Tuesday, December 4, 2012

Article IV Consultation 2012: Assessment of the Nepali economy by the IMF

In this year’s Article IV Consultation, the IMF has warned that the political uncertainty is complicating macroeconomic management in Nepal. The usual narrative about economic growth, expenditure concerns, and greater reliance on remittances for financing consumption and imports holds.

The IMF projects real GDP growth to decline to 3.8% in FY2013, thanks to unfavorable monsoon which affected agriculture production, slower services activity due to a potential decline in remittance growth, and a slowdown in growth in India (lower export demand, weaker inward investment, and possibly less remittances). The IMF’s latest growth projection exactly matches the ADB’s latest projection in ADO Update. But, while ADB projected inflation to be at 8.5%, the IMF projects it to be 8.3%.

Some notable observations and suggestions include:

  • Quasi-fiscal liabilities continued to rise through financial losses at the Nepal Electricity Authority and Nepal Oil Corporation. Build political consensus to adopt an automatic price adjustment mechanism while putting in place well-targeted subsidies to protect the vulnerable.
  • Significant restructuring of the financial system has yet to emerge, and balance sheet risks from concentrated exposure to a moribund real estate market are high.
  • Focus on sound policies and structural reforms should be maintained. In 2011, the IMF suggested to enact structural reforms to raise productivity and potential growth.
  • Enact a full budget and strengthen public management to ensure full executive of capital budget.
  • Enhance revenue mobilization efforts but saw work on further tax and customs administration reforms.
  • Targeted and well sequenced acceleration of financial sector reforms, including the amendment of NRB Act to improve the governance of the financial sector.
  • A tightening of monetary policy may be used to signal commitment to price stability and support exchange rate peg.
  • Open market operations and regular auction of T-bills good to mop up excess liquidity.
  • Enhance the business environment, remove infrastructure bottlenecks, increase transparency, and improve governance.

The projection of major macroeconomic indicators for FY2013 are shown in the table below.

Indicator 2009/10 2010/11 2011/12e 2012/13f
Real GDP growth 4.8 3.9 4.6 3.8
CPI (period average) 9.5 9.6 8.3 8.3
Total revenue and grants (% GDP) 18 17.7 18.3 18.1
Expenditure (% GDP) 18.8 18.6 18.2 18.6
Broad money (%change) 14.1 12.3 22.7 12.5
Domestic credit (%change) 16.8 14.6 8 14.4
Private sector credit (%change) 14.2 13.9 11.3 13
Gross investment (%GDP) 37.1 32.5 32.8 32.9
Private investment (%GDP) 30 25.3 25.7 26
Central government (%GDP) 7.1 7.3 7.1 6.9
Gross national saving (%GDP) 34.7 31.6 37.5 33.5
Current account (%GDP) -2.4 -1 4.7 0.6
Trade balance (%GDP) -25.6 -23.6 -23.7 -27.3
Gross official reserves (US$ million) 2,844 3,085 4,307 4,595
Public debt (%GDP) 35.4 33.3 33.3 31.3
GDP at market prices (Rs billion) 1,193 1,368 1,557 1,750
GDP at market prices (US$ billion) 16 19 19.4 20.3

Here is the IMF’s preliminary assessment released on September. The assessment in 2011 is here.