Growth forecast revised upward to 6.5 percent

- BIBEK SUBEDI, Kathmandu
The IMF also showed concern over the rate of credit expansion by Nepali banks and financial institutions

Dec 14, 2018-The International Monetary Fund (IMF) revised Nepal’s economic growth forecast for the current fiscal year sharply upward to 6.5 percent from its earlier estimate of 5 percent on expanding post-earthquake reconstruction and the services and manufacturing sectors.

“Following a prolonged period of subdued growth, economic activity in Nepal has picked up in recent years supported by greater political stability and a more reliable supply of electricity,” said Greet Almekinders, head of the IMF’s Article IV mission to Nepal.

The IMF cautioned the government that the current growth can be unsustainable as the economy is growing beyond potential, and has advised it to go slow on the stimulus—both fiscal and credit policy. “The current economic expansion also comes with some challenges that need to be carefully managed,” Almekinders told journalists on Thursday.

“The growth above potential has led to strong domestic demand, and such demand has contributed to a sharp increase in Nepal’s current account deficit which has reached 8.2 percent of GDP in the last fiscal year, and has led to some outflows of foreign currency reserves.”

The IMF also showed concern over the rate of credit expansion by Nepali banks and financial institutions and recommended macro-prudential measures to temper excessive credit in order to reduce risks to the economy. Credit expansion by banks and financial institutions increased 25 percent within a year, as per the central bank’s statistics released in mid-October. Credit demand from the private sector is still high, and banks are keen to lend more despite a majority of them reaching the regulatory threshold for lending.

The Nepal Bankers’ Association—the umbrella association of commercial banks in the country—even asked the central bank to increase the credit to core capital-cum-deposit (CCD) ratio so that banks and financial institutions can lend more. Nepal Rastra Bank has fixed the CCD ratio at 80 percent. This means banking institutions cannot extend more than 80 percent of the deposit and core capital as loans.

The central bank rejected the bankers’ demand outright and the IMF team supported the decision.

“The visiting IMF team supports the authorities’ intention to maintain the 80 percent limit on the CCD ratio,” said Almekinders. “Pressures to make changes to the calculation of the CCD ratio to expand room for credit growth should be resisted.” The IMF also asked government officials to encourage banks to build additional capital and provision buffers against potential losses.

The visiting officials recommended increasing foreign direct investment, strengthening governance and institutions, and enhancing access to finance, particularly for the underserved population outside major cities, as top priorities.

Published: 14-12-2018 07:41

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