Background: Article IV Consultation
Usually every year, the International Monetary Fund (IMF) holds bilateral discussions with its member countries with the central motive to review the overall economic developments in the country under Article IV of the IMF’s Articles of Agreement. These discussions focus on issues relating to exchange rate, monetary, fiscal and regulatory policies to maintain economic stability and overall macro-critical structural reforms needed in the country.[i] Upon the completion of the discussions and evaluation, the IMF staff present a report to the executive board for assessment, which is then issued to the specific country’s authorities. This overall process is known as the Article IV Consultation.
In this background, the IMF conducted its 2020 Article IV Consultation with Nepal during January 5-17, 2020. The IMF team, led by Ms. Laura Jaramilo, met with the Finance Minister Dr. Yuba Raj Khatiwada, Governor of Nepal Rastra Bank Dr. Chiranjibi Nepal and other government officials as well as representatives from private as well as development sectors.
The major takeaways from the consultation[ii] are presented below:
- Economic expansion, greater than the previous years: The economy of Nepal has been expanding at a rate, which is above the long-term average in the previous years, coupled with greater political stability, improved electricity supply as well as reconstruction activities after the most disastrous earthquake in 2015.
- Continued growth expectations: With a positive and optimistic economic growth, but signs of moderation at hand, the IMF team projects economic growth to hover around 6 percent in the FY 2019/20. The reasons are attributed to a slower growth rate in India, sluggish remittance inflows, lack of agricultural production. Likewise, due to food inflation, the overall inflation is expected to be at 6 percent. Given this, gradually, the current account deficit has been narrowing, gross official reserves have been stabilizing and credit growth has been slowing.
- Need for additional policies to support inclusive growth: In order to safeguard macroeconomic and financial stability in the country, there is a dire need for additional policies that are in alignment with inclusive growth strategies. For this, the transition to federalism has to be effectively driven. Greater emphasis also has to be placed on prudent fiscal policies and fiscal sustainability.
- Limiting the systemic risk in the financial sector: The central bank, Nepal Rastra Bank (NRB), has taken a series of macro-prudential measures to prevent and limit the financial sector risks. Due to this, credit growth has reached a level that complements and supports economic growth while also protecting financial stability. Further actions to strengthen bank supervision and regulation have been taken through the introduction of a supervisory information system and implementation of selected elements of the Basel III capital framework.
Besides, the policy brought by NRB which requires banks to increase their capital ratio by July 2020 is appropriate. However, monitoring the asset quality of the banks needs to be continued, and monitoring of concentration risk has to be improved.
- Strengthening the implementation of monetary policy: A reform that holds one of the highest priorities for NRB is to strengthen the implementation of monetary policy by placing a well-functioning interest rate framework. The framework should drive the reduction of volatility in short-term interest rates, and in turn, allow NRB to improve financial market development.
- Creating an enabling environment for foreign direct investment: The development objectives laid out by the concerned authorities can be fulfilled through foreign direct investment as it supports economic activity and creates jobs in the market. The efforts put in recent years have resulted in a favourable investment climate. To further boost this, an enabling environment has to be created so that the acts in place can be properly implemented through increased capacity, adequate staffing, better skills matching, alignment of incentives and strategies across and within Ministries so that high-quality projects move forward.
Due to the onset of the global economic crisis in the previous years, the surveillance of the economies of countries conducted by the IMF has taken great importance.
In light of this, given the current situation of the country where the news that floods our lives on a daily basis is always often pessimistic, vigilant monitoring of the economic state of the country holds paramount importance. With the Article IV consultations targeted for Nepal, it is assuring to know that a transparent monitoring process is going on and that it accompanies analysis as well as the views of the Board which is necessary for us to internalize and implement. This gives room for our country to oversee the issues, growth prospects and address them timely to prevent economic turmoil and the potential for global spillovers.
[i] “IMF Surveillance”, International Monetary Fund, 8 March 2018. Retrieved from- https://www.imf.org/en/About/Factsheets/IMF-Surveillance
[ii] “IMF staff completes 2020 Article IV Mission to Nepal”, Pemba Sherpa, International Monetary Fund, 17 January 2020. Retrieved from- https://www.imf.org/en/News/Articles/2020/01/17/pr2011-nepal-imf-staff-completes-2020-article-iv-mission
Thumbnail picture source: https://egyptindependent.com/egyptian-american-economist-nominated-to-be-imfs-next-managing-director/