Nepal: Request for an Arrangement Under the Extended Credit Facility -Press Release; Staff Report; Debt Sustainability Analysis; Staff Supplement; Statement by the Executive Director for Nepal
Author:
International Monetary Fund. Asia and Pacific Dept
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Publication Date:
27 Jan 2022
eISBN:
9798400200380
Language:
English
Keywords:
concessional budget support loan; project loan disbursement; loan disbursement; shock strains Nepal; financing gap; COVID-19; Credit; Fiscal risks; Global
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1. Before the COVID-19 shock, strong growth in Nepal had been supported by greater political stability, improved electricity supply, and earthquake reconstruction. Large remittance inflows (mainly from Gulf Cooperation Council (GCC) countries, India, and Malaysia) were also helping to alleviate poverty and unemployment. Buffers built before the COVID-19 pandemic— including a modest fiscal deficit, relatively low public debt to GDP, and a comfortable level of gross official reserves—provided some policy space to respond.

Abstract

1. Before the COVID-19 shock, strong growth in Nepal had been supported by greater political stability, improved electricity supply, and earthquake reconstruction. Large remittance inflows (mainly from Gulf Cooperation Council (GCC) countries, India, and Malaysia) were also helping to alleviate poverty and unemployment. Buffers built before the COVID-19 pandemic— including a modest fiscal deficit, relatively low public debt to GDP, and a comfortable level of gross official reserves—provided some policy space to respond.

Background

1. Before the COVID-19 shock, strong growth in Nepal had been supported by greater political stability, improved electricity supply, and earthquake reconstruction. Large remittance inflows (mainly from Gulf Cooperation Council (GCC) countries, India, and Malaysia) were also helping to alleviate poverty and unemployment. Buffers built before the COVID-19 pandemic— including a modest fiscal deficit, relatively low public debt to GDP, and a comfortable level of gross official reserves—provided some policy space to respond.

2. The COVID-19 pandemic is taking a heavy toll on Nepal’s economy. Faced with immediate healthcare and economic shocks, in FY2019/20, Nepal met financing needs with the Rapid Credit Facility (100 percent of quota), support from the World Bank, Asia Development Bank and other development partners, debt relief under the Catastrophe Containment and Relief Trust (CCRT) and debt reprofiling under the G20 Debt Service Suspension Initiative (DSSI). However, additional financing gaps have emerged as the pandemic has persisted, with Nepal hit by a second wave at the end of FY2020/21, and livelihoods are at risk due to job and income losses.

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COVID-19 Developments in Nepal

Citation: IMF Staff Country Reports 2022, 024; 10.5089/9798400200380.002.A001

Source: outworldlindata.org/coronavirus/country/MNpal omkoronaviruq/counttvflxleml

3. Implementation of COVID-19 response measures is taking place amid a transition to fiscal federalism. As mandated by the Constitution of Nepal, responsibility for many public services is being devolved to 7 provincial and 753 local governments (MEFP, H17). While federalism can improve service delivery and strengthen accountability, weak capacity of subnational governments (SNGs) is a challenge that has been exacerbated by the COVID-19 shock.

4. The new government has committed to comprehensively address the health, economic, and social impact of the pandemic. On July 18, 2021, Prime Minister Deuba obtained a vote of confidence from Parliament and took office, and his government is now expected to remain until the next elections in late 2022. The authorities issued a Status Paper on the economy in August 2021, and its vision and priorities are consistent with the polices supported by the ECF, including the prioritization of the pandemic response. In September 2021 a revised 2021/22 budget was approved, which kepttotal expenditure broadly unchanged—increasing COVID-19 vaccine expenditures while cutting administrative expenses. Poverty reduction and social protection were also prominent.

Recent Developments, Outlook and Risks

A. Recent Developments

5. The pandemic continues to impact health and livelihoods. From April to July 2021, Nepal suffered a devastating second wave of COVID-19, interrupting a gradual recovery in economic activity. There have been over 800,000 confirmed cases and over 11,000 recorded COVID-19 deaths, the majority of which were during the second wave, and healthcare capacity remains very low. GDP contracted 2.1 percent in FY2019/20, and staff estimate a partial recovery at 2.7 percent growth for FY2020/21. The drop in tourism and services led to a collapse of a key growth industry that will take time to recover. Households are experiencing an ongoing shock to income and social assistance programs have limited coverage, implying a likely setback to poverty alleviation gains in recent years. Vaccine procurement is increasing, however widespread vaccination is not expected until well into calendar year 2022.

6. The authorities responded proactively. Despite implementation difficulties related to the lockdown, disease prevention, containment, and health management policies were strengthened, with implementation by both the federal and subnational governments. Existing cash transfer programs were maintained and, in some cases increased, while temporary measures included daily food rations to the most vulnerable and utility bills subsidies. Measures to mitigate job loss included an expansion of the Prime Minister’s Employment Program and skills training. Several federally financed measures have been implemented by local governments. Tax relief measures included extension of tax deadlines, VAT and customs duty exemptions for COVID-19 related imports, and income tax rebates for MSMEs and highly affected industries. Liquidity and credit measures were implemented and macroprudential policies eased, while the NRB is allowing for loan deferral programs. The authorities enhanced the refinance facility and concessional loan program to support entrepreneurs, MSMEs, and affected businesses including in the tourism industry.

7. The COVID-19 shock affected both revenues and expenditures. Temporary factors led to a narrowing of the overall fiscal deficit from 5.3 percent of GDP in FY2019/20 to 4.2 percent of GDP in FY2020/21. Specifically, increases in import related taxes and deferred tax receipts raised revenues by 2.2 percent of GDP. Concurrently, budget execution, which usually increases in the 2nd half of the fiscal year, was severely constrained by the second wave and associated lockdown measures. Public debt in FY2020/21 was 47.2 percent and Nepal remains at low risk of debt distress. Nepal’s external and domestic debt are roughly equal (Annex V). External creditors are mainly multilateral (88 percent of all external debt including the World Bank’s International Development Association and the Asian Development Bank). Japan is the largest bilateral creditor, followed by China, India, and Korea.

8. Banks’ financial performance has likely been impacted by the COVID-19 shock, but the reported impact is masked by COVID-19 related support measures and regulatory forbearance. Deposits increased year-on-year by 17.2 percent as of October 2021 and despite a 29.7 percent increase in total loans, by October 2021 the NPL ratio had decreased to 1.4 percent (from 1.8 percent in January 2021 and 1.5 percent as of August 2021), reflecting the high level of masking effects of COVID-related forbearance measures. The NRB does not yet have any concrete plans for unwinding the temporary COVID-mitigating measures, and full exit from these measures and recognition of COVID-impacted loans are likely to lead to an increase in the overdue loans and NPL ratios.

9. After an initial collapse in 2020, imports have rapidly grown, fueling a large current account deficit (8.3 percent of GDP). Buoyed by formalization and the ongoing global recovery, remittances remained robust, and combined with accommodative monetary policy they supported consumption, driving import growth of 25.7 percent year-on-year in FY2020/21. Goods exports have grown at 30.0 percent year-on-year but remain an order of magnitude smaller than imports. Tourism, which fell 90 percent during the pandemic, is forecast to only partially recover in FY2021/22 and not reach pre-pandemic levels until later in FY2022/23. Q1 data for FY2021/22 shows that import growth has further increased, while remittances have begun to soften.

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Exports and Imports

(Growth, in percent)

Citation: IMF Staff Country Reports 2022, 024; 10.5089/9798400200380.002.A001

Sources: Nepali authorities; IMF staff estimates.

10. Gross international reserves remain adequate but have begun to decline in recent months. In October 2021, gross official reserves stood at US$10.22 billion (7.9 months of prospective imports), a decrease from $10.56 billion in July 2020. Reserves accumulated during the first three quarters of FY2020/21 due to temporary factors such as strong trade credit, COVID-19 related official loans, the 2021 SDR allocation of SDR 150.4 million (US$214 million, 0.18 months of imports1), as well as the limited expenditure capacity due to the lockdowns and remittance formalization. However, as the import recovery strengthened, reserve coverage has begun to fall in recent months and is projected to continue its downward path through the program period. External and fiscal financing will be needed to support the response to the pandemic, which remains uncertain in duration and intensity—as well as to facilitate a continued recovery. Structural issues also give rise to a protracted BoP need unrelated to the pandemic, given Nepal’s high import and remittance dependence, and narrow export base. Maintaining a comfortable level of reserves is key to protecting the credibility of the exchange rate peg, and to maintain buffers in case other possible risks materialize (including natural disasters).

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Total Foreign Employment

(Thousands of workers)

Citation: IMF Staff Country Reports 2022, 024; 10.5089/9798400200380.002.A001

Sources: Nepali authorities; IMF staff estimates.
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Remittances

Citation: IMF Staff Country Reports 2022, 024; 10.5089/9798400200380.002.A001

Sources: Nepali authorities; IMF staff estimates.

B. Outlook and Risks

11. The trajectory of the pandemic is extremely uncertain, weighing on the economic outlook. Movement restrictions were maintained through much of 2021 as COVID-19 cases remain elevated. The acute phase of the pandemic is assumed to be over by mid-2022/23 as local transmission is reduced to low levels. Nepal however remains vulnerable to further infection waves. The recent global emergence of the omicron variant poses immediate risks, as does the impact of potential further new variants, especially if vaccination rates remain low.

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Containment Measures, Stringency Index

Citation: IMF Staff Country Reports 2022, 024; 10.5089/9798400200380.002.A001

Source: https://ourworldindata.org/covid-stringency-index
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Community Google Mobility Index

Citation: IMF Staff Country Reports 2022, 024; 10.5089/9798400200380.002.A001

Source: https://ourworldindata.org/covid-google-mobility-trends

12. Growth is expected to gradually resume in FY2021/22, with a deterioration in the external and fiscal accounts.

  • Growth. Growth is forecast at 4.4 percent in FY2021/22 driven by a tepid recovery in sectors hard hit by pandemic shut downs, such as construction, manufacturing and services. The outlook for tourism—a bedrock of the Nepali economy and key source of employment— remains fragile. Growth in the following years will be supported by greater and more efficient public infrastructure and development spending, and expansion of hydropower.

  • Inflation. With the peg to the Indian rupee, inflation in Nepal is expected to broadly follow developments in India. Inflation is expected to rise to 5.7 percent during-FY2021/22, as higher oil and food prices globally exert moderate inflationary pressures.

  • Fiscal accounts. The overall fiscal deficit is expected to widen to 6.3 percent of GDP in FY2021/22 as higher expenditure needs arise from the resumption of capital projects and the governments’ pandemic response.

  • Current account. Nepal’s current account deficit is expected to remain wide at -9.1 percent in FY2021/22. Imports are projected to remain at high levels given significant fiscal and monetary support for the economic recovery, as well as higher oil and food prices, COVID-19 related health spending, inventory rebuilding, and government capital spending. However, while the outlook is uncertain, the very large increases in imports seen in Q1 FY2021/22 are expected to dissipate somewhat as some of these temporary factors unwind. At the same time, given recent increases in the number of Nepali migrant workers seeking employment abroad, remittances should also begin to recover, providing further support to the current account. The external position of Nepal in FY2020/21 was moderately weaker than the level implied by fundamentals and desirable policies

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Annual Growth Projections

(In percent; year-on-year)

Citation: IMF Staff Country Reports 2022, 024; 10.5089/9798400200380.002.A001

Sources: IMF staff projections
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Real GDP Growth and External Sector Development

(In percent; year-on-year)

Citation: IMF Staff Country Reports 2022, 024; 10.5089/9798400200380.002.A001

Sources: Nepali Authorities; IMF staff estimates.1/ For FY 2020/21 showing the IMF staff estimates.

13. The depth and duration of the pandemic are the main risks to the outlook. The economic impacts of the pandemic and associated physical distancing measures are expected to gradually decline during FY2021/22 under the baseline. Should the pandemic intensify more than expected through the program period (including because of new variants and uncertainty regarding the widespread availability of COVID-19 vaccines), it will weaken recovery prospects in major economic partners, and create disruptions to Nepal’s domestic activity, remittances, and tourism, resulting in larger and more protracted balance of payments and fiscal financing needs. If financing were not available to fill such increased external and fiscal needs, growth would be weaker than in the baseline, given the insufficient support to the economy, further hurting poverty alleviation efforts. Rising vulnerabilities in the banking system generate additional risks to the outlook, as well as those related to implementation capacity and fiscal pressures from the transition to fiscal federalism. The global response to rising inflation also weighs on the outlook. Rising commodity prices, risk of social and political instability also weigh on the outlook, and Nepal is vulnerable to climate related shocks and natural disasters (flooding, landslides, earthquakes).

The Extended Credit Facility

A. Program Objectives and Policies

14. The ECF program has three main objectives, aligned with the government’s Relief, Restructuring, and Resilience (3R) plan to address the economic and social impacts of the pandemic and the medium-term recovery:

  • Mitigate the COVID-19 impact on health and economic activity, and protect vulnerable groups, including by making room in the budget for health, social assistance, and job support, while enhancing fiscal transparency and governance.

  • Preserve macroeconomic and financial stability, including by maintaining a prudent fiscal stance, preserving reserve adequacy, and strengthening financial sector regulation and supervision.

  • Support a reform agenda that leads to sustained growth and poverty reduction over the medium-term, including by implementing cross-cutting institutional reforms that improve governance and reduce corruption vulnerability. Specifically, upgrading the tax system, strengthening public spending efficiency, advancing fiscal federalism, improving fiscal risk and public debt management, and strengthening the NRB institutional framework.

15. Strong ownership, sustained support from development partners, and the appropriate prioritization and sequencing of reforms is critical. Nepal continues to face considerable uncertainties as the COVID-19 shock strains Nepal’s pre-existing institutional and capacity constraints, with the pandemic’s magnitude, duration and impact still unclear. The program therefore aims at careful prioritization and parsimony, focusing first on attending the most urgent needs and critical reforms to effectively and sustainably tackle the pandemic shock, followed by a gradual stepping up in the pace of reforms during the program period. The program also supports a consistent, well-articulated policy mix based on all policy levers. The program will seek complementarity with other development partner programs whenever possible, and implementation of reforms will be supported by IMF technical assistance, including through HQ and SARTTAC. Table 10 provides an overview of the conditionality under the program.

B. Fiscal Policy

16. Fiscal policy in the early part of the program accommodates spending to address health needs, support the economy, and protect the most vulnerable, but fiscal deficits will gradually decline once the health crisis wanes. The FY2021/22 budget kept many COVID-19 response measures of FY2020/21 and further increased all types of social security allowance and Child Protection Grants by one third, expanded grants and free lunch program to poor families, and increased COVID-19 vaccine purchases. The budget also provides tax relief to sectors adversely impacted by COVID-19 pandemic, in addition to measures of strengthening invoice monitoring and control to reduce tax leakage and introducing digital service taxes to expand tax bases. These measures together will widen the overall fiscal deficit to 6.3 percent of GDP in FY2021/22, though it is still less than the budgeted deficit in part due to underspending of the capital budget. However, fiscal deficits are expected to decline to 3.5 percent of GDP by FY2024/25. Revenues will improve with the rebound in economic activity and upgrades to the tax system, including the reduction of ineffective tax exemptions, improving revenue administration efficiencies, and modernizing tax policy framework. Are venue mobilization strategy (MEFP HI5) will be developed, building on the existing efforts to enhance tax administration and drawing on recommendations from FAD TA (SB, 3rd review). The authorities have taken steps to estimate tax expenditures related to international trade and will report tax expenditures comprehensively after the domestic component is also estimated to enhance transparency and allow for a cost-benefit analysis (SB, 2nd review, MEFPH15). Spending will be lower, facilitated by roll-off of temporary support measures and less duplication of spending responsibilities across levels of governments. The federal government primary deficit in the program period (indicative target (IT)) has been calibrated at a level consistent with stabilizing the debt by the end of the program period while preserving priority expenditures, including social spending and support for the economic recovery. The authorities have expanded social programs in FY2021/22, and an indicative target will be introduced in the second review, which will initially focus on child grant spending (MEFPH20). Staff will continue to actively engage with other development partners (including World Bank, UNICEF, FCDO) on social spending issues.

17. The fiscal deficit trajectory under the program will help stabilize public debt. Nepal continues to be assessed at low risk of distress. Public debt is projected to peak at 55.3 percent of GDP in FY2024/25, declining thereafter, as the primary deficit moves below the debt-stabilizing level of 2.1 percent of GDP (similar to the five-year average prior to the COVID-19 pandemic). Debt-to-GDP would stabilize much earlier if Net Acquisition of Financial Assets (NAFA), mostly loans and capital injections to SOEs, incorporated in the baseline forecast were to be smaller2.

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Debt-Stabilizing Primary Deficits

(In percent of GDP)

Citation: IMF Staff Country Reports 2022, 024; 10.5089/9798400200380.002.A001

Source: IMF staff estimates.

18. The program supports a comprehensive fiscal structural reform agenda—with both revenue mobilization and public financial management reforms. The key measures (MEFPH14–18) include: i) An action plan to address the public investment efficiency gap (SB, 2nd review), drawing on recommendations from the public investment management assessment (PIMA) and its climate change component (PIMA CC) conducted in March and April 2021. ii) A fiscal risk register will be developed (SB, 2nd review) followed by a comprehensive fiscal risk statement to be published with the budget speech (SB, 4th review), iii) A fiscal risk monitoring system for subnational governments will also be established, supported by Fund TA(SB, 3rd review), iv) All operational funds will be reported to the Financial Comptroller General Office (FCGO) for inclusion in the consolidated financial statements (SB, 1st review), cash flow forecasting will be prepared and shared with the PDMO and the NRB on a regular basis (SB, 2nd review), and debt management function transferred from NRB to the PDMO (SB, 6th review).

19. The program will also support fiscal transparency and measures to enhance governance and combat corruption (MEFP H33–34). The program includes several cross-cutting institutional reforms that address governance, vulnerability to corruption, and efficiency of the public sector. In addition, the authorities continue to implement spending transparency commitments, including that the Office of the Auditor General (OAG), an independent Constitutional body, audits the government accounts on an annual basis, as per its mandate, and publishes the results on the OAG website. The latest OAG report for FY2019/20 was published in August 20213. In addition, spending from the COVID-19 Fund—an extra-budgetary fund with financing from government, development partners, and the private sector—is being published monthly and the OAG is also expected to audit this Fund in 20224. In the context of commitments made at the time of the Rapid Credit Facility disbursed in May 2020, the authorities have since published a quarterly report on federal government spending on the COVID-19 response, and a further report will be published by March 2022 (SB, 1st Review). Furthermore, the authorities have issued a Public Information Notice (PIN) on the collection and publication of beneficial ownership information5. Consistent with the published PIN, implementation agencies will publish on a government website large public procurement documentation, ex-post validation of delivery, the name of awarded companies, and the name of their beneficial owner(s) for all new, large, COVID-19 related procurement contracts (Prior Action).

C. Monetary and Financial Sector Policies

20. Inflation has remained generally stable despite some heightened risk factors. The year-on-year consumer price inflation and wholesale price inflation stood at 4.2 percent and 3.8 percent, respectively as of October 2021. Heightened risk factors on inflation are the appreciation of Indian rupee, increase in the prices of petroleum products and disruptions to the agricultural production due to climate related factors such as monsoons and floods. The authorities remain committed to having price and external sector stability as overarching objectives of monetary policy and preserving the credibility of the exchange rate peg by maintaining an adequate level of reserves (MEFPU22).

21. The NRB is gradually unwinding accommodative monetary policy. The accommodative monetary policy adopted in FY2020/21 resulted in high credit growth with generally stable inflation. The NRB announced moving to a more neutral monetary policy framework for the current fiscal year (FY2021/22). Within this framework, the NRB increased the deposit collection rate (the lower boundary for the interest rate corridor) from 1 percent to 2 percent and policy rate from 3 percent to 3.5 percent while keeping the Standing Liquidity Facility (SLF -the upper boundary for the interest rate corridor) constant at 5 percent.

22. Credit growth remains high, leading to greater liquidity needs in the banking system. With the gradual lifting of restrictions on economic activities after the first quarter of FY 2020/21 coupled with the availability of refinance facilities at concessional rates, imports, supported by high credit growth, increased substantially. Given the lower level of remittance inflows, the surge in imports have mostly been financed by loans. Despite the 17.2 percent year-on-year increase in deposits, loans increased by 29.7 percent as of October 2021. As of October 2021, the cash balances of Banking and Financial Institutions (BFIs) at the NRB are only marginally above the cash reserve requirement and around 7 percent of its level in the previous year. In the first three months of the current fiscal year, the NRB injected over Rs. 1 billion of liquidity in the market and interbank transactions across commercial banks have substantially increased with interbank interest rates approaching the SLF rate. The NRB remains committed to restricting annual credit growth to 19 percent while the expected deposit growth is around 15 percent in FY 2021/22. Additionally, the NRB stands ready to provide liquidity in the system, where necessary, through SLF and repo facilities while the refinancing facility will gradually be scaled back. The authorities will also continue to closely monitor inflation developments and credit supply and stand ready to adjust policy settings in case signs of overheating appear (MEFPH23). Staff reiterated that the interest rate corridor framework should be strengthened in the medium term.

23. The reported capital adequacy levels are above the regulatory minima and NPL ratios are at low levels, but the banking system requires close monitoring. As of October 2021, the capital adequacy ratio of the banking system is 13.5 percent, and despite the high level of credit growth (evident even before the pandemic), the NPL ratio stands at 1.4 percent. The high share of revolving loans, evergreening practices, the difficulty in monitoring consolidated borrower exposures, unavailability of bank-level forbearance data, and insufficient level ofCOVID-19 related monitoring raise concerns that NPLs are understated, provisioning for loan losses is inadequate, and capital adequacy is overstated. At the same time, there are ongoing COVID-19 related borrower support and regulatory forbearance measures, which are likely to hide the vulnerabilities in asset quality (Annex I)6. The authorities have a firm intention to gradually phase them out. Concrete plans, yet to be announced, should be based on a fuller view of potential impacts. Further clarity is needed for the assessment of the health of the banking sector. Staff will work with the authorities ahead of the first review to analyze the banking system using bank level forbearance data7.

24. The NRB should continue to closely monitor the impact of COVID-19 on the financial sector. The effects of the potential deterioration in the asset quality, as well as the rising level of loan loss provisions, on the profitability and capital adequacy levels of banks should be assessed. The effects of rising leverage on the real sector should also be monitored. It is welcome that the NRB stands ready to tighten macroprudential policies8 to curb credit growth and mitigate the buildup of financial vulnerabilities (MEFP H24), and staff will further discuss with the authorities the calibration of macroprudential measures. COVID-19 related support measures in the financial sector should however be gradually unwound, and the remaining ones should be targeted and time bound (MEFPU32).

25. The program follows a carefully sequenced strategy to further strengthen financial sector regulation and supervision. The strategy (1) prioritizes actions to ensure the provision of adequate and timely supervisory data, including those relating to COVID-19 response measures; (2) updates the regulatory framework to enable more accurate assessment of the asset quality of banks and that better captures existing risks; (3) provides an accurate assessment of the banks’ asset quality based on the new regulation through auditor-assisted on-site inspections; and (4) continues to enhance the quality of supervision, supported by the data and regulatory upgrades. Specific actions include the following and the authorities remain committed to implementing these actions (MEFPU28–31):

  • To enhance monitoring of the impact of COVID-19 and related policy measures on asset quality, the NRB will enhance and customize its current reporting template to regularly collect information on forbearance, provisioning levels, asset classifications, and payback capacity of borrowers (SB, 1st review). The NRB’s analyses of this information will be used to inform future on-site inspections to further increase its effectiveness and planning of the phase-out of the COVID-19 measures as well as taking appropriate supervisory and enforcement actions.

  • The NRB will approve an action plan (SB, 1st Review) and complete the full implementation of the Supervisory Information System (SIS) for class A banks (SB, 2nd review) and proceed in a second stage with the implementation of SIS for Class B and C banks9.

  • Asset classification in Nepal, including NPLs, is mostly defined in terms of the days past due and does not adequately incorporate qualitative factors that could affect borrowers’ creditworthiness. Additionally, the current regulatory framework does not include clear definitions of forborne loans and NPLs, and guidance on how these loans should be treated in reclassifications. The NRB will draft amendments to the regulatory framework to address these shortcomings (SB, 1st review), in line with MCM recommendations. The new regulation will be issued while allowing an adequate transition period for the banks to implement (SB, 2nd review).

  • The NRB will launch (SB, 3rd review) and complete (SB, 4th review)—for the 10 largest banks—in-depth on-site inspections assisted by independent third-party auditors to review loan portfolios in line with the new regulatory framework and with special attention to loan and collateral valuation, evergreening, group borrowing, concentration risks, and the impact of COVID-19 on loan portfolios and reclassification of loans. Any banks found to be undercapitalized based on the diagnostics will be required to present a recapitalization plan.

26. The authorities have expressed their commitment to ensuring a stable and well-capitalized banking system. Enhanced monitoring and the updated regulatory framework will facilitate an accurate assessment of the health of the financial sector. To ensure the effectiveness of the supervisory process, the NRB have committed to take relevant and timely enforcement actions where necessary. If any bank becomes undercapitalized, the NRB will use the set of relevant early intervention measures, including further suspension of dividend payments and taking other corrective measures10such as limitations in loans, deposits, and investments, requiring changes in the business structure and the removal of management. The NRB will ensure that banks’ loan classification correctly reflects the asset quality of the banking system and regulatory forbearance measures will be gradually withdrawn. Once the acute phase of the pandemic is over, the authorities will develop a strategy to continue strengthening financial sector regulation and supervision, with support from IMF technical assistance and a potential Financial Sector Stability Review (FSSR) (MEFP 1B2).

27. Strengthening the AML/CFT framework remains a priority. The authorities have committed to make progress on the implementation of their AML/CFT framework, while remaining vigilant and ready to act upon any new or emerging AML/CFT risks (MEFP 1135). The authorities have also committed to continuing their efforts to increase access to financial services and to develop financial markets, while maintaining financial stability (MEFP 1136).

28. The program will seek to improve the autonomy and accountability framework of the NRB. Specific reforms will be guided by key recommendations from the 2021 safeguards assessment. The assessment found limited progress in implementing previous safeguards recommendations and emphasized needed reforms related to the current shortcomings in the external audit of NRB’s accounts, financial reporting processes that fall short of international standards, and the need for modernization of the central bank framework to strengthen the autonomy and accountability of the NRB. The authorities will therefore submit to the Parliament amendments to modernize the NRB Act, addressing key recommendations of the safeguards assessment report (SB, 2nd review). Furthermore, the Auditor General will appoint reputable international auditors with experience in applying International Standards on Auditing and auditing central banks to audit of the NRB financial statements starting with FY2021/22 (SB, 1st review, MEFP U25).

Text Table 1.

Nepal: Sequencing of Reforms under the ECF Arrangement, FY2021/22-FY2024/25

article image

Financing and Program Modalities

29. Staff considers access of 180 percent of quota (SDR 282.42 million; US$398.8 million) under the 38-month ECF to be appropriate. The ECF would help Nepal address immediate BOP and fiscal financing needs (Text table 2) related to the pandemic that have been compounded by a pre-existing protracted balance of payments need resulting from high import-dependency, a narrow export base and a heavy reliance on remittances. Waves of the COVID-19 pandemic and the economic disruptions from prolonged periods of lockdown therefore give rise to balance of payments and fiscal financing gaps in the near term.

Text Table 2.

Nepal: Projected Financing Gap in FY2021/22 (percent of GDP)

article image
Sources: Nepali authorities; and IMF staff estimates.

Current account excludes official transfers

IMF-CCRT debt relief (US$4.9 mil) is included.

IMF-ECF (US$166.2 mil), WB (US$350 mil), and ADB (US$100 mil).

Note: Current baseline forecast is as of December 7, 2021.

30. The program is fully financed, with firm commitments in place for the next 12 months and there are good prospects for the remainder of the program. The pandemic response, including the urgent procurement of vaccines and continued economic support measures, have created an immediate balance of payments gap, estimated at 4.9 percent of GDP in FY2021/22, which would be financed with the ECF and budget support from development partners (1.2 percent of GDP in firm commitments so far) and a drawdown of reserves (3.1 percent of GDP). Alternative budget financing options are not available, particularly given the limited absorptive capacity of domestic markets.

31. Phasing will be somewhat frontloaded to match the timing of acute COVID-related needs. The fiscal financing gap is large in the first year of the program and insufficient financing would directly hinder the government’s COVID-19 response, which would have a lasting impact on poverty and the economy. Fiscal and external financing needs will decline over the medium term supported by the economic recovery process, the gradual dissipation of uncertainty related to the pandemic, and the authorities’ steadfast implementation of policies to promote macroeconomic stability and inclusive growth. Further, development partners are supportive of Nepal’s reform commitments under the ECF arrangement, thus providing policy assurances that could catalyze additional support over the medium term. In this context, a combined access of 100 percent of quota will be available within the first 12 months (50 percent at Board approval, and 25 percent at the first and second reviews), with the remaining 80 percent distributed in the subsequent reviews (table 7).

32. Program performance will be monitored by semi-annual reviews. Indicative targets (Us) will be set on the primary deficit of the federal government (a deficit ceiling, converting to QPCs in the 3rd review), and tax revenues (a floor, to be incorporated in the second year of the program). Applying ITs before their conversion to QPCs would support the authorities’ capacity building efforts and effective implementation of the strong fiscal indicators. The ITs on the primary deficit would be adjusted (i) upward (downward) to accommodate revenue shortfalls (windfalls) and (ii) upward (downward) if concessional project loans disbursed exceed (fall short of) the programmed amounts (TMU, 119 and 1110). Quantitative performance criteria (QPCs) will be set on net international reserves, and the standard continuous QPCs on non-accumulation of external arrears and non-introduction of exchange restrictions and multiple currency practices will apply. The QPCs on net international reserves would be adjusted (i) downward to accommodate revenue shortfalls and (ii) downward if concessional budget support loans disbursed fall short of the programmed amounts. Any downward adjustment to the QPC on net international reserves is capped to maintain reserve adequacy levels (TMU, 115). Structural benchmarks (SBs) for the first year of the program will be tightly focused on actions critical to addressing urgent needs in the face of the pandemic, with a broader structural reform agenda implemented once the recovery phase takes hold. The design of structural benchmarks complements other development partner programs where possible. A Poverty Reduction and Strategy Paper (PRSP) will be prepared (SB, 2nd review).

33. The program helps anchor and leverage the Fund’s capacity development strategy with Nepal. Fiscal policy support will focus on domestic revenue mobilization, public investment, and fiscal risk management. Financial sector technical assistance will include work on financial sector supervision, as well supporting the authorities’ efforts on central bank governance and modernization. A Financial Sector Stability Review is also envisaged.

34. A new safeguards assessment of the central bank has been completed. Its findings (see para 28 above) form the basis for structural conditionality related to institutional reforms. An agreement between the NRB and the MOF clarifying responsibilities for servicing obligations to the Fund will be put in place.

35. Capacity to repay remains adequate. IMF credit outstanding is projected to peak at 282.3 percent of quota in FY2024/25 (SDR 442.9 million), within the cumulative normal access limit of the PRGT. This amount corresponds to 7.9 percent of official reserves and 1.3 percent of GDP in FY2024/25. The authorities’ track record of servicing IMF debt is strong.

36. Staff and the authorities discussed contingency plans for a possible adverse scenario. The outlook is subject to considerable uncertainty from the depth and duration of the pandemic. Nepal’s buffers provide an important first line of defense, but additional fiscal and monetary policy measures could be needed, alongside further measures and financing to support the financial sector, should BoP pressures continue for longer than projected. The current fiscal framework includes 0.8 percent of GDP to support the financial sector, but given the vulnerabilities in the system, a significantly larger fiscal allocation would be needed in the event of a downside scenario materializing. Close engagement will allow for consultation with Fund staff if these shocks were to materialize.

Staff Appraisal

37. The COVID-19 pandemic severely impacted Nepal’s economy. Tourist arrivals collapsed, domestic activity plummeted, remittances have been volatile, and growth was lower than expected in 2019/20. The authorities reacted proactively, implementing a wide-ranging set of fiscal, monetary and financial sector policies, as well as disease prevention, containment, and health management measures.

38. A gradual resumption in economic activity and a corresponding surge in imports and related tax receipts led to higher growth and improved fiscal outturns in 2020/21. However, important fiscal and external financing needs remain, and the trajectory of the pandemic remains extremely uncertain, weighing on the economic outlook, and risks remain high. Both external and overall debt in Nepal are assessed at low risk of debt distress, while the external position of Nepal in FY2020/21 was moderately weaker than the level implied by fundamentals and desirable policies.

39. The ECF arrangement supports the government’s priorities. The arrangement would help mitigate the pandemic’s impact on health and economic activity and protect vulnerable groups; preserve macroeconomic and financial stability; implement reforms to support sustained growth and poverty reduction; and catalyze additional external financing.

40. Fiscal policy in the early part of the ECF would accommodate spending to address health needs, support the economy, and protect the most vulnerable. Fiscal deficits would gradually decline once the health crisis wanes, helping to stabilize public debt, while accommodating the authorities’ commitment to further enhance social safety nets. The program will also support a comprehensive fiscal structural reform agenda, with both revenue mobilization and public financial management reforms to address the public investment efficiency gaps, strengthen fiscal risk management, improve public debt and cash management, and help advance fiscal federalism in a fiscally prudent manner.

41. Fiscal transparency and measures to enhance governance and combat corruption will also be prominent. Several cross-cutting institutional reforms that address governance, vulnerability to corruption, and efficiency of the public sector will be taken forward, in addition to the continued implementation of spending transparency commitments.

42. The NRB should prudently monitor the level of liquidity in the banking system. They should stand ready to provide liquidity in the system where necessary while gradually scaling down the refinance facility. The NRB’s gradual unwinding of accommodative monetary policy and commitment to remain vigilant toward emerging risks in the external and financial sectors due to high levels of increase in the credit supply are welcome, and they should stand ready to adjust policy settings in case signs of overheating appear.

43. Financial sector regulation and supervision needs to be strengthened. The carefully sequenced strategy defined in the ECF will help preserve the stability of the financial system and support growth though ensuring the provision of adequate and timely supervisory data, updating the regulatory framework to enable more accurate assessment of the asset quality of banks and that better captures existing risks, providing an accurate assessment of the banks’ asset quality, and enhancing the quality of supervision, supported by the data and regulatory upgrades. The NRB should stand ready to tighten macroprudential policies to prevent overheating in the economy. Measures to improve the autonomy and accountability framework of the NRB would support this agenda.

44. Based on the protracted balance of payment need and policy commitments, staff supports the authorities’ request for a 38-month arrangement under the ECF, with access equivalent to 180 percent of quota (SDR 282.42 million).

Figure 1.
Figure 1.

Nepal: Recent Macro-Economic Developments

Citation: IMF Staff Country Reports 2022, 024; 10.5089/9798400200380.002.A001

Figure 2.
Figure 2.

Nepal: Recent Monetary Sector Developments

Citation: IMF Staff Country Reports 2022, 024; 10.5089/9798400200380.002.A001

Figure 3.
Figure 3.

Nepal: External Sector Developments

Citation: IMF Staff Country Reports 2022, 024; 10.5089/9798400200380.002.A001

Figure 4.
Figure 4.

Nepal: Recent Fiscal Developments

Citation: IMF Staff Country Reports 2022, 024; 10.5089/9798400200380.002.A001

Figure 5.
Figure 5.

Nepal: Socio-Economic Indicators

Citation: IMF Staff Country Reports 2022, 024; 10.5089/9798400200380.002.A001

Table 1.

Nepal: Selected Economic Indicators, 2018/19–2025/261/

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

Fiscal year ends mid-July.

2/ The UN Human Development Index is a composite index measuring average achievement in three basic dimensions of human development—a long and healthy life, knowledge and a decent standard of living. 3/ CCRT debt relief is included in grants and net incurrence of liabilities (foreign). The first tranche of CCRT debt relief covering the period April 14, 2020 to October 13, 2020 for SDR 2.9 million in FY 2019/20 was approved on April 13, 2020. The second tranche of CCRT debt relief covering the period October 14, 2020 to April 13, 2021 for SDR 3.6 million was approved on October 2, 2020. The third tranche of CCRT debt relief covering the period April 14, 2021 to October 15, 2021 for SDR 3.6 million was approved on April 1, 2021. The fourth and fifth (final) tranche of CCRT debt service relief covering the period from October 16, 2021 to January 10, 2022 and January 11 to April 13, 2022 was approved on October 6, 2021 and December 15, 2021 respectively for SDR 3.6 million. Note: Current baseline forecast is as of December 7, 2021.
Table 2.

Nepal: Summary of Central Government Operations, 2018/19–2025/26 1/

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

Fiscal year ends mid-July.

CCRT debt relief is included in grants and net incurrence of liabilities (foreign). The first tranche of CCRTdebt relief covering the period April 14, 2020 to October 13, 2020 for SDR 2.9 million in FY 2019/20 was approved on April 13, 2020. The second tranche of CCRT debt relief covering the period October 14, 2020 to April 13, 2021 for SDR 3.6 million was approved on October 2, 2020. The third tranche of CCRTdebt relief covering the period April 14, 2021 to October 15, 2021 for SDR 3.6 million was approved on April 1, 2021. The fourth and fifth (final) tranche of CCRTdebt service relief covering the period from October 16, 2021 to January 10, 2022 and January 11 to April 13, 2022 was approved on October 6, 2021 and

30 percent of VAT and domestic excise revenues are shared with sub-national governments.

Note: Current baseline forecast is as of December 7, 202 1.FY2020/21 budget is as of May 28, 2020; FY2021/22 budget is as of September 10, 2021.
Table 3.

Nepal: Monetary Indicators, 2018/19–2025/261/

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

Fiscal year ends mid-July.

Net international reserves program definition, see Technical Memorandum of Understanding.

Note: Current baseline forecast is as of December 7, 2021.
Table 4.

Nepal: Balance of Payments, 2018/19–2025/261/

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

Fiscal year ends mid-July.

The first tranche of CCRT debt relief covering the period April 14, 2020 to October 13, 2020 for SDR 2.9 million in FY 2019/20 was approved on April 13, 2020. The second tranche of CCRT debt relief covering the period October 14, 2020 to April 13, 2021 for SDR 3.6 million was approved on October 2, 2020. The third tranche of CCRT debt relief covering the period April 14, 2021 to October 15, 2021 for SDR 3.6 million was approved on April 1, 2021. The fourth and fifth (final) tranche of CCRT debt service relief covering the period from October 16, 2021 to January 10, 2022 and January 11 to April 13, 2022 was approved on October 6, 2021 and December 15, 2021 respectively for SDR 3.6 million.

Official loans only includes firm financing commitments so far. This includes IMF-ECF (US$166.2 mil), WB (US$350 mil), and ADB (US$125 mil) in FY2021/22. The ECF is expected to catalyze additional financing from development partners.

Net international reserves program definition, see Technical Memorandum of Understanding.

The authorities define gross foreign exchange reserves as follows: Gross official reserves – go Id/SDR/IMF reserve position + bank and financial institutions’

Note: Current baseline forecast is as of December 7, 2021.
Table 5.

Nepal: External Financing Requirements and Sources, FY2021/22–2024/25

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Sources: Nepali authorities; and IMF staff estimates and projections

Other includes currency and deposits, trade credits and other financial flows.

CCRT debt relief is included in grants and net incurrence of liabilities (foreign). The first tranche of CCRT debt relief covering the period April 14, 2020 to October 13, 2020 for SDR 2.9 million in FY 2019/20 was approved on April 13, 2020. The second tranche of CCRT debt relief covering the period October 14, 2020 to April 13, 2021 for SDR 3.6 million was approved on October 2, 2020. The third tranche of CCRT debt relief covering the period April 14, 2021 to October 15, 2021 for SDR 3.6 million was approved on April 1, 2021. The fourth and fifth (final) tranche of CCRT debt service relief covering the period from October 16, 2021 to January 10, 2022 and January 11 to April 13, 2022 was approved on October 6, 2021 and December 15, 2021 respectively for SDR 3.6 million.

Exceptional financing includes firm financing assurances for the first year of the program and good prospects of financing over the program and projection period.

Debt Service Suspension Initiative (DSSI) of US$32.5 million in FY2020/21. In line with the Revised Paris Club MOU, repayments are projected to start in FY2022/23 for a period of five years with a one-year grace period.

Vaccine support is project financing and is therefore included in the medium and long term borrowing of the authorities. The World Bank disbursed US$75 million in FY2020/21 and the ADB is expected to disburse US$165 million in FY2021/22.

Note: Current baseline forecast as of December 7, 2021.
Table 6.

Nepal: Financial Soundness Indicators, 2014/15–2020/21

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Source: Nepali authorities. Note. Data reflect all banks and financial institutions. Data presented as at the end of the fiscal year (i.e. in mid-July for the year indicated).
Table 7.

Nepal: Proposed Access and Phasing Under the Extended Credit Facility1

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Source: IMF staff estimates

Nepal’s quota is SDR 156.9 million.

Table 8.

Nepal: Indicators Proposed for Quantitative Performance Criteria and Indicative Targets, First Two Reviews1/

(Rs. million unless otherwise indicated)

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Sources: Nepali authorities and IMF staff estimates/projections based on the Nepali fiscal year and calendar.

The quantitative targets, indicative targets, program exchange rates and adjusters are defined in the Technical Memorandum of Understanding (TMU). Foreign currency deposits of commercial banks and other financial institutions held at the NRB are considered reserve related liabilities and excluded.

This quantitative target is applied on a continuous basis.

Cumulative from the beginning of the fiscal year.

Excludes interest payments.

The social spending indicative target will initially be a floor on spending on the child protection grant. This indicative target will start in the second review with the test dates beginning in July 2022. The initial floor will be FY2020/21 outturns plus an additional amount to reflect the announced one third increase in budget.

The program targets for the primary deficit include adjusters for the level of revenue collection. The upward adjustment to the ceiling is capped at NPR 124,003 million for FY2021/22.

The program targets for the primary deficit include adjusters for foreign-financed project loan disbursements on concessional terms. Foreign-financed project loan disbursements is the difference between total external financing and budget support from development partners.

The program targets for net international reserves include adjusters for budget support from development partners and for revenue collection. Any downward adjustment to the NIR floor will be capped at USD 1040 million for FY2021/22 to maintain reserve adequacy.

Table 9.

Nepal: Projected Payments and Indicators of Capacity to Repay the Fund, 2022–20351

(In millions of SDRs)

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Source: IMF staff estimates and projections.

Reporting Year: August to July

Nepal received debt relief of SDR2.9 million in FY2019/20 and SDR3.6 million in FY2020/21 covered by grants from the CCRT. The first tranche of CCRT debt relief covering the period April 14, 2020 to October 13, 2020 for SDR 2.9 million in FY 2019/20 was approved on April 13, 2020. The second tranche of CCRT debt relief covering the period October 14, 2020 to April 13, 2021 for SDR 3.6 million was approved on October 2, 2020. The third tranche of CCRT debt relief covering the period April 14, 2021 to October 15, 2021 for SDR 3.6 million was approved on April 1, 2021. The fourth and fifth (final) tranche of CCRT debt service relief covering the period from October 16, 2021 to January 10, 2022 and January 11 to April 13, 2022 was approved on October 6, 2021 and December 15, 2021 respectively for SDR 3.6 million.

Table 10.

Nepal: Proposed Structural Benchmarks: 12-Months After Board Approval

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Annex I. Key COVID-19 Financial Sector Relief Measures

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Source: The NRB

CRR was reduced from 4 to 3 percent as of July 2020. Remained unchanged in the Monetary Policy 2021/22 First-Term Review

SLF rate was kept at 5 percent, deposit collection rate was reduced from 2 to 1 percent and policy rate was reduced from 3.5 to 3 percent as of July 2020. Remained unchanged in the Monetary Policy 2021/22 First-Term Review

The outstanding amount of refinance provided by NRB remained Rs.119.35 billion in mid-October 2021.Banks, not the NRB, bear the related credit risks.

The government subsidizes interest rates by 2 percent and 50 percent of insurance premium. As of mid-October 2021, the outstanding concessional loan is Rs.198.92 billion extended 148,750 borrowers. The authorities expect credit risks to the banks to be mitigated by loan insurance.

Under this provision, Rs. 1 billion loan has been approved as of mid-October 2021.

However, such loans should be recovered in four installments after the end of relaxation period.

Interest is not allowed to be capitalized in such cases.

Deprived sector credit will be redirected to MSMEs gradually. Currently, loans up Rs. 1.5 million provided to the self- employed businesses who lost their employment in tourism sector due to COVID; loans up to Rs. 2.5 million to purchase a vehicle for self-employment purpose; project loans up to Rs. 2 million provided to female entrepreneur and project loans up to Rs. 2 million provided to agricultural businesses are accepted as deprived sector loans.

Increased the limit on a bank's lending to 90 percent of the sum of its deposits and core capital from 85 percent until July 2022 (while removing carveouts), but any bank exceeding such limit was required to bring it down to 90 percent by mid-July 2022. As of August 2021, credit to deposit ratio (CD) was restricted to 90%

It was increased from 65 percent to 70 percent in July 2020.

Debt-equity ratio for other loans is kept at 50%. The single obligor limit of the margin nature loan is fixed at Rs. 40 million from one institution and Rs. 120 million in total.

Note: Measures as of November, 2021.

Annex II. Nepal’s Pandemic Health Response

1. The government has been proactive in addressing COVID-19 in Nepal. 1 Nepal has seen intermittent surges of rising infections ever since its first confirmed COVID-19 case on January 23, 2020. As of December 1, 2021, a total of 821,651 cases and 11,529 deaths have been reported. Measures taken to address the transmission of infections include: (i) public sensitization campaign for mask wearing social distancing and vaccine acceptance; (ii) tailored mobility restrictions particularly during surges; (iii) expanded COVID-19 testing facilities. Relatedly, the number of RT-PCR testing laboratories increased to 102 in December 2021 compared to 63 in September 2020.

uA001fig10

COVID in Nepal

Citation: IMF Staff Country Reports 2022, 024; 10.5089/9798400200380.002.A001

Sources: Johns Hopkins University and IMF staff calculations.

2. A core element of the agenda is to improve access and to strengthen healthcare capacity. The government of Nepal provides free basic healthcare for all. With the onset of the pandemic, the government covered the cost of testing and treatment for the poor and vulnerable, frontline health, and other essential workers. To strengthen capacity, the government also increased hospital beds, set up quarantine centers and temporary hospitals, eliminated duties on the importation of medical supplies which helped expand the availability of equipment’s such as oxygen cylinders and generators. To address capacity constraints especially at the subnational level the government in partnership with the WHO is investing in training healthcare workers

uA001fig11

Physicians per 1,000 People

(2016–19 average)

Citation: IMF Staff Country Reports 2022, 024; 10.5089/9798400200380.002.A001

Source: World Bank, World Development Indicators.

3. The government is leveraging support from the international community to vaccinate its eligible population by April 2022. As of December 1, 2021, 2.3 million vaccine doses have been administered and 28 percent of the eligible population have been fully vaccinated.2 To this end, the government has been proactive in getting vaccines, ultra-cold storage facilities, including through grants, bilateral procurement and GAVI’s COVAX multilateral vaccine sharing facility. In addition to the IMF’s RCF financing in May 2020, the government mobilized resources from development partners (ADB, WB, WHO, UN).

Annex III. Implementing Fiscal Governance Commitments of RCF

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Annex IV. Social Spending in Nepal

1. The authorities are committed to protecting and strengthening social spending in Nepal but face several challenges in the sector. The social policy system in Nepal is complex and faces coordination issues. There are numerous social policy programs administered by different agencies, with no single, overarching social support agency responsible for the overall system. The shift to fiscal federalism is exacerbating the challenges. The role of each level of government is under transition, and capacity issues for newly established subnational governments limit policy implementation.

2. Social spending in Nepal currently focusses on older individuals, with more limited support directed towards children and working age populations. Two thirds of social spending is allocated to public sector pensions covering seven percent of the population. The remainder of spending is dominated by five core allowances with the most generous in access and amount being the Old Age Allowance (universal to all over 65s). By comparison, the child protection allowance targets young children in impoverished areas but is set at less than one fifth of the Old Age Allowance. The new flagship Prime Ministers Employment Program (PMEP) guaranteeing minimum employment to vulnerable households will provide support to working age individuals if effectively implemented. The World Bank estimates that 49% of the population is currently covered by social safety nets, and that the social security and employment programs reduce poverty by less than eight percent.

3. The authorities’ COVID-19 response so far has relied mainly on expanding existing social assistance programs and introducing some temporary additional measures. The government recently announced a 33 percent increase in the five core social spending allowances, raising the Old Age Allowance to 4,000 NPRs per month. The child grant has also been expanded to an additional 11 impoverished areas. Health actions such as temporarily free COVID-19 testing and treatment were introduced, and effective emergency food support was disbursed during the first lockdown. Expansion of the PMEP and retraining programs are at the center of the government’s recovery plan once the crisis abates and are supported by World Bank programs.

4. Looking ahead, the authorities intend to improve the targeting and strengthen the accountability of social assistance programs. The five core allowances and Prime Ministers Employment Program will remain a centerpiece of the social spending sector. In addition, the development of a National Social Registry (NSR), also supported by the World Bank, will allow for improved administration and targeting of policies. Local authorities’ ongoing capacity development will also assist with targeting and delivery. The IMF program supports the authorities’ agenda through protecting budgetary space for social spending and indicative targets on key programs.

Annex V. Decomposition of Public Debt and Debt Service by Creditor, 2020–2022

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As reported by country authorities according to their classification of creditors, including by official and commercial. Debt coverage is the same as the DSA. Debt levels in this table may differ from those in other tables as the calculations here are based on US$.

Multilateral creditors” are simply institutions with more than one official shareholder and may not necessarily align with creditor classification under other IMF policies

Loans here refer to the negative Treasury Single Account (TSA) balance.

Debt is collateralized when the creditor has rights over an asset or revenue stream that would allow it, if the borrower defaults on its payment obligations, to rely on the asset or revenue stream to secure repayment of the debt. Collateralization entails a borrower granting liens over specific existing assets or future receivables to a lender as security against repayment of the loan. Collateral is “unrelated” when it has no relationship to a project financed by the loan. An example would be borrowing to finance the budget deficit, collateralized by oil revenue receipts. See the joint IMF-World Bank note for the G20 “Collateralized Transactions: Key Considerations for Public Lenders and Borrowers” for a discussion of issues raised by collateral.

Includes other-one off guarantees not included in publicly guaranteed debt (e.g. credit lines) and other explicit contingent liabilities not elsewhere classified (e.g. potential legal claims, payments resulting from PPP arrangements).

Annex VI. Risk Assessment Matrix

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The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding the baseline (“L”(low) is meant to indicate a probability below 10 percent, “M” (medium) a probability between 10 percent and 30 percent, and “H” (high) a probability of 30 percent or more). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

Annex VII. External Sector Assessment1

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Appendix I. Letter of Intent

Kathmandu, Nepal December 22, 2021

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Ms. Georgieva,

We would like to thank the IMF for its continued support over the years. The expeditious approval of the $214 million emergency disbursement under the Rapid Credit Facility in May 2020, and ongoing debt relief provided under the Catastrophe Containment and Relief Trust, have made a substantial contribution to addressing the financing needs that emerged in the wake of the COVID-19 pandemic. Further, the recently approved SDR allocation for Nepal has helped preserve our foreign reserve buffers and the credibility of the exchange rate peg, and ensure we remain nimble to address other risks that materialize (including natural disasters).

Nepal has suffered two devastating waves of COVID-19 which derailed our growth momentum. The burden of the pandemic has been significant in Nepal. The decisive containment measures that we took to limit the spread of the virus and save lives imposed unprecedented economic costs. GDP contracted 2.1 percent in FY2019/20, and we have only seen a partial recovery at 2.7 percent growth for FY2020/21. Tourism a key source of foreign exchange and employment creation in Nepal collapsed at the onset of the pandemic and the prospects for recovery remain weak until the pandemic is under control globally. As a result, external and fiscal financing gaps have emerged alongside a widespread increase in unemployment and poverty, that threatens achieving the goals outlined in our 2018–2022 National Development Plan ‘Prosperous Nepal, Happy Nepali’.

The ongoing pandemic and uncertain global economic outlook weigh on Nepal’s prospects. Remittances is a major source of our foreign financing and key driver of growth. While the flow of remittances has been broadly resilient in the last fiscal year (FY2020/21), we are concerned about recent bouts of volatility, and the impact of a decline in remittances if economic activity slows in source countries and travel restrictions intensify for Nepali workers.

We are determined to protect the significant gains in poverty alleviation that Nepal has made over the past decades despite the heavy toll the pandemic has inflicted on our economy. To this end, we issued a status paper in September 2021 that highlights the government’s reform priorities which is consistent with the attached Memorandum of Economic and Financial Policies (MEFP). In the near term, the pandemic response is our clear priority. We will vaccinate all eligible citizens by Mid-April 2022 and provide support to those hard-hit by the pandemic. We also recognize the need to improve economic performance, create jobs, and restore hope. To this end, we also committed to reforms to maintain fiscal discipline, promote fiscal federalism and intergovernmental fiscal management, improve the efficiency of public investment, and enhance the delivery of public services. The expanded social safety net announced in the FY2021/22 replacement budget will help protect the vulnerable and prevent additional households from falling into poverty. However, we are acutely aware of the significant task that is still ahead of us in meeting our commitments to providing relief for sectors most affected byCOVID-19; strengthen our health infrastructure; modernize our economy; and reduce poverty and inequality.

Against this backdrop, we are requesting a 38-month ECF arrangement in the amount of SDR282.42 million (about US$398.8 million,180 percent of Nepal quota) to support a more robust COVID-19 response that can help mitigate the COVID impact on health and economic activity, protect vulnerable groups, and preserve macroeconomic and financial stability. The ECF program will also help facilitate the implementation of reforms to support sustained growth and poverty reduction; and catalyze additional financing from Nepal’s development partners. Beyond this much needed immediate financial assistance, we reaffirm our willingness to remain engaged with the IMF and to benefit from its policy advice and its capacity development support.

We believe that the economic and financial policies set forth in the Memorandum of Economic and Financial Policies (MEFP) are adequate to achieve the objectives of the ECF program and help to achieve sustainable and equitable growth in Nepal. Measures to boost revenues and public spending efficiency, strengthen financial sector regulation and supervision, and build institutions will support our goals of economic modernization and transformation, and poverty reduction. We commit to take any additional measures that may become appropriate for this purpose. We will consult with the IMF on the adoption of such measures and in advance of any revisions to the policies contained in the MEFP, in accordance with the Fund’s policies on such consultation. We intend to remain in close consultation with Fund staff and provide timely information necessary for monitoring economic developments and implementation of policies under the ECF-supported program.

We request that the ECF disbursement SDR282.42 million be made directly to the Federal Consolidated Fund. We intend to use the ECF disbursement to help fill the projected fiscal financing gap that will emerge as higher spending on health, social assistance, and policy measures is needed to support the economy. We commit to update the Memorandum of Understanding (MOU) between Nepal Rastra Bank and the Ministry of Finance regarding the use of IMF resources for budget support (signed May 08, 2020). The MOU will specify (i) the maintenance of a specific government account at the central bank (as a subaccount of the Federal Treasury) to receive IMF resources under the ECF arrangement; and (ii) the establishment of a clear framework agreement between the NRB and the Ministry on the responsibilities for timely servicing financial obligations to the IMF.

We do not intend to introduce measures or policies that would exacerbate the current balance-of-payments difficulties, or which are inconsistent with Article VIII of the IMF’s Articles of Agreement. We do not intend to accumulate external or domestic arrears.

In line with our commitment to transparency, we hereby consent to the publication of this letter, the attached MEFP and TMU, the staff report and other ECF-related documents, on the IMF’s website.

Sincerely yours,

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Attachment I. Memorandum of Economic and Financial Policies

This memorandum sets out our economic and financial policy commitments to support the request for a 38-month arrangement under the Extended Credit Faciiity (ECF) of the International Monetary Fund. The economic program has three main objectives: First, to mitigate the COVID-19 impact on health and economic activity and protect vulnerable groups. Second, to preserve macroeconomic and financial stability. Third, to implement a reform agenda that leads to sustained growth and poverty reduction. These goals are in line with the government’s immediate priorities elucidated in the August 2021 Status Paper on the current economic situation of Nepal and the medium-term strategic priorities in our 2018–2022 National Development Plan ‘Prosperous Nepal, Happy Nepali’ and our Relief, Restructuring and Resilience (3R) plan to address the economic and social impacts of the pandemic.

A. Introduction

1. The COVID-19 pandemic continues to pose a severe threat to health conditions and economic activities in Nepal and across the globe. While the economy was seeing glimpses of recoveryin early2021, between April and July 2021 Nepal suffered a devastating second wave of rising Covid-19 infections that necessitated the reintroduction of lockdowns and containment measures. Tourist arrivals collapsed and remittances have been volatile because of weaker economic activity in destination countries and travel restrictions for migrant workers. Services and construction projects (including major infrastructure projects) have been affected because of the implementation of measures to contain the spread of the virus. With the economy hard-hit, there has been a significant shortfall in government revenue and greater spending needs, increasing the fiscal deficit. Losses of jobs and income may likely be a setback to the important social development gains of the past decade.

2. The government of Nepal is comprehensively addressing the health, economic, and social impact of the pandemic. The government took measures to contain the spread of the pandemic. Widespread COVID-19 testing and treatment was rolled out during the early stages of the pandemic, which was cost free for all in government testing facilities. The rollout of vaccines started in January 2021, though has been constrained because of limited availability and capacity constraints. Fiscal measures to address the pandemic have included (1) increased health spending which has enabled a rapid scale-up of COVID-19 testing and treatment facilities; (2) tax relief to households and businesses; (3) the expansion of social assistance, including in-kind food transfers, subsidies for utility bills, and wage support for informal sector workers—including through expansion of the Prime Minister’s Employment Program (PMEP) which offers 100 days of subsistence wage work in public works projects; (4) a concessional loan facility to support affected businesses and micro, small, and medium-sized enterprises; (5) a business continuity fund for the payment of workers’ wages in cottage, small and medium enterprises, and tourism sector; and (6) cash transfers for poor families highly affected by COVID. To support the continued supply of credit, the Nepal Rastra Bank (NRB) has ensured adequate liquidity (lowering the policy rate and cash reserve ratio), increased the size of the Refinance Facility Fund to provide subsidized interest rates to banks for on-lending to priority sectors, eased macroprudential measures (no longer requiring banks to build a counter cyclical capital buffer and increasing the limit on loan to value ratios), and provided temporary relief to affected borrowers (introducing loan moratoria and regulatory forbearance measures).

3. More recently, we are implementing additional measures to reduce poverty and boost Nepal’s health infrastructure. Specific measures announced in the FY2021/22 replacement budget include a 33 percent increase in all social security allowances including the child protection grant; and expanding the scope of Social Security Fund to informal sector workers. While continuing to provide vaccination for all Nepali citizens as well as free tests and treatment of COVID in all government laboratories and hospitals, we have also purchased additional medical equipment and supplies, including ICUs, ventilators, oxygen cylinders and mobilized additional health workers to boost capacity.

4. Strong policy buffers built before the COVID-19 pandemic have aided our proactive response to date. Growth in 2018/19 was 6.7 percent, with continued growth momentum in the first half of FY2019/20 (fiscal year ends mid-July), supported by more reliable electricity supply and post-earthquake reconstruction. Inflation was stable around 6 percent with the exchange rate peg to the India rupee providing a credible anchor. In February 2020, prior to the onset of the global pandemic, gross official reserves were comfortable at USD 8.7 billion, about 8.6 months of prospective imports. Further, strong revenue collection and prudent fiscal management over the years, buffered by concessional financing from development partners, meant that our deficits were modest and public debt in FY2018/19 was assessed to be at low risk of external and overall debt distress. While these buffers created policy space for an initial rapid response to the pandemic, the depth and duration of the COVID-19 shock is giving rise to additional financing needs to support our efforts to protect health and livelihoods.

5. The economy faces downside risks from the COVID-19 pandemic. The uneven pace of global vaccination efforts and new Covid-19 variants create much uncertainty about the timing and strength of the economic recovery in Nepal and our major economic partners. As a result, the outlook for remittances and tourism—key sources of foreign currency earnings—remains subdued.

6. The ECF arrangement will support our efforts to respond to COVID-19, preserve macroeconomic and financial stability, and support the transition towards sustainable and inclusive growth. The macroeconomic framework and reform agenda underpinning the ECF will help support a sustained recovery while continuing to mitigate the social and economic impact of COVID-19. The program will contribute to strengthening institutional frameworks and capacity building. The ECF is also expected to catalyze additional financing from development partners.

B. Recent Macroeconomic Developments and Outlook

7. COVID-19 has taken a heavy toll on Nepal’s economy, derailing earlier growth momentum. The COVID-19 shock hit Nepal in the second half of FY2019/20 through a decline in tourism, construction, and economic activity, and volatility of remittances. The economy slumped into a recession with FY2019/20 growth at -2.1 percent, which was partially offset by an estimated 2.7 percent growth rate in FY2020/21. Inflation slowed to 4.2 percent in July 2021 from 4.8 percent in July 2020, mainly due to the lower housing and utilities prices. After an initial collapse in 2020, imports have rapidly grown, fueling a large current account deficit. Buoyed by formalization and the ongoing global recovery, remittances remained robust throughout FY2020/21. Combined with accommodative monetary policy, remittances have supported consumption, driving import growth of 25.7% year on year in FY2020/21.

8. Our fiscal position was affected by the COVID-19 pandemic. While COVID 19 related expenditures increased as we quickly responded to the pandemic, temporary factors led to a narrowing of the overall fiscal deficit from 5.3 percent of GDP in FY2019/20 to 4.2 percent of GDP in FY2020/21. Specifically, increases in import related taxes and deferred tax receipts raised revenues by 2.2 percent of GDP. Ultimately, budget execution was severely constrained by the second wave and associated lockdown measures. Public debt is estimated at 47.2 percent of GDP in FY2020/21, as defined in the Joint Bank-Fund Debt Sustainability Analysis1.

9. Banks’ financial performance has likely been impacted by the COVID 19 shock. Despite the high level of credit growth, the non-performing loan (NPL) ratio remains at 1.4 percent and reported capital adequacy ratios of all banks remain above the regulatory minima in October 2021. Nonetheless, given the economic fallout of Covid-19, we are monitoring the system closely to ensure NPLs are appropriately measured, and that provisioning and capital remain adequate for all banks.

10. Our growth outlook will depend on the timing and pace of recovery from COVID-19, which remains highly uncertain. To align with the IMF’s global assumptions on the pandemic in the October 2021 World Economic Outlook, for Nepal it is assumed that fiscal year 2021/2022 will continue to be impacted by Covid-19 and that vaccines will be widely available in the first half of FY2022/23. Based on these assumptions and considering the severity of the second Covid-19 wave in the last quarter of this FY and the widespread flooding seen in October, growth is projected to be 4.4 percent in FY2021/22. Inflation is expected to rise to about 5.9 percent toward the end-FY2021/22 due to inflationary pressure from higher global oil and food prices and continued supply disruptions. We also expect the current account deficit to remain wide at-9.1 percent of GDP in FY 2021/22 as imports rebound. We expect growth to accelerate in FY2022/23 as the economy continues to recover from COVID-19.

C. Economic and Financial Policies Fiscal Policy

11. Fiscal deficits for FY2021/22 and FY2022/23 accommodate COVID-19 pandemic related spending to support health and livelihoods. The impact of the pandemic has been more severe and longer lived than expected, creating fiscal pressures. The fiscal deficit is now projected at 4.2 percent of GDP for FY2020/21 and 6.3 percent of GDP for FY2021/22. On the expenditure side, the budgets include spending on COVID-19 related healthcare, social assistance, and labor support, and concessional loans to businesses to provide economic relief. Budgeted social spending (including health, education and social protection) has been significantly increased by 24 percent in FY2020/21 and 52 percent in FY2021/22, to build a robust health system, provide quality education opportunities and life skills, and boost the level of social protection. We have adopted measures to reduce administrative expenditures—such as office operation, fuel, low priority workshops, consultancy, purchase of furniture and vehicles, and allowances—to make room for our priority spending. Furthermore, operational grants to public entities other than those providing basic services have been stopped. Revenues are expected to recover to 23.8 percent of GDP in FY2021/22. The deficits are financed with support from our development partners—including the prospective IMF-ECF arrangement, World Bank and Asian Development Bank’s project loans and policy-based loans, and financing from official bilateral creditors, including the DSSI—as well as domestic debt issuance.

12. Procurement and distribution of Covid-19 vaccines will add further pressure on the budget, and vaccine availability remains a major constraint. Nepal has started receiving vaccines under the COVAX facility, which would provide coverage for 20 percent of the population. Countries including India and China have provided vaccines as direct bilateral grants to Nepal.2 We are also purchasing additional vaccines to extend coverage. However, limited supply of vaccines and infrastructure constraints has impeded a more rapid rollout. We are mobilizing additional resources, including from development partners, to accommodate the additional spending needs on vaccines.

13. Once the pandemic dissipates, we will begin to gradually reduce fiscal deficits to stabilize debt and protect fiscal sustainability. We plan to phase-out temporary support measures as the recovery takes hold. We will develop a domestic revenue mobilization action plan (further discussed below) to enhance revenue collection and make room for priority spending. At the same time, we will reduce redundant expenditures of the federal government once the corresponding responsibilities are further transferred to local and provincial governments. The path for primary deficits will be consistent with maintaining medium-term fiscal sustainability while preserving priority expenditures, including social spending and other expenditures critical to support economic recovery. We will also strengthen the financial oversight of public enterprises, with support of IMF technical assistance, and take steps to reduce associated fiscal risks as soon as feasible after the pandemic.

Revenue Mobilization

14. In the near term, our focus has been to provide tax relief to people and businesses impacted by COVID-19 pandemic and support economy recovery. In FY2019/20 and again in FY2020/21, we deferred tax deadlines during the lockdown periods. We exempted customs duties for medical supplies, provided VAT exemptions on Covid-19 related medical supplies and equipment, and offered tax rebates for micro, cottage and small businesses and industries highly affected by COVID-19, such as air service, transport service, hotel, travel, and trekking businesses.

15. In the medium term, we will continue our efforts to enhance our tax system to sustainably finance our national development efforts. Our tax revenue had increased from less than 10 percent of GDP in FY2006/2007 to over 19 percent before COVID-19 (FY2018/19). Both policy and structural measures contributed to this impressive increase over the years. Specifically, policy measures such as the enhancement of revenue administration (including the implementation of Inland Revenue Management Strategic Plans and Customs Reforms and Modernization Strategies and Action Plan) contributed to these achievements. On the structural side, the significant increase in imports fueled by substantial growth in remittances and capital expenditures supported the increase in revenues. Building on past progress, we will develop a domestic revenue mobilization action plan to enhance taxation on domestic economic activity (structural benchmark, 3rd review), with support from IMF technical assistance. We have estimated the related cost of tax exemption at the Department of Customs and will publish this data by March 2022 (structural benchmark, 1st review). With the support of IMF technical assistance, we will estimate the costs of other tax exemptions and publish their costs where feasible by September 2022 (structural benchmark, 2nd review) to enhance transparency and allow for a cost-benefit analysis approach to the use of exemptions.

Expenditure Reforms

16. We will improve our public investment management to enhance the efficiency of capital spending. Public investment is a critical component of our development plan ‘Prosperous Nepal, Happy Nepalis’, and will play a critical role in supporting the recovery. According to the public investment management assessment (PIMA) conducted by the IMF in 2021, there is significant room to improve the efficiency of our public investment management system. The weaknesses in this system, especially those institutions related to resource allocation and project implementation, have contributed to the low efficiency. Given our high vulnerability to climate change and natural disasters, the climate change module of the PIMA also highlighted opportunities to further integrate climate change considerations in public investment management. We will develop an action plan to improve the efficiency of public investment spending and strengthen climate resilience (by September 2022, structural benchmark, 2nd review), drawing on recommendations from the PIMA.

17. Advancing fiscal federalism will continue to be on the top of our reform agenda. As mandated by the Constitution of Nepal, we have been moving towards fiscal federalism and devolving responsibility for the provision of many public services to 7 provincial and 753 local governments. The legal framework governing fiscal federalism has been largely established, including the enacted Intergovernmental Fiscal Arrangement Act, the Local Government Operation Acts, and the Federal, Provincial and Local Level (Coordination and Interrelation) Act 2020. In addition, the regulation of the Financial Procedures and Fiscal Responsibility Act has been approved, which will facilitate adequate budget formulation and incentivize fiscal responsibility of subnational governments. All 7 provincial governments have implemented the Provincial Line Ministry Budget Information System (PLMBIS), and all 753 local governments have implemented the Subnational Treasury Regulatory Application (SuTRA), which will support reporting and monitoring of subnational governments. Legislation authorizes subnational governments to borrow but this is subject to pre-approval by the federal government and subject to certain limits that are set by the National Natural Resources and Fiscal Commission everyyear. To manage spending pressures, create adequate incentives for fiscal discipline among subnational governments, and contain possible fiscal risks, we agree to implement a framework that will allow the government to closely monitor and contain possible fiscal risks from subnational governments, with the specific measures to be based on recommendations from IMF technical assistance support (by March 2023, structural benchmark, 3rd review).

18. We will step up our efforts to strengthen fiscal risk management. We expect public-private partnerships (PPPs) to play a large role in accelerating infrastructure development in the coming years, including at the local and provincial government level. While PPPs would improve the efficiency of public investment and accelerate infrastructure delivery, they may also entail explicit and/or contingent liabilities to the government. The financial position of public enterprises has improved in recent years. However, some public enterprises continuously suffer financial losses and have defaulted on loans to the government. While subnational governments do not have debt so far, their borrowing could rise as spending capacity increases. Furthermore, the various loan and loan guarantee programs of the government in the context of COVID-19, which were necessary to support the economic recovery, may also increase fiscal risks. We also face significant risks from natural disasters and climate change. As the first step, we will take stock of these risks and develop a fiscal risk register by September 2022 to help better understand the fiscal risk exposure (structural benchmark, 2nd review). Subsequently, by September 2023, a comprehensive fiscal risk statement will be prepared and published to systematically analyze the sensitivity of budget estimates and public debt projections to various fiscal risks (structural benchmark, 4th review). These efforts will help us develop and implement an action plan with clear steps to manage and control major fiscal risks. We plan to request IMF TA to assist us with these reforms.

19. We will continue to enhance debt transparency and debt risk management by revamping our public debt and cash management. We have established the Public Debt Management Office (PDMO) to consolidate the public debt management functions currently scattered among various entities. We will prepare the medium-term debt management strategy that weighs the cost and risk of the government’s entire debt portfolio and update it at least annually. Comprehensive debt bulletins, including details on individual borrowings, will also be published in a portal of the PDMO’s website, with support from World Bank technical assistance. In this ECF program, we will complete the transfer of the domestic debt management function from the NRB to the PDMO to further delineate monetary policy and fiscal policy. We will improve our cash management transparency by reporting all operational funds in the consolidated financial statements, starting with FY2020/21 (by May 2022, structural benchmark, 1st review). By September 2022, we will also develop cash flow forecasting by the Ministry of Finance to be shared with the FCGO, PDMO and NRB on a regular basis (structural benchmark, 2nd review).

Social Spending

20. Social spending has played a key role in the government response to the Covid-19 shock. The pandemic has resulted in job and income losses, which may contribute to higher poverty and vulnerabilities in the near term. The government maintained existing cash transfer programs, increased coverage of the child grant to an additional 11 districts (25 in total, selected based on human development index), and expanded the PMEP and skills training to mitigate job losses. Healthcare spending is expected to increase to 2 percent of GDP in FY2021/22 from 1 percent of GDP in FY2018/19, due to expenditures on COVID-19 pandemic containment measures, strengthening basic healthcare services, extending health insurance coverage to additional districts, and building new hospital facilities.

21. We are committed to further enhance our social safety net to support our poverty alleviation efforts. The NPC will issue a Poverty Reduction and Growth Strategy Paper based on our 15thNational Development plan by September 2022 (structural benchmark, 2nd review), which will outline the priorities in coming years. We are developing a National Social Registry (NSR), including a system of national identification cards, supported by the World Bank. We are also rolling out the Poverty Identification Program (PIR) registry. The NSR and PIR will facilitate the identification of vulnerable households and allow for more efficient targeting of social transfers. We will also preserve social spending, in particular the child grant.

Monetary and Exchange Rate Policy

22. The overarching objectives of monetary policy in Nepal continue to be price and external sector stability. Inflation has remained generally stable despite some heightened risk factors such as increase in the prices of petroleum products, and disruptions to agricultural production due to climate related factors such as monsoons and floods. We will continue to preserve the credibility of the exchange rate peg by maintaining an adequate level of reserves. We remain committed to improving the effectiveness of the interest rate corridor to manage short-term liquidity and provide a credible anchor for short-term interest rates.

23. We are gradually unwinding accommodative monetary policy. Monetary policy has been accommodative in the previous fiscal year resulting in high credit growth with moderate inflation. In line with moving to a more neutral monetary policy framework for this fiscal year FY2021/22, we increased the deposit collection rate (lower boundary for the interest rate corridor) from 1 to 2 percent and policy rate from 3 to 3.5 percent while keeping the standing loan facility rate (SLF) constant. The NRB will continue to provide liquidity in the system, where necessary, through SLF and repo facilities. The refinancing facility will be gradually scaled back. We are committed to restricting the annual credit growth to 19 percent while the expected deposit growth is around 15 percent in FY2021/22. We will continue to closely monitor inflation developments and credit supply and stand ready to adjust policy settings in case signs of overheating appear. In the program, we will maintain adequate level of reserves (QPC) to preserve the credibility of the exchange rate peg, to prepare in case of further weakening of remittances, and in case other risks materialize.

24. We remain committed to closely monitoring the risks in the loan portfolios and prudently stand ready to tighten macroprudential policies. Macroprudential measures that we have in place include: the single obligor limit (the single obligor limit of the margin nature loan is fixed at Rs. 40 million from one institution and Rs. 120 million in total); credit to deposit ratio (CD, currently 90%); debt service to income ratio (currently 50%); and loan to value ratio (LTV, currently 60%). We remain committed to monitor the effects of rising leverage on the real sector and the possible deterioration in the loan portfolios and stand ready to further tighten macroprudential policies to curb credit growth and mitigate the buildup of financial vulnerabilities.

25. We are committed to enhancing the autonomy and accountability framework of the NRB. By September 2022, we will submit to Parliament amendments to modernize the prevailing NRB Act, guided by key recommendations from the IMF safeguards assessment of the NRB (structural benchmark, 2nd review). The amendments will clarify the primacy of the NRB’s price stability objective, strengthen the NRB’s institutional and financial autonomy as well as personal autonomy of its key officials, clarify the roles and responsibilities of the NRB’s governance bodies, strengthen oversight over the NRB, and establish the independence of the Board’s Audit Committee. Limits on the government’s borrowing from the NRB as defined in the NRB Act will be maintained. The external audit of Nepal Rastra Bank for FY2021/22 will be commissioned as per the recommendations of the 2021 Safeguards Assessment Report (structural benchmark, 1st review) by the Auditor General of Nepal on the basis of the Constitution and prevailing laws of Nepal.

26. We do not intend to introduce measures or policies that would exacerbate balance of payments difficulties. We do not intend to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions, import restrictions for balance of payments reasons, or multiple currency practices, or to enter into bilateral payments agreements which are inconsistent with Article VIII of the IMF’s Articles of Agreement.

Financial Sector Policies

27. We have taken steps to preserve financial stability and strengthen financial sector regulation and supervision. Following the issuance of the Risk Management Guidelines (RMG)in 2018, commercial banks started to prepare self-assessment reports of their compliance with the guidelines. We further plan to enhance credit risk management capacities of banks by incorporating the topics of implementation of the IRB approach, credit risk assessment, expected credit loss calculation under IFRS 9, and the adoption of the simplified standardized approach in the credit risk management guidelines with technical assistance support from the IMF. We continue to develop on-site supervisory capacity for risk-based supervision. Banks were required to build up 2 percent countercyclical capital buffer by July 2020, but this requirement has been suspended until July 2022 due to the Covid outbreak. Efforts have been made to enhance offsite supervision activities and the update of the offsite supervision manual is a work in progress. We are making progress in the implementation of the Supervisory Information System (SIS) to enable timely and reliable collection and analysis of supervisory data and started designing templates and training of banks to facilitate submissions. We will approve an action plan by March 2022 (Structural benchmark, 1 st Review) and complete the full implementation of the SIS for class A banks as per the action plan by September 2022 (Structural benchmark, 2nd review). We need capacity building for the implementation of the SIS in class B, C, D banks. We plan to enhance the risk management capacity of the NRB through the TAwe will receive from the IMF.

28. We will enhance oversight of banks’ asset quality for timely monitoring of the COVID-19 related impact. Covid-19 has deteriorated some borrowers’ capacity to repay their loans. We will introduce, by March 2022, customized bank reporting templates to collect information on forbearance, provisioning levels and asset classifications on an ongoing basis (structural benchmark, 1st review). The updated reporting template will help precisely identify borrowers and exposures subject to the measures taken in response to the pandemic, including loan moratoria, and allowfor close monitoring of affected loans. We will prepare an assessment of the financial stability implications of COVID-19 based on the collected information to inform our future on-site inspections, contingency planning, and further calibration of policy measures.

29. To preserve stability of the financial system while supporting growth, banks will be encouraged to engage in restructuring of loans for firms that are viable but have temporary liquidity shortages. We will enhance our regulatory framework to provide clear guidance on restructuring, encourage banks to watch for the creditworthiness of the borrowers on an ongoing basis, and layout the rules of asset classification and reclassification that enables accurate assessment of banks’ asset quality. We will draft amendments to the regulations to (1) strengthen the identification criteria of non-performing loans (e.g., unlikeliness to repay in full, debt servicing with another loan); (2) clarify the rules of asset classification and reclassification, including for revolving loans; and (3) provide a clear guidance on restructuring and rescheduling. We will draft the amendments and publish for a public consultation by March 2022 (structural benchmark, 1streview). By September 2022, we will issue the new regulation (structural benchmark, 2nd review), while allowing an adequate phase-in period for the banks to implement.

30. We will continue to ensure banks’ compliance with prudential requirements. By March 2023, we will launch in-depth on-site inspections for the largest 10 banks assisted by a third-party international audit firm (structural benchmark, 3rd review) to review loan portfolios in line with the new regulatory framework and paying special attention to loan and collateral valuation, evergreening, group borrowing, and concentration risks. We will seek IMF support for the preparation of the terms of reference for the hiring of the third-party international audit firm and the design of the loan portfolio reviews. We will complete the reviews and have the review results endorsed by the NRB Board by September 2023 (structural benchmark, 4rth review). We will develop a plan to deal with the review’s findings, and any bank with capital shortfalls will be required to submit capital management plans setting out how they will return to full compliance with regulatory requirements. We will prudently monitor the relevant reclassification of loans and proactively provide guidance on the prudential treatment of moratoria and NPL management strategies.

31. We are committed to the full implementation of the Supervisory Information System (SIS). By June 2022, the NRB Board will approve a strategic plan for the full implementation of the SIS among class A banks (structural benchmark, 1st review) that ensures sufficient data quality and will complete the full implementation of the SIS among class A banks and allow supervisors to rely fully on the SIS reporting by November 2022 (structural benchmark, 2nd review). We will use SIS as a tool to enhance the efficiency of the supervisory framework, protecting the supervisoryjudgement in the process. We will improve off-site surveillance assisted by the information and analyses available through the SIS to provide better feedback to on-site inspections. At a second stage, we will aim to achieve the full implementation for class B and class C banks.

32. We remain committed to ensuring a stable and well-capitalized banking system that can support the recovery by effectively monitoring and supervising the health of the financial system. Enhanced monitoring and the updated regulatory framework will facilitate an accurate assessment of the health of the financial sector. To ensure effectiveness of the supervisory process, we stand ready to take relevant and timely enforcement actions where necessary. If any bank becomes undercapitalized, the NRBwill use the set of relevant early intervention measures, including further suspension of dividend payments. Covid related support measures in the financial sector will be gradually unwound, and the remaining ones will be targeted and time-bound. We will ensure that banks’ loan classification correctly reflects the asset quality of the banking system and regulatory forbearance measures will be gradually withdrawn. Once the acute phase of the pandemic is over, we will develop a strategy to continue strengthening financial sector regulation and supervision, with support from IMF technical assistance and a potential Financial Sector Stability Review (FSSR).

Governance and Other Reforms to Support the Business Environment

33. Recognizing that corruption can hurt growth, the government of Nepal has taken important steps to improve governance. We remain committed to strengthening governance and combatting corruption. We have ratified the United Nations Convention Against Corruption (UNCAC), established several anti-corruption bodies, and enacted anti-corruption related legislation. The Prevention of Corruption Act (PCA) is the country’s main anti-corruption law. The Commission for the Investigation of Abuse of Authority (CIAA) is Nepal’s constitutional body for corruption control. We are in the process of ensuring the PCA is fully in line with UNCAC and its implementation and enforcement are adequate.

34. We commit to ensure the transparency of COVID-related expenditures. We have achieved considerable progress in public financial management reforms in recent years. We have implemented the cash basis International Public Sector Accounting Standards and all expenditures are available online daily. The monthly aggregate expenditures of the COVID-19 Fund continue to be published on the FCGO website. To meet the commitment on the publication of budget expenditures related to COVID, we have published a comprehensive report that includes government spending related to the COVID-19 response on the MOFs website with the support of the Asian Development Bank. The report focuses on our response around three priority areas: health systems; social protection for the poor and vulnerable; and economic recovery for affected sectors. We will publish a further report by March 2022 (structural benchmark). We expect government expenditure on COVID to decline in FY2022/23 as the pandemic comes under control in Nepal and globally. With this background, we will continue to monitor and publish a streamlined set of information on the remaining budgetary expenditures related to COVID on a semi-annual basis. The annual comprehensive audit of the Office of the Auditor General for FY2020/21 to be published in 2022 will coverall government spending. Further, we have issued a Public Information Notice (PIN) on the collection and publication of beneficial ownership information. Consistent with the published PIN, implementation agencies will publish on a government website large public procurement documentation, ex-post validation of delivery, the name of awarded companies, and the name of their beneficial owner(s) for all new, large, Covid-19 related procurement contracts (as of December 9 2021, prior action).

35. Strengthening the AML/CFT framework remains a priority. The Asia/Pacific Group on Money Laundering (APG) is to assess Nepal’s compliance with the global AML/CFT standards through a mutual evaluation (peer review) program in 2022. We intend to make progress on the implementation of the AML/CFT framework. We recognize the importance of Nepal not being listed by the FATF as a country with strategic AML/CFT deficiencies and the potential impact that this could have on Nepal’s correspondent banking relationships and access to the global financial network. We remain vigilant and stand ready to act upon any new or emerging AML/CFT risks, and will undertake further measures to strengthen governance and combat corruption as necessary

36. We will continue our effort to increase access to financial services and to develop financial markets, while maintaining financial stability. We will closely monitor the cooperative sector, including the cooperates’ increasing role as financial services providers and their linkages to banks and financial institutions. Payment systems are an integral part of monetary policy implementation and capital market development. We will continue our effort to develop safe and efficient payment system infrastructure and practices with a special focus on the retail side and strengthen the legal and regulatory framework. We are implementing the Retail Payment Strategy, with support from the World Bank, to deepen digital retail payment system, promote the channeling of government and remittance payment to transaction accounts, increase financial literacy with targeted interventions towards women, and strengthen the legal and regulatory framework. Toward the development of capital markets, we will adopt a medium-term debt management strategy to build and maintain a functioning yield curve and upgrade the securities depository system. We believe these measures will be critical to supporting the development of the private sector.

D. Risks and Contingencies

37. The trajectory of the COVID-19 pandemic in Nepal and globally is extremely uncertain and will continue to weigh on the economic outlook. Until vaccines are widely distributed, it is likely that Nepal, like many other countries, will continue to experience health and economic disruptions from the impact of the COVID-19 pandemic. If Covid-19 developments were to deteriorate compared to our baseline, economic outcomes would worsen. There are also potential upside risks to growth if Covid-19 developments are more benign than assumed in the baseline.

38. We believe that Nepal’s buffers—strong levels foreign exchange reserves and low risk of debt distress—can provide the needed policy space to address the pandemic in the near term with financing from development partners. However, if the pandemic further intensifies or tail risks materialize leading to a financing shortfall, we commit to close the gap with additional expenditure compression of lower priority recurrent and capital expenditures and to seek additional financing from development partners.

E. Financing and Program Monitoring

39. We will continue to mobilize resources from international development partners to support our COVID-19 response, and the economic stabilization and recovery program. The government estimates that the financing needs for the FY2021/22-FY2024/25 program will be covered by assistance from the International Monetary Fund, the World Bank, the Asia Development Bank, and official bilateral creditors. We will work with our international development partners, especially the IMF and the World Bank, to successfully implement the reforms outlined above. IMF disbursements will be made available to the budget during the program period.

40. The program will be closely monitored through quantitative performance criteria, indicative targets, and structural benchmarks as listed in Tables 1 and 2. The Technical Memorandum of Understanding describes the definitions as well as data provision requirements. The first two program reviews are scheduled to be completed in June 2022 and January 2023 (based on mid-January and mid-July 2022 test dates, respectively). Thereafter, the program will continue with monitoring on a semi-annual basis by the IMF Executive Board.

Table 1.

Nepal: Proposed Structural Benchmarks, January 2022 to December 2022

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Table 2.

Nepal: Quantitative Performance Criteria and Indicative Targets, July 2021 to July 2022 1/

(NPR million unless otherwise indicated)

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Sources: Nepali authorities and IMF staff estimates/projections based on the Nepali fiscal year and calendar.

The quantitative targets, indicative targets, program exchange rates and adjustors are defined in the Technical Memorandum of Understanding (TMU]. Foreign currency deposits of commercial banks and other financial institutions held at the NRB are considered reserve related liabilities and excluded.

This quantitative target is applied on a continuous basis.

Cumulative from the beginning of the fiscal year.

Excludes interest payments.

The social spending indicative target will initially be a floor on spending on the child protection grant. This indicative target will start in the second review with the test dates beginning in July 2022. The initial floor will be FY2020/21 outturns plus an additional amount to reflect the announced one third increase in budget.

The program targets for the primary deficit include adjustors for the level of revenue collection. The upward adjustment to the ceiling is capped at NPR 124,003 million for FY2021/22.

The program targets for the primary deficit include adjustors for foreign-Ana need project loan disbursements on concessional terms. Foreign-financed project loan disbursements is the difference between total external financing and budget support from development partners

The program targets for net international reserves include adjustors for budget support from development partners and for revenue collection. Any downward adjustment to the NIR floor will be capped at USD 1040 million for FY2021/22 to maintain reserve adequacy.

Attachment II. Technical Memorandum of Understanding

This memorandum reflects understandings between the Nepali authorities and the IMF staff in relation to the Extended Credit Facility (ECF) during January 2022-March 2025. It specifies valuation for monitoring quantitative performance criteria under the program (Section A), performance criteria and indicative targets (Section B), and data reporting (Section C). The authorities will consult with the IMF before modifying measures contained in this TMU or adopting new measures that would deviate from the goals of the program.

A. Program Exchange Rates and Gold Valuation

1. Program exchange rates are used for formulating and monitoring quantitative performance criteria. All assets and liabilities denominated in U.S. dollars (USD) will be converted into Nepali Rupees (NPR) at a program exchange rate of NPR 119.19 per one USD, which corresponds to the exchange rate on November 3, 2021. Gold holdings will be valued at USD 1,777 per troy ounce, the price in September 2021 from the IMF website on primary commodity prices. Assets and liabilities denominated in SDRs and in foreign currencies not in USD will be converted into USD at the September 30, 2021 exchange rates reported in the Table 1:

Table 1.

Nepal: Program Exchange Rates1/

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The reference date for Nepali Rupeeis November 3, 2021.

B. Performance Criteria and Indicative Targets

2. The quantitative performance criteria and indicative targets for January and July test dates are specified in Table 2 of the Memorandum of Economic and Financial Policies.

Quantitative Performance Criteria on Net International Reserves of the Nepal Rastra Bank

3. Net international reserves (NIR) are defined as reserve assets minus reserve related liabilities of Nepal Rastra Bank (NRB) expressed in U.S. dollars.

  • Reserve assets of the NRB, as defined in the sixth edition of the Balance of Payments Manual (BPM6), are claims on nonresidents denominated in foreign convertible currencies and Indian rupee controlled by the NRB and are readily and unconditionally available to the NRB for meeting balance of payments financing needs, intervention in exchange markets, and other purposes. They include NRB holdings of monetary gold, SDRs, Nepal’s reserve position in the IMF, foreign currency cash (including foreign exchange banknotes in the vaults of NRB), and readily available deposits abroad (including balances on accounts maintained with overseas correspondent banks). Excluded from reserve assets are any assets that are pledged, collateralized, or otherwise encumbered; claims on residents; precious metals other than monetary gold; illiquid assets; and claims on foreign exchange arising from derivatives in foreign currencies vis-a-vis domestic currency (such as futures, forwards, swaps, and options).

  • Reserve related liabilities are defined as foreign exchange liabilities of the NRB to nonresidents; Nepal’s outstanding credit to the IMF; foreign currency reserves and deposits of commercial banks and other financial institutions held at the NRB; commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, and options); and all arrears on principal or interest payments to commercial banks, suppliers, or official export credit agencies.

  • To measure the program NIR, all foreign-currency related assets and liabilities will be converted into USD at the exchange rates specified in paragraph 1, Table 1.

4. Targets for the program NIR are set as a floor.

5. The program targets for net international reserves include adjustors for budget support from development partners and for revenue collection.

  • Budget support from development partners. Should the actual disbursement of budget support from development partners be below the projections under the program, the NIR floor will be adjusted downward by the difference between the actual level and the projected level of disbursements under the program. The projections of budget support from development partners for the first 2 test dates covering a 12-month period from program approval are presented in Table 2.

  • Revenue collection. The program targets for NIR include adjustors for revenue collection, reflecting the strong link between the revenue base to remittances and other foreign exchange flows. In case revenue collection is below the level projected under the program, the NIR target will be adjusted by the equivalent USD amount of the revenue adjuster to the primary deficit ceiling described in paragraph 10 below.

  • Cap on downward adjustment. Any downward adjustment to the NIR floor for the conditions described in the two preceding bullets will be capped at USD 1040 million for FY2021/22.1

Table 2.

Nepal: Budget Support from Development Partners Projected under the Program

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Indicative Target on the Primary Deficit of the Budgetary Central Government

6. The budgetary central government, for the purpose of the program, consists of all the entities listed in the Administrative Expenditure Estimate table of the budget (Table 3).

Table 3.

Nepal: Institution Coverage of Budgetary Central Government

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7. The primary deficit of the budgetary central government is defined as primary expenditures minus revenues minus grants.

  • Primary expenditures include capital expenditures and recurrent expenditures except interest payments. Financing expenditures (the amortization of domestic and external borrowing, loan and share investment in public enterprises and other enterprises, and foreign share investments) are excluded. Capital expenditures are the same as the capital expenditures defined in the budget. Recurrent expenditures (excluding interest expenditure) include the following items in the budget: compensation of employees, use of goods and services, subsidies, grants, social security, other current expenditure. Revenue sharing for province and local levels is excluded.

  • Revenues of the budgetary central government are those revenues to be deposited in the Federal Treasury. They include all taxes and non-tax revenue as defined in the budget. Revenue sharing for province and local levels is excluded. Other receipts are also excluded.

  • Revenues and primary expenditures should be recognized on a cash basis.

  • The Financial Comptroller General Office monthly reports will be used as the basis for program monitoring.

8. Targets for the primary deficit of the budgetary central government are set as a ceiling. Targets are set for cumulative flows from the end of the previous fiscal year.

9. The program targets for the primary deficit include adjustors for revenue collection.

  • Adjuster for revenue shortfalls. Should the revenue outturn be below the projected level under the program, the primary deficit ceiling will be adjusted upward (higher deficit) by the difference between the revenue outturn and the level of revenues projected under the program. The upward adjustment to the ceiling is capped at NPR 124,003 million for FY2021/22. This adjuster would prevent having to tighten fiscal policy under the program if the economy is weaker than projected.

  • Adjuster for revenue windfalls. Should revenue outturn be above the projected level under the program but below the MOF revenue collection targets, there would be no adjustment to the primary deficit target (implying that expenditure could be higher by the equivalent amount of the revenue overperformance, keeping the overall primary deficit target unchanged). Should the revenue outturn exceed the MOF revenue collection targets, the primary deficit ceiling will be adjusted downward (lower deficit) by the difference between the revenue outturn and the MOF revenue collection target. This adjustor would allow for higher spending if revenues are higher than the program projection, while promoting a buildup of fiscal buffers if revenues overperform by a large amount.

  • The level of revenues projected under the program and MOF revenue collection targets for the first 2 test dates are presented in Table 4.

Table 4.

Nepal: Revenues of the Budgetary Central Government Projected under the Program and Revenue Collection Targets

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10. The program targets for the primary deficit include adjusters for foreign-financed project loan disbursements on concessional terms.

  • Adjuster for higher than projected foreign-financed project ban disbursements on concessional terms. Should the actual disbursement of foreign-financed project loans be above the projections under the program, the primary deficit ceiling will be adjusted upward (higher deficit) by the difference between the actual level and the projected level of disbursements under the program. The upward adjustment to the ceiling is capped at the difference between the budget amount and the projected level of disbursement. This adjuster means that the program does not constrain foreign-financed project loan disbursements on concessional terms.

  • Adjustor for higher than projected foreign-financed project ban disbursements on concessional terms. Should the actual disbursement of foreign-financed project loans be below the projections under the program, the primary deficit ceiling will be adjusted downward (lower deficit) by the difference between the actual level and the projected level of disbursements under the program. This adjustor would align project spending with the actual disbursement of foreign-financed project loans on concessional terms.

  • The projections of foreign-financed project loan disbursements for the first 2 test dates are presented in Table 5.

Table 5.

Nepal: Foreign-Financed Project Loan Disbursements Projected under the Program

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Indicative Target on Social Spending of the Budgetary Central Government

11. The indicative target will initially focus on the child grant spending. The child grant reaches vulnerable households, is implemented by the federal government, and is monitorable in a timely way. Health and education spending, while key pillars of social spending, are being devolved to local and provincial governments and implementation is not fully under control of the federal government. Indicative targets on the child grant are set as a floor for: (1) Cumulative flows from the end of the previous fiscal year. Spending should be recognized on a cash basis and flows should be recorded when cash is paid.

Continuous Performance Criteria

12. Continuous quantitative performance criteria apply to the non-accumulation of new external payments arrears on external debt contracted or guaranteed by the budgetary central government or NRB. External payment arrears consist of external debt service obligations (principal and interest) falling due to nonresidents after approval of this arrangement and that have not been paid when due in accordance with the relevant contractual agreements (including any contractual grace period). Excluded from the prohibition on the accumulation of new arrears are external arrears that are subject to debt rescheduling agreements or negotiations.

13. Standard continuous performance criteria include: (1) prohibition on the imposition or intensification of restrictions on making of payments and transfers for current international transactions; (2) prohibition on the introduction or modification of multiple currency practices; (3) prohibition on the conclusion of bilateral payments agreements that is inconsistent with Article VIM; and (4) prohibition on the imposition or intensification of import restrictions for balance of payments reasons.

C. Provision of Information to the IMF

14. Performance under the program will be monitored using data supplied to the IMF by the Ministry of Finance (MOF) and the NRB as specified in Table 6 below, consistent with the program definitions above and within the time frame specified. The authorities will transmit promptly to the IMF staff any data revisions within 14 days after being made. Any data and information indicating the non-observance of the continuous performance criteria will be provided immediately. In addition, the authorities will transmit to IMF staff any information or data not defined in this TMU but pertinent for assessing or monitoring performance relative to the program objectives. All reports and data should be transmitted to the IMF electronically and in English.

15. In addition, the MOF and NRB will send to the IMF a quarterly report documenting progress with implementing structural benchmarks under the program. These reports will include: relevant documentation such as draft legislation and implementation plans; explain any deviations from the initial reform timetable and remedial measures taken to minimize such deviations (if any); specify expected revised completion date; and details on major economic and social measures taken by the government and expected to have an impact on program sequencing (such as changes in legislation, regulations, or any other pertinent information).

16. The authorities will inform IMF staff of the creation of any new extra-budgetary funds or programs immediately. This includes any new funds, or other special budgetary and extra-budgetary programs that may be created during the program period to carry out operations of a fiscal nature as defined in the IMF’s Manual on Government Finance Statistics 2014.

Table 6.

Nepal: Data Reporting Requirements 1/

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Note: A = Annually; Q = Quarterly; M = Monthly; W = Weekly.

Reports and data are provided in English. Data are provided in excel files.

After the end of respective week, month, quarter, or fiscal year in Nepali calendar, unless otherwise indicated.

30 calendar days after the delivery of the budget speech.

30 calendar days after January 15.
1

The authorities plan to hold the SDR allocation in reserves.

2

NAFA has averaged 1.3 percent of GDP per year and includes financing of SOEs to implement the authorities’ development program (see DSA). Envisaged technical assistance related to fiscal risks will help specify further steps to enhance SOE sustainability as needed,including in the context of the program.

6

As of July 2021, approximately 32 percent of profits stem from the written off provisions (reversals), which is a one-off source.

7

Staff will also work to gain a fuller understanding of the banking sector exposures to the public sector, including SOEs, to complement the assessment of fiscal risks (H18).

8

The following macroprudential measures are currently implemented:The single obligor limit (the single obligor limit of the margin nature loan is fixed at Rs. 40 million from one institution and Rs. 120 million in total), credit to deposit ratio (CD, currently 90%), debt service to income ratio (currently 50%), and loan to value ratio (LTV, 70% for margin loans and 60 percent for the business housing projects licensed by the government).

9

Class A banks are commercial banks, class B banks are development banks, and class C banks are finance companies.

10

Corrective measures are listed in Article 86C of the NRB Act.

1

Measures related to social assistance and support to business are discussed in the main text.

1

The assessment is based on FY2020/21 (mid-2021) data for Nepal and end-2020 data for other countries.

1

The coverage of public debt includes general government debt (including the negative Treasury Single Account (TSA) balance), government guarantees, and central bank borrowing on behalf of the government.

2

Several countries including Japan and the USA donated vaccines through the COVAX facility.

1

The NIR adjuster cap is the minimum of: (i) the revenue cap converted to USD at program exchange rates; and (ii) the difference between the NIR floor and NIR adequacy levels. The cap ensures that any downward adjustment maintains reserve adequacy levels.

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Cover IMF Staff Country Reports
Nepal: Request for an Arrangement Under the Extended Credit Facility -Press Release; Staff Report; Debt Sustainability Analysis; Staff Supplement; Statement by the Executive Director for Nepal
Author:
International Monetary Fund. Asia and Pacific Dept
Volume/Issue:
Volume 2022: Issue 024
Publisher:
International Monetary Fund
ISBN:
9798400200380
ISSN:
1934-7685
Pages:
102
DOI:
https://doi.org/10.5089/9798400200380.002

COVID-19 Developments in Nepal

Exports and Imports

(Growth, in percent)

Total Foreign Employment

(Thousands of workers)

Remittances

Containment Measures, Stringency Index

Community Google Mobility Index

Annual Growth Projections

(In percent; year-on-year)

Real GDP Growth and External Sector Development

(In percent; year-on-year)

Debt-Stabilizing Primary Deficits

(In percent of GDP)
Figure 1.

Nepal: Recent Macro-Economic Developments
Figure 2.

Nepal: Recent Monetary Sector Developments
Figure 3.

Nepal: External Sector Developments
Figure 4.

Nepal: Recent Fiscal Developments
Figure 5.

Nepal: Socio-Economic Indicators

COVID in Nepal

Physicians per 1,000 People

(2016–19 average)