The Executive Board of the International Monetary Fund (IMF) has approved a disbursement of $41.8 million (approximately Rs5.8 billion) for Nepal, following the completion of the fifth review under the four-year Extended Credit Facility (ECF).  

In a statement issued on Friday, the IMF announced that its Executive Board had completed the review on Wednesday, March 12, allowing Nepalese authorities to withdraw the equivalent of SDR 31.4 million (about $41.8 million) under the ECF. With this latest installment, total disbursements under the facility for budget support have reached SDR 219.7 million (approximately $289.1 million).  

The IMF initially approved the ECF arrangement for Nepal on January 12, 2022, with a total commitment of SDR 282.4 million.  

According to the IMF, Nepal has made tangible progress in implementing reforms under the program, supporting early signs of economic recovery while maintaining macroeconomic and financial stability and protecting vulnerable populations. However, the organization noted that the economy continues to grapple with subdued domestic demand .  

“Economic activity is expected to pick up moderately in FY2024/25 on account of disruptions caused by the September 2024 floods,” the IMF statement read. “Growth is expected to reach 4.2 percent in FY2024/25, supported by a planned increase in capital spending including on reconstruction, an accommodative monetary policy stance, and additional hydropower generation."  

The floods and landslides triggered by incessant rainfall in the last week of September 2024 inflicted an estimated loss of Rs 46.68 billion across multiple sectors, according to the National Disaster Risk Reduction and Management Authority (NDRRMA). These disasters disrupted transportation networks and severely impacted agriculture, leading to a spike in vegetable prices. Year-on-year (y-o-y) consumer price inflation surged to 6.05% in mid-December 2024 —the highest level since mid-October 2023, according to Nepal Rastra Bank (NRB). Under the food and beverage category, the y-o-y price index for vegetables skyrocketed by 43.05% between mid-November and mid-December.  

However, expecting these supply-side pressures to be short-lived, the IMF projects average inflation to remain close to NRB’s target of around 5 percent. Inflation had already moderated to 5.41% in mid-January and further eased to 4.16% in mid-February.  

The IMF highlighted the need for stronger efforts to mobilize revenue to support development spending and maintain fiscal sustainability. However, it pointed out key challenges, including poor capital spending, financial-sector vulnerabilities , and political instability .  

A persistent issue, Nepal’s capital expenditure remains low. As of March 13, the government had spent only 23.37% of the unrevised capital expenditure budget in the first eight months of the current fiscal year, according to data from the Financial Comptroller General Office (FCGO). This trend mirrors last year’s performance, when capital expenditure was just 26.89% during the same period.  

As of Thursday, March 13, capital expenditure stood at Rs 82.33 billion. Initially, the government had allocated Rs 352.35 billion for capital expenditure this fiscal year, later revising it down to Rs 299.5 billion through a mid-term review.  

Following the Executive Board’s discussion, Bo Li, Deputy Managing Director at the IMF, stated: “Executive Directors welcomed the continued recovery and the broadly adequate performance under the program, acknowledging the challenges posed by political uncertainty and recent flood-related disruptions. They noted that while the outlook remains broadly favorable, it is subject to downside risks. Accordingly, Directors encouraged continued prudent policies to safeguard macroeconomic stability and steadfast implementation of structural reforms to foster sustainable and inclusive growth. Fund capacity development will also be important to achieve program objectives.”  

Directors have recommended gradual, growth-friendly fiscal consolidation to stabilize debt. They emphasized the need for improved revenue mobilization to support higher capital spending while protecting vulnerable groups. The IMF welcomed Nepal’s adoption of the Domestic Revenue Mobilization Strategy.

The IMF directors agreed that monetary policy should remain cautious and data-driven to preserve price and external stability. “They highlighted the importance of amending the Nepal Rastra Bank Act to strengthen its governance, independence, and accountability,” the statement quoted Bo as saying.  

Given rising financial sector vulnerabilities, the IMF urged Nepal to adopt a proactive approach. The organization recommended aligning financial sector regulations with international standards, conducting a planned loan portfolio review, and developing a comprehensive strategy to address problematic savings and credit cooperatives.  

As part of the ECF conditions, the IMF has also mandated NRB to conduct independent audits of 10 major commercial banks to assess suspected loan evergreening practices. Earlier this month, the central bank shortlisted six firms for this task after terminating an earlier selection process.  

In a notable development, the IMF raised concerns about Nepal’s recent grey listing by the Financial Action Task Force (FATF) , an intergovernmental body that oversees global anti-money laundering (AML) and countering the financing of terrorism (CFT) compliance. 

The FATF placed Nepal on its grey list on February 21, for the second time, citing deficiencies in the country’s AML/CFT framework. It has outlined seven key areas for improvement and provided a two-year window for Nepal to strengthen its compliance efforts.  

“Noting Nepal’s recent FATF grey listing, Directors stressed the urgency of strengthening the AML/CFT framework through reforms to enhance legal, regulatory, and supervisory frameworks,” Bo said.  

The IMF also underscored the need for ambitious structural reforms to foster sustainable and inclusive growth. It called for efforts to reduce the high cost of doing business, enhance the investment climate, improve governance, and strengthen anti-corruption institutions .  

Additionally, the IMF emphasized Nepal’s high vulnerability to natural disasters and highlighted the importance of strengthening resilience to climate-related shocks . “Nepal’s high vulnerability to natural disasters underscores the importance of enhancing resilience to climate shocks,” Bo concluded.