commercial banks by having external managers review existing portfolios and prepare the banks for divesting all state assets within two years. A new external management team needs to be selected expeditiously to replace the consultants who withdrew from the RBB contract. It is important for the authorities to consider all restructuring alternatives proposed by the external managers. The restructuring of the two large development banks is also a priority. The restructuring options should include rationalization of ADBN and closure of NIDC. In addition, the staff calls for vigilance about the quality of bank lending and strengthening of the central bank’s supervisory capacity.

48. The staff commends the maintenance of Nepal’s open trade and investment regime under difficult conditions. In this regard, the authorities’ plan to further reduce the maximum tariff rate is welcome, and the staff urges the conversion into excises of the exceptionally high tariff on vehicles imposed two years ago.

49. Implementation of public sector reforms needs to be strengthened. A good start was made in reducing the overemployment of lower-level civil servants—including maintaining the hiring freeze, contracting out some service work, implementing an early retirement scheme, and identifying vacant positions to be eliminated. These efforts need to be followed through and incentives for professional staff should be improved. Efforts to privatize public enterprises slated for early sale need to be revived, and the financial situation of other public enterprises assessed with a view to making decisions on future privatization.

50. The authorities’ efforts to improve governance and implement anti-corruption measures are welcome. Better monitoring of central and local government activities is critical for improved fiscal transparency. Improved corporate governance would be facilitated by the adoption of internationally accepted accounting and auditing standards at large private and public firms. The staff welcomes the authorities’ more directed anti-corruption efforts that will focus on largest loan defaulters and those responsible for misuses of largest public funds.

51. There are serious deficiencies in official statistics that impede effective policy formulation and monitoring. The authorities are encouraged to implement recommendations made by past STA missions and the BOP expert currently working with them. Considerable donor support will continue to be needed to strengthen the limited capacity of the national statistics office in the medium run.

52. Nepal maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions except for restrictions on payments for personal travel. The staff urges the authorities to remove these restrictions as soon as possible.

53. It is proposed that the next Article IV consultation with Nepal take place on the standard 12-month cycle.

Figure 1.
Figure 1.

Nepal: Exchange Rates

Citation: IMF Staff Country Reports 2002, 205; 10.5089/9781451829907.002.A001

Table 1.

Nepal: Selected Economic Indicators, 1997/98–2002/031/

Nominal GDP (2000/01): US$5,554 million

Population (2000/01): 23.2 million

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

Fiscal year ends July 15.

Staff estimate for 200203, not the budget target.

Estimates for 2001/02 refer to June.

Cumulative, excluding re-exports.

Cumulative, excluding gold.

Ratio is in terms of projected imports of goods and services.

In percent of exports of goods, services, and private transfers; including debt service to the Fund.

Table 2.

Nepal: Summary of Government Operations 1999/2000-2002/031/

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

Fiscal years start mid-July. Table confined to central government operations as contained in the budget.

Based on the Budget Speech, delivered on July 8, 2002. However, expenditures in the estimate in 2001/02 reflects staff estimate as the detailed expenditure items were not available at the time of the 2002/03 budget speech.

Current and capital and net lending expenditures are based on new economic classification provided by the authorities and staff estimates. The traditional presentation is in terms of regular and development expenditures.

Table 3.

Nepal: Balance of Payments, 1997/98-2004/05

(In millions of U.S. dollars)

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Reflects assumptions under the base-case scenario, i.e. improvement in the security situation in the second half of 2002/03.

Includes official transfers that are channeled through the budget only.

Large net other investments and errors and omissions reflect data weaknesses in capital account, unreported remittances and large informal trade.

As percent of GDP

Short-term debt in the form of outstanding trade credits and amortization due the following year.

As a ratio of exports of goods and services (excluding reexports of oil) and private transfer receipts.

Table 4.

Nepal: Monetary Accounts, 1998-2001 and Targets for 2002-2003

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Sources: Data provided by the authorities; and staff estimates and projections.

Commercial banking deposit and lending data is typically subject to upward revision due to some repotting lags.

Assumes increase in NRB’s NFA of $38 million in 2001/02 and $45 million in 2002/03.

Table 5.

Nepal: Medium-Term Scenarios, 1997/98–2004/05

(In percent of GDP, unless otherwise indicated)

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Sources: Data provided by Nepalese authorities; and staff estimates and projections.

Public savings and investment estimate derived from fiscal accounts. Gross investment derived from national income accounts.

Historical totals include changes in stocks.

Staff estimate for 2002/03, not the budget target.

From 2002/03, current includes interest cost of restructuring bonds.

Excluding re-exports.

Excluding gold.

Excludes possible balance sheet impact of restructuring RBB and NBL, but included in fiscal projections.

Table 6.

Nepal: Vulnerability Indicators, 1995/96–2000/2001

(In percent of GDP, unless otherwise indicated)

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Sources: Data provided by the Nepalese authorities.

Fund staff estimates.

From Special Audit Report by an accounting firm, R. Bajracharya & Company.

Consists of public and public guaranteed external debt, domestic claims on government by banking sector, and domestic credits to the central government by non-banking sector.

Including private sector credit by NRB.

Including re-exports.

Including gold.

Excluding SAF and ESAF.

Foreign currency liabilities as a percent of foreign currency assets.

Short-term debt in the form of outstanding trade credits and amortizations due in the following year.