Nepal has been hit hard, albeit with some time lag, by the recent global economic downturn. The country is experiencing a significant decline in exports, a sharp slowdown in remittances and a worsening of economic confidence, which has contributed to a large deterioration in the current account balance and a decline in international reserves as well as a liquidity crunch in the banking sector. The RCF for Nepal aims at addressing external and financial risks and helping catalyze possible donor support.

The RCF, which provides a rapid and flexible financial assistance for low-income countries that face an urgent balance of payments need, does not require any explicit program-based conditionality or review, but economic policies are expected to address the underlying balance of payments difficulties and support policy objectives including macroeconomic stability and poverty reduction. Financing under the RCF carries a zero interest rate, has a grace period of 5½ years, and a final maturity of 10 years.

The Executive Board also concluded the 2010 Article IV consultation with Nepal today. A Public Information Notice will be published in due course.

Following the Executive Board's discussion on Nepal, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, stated:

“Nepal is facing considerable external and financial risks. A substantial, albeit delayed, impact of the global crisis has led to a significant deterioration of the current account, a loss of international reserves, and a liquidity crunch in the banking sector. The external shock exposed the country's structural weaknesses, its reliance on remittances, and the build-up of risks in the financial sector.

“The government's policy program, supported by the IMF, is aimed at addressing these risks and stabilizing international reserves. At the core of the program are a tight monetary and fiscal policy stance to support the exchange rate peg, which remains Nepal's anchor for macroeconomic stability, and efforts to improve financial sector soundness.

“The Nepal Rastra Bank has taken steps to tighten monetary policy through, inter alia, raising the Standing Liquidity Facility rate. Building on a strong track record of fiscal prudence, including during the political transition, the government has committed to maintaining the domestically financed budget deficit close to 2 percent of GDP in the 2010/11 budget. The authorities have introduced macro prudential measures to limit banks' liquidity risk and exposure to the real estate sector, and imposed a partial bank licensing moratorium. They are also committed to strengthening supervision, enhancing contingency planning, encouraging financial sector consolidation, and reforming the two state-owned banks.

“The authorities' program is strong and well focused. If fully implemented and provided the external situation improves as envisaged, it is expected to restore Nepal's macroeconomic stability and lay more favorable conditions for higher growth and poverty reduction. This program could also serve as a bridge to a successor Fund arrangement, which would help address the country's structural challenges.”