The International Monetary Fund (IMF) has revised Nepal’s economic growth forecast sharply upward to 5.5 percent for this fiscal year, signalling an end to a two-year streak of low growth.

The IMF had previously predicted Nepal’s economy to expand by 4 percent in 2016-17. It upgraded growth forecast on the back of expectations of a big jump in agricultural output due to a good monsoon, and higher government spending, among others.

The growth estimate of the IMF, however, is lower than government’s forecast of 6.5 percent, but higher than the World Bank’s projection of 5 percent and the Asian Development Bank’s estimate of 4.8 percent.

“Nepal’s economy is rebounding following the slowdown caused by the 2015 earthquakes and trade disruptions, and supported by the government’s efforts to revitalise the reform agenda,” Geert Almekinders, head of IMF’s Article IV mission to Nepal, told journalists on Monday.

Nepal was in doldrums for two fiscal years as earthquakes of 2014-15 and nearly five-month-long Indian trade embargo of 2015-16 sent the economy into a painful tailspin.

These factors caused growth to drop to 2.3 per cent in 2014-15 and to 0.8 per cent in 2015-16.

But a good monsoon this fiscal year is expected to help the economy make a turnaround. And signals are already in the air, as paddy production, which makes a contribution of around 6 percent to the gross domestic product, is projected to jump 21.66 percent in the current fiscal year.

“Also, accommodative monetary policy and rising government spending are supporting economic activities to normalise,” said Almekinders.

But to sustain growth rate that is likely to be achieved in the current fiscal year, Nepal must put appropriate policies in place, the IMF has said.

Strong policies, according to Almekinders, are needed to enhance confidence amid ongoing political uncertainty. “They are also needed to strengthen key institutions and administrative capacity which are critical for overcoming the chronic under-implementation of the budget and boosting private investment and growth.”

“So, the medium-term outlook for Nepal critically depends on the authorities’ efforts to sustain and deepen the nascent reform momentum,” Almekinders said, warning, “Growth would likely revert to average of the past decade-[around 4 percent per annum]-and fall short of substantially improving living standards and social indicators, in the absence of strong policies.”

Lately, Nepal has made efforts to introduce policy reforms. This has resulted in introduction of new Industrial Enterprise Act, Special Economic Zone Act and Bank and Financial Institution Act. Currently, Parliament is also reviewing drafts of Labour Bill and Foreign Investment and Technology Transfer Bill, which are expected to be endorsed soon.

Along with this initiative, the government should do more to implement the capital budget, the IMF has said.

The country’s capital spending stood at mere 11 percent of the total allocation in the first half of this fiscal year, reflecting the government’s indifferent attitude towards bridging the infrastructure gap, which has emerged as the major binding constraint for growth. The spending trend has remained the same in the past as well.

“Going forward, Nepal should come up with a budget that could be implemented rather than an aspirational budget,” Almekinders said, adding, “Also, the monetary policy should chart out medium-term inflation path, rather than one-year target, so that Nepal doesn’t lose competitiveness with India.”