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IMF favours monetary tightening to contain Nepal’s falling forex reserves

CNA – Nepal should engage in monetary tightening including rate hikes to contain dwindling forex reserves, without resorting to import curbs that could push up prices and hamper economic growth, a senior International Monetary Fund (IMF) official said.

The government must address inflationary pressures and growing external imbalances, while safeguarding the economic recovery, Robert Gregory, Head of an IMF team that held week-long discussions with government officials, said in a statement yesterday.

Nepal, a landlocked country between China and India, banned luxury goods imports until mid-July to rein in capital outflows as foreign exchange reserves fell over 18 per cent to USD9.6 billion as of mid-March from mid-July – enough to last around six months.

Following a sharp rise in the cost of imports pushed by soaring global crude oil and other commodity prices after the Ukraine war, Nepal’s international reserves “have declined more than anticipated”, the IMF statement said.

However, a prudent budget, as suggested under its financial support programme, along with monetary tightening would help address the inflationary pressures and growing economic imbalances, the statement said.

Souvenir shop owners wait for customers at an alley in Bhaktapur, Nepal. PHOTO: CNA

Consumers in the Himalayan nation of 29 million people are facing tough times as annual retail inflation hit a five-year high of 7.14 per cent in the month through mid-March, pushed up by rising fuel and food prices, while household income levels are still below pre-pandemic levels.

The IMF team praised the Nepal government’s recent steps to tackle external pressures by gradually exiting from COVID-related expansionary monetary policy and said forex reserves were adequate for now.

Commenting on the IMF officials’ comments, Finance Ministry official Ishwari Aryal said, “they will be addressed accordingly”.

Nepal is to take Extended Credit Facility (ECF) of USD400 million from the IMF over the next three years, he told media.