NATIONAL 6 -(Spotlight Weekly)]

Straggling Along

Although there are foreboding conditions, Nepal seems to be managing to walk the tight rope, the IMF report indicates

By SANJAYA DHAKAL

The recent meeting of the executive board of the International Monetary Fund (IMF) has expressed satisfaction over the macroeconomic performance of the Nepalese economy during the past two years, despite the countryís difficult political circumstances.

Rastriya Banijya Bank : Acute need for reform

"Growth was accelerating, inflation was declining, and international reserves remained at a comfortable level," observed the report, prepared after the conclusion of the 2001 Article IV Consultation with Nepal.

Overall real GDP growth (at market prices) surged from 4.5 percent in 1998/99 (fiscal year ending July 15) to 6.5 percent in 1999/2000, led by improved agricultural performance and strong exports. Growth is expected to have eased to 5.5 percent in 2000/01, owing to the dampening effects of higher oil prices and a marked decline in tourism due to domestic disturbances. Consumer price inflation fell to under 1 percent in the 12 months to mid-2000 and remained below 4 percent during the following year, with abundant food supplies offsetting the effects of higher energy prices.

The report also expresses satisfaction over the reserves despite the declines in capital transfers and foreign direct investment. Aided by strong exports and increased remittances, gross official reserves reached $US 946 million in 1999/2000 and $1014 million in 2000/01, equivalent to five months of imports in both years.

It further noted that the fiscal performance was generally favorable, with the overall deficit declining to 4.75 percent of GDP in 1999/2000. However, the deficit rose to 6.75 percent of GDP in 2000/01, owing to a significant overrun in the current expenditure budget, even though domestic revenues remained close to the budget target.

Apart from the above rosy assessment, the report also noted some disappointing developments in the country's economic sector, particularly in the area of structural reforms. In order to alleviate poverty, Nepal's primary goal has been to achieve and sustain higher levels of growth. "However, growth has been impeded by weak infrastructure, low saving and investment rates, fiscal constraints and inefficient public resource management," observed the report.

The financial performance of public sector enterprises continued to be disappointing, with virtually no progress on their privatization, reads the assessment by the executive board.

The executive board urged the authorities to continue the process of streamlining the civil service and prioritizing public expenditures. It highlighted the urgency of addressing the balance sheet problems of the two largest banks -- Nepal Bank Limited and Rastriya Banijya Bank -- noting that their recapitalization would need to be preceded by proper restructuring under the new management.

The board also noted the need to strengthen revenue mobilization and improve the targeting of budget allocations so as to allow for higher social spending. It recommended the authorities to take steps to improve the liquidity of official reserves, and to lower excess liquidity in the banking system and contain central bank financing of the budget.

The board also encouraged the Nepalese authorities to maintain an open trade and investment regime and access to world markets.

"Based on the report assessment we can say that Nepal is not in crisis right now nor is it at the edge of such crisis. But it has not been able to put together effective policies because of political instability, Maoist threat and so on," said Lawrence Demilner, Resident Representative of the IMF in Kathmandu.

The report is prepared after the visit by staff team of IMF, usually every year. The team collects economic and financial information, and holds discussions with officials. It submits the report for discussion by the

Executive Board.

There are 184 member countries of the IMF. Presently, Nepal belongs to a constituency represented by Thailand in the Executive Board. The present assessment is based on the summary of the views of the Executive Board as expressed during the August 31, 2001 Executive Board discussion.