"The outlook for 2012/13 is challenging. Real GDP growth is projected to decline to 3.8 percent, reflecting a weaker monsoon, and slower services activity as remittance growth may slow," said the IMF Executive Board following the conclusion of its consultation with the Himalayan nation. "Spillover effects from declining growth in India (through lower export demand, weaker inward investment, and possibly less remittances), and the dampening effect of continued political uncertainty will also present further challenges to growth in Nepal. Inflation is also on the rise, and upward pressure on prices may increase in line with projected developments in India over the next few months," it said.
The IMF Executive Board noted that downside risks are increasing because of spillover effects from the slowing Indian economy, a protracted political transition, and stresses in the financial sector.
"To secure macroeconomic stability and to foster sustainable and inclusive growth, Directors emphasized continued commitment to sound policies and structural reforms, particularly in the financial sector," it said.
Advising continued fiscal prudence, consistent with the objective of keeping public debt roughly constant over the medium term, the IMF Board called on the Nepalese authorities to act expeditiously to pass a full-year budget for 2012/13 and to strengthen public financial management to ensure full execution of the capital budget.
Stressing the need to address the quasi-fiscal liabilities arising from financial losses at the Nepal Oil Corporation and the Nepal Electricity Authority, the IMF Executive Board, recognizing the difficult political situation, encouraged authorities to build consensus to gradually adopt an automatic price adjustment mechanism, while putting in place well-targeted subsidies to protect the vulnerable.
Noting that Nepal remains in an important political transition, but the lack of political consensus complicates macroeconomic management, the IMF said the dissolution of the constituent assembly in May has delayed significantly the passage of a full-year government budget for 2012/13 and other key pieces of legislation.
"Higher growth and progress in poverty reduction could be enabled by political consensus, policy stability, an easier labor environment, and more effective use of external support," it said.