The IMF has just released the preliminary findings and recommendations 2012 Article IV Consultation discussions.The usual narrative about economic growth, expenditure concerns, and sustainability of economy by remittances holds.
Macroeconomic outlook remains challenging. Strong agriculture production and growth in services sector boosted real GDP growth to 4.6 percent despite fledging industrial sector. Non-food and services (mostly of imported nature) prices exerted more pressure on inflation last year as a result of depreciation of currency and increase in fuel prices. High remittance inflows has contributed to keeping current account and balance of payments in surplus. Lower fiscal deficit than expected points to the inability to spend on capital projects. Good revenue mobilization helped keep deficit and public debt on a stable footing.
Here is the outlook for short term:
- GDP growth expected to decline due to late monsoon, continued weakness in industrial output and slow growth in India.
- Inflation is likely to miss targets and remain at around 8-9 percent range.
- BoP surplus is likely to decline as growth of remittances moderates.
- Delay in adopting a full-year budget for 2012/13 could further dampen investment and growth.
- A full-year budget—limiting the deficit to about 2 percent of GDP, consistent with macroeconomic and debt sustainability—should be adopted as soon as possible.
- High levels of capital spending to meet Nepal’s pressing infrastructure needs and support medium-term growth. But, its challenging.
- Further strengthening of tax administration and collection will be vital, as will a focus on collecting arrears.
- Tighter expenditure management and cash planning will also be key to ensuring that government and donor-supported investment projects are implemented.
- Large losses of NOC and NEA are unsustainable.
- Recommends adoption of an automatic price adjustment mechanism to contain losses of NOC.
- The exchange rate peg to the Indian rupee should remain the key monetary policy priority. It means maintaining interest rates higher than in India.
- Excess liquidity generated by strong remittance growth in 2011/12 should be mopped up by tightening monetary policy.
- Weak supervision, liberal licensing policy in previous years and exposure to real estate sector remains a risk for financial sector. NRB’s corrective steps have been useful in containing spread of risks.
- Implementation of revised NRB Act to allow for swift intervention of problem banks, rigorous implementation of the prompt corrective action framework, and strengthened supervision and enforcement of prudential regulations.
Very brief but entirely appropriate diagnosis and recommendations by the IMF. You will have to wait for the full 2012 Article IV Consultation report to dig deeper into these issues.