Nepal: Staff Report for the 2014 Article IV Consultation—Informational Annex
Author: International Monetary Fund. Asia and Pacific Dept
Publication Date:
18 Jul 2014
eISBN:
9781498386784
Language:
English
Keywords:
ISCR; CR; remittance inflow; authority; debt; prefix; decentralization effort; broad money; Nepal portfolio; Nepalese rupee; Nepal resident mission; External sector statistics; Loans; Global
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KEY ISSUESContext: Successful elections for a new Constituent Assembly and formation of a new government have stabilized the political situation.Macroeconomic situation and outlook: Nepal’s macroeconomic situation remains broadly favorable. Growth is projected to recover in 2013/14 owing to good monsoons, robust growth in services, and increased public spending. Inflation is moderating, in line with developments in India. High remittance inflows are supporting a strong external position, as well as high reserve money growth. Risks to the outlook are slightly tilted to the downside, involving slower-than-expected growth in countries hosting Nepali workers and domestic financial sector risks.Medium term prospects: While remittances are expected to continue to support the external position, the outlook for growth depends on improving the environment for private investment. This requires a decisive boost in public capital spending, and structural reforms in key areas.Financial sector: Despite progress, significant vulnerabilities remain. The recent assessment under the FSAP, Nepal’s first, raised concerns about asset quality and interconnectedness, as well as financial sector infrastructure—including the legal framework—and supervision and crisis preparedness. At the same time, a largely unsupervised cooperatives sector is growing rapidly.Key policy recommendations: Monetary policy should aim at controlling the volatility and level of excess reserves in the financial system, implying a modest tightening of monetary conditions. The exchange rate peg to the Indian rupee provides a useful nominal anchor for the economy, and the real exchange rate is broadly in line with fundamentals. Capital spending needs to be boosted to provide key infrastructure, and reforms implemented to support private investment, which will help generate sustained economic growth and employment opportunities. In the financial sector, further reforms to bolster regulation and supervision, and improve financial infrastructure are needed to reduce risk and increase access to finance.

Abstract

KEY ISSUESContext: Successful elections for a new Constituent Assembly and formation of a new government have stabilized the political situation.Macroeconomic situation and outlook: Nepal’s macroeconomic situation remains broadly favorable. Growth is projected to recover in 2013/14 owing to good monsoons, robust growth in services, and increased public spending. Inflation is moderating, in line with developments in India. High remittance inflows are supporting a strong external position, as well as high reserve money growth. Risks to the outlook are slightly tilted to the downside, involving slower-than-expected growth in countries hosting Nepali workers and domestic financial sector risks.Medium term prospects: While remittances are expected to continue to support the external position, the outlook for growth depends on improving the environment for private investment. This requires a decisive boost in public capital spending, and structural reforms in key areas.Financial sector: Despite progress, significant vulnerabilities remain. The recent assessment under the FSAP, Nepal’s first, raised concerns about asset quality and interconnectedness, as well as financial sector infrastructure—including the legal framework—and supervision and crisis preparedness. At the same time, a largely unsupervised cooperatives sector is growing rapidly.Key policy recommendations: Monetary policy should aim at controlling the volatility and level of excess reserves in the financial system, implying a modest tightening of monetary conditions. The exchange rate peg to the Indian rupee provides a useful nominal anchor for the economy, and the real exchange rate is broadly in line with fundamentals. Capital spending needs to be boosted to provide key infrastructure, and reforms implemented to support private investment, which will help generate sustained economic growth and employment opportunities. In the financial sector, further reforms to bolster regulation and supervision, and improve financial infrastructure are needed to reduce risk and increase access to finance.

Fund Relations

(As of April 30, 2014)

I. Membership Status:

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

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Financial Arrangements: (In SDR Million)

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VI. Projected Obligations to Fund:

(in millions of SDRs; based on existing use of resources and present holdings of SDRs):

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Exchange Rate Arrangement

In February 1993, Nepal unified its exchange rate and eliminated the multiple currency practice associated with the previous dual exchange rate arrangement. In October 1997, the exchange arrangement of Nepal was reclassified as that pegged to a single currency unit from pegged to a currency composite. The Nepalese rupee is pegged to the Indian rupee at a rate of 1.6. Currently, all merchandise imports (except for a few goods restricted for security or related reasons) are freely available through an open general license system, with foreign exchange provided through the banking system at the market exchange rate. As of March, 2014, the exchange rate for the Nepalese rupee (Nr) was US$1=Nrs. 97.88.

The restriction on quantitative limits on foreign exchange for leisure travel was removed in early 2011. The Industrial Enterprises Act places a 75 percent limit on the conversion and transfer to foreign currency of salaries of non-residents from countries where convertible currency is in circulation. Since the limit applies to amounts that may be less than net salaries, it gives rise to an exchange restriction under Article VIII.

Safeguards Assessments

A safeguards assessment of the NRB was concluded in May 2011. 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.

2012 Article IV Consultation

The Executive Board discussed the staff report for the 2012 Article IV consultation (IMF Country Report No. 12/ 326) on November 16, 2012. Consultations with Nepal are held on the standard 12 month Article IV consultation cycle.

Technical Assistance Since 2010

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Resident Representative

Mr. Thomas Richardson has been the Senior Resident Representative since August 6, 2012. He is based in New Delhi.

Relations with the World Bank Group

(As of April 10, 2014)

A. Partnership in Nepal’s Development Strategy

Nepal has achieved remarkable progress over the last years. The country managed to halve the percentage of people living on less than $1.25 a day in only seven years, from 53 percent in 2003/2004 to 25 percent in 2010/2011. Several social indicators in education, health and gender have also improved. In addition, since the end of the civil war in 2006, Nepal has successfully transitioned away from being a post-conflict country and former combatants have been integrated into the country’s armed forces. While the country’s political transition – notably the drafting of a new constitution – is taking longer than expected, the November 2013 elections, which resulted in a peaceful transfer in power, were an important step toward the formation of an inclusive and democratic state.

To build on this progress, Nepal needs to take advantage of its economic potential and put in place the prerequisites that will provide faster, sustained and inclusive growth. While the political process remains intricate (understandably so given Nepal’s relatively short experience with democratic governance), the country urgently needs to pay greater attention to the economy. Remarkably, Nepal’s economy grew steadily even during the height of conflict and economic management remained prudent, resulting in a budget surplus in 2013. Yet growth levels are too low to allow Nepal to continue its past progress and relegate poverty to history. Current growth relies heavily on remittances supporting consumption and growth in basic services with low growth potential.

To move to a higher growth trajectory, Nepal will have to remove bottlenecks to private and public investment in key growth sectors. The most vivid example of Nepal’s economic potential is hydropower. While the estimated potential for hydroelectricity generation in Nepal is 84,000 MW, of which at least half is economically viable, only 746 MW (less than 2 percent of the viable potential) is currently developed. Hydropower development could be a game changer for Nepal. Development of the sector would reduce load-shedding and provide major revenues through exporting electricity to India or even China.

The World Bank Group (WBG) stands ready to support Nepal’s aspirations for increasing economic growth through increased investments in key sectors while providing support to make growth more inclusive and to help equalize opportunities across groups and communities. This constitutes a major shift in World Bank Group (WBG) support away from short-term post-conflict assistance towards establishing the foundations for increased and inclusive growth. After three consecutive interim strategies in Fiscal Years (FY) 2007, 2009 and 2011, the WBG will provide more long-term support. A new Country Partnership Strategy (CPS) is being finalized and will cover four years from FY2014-2018.

B. IMF-World Bank Collaboration in Specific Areas

Areas in which the Bank leads and there is no direct IMF involvement

The areas in which the Bank leads the policy dialogue and there is no direct IMF involvement are the social sectors, infrastructure, environment, and agriculture.

In education, the Bank has encouraged Nepal’s decentralization efforts to achieve more effective delivery of public services and has played a pivotal role in supporting the transfer of public schools to community management. Along with other donors, the Bank is actively supporting Nepal’s well-formulated, ten-year primary education reform program through the ongoing School Sector Reform Project (SSRP). This Sector Wide Approach (SWAp) brings together GON and 12 development partners – of which 9 partners pool their resources with those of the GON, and 3 development partners who support the program directly. The Second Higher Education Project supports (a) enhanced quality, efficiency and relevance of higher education through a set of systemic reforms, and incentives to selected institutions; and (b) improved access for academically qualified students from disadvantaged groups in (i) higher education and (ii) higher secondary education. The objective of the Enhanced Vocational Education and Training Project is to expand the supply of skilled and employable labor by increasing access to quality training programs, and by strengthening the technical and vocational education and training system in Nepal. Under its new CPS, the WBG will shift its ongoing engagement in the education sector toward a stronger focus on equalizing access, improving quality and providing skills for jobs.

In health sector, the Bank has been working closely with the government and development partners in supporting the government’s sector program since 2004 through a SWAP, similarly to its engagement in the health sector. The Second HNP and HIV/AIDS Project is assisting the Government in improving the equitable delivery of health care services, specifically by increasing access to essential health care services and their utilization by the underserved and the poor. The Community Action for Nutrition Project (Sunaula Hazar Din) aims to improve attitudes and practices known to improve nutritional outcomes of women of reproductive age and children under the age of 2. Changes in attitudes and practices would address the key risk factors for child malnutrition and create demand for nutrition related services and products. The supply of these services and products will be provided through existing public sector and donor-funded programs, the private sector and, to a limited extent, financed through the Project.

To support broad-based growth, the Bank supports investments in several key infrastructure sectors. The Road Sector Development Project provides all-season road access in select hill districts. The Bridges Improvement and Maintenance Program provides innovative financing by utilizing a new financing instrument (Program-for-Results), which links disbursements of funds directly to the delivery of verifiable results. It is the first Program-for-Results to be approved by the World Bank’s Board under IDA and supports the vision behind Nepal’s Bridge Policy and Strategy of 2004 to provide “safe, reliable and cost effective” bridges.

The Bank is also strongly engaged in the energy sector where, however, progress continues to be slow. The Kabeli Transmission Project aims (i) to support the addition of transmission capacity to the Integrated Nepal Power System; and (ii) to provide access to electricity and cooking fuel to communities in the area of the Kabeli 132 kV transmission line. The upcoming joint IDA-IFC Kabeli-A Hydroelectric Project will add on grid generation capacity through public private investment in a peaking run-of-river hydropower project with an installed capacity of 37.6 MW. It will also assist the Investment Board of Nepal (IBN) in improving its ability to carry out its responsibilities of facilitating the development of large hydropower projects across the country in line with applicable international performance, technical, environmental and social standards.

To address issues arising from rapid urbanization in Nepal, IDA also provides support to improve municipal governance, including municipal services, through the Urban Government and Development Program: Emerging Towns Project.

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

After a long gap, the Bank re-engaged in the agriculture sector through the Agriculture Commercialization and Trade Project. It aims to improve the competitiveness of smallholder farmers and the agribusiness sector in selected commodity value chains and 25 districts supported by the project. To address the food insecurity issues, a Social Safety Net Project is under implementation. It addresses the short and medium term implications of the global food crisis for the country by strengthening the agricultural production and safety net mechanisms on a broad scale. The objective is to ensure access to food and basic needs for vulnerable households in the short term in food insecure districts.

Recognizing that Nepal’s development agenda is closely intertwined with peace building, a Peace Support Project is under implementation. The project aims to contribute to the peace process by providing interim cash transfers and services to conflict-affected groups.

While many of the Bank’s investment/sector operations mentioned above also support social inclusion, a more direct initiative in this area that received Bank support is the Poverty Alleviation Fund (PAF). PAF channels resources to the poorest groups in rural communities by creating infrastructure, employment and income-generating opportunities.

Areas in which the Bank leads and its analysis serves as input into the IMF program

The Bank takes the lead in assisting Nepal with public expenditure analysis. In addition, the Bank’s intensive dialogue and technical assistance have been supporting the reforms, including the development of a credible Medium Term Expenditure Framework (MTEF). This framework has applied since FY04 to the prioritization of the development budget to ensure efficient budget allocations for priority projects.

Areas of shared responsibility

The Bank and the IMF continues to provide assistance in the overall management of the country’s macroeconomic aggregates. The Bank and the IMF have assisted in debt management through technical assistance, joint Debt Sustainability Analysis and policy dialogue to ensure that the overall debt stock and fiscal deficits are within reasonable limits. To sustain the impressive revenue growth, in addition, the Bank and the IMF continue to provide policy advise and technical assistance.

The Bank and the IMF also work closely together on providing support to financial sector strengthening, most recently through carrying out a joint Financial Sector Assessment Program (FSAP). WBG support to the financial sector aims to address economic risks stemming from the sector’s rapid expansion and associated distress in the banking sector. To address financial-sector vulnerabilities, the Bank has been providing technical assistance in the areas of crisis management, bank resolution and deposit insurance. A FY13 Development Policy Operation (DPO), developed closely with DFID and the IMF, helped to address some of the root causes of the sector’s difficulties. A follow-up DPO – building on the FSAP as well as a DFID-supported banking sector diagnostic – will aim to consolidate banking sector stability and pave the way for developing a more robust and inclusive financial sector.

C. World Bank Group Strategy and Lending Operations

World Bank Group support to Nepal is aligned to its twin global goals—eliminating extreme poverty and boosting shared prosperity. A poverty “lens”, developed for the news CPS, concludes that while Nepal’s progress on poverty reduction was commendable, a significant share of the population remains clustered around the poverty line. It confirms the need for WBG support to focus on removing Nepal’s binding growth constraints to allow for higher income levels. In this context the International Development Association (IDA), the International Finance Corporation (IFC) and the Multi-lateral Investment Guarantee Agency (MIGA) will continue to foster its ongoing collaboration to make maximum use of its joint comparative advantage. WBG efforts will be organized within two pillars. Under pillar 1, it will support increasing economic growth and competitiveness, and will focus on hydroelectric power generation, enhancing transport connectivity, and improving the business environment. Under pillar 2, the WBG will provide support to increasing inclusive growth and opportunities for shared prosperity, by enhancing the productivity of agriculture, equalizing access to health care, skills development and social protection. Cutting across these pillars, WBG activities will contribute to improving the effectiveness, efficiency and accountability of public expenditure.

WBG support will be guided by the principles of balancing risks and rewards, selectivity and flexibility. In a shift from more cautious approaches taken in past strategies, the WBG will engage in larger programs that strive for nation-wide impact. Regarding selectivity, this strategy consolidates the WBG’s engagement into fewer sectors, where the Group has a comparative advantage and can leverage its financing and analytical resources for greater development impact. In addition, the WBG will maintain programming flexibility, given the politically-fragile country environment.

Within each of the CPS pillars, the strategy identifies specific areas where the Bank Group can make a difference. For IDA, these include transport, energy, education/skills, health, and public expenditure management. For IFC, these include supporting hydropower, improving access to finance, facilitate new private investments and reduce the barriers of investment in priority sectors, promote tourism and support agribusiness. IDA and IFC expect to work together on hydropower development, agriculture, and improving access to finance.

FY14 Lending Program: In FY14, IDA is committing US$222 million in new commitments, including the Strengthening National Rural Transport Project (U$100 million), Irrigation and Water Management Additional Financing (US$50 million) and the Third Rural Water Supply and Sanitation Project (US$72 million).

Bank Assistance Program in Nepal: The current portfolio consists of 17 projects with net commitments of $1.5 billion, and three regional projects with net commitments of about $240 million. The average project size is $86 million, near the Bank-wide IDA average of about $87 million. Cumulative disbursements as of January 31, 2014, were $633 million (about 46 percent of net commitments) for the national and about $15million (about 6 percent of net commitments) for the regional projects.

Economic and Sector Work: The World Bank Group is also engaged in analytical and knowledge dissemination exercises. It provides regular economic updates and advises the Nepalese authorities on key economic policies. It also works with partners and the government on analyzing poverty trends in Nepal. For example, with support from the U.K.’s Department for International Development and Denmark, the Bank worked closely with the Central Bureau of Statistics to complete the latest Living Standards Survey (NLSS 3), to provide core data on poverty trends and access to services.

Activities of the International Finance Corporation (IFC) in Nepal

IFC’s committed investment portfolio in Nepal stood at $40 million as of March 4, 2014, consisting of power, transport, banking, microfinance, tourism, and trade finance lines. IFC invested in 14 projects (for $57 million in total) over the last ISN period (FY12 and FY13) and 6 projects (for around $4 million in total) in FY14 as of March 4, 2014. Most recently, IFC’s investments include hydropower investments, an airline expansion, and credit for trade financing.

On the advisory services side, IFC is engaged in a range of areas including investment climate, access to finance and sustainable business advisory. Besides, there is also a pipeline of advisory projects in the PPP transaction space. IFC’s advisory services has strengthened multifold, from an active portfolio of $1.3 million in FY09 (three projects) to $12.8 million as of February 2014 (10 percent of South Asia Portfolio), across 12 projects in Nepal. Some high impact ongoing programs in the country include: Investment Climate Reform Project; enhancing access to finance through strengthening the payments system and credit bureau, and improving sustainable energy finance practices; and promoting climate resilient agriculture. A strong pipeline of projects has been developed to continue the transformative work. Some of the upcoming projects include work in the Nepal hydro sector which is a IFC/World Bank joint initiative and includes support for impact investments and sector wide adoption of E&S standards; scaling up renewable energy and SME banking programs; and development of PPP transactions in critical sectors.

Going forward, IFC will seek to continue the programs aligned with the three strategic pillars of IFC’s South Asia Strategy which includes: (a) inclusive growth; (b) climate change; and (c) regional and global integration. IFC will continue to prioritize on the hydropower sector, financial sector and agribusiness. IFC’s additionality in Nepal comes through providing longer tenor financing than is available in the market, patient equity capital, crisis response products such as liquidity facilities, global and regional expertise and experience, and technical assistance to enhance areas such as corporate governance and management of environmental and social risks. IFC aims to continue to respond to client needs through facilities such as SME Venture Fund, Infraventures, transaction advice for PPPs, and risk-sharing facilities. As local currency financing is essential for companies and sectors that generate local currency revenues, including large scale infrastructure hydropower-projects, IFC plans to continue its effort in partnership with IDA, with the GON to create such instruments.

IFC is supporting the Nepal Business Forum (NBF), a public private dialogue platform established by the GoN in 2010, which brings together over 40 government and private sector agencies to dialogue and review government policy and regulation towards the private sector, with the aim of improving the effectiveness, and accountability of private sector policy making, and regulatory enforcement. Given the political uncertainty and civil unrest, the NBF has been an important tool in helping the country refocus on economic growth by facilitating constructive dialogue on constraints to investment, trade and export, and finance and credit.

In addition, IFC’s advisory service continues to facilitate new private investments and reduce the barriers of investment in key priority sectors including tourism, agriculture, finance, and infrastructure (especially hydropower). IFC is supporting the GoN with PPP transaction advisory to assist in evaluating its priority projects through a Memorandum of Understanding with the Investment Board of Nepal. Under this MoU, IFC will provide support to the development of feasibility studies, strategic options for particular projects, development of contract documents, as well as support and capacity building to take these projects to market.

Other ongoing IDA/IFC work is laying the foundation to help Nepal transform to a climate resilient development path—consistent with poverty reduction and sustainable development goals—with financial support from the Pilot Program for Climate Resilience and other climate investment funds. IFC is working with leading agribusiness firms to improve agricultural and water management practices, introduce new technologies among smallholder farmers producing rice, maize and sugarcane to help them adapt to climate change. The objective is to expand the agriculture sector in Nepal using sustainable and replicable climate smart models in order to improve farmer resilience.

Table II.1.

IDA Projects

(Amounts in US$million)

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Relations with the Asian Development Bank

Country Program

The Asian Development Bank (ADB) began lending to Nepal in 1969. As of 31 December 2013, Nepal has received 167 loans/grants—128 sovereign ADF loans ($3,103.38 million), 5 non-sovereign loans ($58.64 million), and 34 ADF grants ($823.75 million) totaling $3,985.77 million. Nepal Country Partnership Strategy (CPS) 2013–2017, approved in October 2013 is more selective, with a bulk of the CPS resource envelope allocated to operations in energy, transport, and urban infrastructure and services, followed by agriculture and education. Five thematic priorities—gender equality and social inclusion, environmental sustainability, good governance, regional cooperation and integration, and private sector development will be mainstreamed in ADB operations. The portfolio of active sovereign ADF loans and grants as of 31 December 2013 consists of 47 loans and grants with an overall net amount of $1,553.75 million.

The assistance program for 2013 comprised seven projects with a total of $330.5 million in ADF loans and $45.5 million in ADF grants. The projects include the Tanahu Hydropower Project (loan $150.0 million); Skills Development Project (grant $20.0 million); Kathmandu Valley Waste Water Management Project (loan $80.0 million); SASEC Road Connectivity Project (loan $75.0 million); Project Preparatory Facility for Energy (grant $21.0 million); and Bagmati River Basin Improvement Project (loan $25.5 million and grant $4.5 million).

Technical Assistance

As of 31 December 2013, ADB has approved technical assistance (TA) projects totaling $180.30 million. There are currently 24 ongoing TAs amounting to $32.8 million. 19 projects (22 loans and grants) and 6 TAs which are about 51% and 25%, respectively, of the Nepal portfolio, are currently being administered by the Nepal Resident Mission.

Private Sector Operations

ADB’s private sector operations in Nepal began in 1989. As of 31 December 2013, cumulative approvals in four projects amounted to $58.6 million. One of the major private sector projects is the 60-MW Khimti Hydropower project, which was approved in 1996. ADB’s private sector operations will focus mainly on hydropower development, both for domestic sale and for export to India although many constraints to investment remain and further policy dialogue is required. Moving forward in the energy sector, ADB’s private sector arm will look into private sector-led investments on a case-by-case basis.

ADB’s Trade Finance Program (TFP) fills market gaps by providing guarantees and loans through partner banks in support of trade. TFP has done over 8,000 transactions supporting over $16 billion in trade and over 4,000 small and medium-sized enterprises since 2004. In 2013, TFP supported $4 billion in trade through over 2,000 transactions. In Nepal, the TFP works with three banks and has supported over $69 million in trade.

Sovereign Loans and Grants by the Asian Development Bank, 1968 - 2013

(as of 31 December 2013)

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Statistical Issues

Economic and financial data are broadly adequate for surveillance, with scope for improvement especially in fiscal (external financing) data, more detailed price statistics, and the timeliness and quality of balance of payments data. Nepal provides core data to the Fund and releases data in government and central bank publications. It has been a participant in the General Data Dissemination System (GDDS) since May 2001. Metadata were initially posted on the Dissemination Standards Bulletin Board in May 2001 and last updated in January 2009.

Real Sector Statistics

The Central Bureau of Statistics (CBS) compiles national accounts using the methodology of the 1993 SNA. Key estimates include GDP by industry (in current and constant prices) and by expenditure categories (current prices), and gross national income and savings. A 2011 STA mission revealed that on the expenditure side, no separate estimate of change in inventories is made, and inventories plus statistical discrepancy is treated as a residual, which has risen over time to more than 13 percent of GDP. This raises serious doubts over the reliability of other categories of final expenditure, particularly household final consumption and capital formation. On the activity side, while benchmark estimates are assessed to be robust, weaknesses arise due to low quality of extrapolators and lack of benchmark surveys in key areas such as construction and trade. Previous STA missions in 2005 and 2006 (with AsDB assistance) provided support to the development of quarterly national accounts (QNA) and the rebasing of the annual national accounts to 2000/01 from 1994/95. CBS is now considering rebasing national accounts to 2004/05 or 2010/11, for the reference year 2013/14 or 2014/15. Significant progress has been made compiling quarterly national accounts estimates for the period 2004/05 to 2012/13; however, these data still require extensive review and editing before publishing. It had been planned that the quarterly data would be published in March or April 2014. The lack of data which can be used to assess estimates for annual household consumption expenditure remains a major shortcoming. The CBS has launched an annual household survey that will collect data on household expenditure that could be used to improve the household expenditure estimates. High frequency indicators are generally lacking; a quarterly manufacturing production index exists but updates are not available since Q1 of 2010/11.

The Nepal Rastra Bank (NRB) compiles the consumer price index (CPI), with 2005/06 as base year. Survey work to revise the CPI basket is underway, expected to be completed in 2013/14, in order to produce a new CPI series by 2015/16. The new survey will include more commodities and is expected to yield a more representative basket, as the previous survey was carried out during the armed conflict, which may have affected survey responses. A core inflation series is not published, although underlying data necessary to calculate such a series appear to be available. NRB also publishes a wholesale price index (WPI), with weights based on 1999/2000 data. Broadly, the index covers agricultural commodities (49.6 percent), domestic manufactured goods (20.4 percent), and imported goods (30 percent). The CBS has received TA to update and expand the producer price index (PPI) to include other economic sectors. Current PPI coverage is restricted to manufacturing. As well, an index of wages and salaries is compiled and published, with base year 2004/05.

Government Finance Statistics

Authorities began to compile fiscal data in accordance with IMF’s Government Finance Statistics Manual 2001 (GFSM 2001) in 2011, an important step forward. Still the budget classification needs further improvement to exclude financing transactions from the functional classification of expenditure, make a more clear distinction between revenue and transactions in nonfinancial assets, subsidies and capital payments to enterprises, and other improvements to ensure full consistency with the GFSM 2001. Meanwhile, treasury single account (TSA) has been rolled out to all 75 districts including Kathmandu, which allows for more timely and accurate fiscal data reporting and monitoring. However, a number of fees collected outside the budget, foreign aid directly paid by donors, the operations of extrabudgetary entities and local governments are not reported in the annual budget, and there is no compilation of the government’s balance sheet in accordance with the GFSM 2001. Government finance statistics are regularly reported for publication in the Government Finance Statistics Yearbook, but not in the International Finance Statistics.

Monetary and Financial Statistics

Following up on the recommendations of a 2009 STA mission that NRB broaden the coverage of monthly monetary statistics to include development banks and finance companies, the NRB now compiles and publishes an expanded broad money survey, which is a significant step forward.

There is room for improvement in the reporting of data on the interest rates. At present, key policy rates including t-bill, interbank, and NRB policy rates are available, but deposit and lending rates of commercial banks are not well reported, while those of development banks and finance companies are not reported at all. It may be useful to report the prime lending rate of top 5 commercial banks, as well as average deposit rates of the same, to provide a sense of the movement over time. At present, maximum and minimum rates are reported, which remain relatively fixed over time and are not very informative.

Data on the NRB’s claims on other depository corporations (ODCs) are not consistent with the data on the ODCs’ liabilities to the NRB because ODCs’ liabilities include only refinance and repo credit from the NRB; separate data on the NRB’s deposits at the ODCs are currently not available and therefore are excluded from the ODCs’ liabilities to the NRB.

External Sector Statistics

The NRB compiles and disseminates balance of payments (BOP) statistics in conformity with the fifth edition of the Balance of Payments Statistics Manual (BPM5). Balance of Payments statistics present several shortcomings in terms of coverage, classification, and data sources. Key shortcomings in BOP statistics are: (i) underestimation of imports, and to a lesser extent exports; (ii) significant problems in measurement of remittances; (iii) incompleteness of data on foreign grants, making it difficult to classify current vs. capital, and official vs. private grants; (iv) absence of direct investment data; and (v) unrecorded financial flows.

Nepal is a participant of the Japan Administered Account for Selected IMF Activities (JSA) project on the Improvement of External Sector Statistics-ESS (BOP, IIP, and External Debt Statistics) in the Asia and Pacific Region. Since 2012, NRB has been receiving technical assistance in the area of ESS. The 2013 STA mission has observed important progress in the implementation of recommendations of previous TA missions. Thus, for first time, the NRB has compiled a preliminary draft of the International Investment Position (IIP), resumed the compilation of external sector debt statistics, and improved the compilation of direct investment. The drafts of the IIP, EDS, and DI have been submitted to the NRB management for approval before national dissemination and submission to IMF STA. In the area of data source, the mission has continued redesigning the International Reporting System (ITRS), the main collection source for compiling BOP and IIP, and assisted the authorities in improving the surveys for collecting direct investment and trade credit data.

Overall the quality of BOP data has improved with the support of IMF STA technical assistance (TA) and training of the NRB staff through ESS IMF HQ and regional courses.

Nepal—Table of Common Indicators Required for Surveillance

(As of April 30, 2014)

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

Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds. Interest rates of commercial banks are reported in the monthly monetary update, whereas official interest rates are reported weekly as well as monthly.

Foreign, domestic bank, and domestic nonbank financing.

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

Including currency and maturity composition. Domestic debt is reported monthly and external debt is reported on annual basis.

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

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Cover IMF Staff Country Reports
Nepal: Staff Report for the 2014 Article IV Consultation
Author: International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2014: Issue 214
Publisher:
International Monetary Fund
ISBN:
9781498386784
ISSN:
1934-7685
Pages:
68
DOI:
https://doi.org/10.5089/9781498386784.002