Nepal should engage in monetary tightening to bolster forex, says IMF

Nepal should engage in monetary tightening including interest rate hikes to bolster its dwindling foreign exchange reserves, without resorting to import curbs that could push up prices and hamper economic growth, a senior International Monetary Fund (IMF) official said on Wednesday.

The government must address inflationary pressures and growing external imbalances while safeguarding the economic recovery, Robert Gregory, head of an IMF team that held week-long discussions with government officials, said in a statement.

Nepal, a landlocked country between China and India, has banned luxury goods imports until mid-July to rein in capital outflows as foreign exchange reserves fell over 18% to $9.6 billion as of mid-March from mid-July - enough to last the country around six months.

Following a sharp rise in the cost of imports due to soaring global crude oil and other commodity prices after Russia's invasion of Ukraine, Nepal's international reserves "have declined more than anticipated," the IMF statement said.

However, a prudent budget, as suggested under its financial support programme, along with monetary tightening would help address the inflationary pressures and growing economic imbalances, the statement said.

Consumers in the Himalayan nation of 29 million people are facing tough times as annual retail inflation hit a five-year high of 7.14% in the month through mid-March, pushed up by rising fuel and food prices, while household income levels are still below pre-pandemic levels.
 

The IMF team praised the government's recent steps to tackle external pressures by gradually exiting from a pandemic-related expansionary monetary policy and said forex reserves were adequate for now.

The World Bank said on Wednesday it would provide $150 million for the "Finance for Growth" Development Policy Credit (DPC) to strengthen financial sector stability, diversify financial solutions, and increase access to financial services in Nepal.
 

Nepal Finance Ministry official Ishwari Aryal said the IMF team's comments "will be addressed accordingly."