National 7 (Spotlight Weekly)

IMF Mission For The First Review Of The PRGF

In November 2003, the Executive Board of the International Monetary Fund approved a three-year Poverty Reduction and Growth Facility (PRGF) program in support of the10th Plan/Poverty Reduction Strategy Paper (PRSP) of His Majesty’s Government of Nepal. The loan totals approximately US$70 million on concessional terms (loans under the PRGF are concessional carrying 0.5 percent interest rate. The grace period is five and a half years, with repayment over 10 years) and is to be disbursed in seven equal tranches over 2003-2006 following the completion of reviews of progress under the PRGF. The first tranche of $10 million was disbursed last November

Discussions on the first review of the PRGF began with the previous government in March 2004. However, given the change of government in June, the review could not be taken up by the IMF Board. Upon the request of the new government, an IMF mission headed by Mr. Hisanobu Shishido visited Nepal during July 26-April 7 to reaffirm the government’s commitment to PRSP/PRGF policies and reform implementation. The mission was informed that the government was committed to continue with key reforms – in governance, public enterprises, and in the financial sector – to improve growth prospects and help achieve poverty reduction goals. Pending the completion of some actions, the second disbursement of the PRGF could thus be considered by the IMF Board sometime in September/October 2004.

The main findings of the mission are:

2003/04

* Macroeconomic performance in 2003/04 was in line with program objectives with real GDP growth expected to be about 3? percent. All the macroeconomic targets for January 2004 and April 2004 (except on reserve money) were met.

* Structural reforms have continued notably in the areas of improving tax administration, fostering money and foreign exchange market development, and improving public debt management. Steps were also taken to improve the banking framework and loan recovery, further NRB reengineering, and restructure troubled commercial and development banks.

2004/05

* The macroeconomic program for 2004/05 is in line with the PRGF’s medium term macroeconomic framework. Real GDP in 2004/05 is projected at 4? percent, driven by agriculture and continued recovery in manufacturing and tourism; inflation is projected to be 4–5 percent; and the NRB is expected to maintain a comfortable international reserves position of around 7 months of imports of goods and services.

* The 2004/05 budget adopted on July 15 is consistent with the PRGF’s medium-term fiscal policy objectives. The budget appropriately aims to raise the revenue-to-GDP ratio including through strong administration efforts. The increase in capital spending is welcome, as are the higher allocations for social sector spending on health, education and poverty related spending. Security-related spending in 2004/05 is budgeted to remain broadly unchanged as a share of GDP compared to 2003/04 (3 percent of GDP). Looking forward, any increase in government employees’ wages would need to be financed from sustainable sources.

* The mission encouraged the government to continue to take steps to improve the banking framework and loan recovery, further NRB re-engineering and restructure troubled commercial and development banks. Intensified efforts are needed to enhance debt recovery. In this regard, the government has committed to fully support the actions of banks against willful defaulters.

* The mission was encouraged by the government’s commitment to the reform of state-owned enterprises. The mission urged the government to avoid incurring any new liabilities in the loss-making enterprises that are being privatized or liquidated.

* Both the government and the mission were extremely concerned over the deteriorating financial condition of the Nepal Oil Corporation (NOC). International oil prices had increased significantly over the past year without any corresponding adjustment in Nepal. In the mission’s view, fuel subsidies were placing a drain on the government budget and were, in large part, not benefitting the poor. The mission urged the government to take action to stem the losses at the NOC by: (i) improving efficiency at the NOC; (ii) making a phased adjustment in fuel prices; (iii) ensuring smoother upward or downward adjustment in fuel prices in the future by adopting an automatic fuel pricing formula; and (iv) opening up the petroleum sector to private importers to provide competition to NOC.

* The mission also discussed a number of other important reforms including improvements in the functioning of the civil service, strengthening the anti-corruption effort, improving fiscal transparency and procurement, and anti-money laundering legislation. In addition, the mission held discussions on fostering the legal framework for the private sector through better insolvency, companies, and competition legislation. It urged the government to move forward with much needed amendments to labor legislation.

(Excerpts of the press release issued by the IMF Resident Representative Office in Nepal August 10, 2004)