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Recent Macroeconomic Developments, Outlooks and Risks – Highlights from IMF Country Report 2017

In order to graduate from the status of Least Development Country (LDC) by FY 2022, the Government of Nepal (GoN) has targeted to achieve annual GDP growth of above 6.5%. However, the intended GDP growth can only be attained if the monetary and fiscal policies and reforms are implemented accordingly. Moreover balanced coordination of fiscal and monetary policy is required to stabilize the economy. In this regard, the International Monetary Fund (IMF) has conducted a macroeconomic review of Nepal focusing on its fiscal and monetary policies highlighting the reforms required to achieve the status of middle income nation by FY 2030. Listed below are some of the key areas that need to be worked to graduate from the LDC by FY 2022 and be listed as middle income nation by FY 2030.

  • Road to recovery: The economy of Nepal is showing signs of recovery with an improved supply situation, accommodative monetary policy and rising government expenditure. The rebound in economic activity can be more pronounced and targeted GDP growth of 6.5% can be achieved if i) policy and structural reforms created in recent months are sustained; ii) recent surge in government spending is supported by higher capital spending and accelerated payment of housing grants; iii) financial closure in one or more foreign-financed hydropower projects is achieved; and iv) flow of remittance is improved; 
  •  Monitoring and Evaluation: Appropriate measures should be embraced to address the crowding out effect of the intended fiscal expansion. Excessive government spending resulting from the expansionary fiscal policy can absorb the economy’s lending capacity and drive down the private investment or discourage private firms from engaging in capital projects; the phenomena is often termed as “crowding out”.  In this regard, Government of Nepal (GoN) should closely monitor the outcomes of fiscal expansion and bring private investment to the mainstream; 
  • Budget Development and Implementation: In order to smoothen the development spending and break Nepal’s low-investment-low-growth equilibrium, GoN should realistically set the budget and get it implemented; as ambitious budget only increases the risk of low quality spending. Furthermore, to create additional fiscal space for infrastructure development, GoN should phase out financial support to state-owned enterprises including Nepal Oil Corporation and Nepal Electricity Authority. Doing so will also help GoN to contain its fiscal risks;
  • Appropriate Monetary Policy: With the adoption of an expansionary fiscal policy, current account being in deficit and slowing down of remittance, Nepal Rastra Bank (NRB) needs to tighten the monetary policy to sustain the existing peg exchange rate of Nepali rupee with the Indian rupee. Accordingly, NRB needs to adopt a suitable policy to eliminate the inflation wedge. Additionally, to restrain potential financial sector risks, authorities must continuously review the monetary policy and assume appropriate measures accordingly to overcome the possible threats;
  • Stable Political Environment: Beside reforms in monetary and fiscal policy, GoN also needs to focus on improving its political environment. As such, unlocking Nepal’s growth potential by stimulating private sector investment and job creation is only possible with the stable political environment. Likewise, equal attention should be given to capacity building (at local and regional level) as well.

The blueprint of achieving middle income status by 2030 lies in the mantra of “Balanced growth” supported by appropriate fiscal policy, accommodative monetary policy and smooth implementation of the given policies. Additionally, it is equally important to focus on improving the business environment as creating job and raising income depends on the development of industries. 

Niraj K.C
Niraj is currently working as an economist beed and has over three years of experience working in the financial sector. He holds a M.sc in International Business and Economics from University of Hohenheim, Stuttgart, Germany with specialization in International Trade and Financial Econometrics. He is also a MBA graduate from Kathmandu University School of Management (KUSOM) with a major in Finance.
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