Nepal and the International Monetary Fund (IMF) have reached a staff-level agreement on policies and reforms required to complete the sixth review under the Extended Credit Facility (ECF), paving the way for a disbursement of around $42.7 million, subject to approval by the IMF’s Executive Board.
The announcement came at the conclusion of a 16-day mission in Kathmandu led by IMF official Sarwat Jahan. Upon approval, Nepal’s total drawdown under the ECF would rise to Standard Drawing Rights (SDR) of 251.1 million (approximately $331.8 million) out of the total approved SDR 282.4 million.
The IMF acknowledged that Nepal has made steady progress under the ECF-supported programme, meeting all quantitative performance targets as of mid-January 2025, with the exception of the indicative target on child welfare grants.
IMF said that structural reform momentum has increased, with notable milestones including the completion of a tax expenditure report, revision of the National Project Bank guidelines, and finalization of a post-loan portfolio review (LPR) roadmap.
"Significant progress has been made on incorporating recommendations from the IMF’s 2021 Safeguards Assessment and 2023 Financial Sector Stability Report into draft amendments to the Nepal Rastra Bank (NRB) Act," a statement issued by IMF read.
It may be noted that the NRB is finalizing the selection of an independent international consultant to carry out the LPR, a key condition for completing the sixth review.
The IMF commended Nepal’s economic recovery, supported by improved construction and manufacturing activity, hydropower expansion, and a strong agricultural harvest. The Fund expects Nepal’s economy to grow by over 4 percent in the current fiscal year, though still below potential. Inflation, which spiked after the September 2024 floods, eased to 3.4 percent year-on-year in April 2025. The country’s external position continues to strengthen, driven by rising exports, remittances, and tourism revenue.
However, the IMF also flagged persistent vulnerabilities in the financial sector. Non-performing loans (NPLs) have risen to 5.2 percent, affecting bank capital buffers, while savings and credit cooperatives (SACCOs) remain under financial strain.
The IMF projects stronger growth in FY2025/26 and expects inflation to remain within the NRB’s target range. However, it warned of several downside risks, including under-execution of capital expenditure, heightened financial vulnerabilities, global uncertainties, and possible disruptions in domestic policy continuity.
The government’s FY2025/26 budget was broadly aligned with IMF programme goals, the Fund noted, highlighting its emphasis on capital spending, private investment incentives, and the expansion of the midday meal programme in public schools.
Monetary policy, according to the IMF, continues to be appropriately cautious and data-driven. Proposed amendments to the NRB Act are expected to reinforce central bank independence and modernize the resolution regime for distressed banks, the statement added.
The IMF also cautioned against a premature rollout of an Asset Management Company to address bad loans, stating it should be contingent upon improvements to the debt recovery framework and a comprehensive review of its business case. It also emphasized timely execution of the LPR and urgent measures to address issues within SACCOs.
Progress has been made in strengthening Nepal’s anti-money laundering and counter-terrorism financing framework, with the focus now shifting to implementing the national AML/CFT Action Plan.
During the mission, the IMF team met with Finance Minister Bishnu Prasad Paudel, National Planning Commission Vice-Chairman Dr. Shiva Raj Adhikari, NRB Governor Dr. Biswa Nath Poudel, as well as representatives from the private sector, think tanks, and development partners.
