KATHMANDU: On June 5, 2026, the IMF’s Executive Board completed the seventh and final review under Nepal’s Extended Credit Facility arrangement, releasing a last disbursement of SDR 31.32 million, equivalent to about USD 42.9 million, bringing total disbursements under the program to SDR 282.42 million, or roughly USD 384.1 million.

The arrangement, approved on January 12, 2022, aimed to safeguard macroeconomic and financial stability, rebuild foreign exchange buffers, and protect vulnerable households during a prolonged period of post-pandemic stress and successive domestic shocks.

With the program concluded, Nepal moves to Post-Financing Assessment and a standard 12-month Article IV consultation cycle.

What was the Extended Credit Facility arrangement Nepal signed with the IMF in 2022, and what was it meant to achieve?

The Extended Credit Facility is an IMF concessional lending instrument for low-income countries facing sustained balance-of-payments problems. Nepal entered the arrangement on January 12, 2022, at a time when its economy was reeling from post-pandemic stress compounded by a domestic credit boom that had already begun to reverse.

The arrangement was approved for SDR 282.42 million, equivalent to 180 percent of Nepal’s IMF quota. The size of the program relative to quota reflects the severity of what Nepal was navigating. The country faced high inflation, thinning foreign reserves, a widening fiscal deficit, and a slowing economy.

The ECF gave the government a structured path to stabilize finances while receiving concessional financing in tranches, each contingent on meeting agreed performance criteria and structural benchmarks. Over seven reviews completed across four years, Nepal drew down the full program amount. The final tranche was released on June 5, 2026.

How did Nepal’s economy perform during the program period and what were the main improvements?

Program performance was broadly adequate despite a punishing sequence of shocks. Inflation fell from an average of 7.7 percent in the fiscal year ending mid-July 2023 to 2.4 percent in January 2026, well below the Nepal Rastra Bank’s 5 percent target.

International reserves were rebuilt substantially, with import coverage rising from 9.3 months to 12.3 months over the same period. As of February 2026, gross official reserves had reached USD 22.1 billion, covering 12.5 months of prospective imports.

The fiscal primary deficit narrowed from 4.5 percent of GDP in the fiscal year ending mid-July 2023 to 0.7 percent of GDP in the fiscal year ending mid-July 2025. These are meaningful improvements.

However, growth was repeatedly disrupted. An earthquake struck in November 2023, catastrophic floods hit in September 2024, youth-led protests erupted in September 2025, and the war in the West Asia sent energy prices higher.

Growth in the current fiscal year ending mid-July 2026 is revised down to 3 percent, well below Nepal’s estimated potential.

What triggered the September 2025 unrest and what economic damage did it cause?

The September 2025 protests were a youth-led movement that caused significant disruption across Nepal. The government’s damage assessment, released in January 2026, estimated total physical damage at Rs. 84.5 billion, equivalent to roughly 1.25 percent of GDP for the current fiscal year.

Of that, Rs. 44.9 billion was damage to public assets. Disruption-related losses to production and services were estimated at an additional Rs. 13.9 billion, or 0.2 percent of GDP. Public-sector reconstruction and repair needs were put at about Rs. 36.3 billion, roughly half of which fall at the federal level.

The impact was most pronounced in manufacturing and construction, where public capital project execution slowed sharply and private investment decisions were delayed as businesses and investors held back amid uncertainty ahead of elections.

Agricultural production was also hit by a delayed monsoon and flooding in October 2025. With household incomes under pressure, already soft domestic demand weakened further.

The government responded with a targeted tax relief package estimated at 0.25 percent of GDP, consisting of a 50 percent exemption on customs and excise duty for firms importing reconstruction materials, and a deduction of damaged inventory from corporate income tax alongside a refund of VAT.

What does Nepal’s fiscal position look like in the current fiscal year?

Nepal’s nominal GDP stands at Rs. 6,505 billion in the current fiscal year ending mid-July 2026. Total revenue and grants are projected at 19.9 percent of GDP, with tax revenue at 17.4 percent, equivalent to Rs. 1,133 billion in absolute terms.

Government expenditure is projected at 22.4 percent of GDP, with recurrent expenditure at 19.3 percent and capital expenditure at only 3.1 percent, well below the budgeted 4.6 percent. The overall fiscal deficit is 2.5 percent of GDP.

The primary balance, which excludes interest payments, shows a deficit of Rs. 58 billion, or 0.9 percent of GDP. Capital expenditure underperformance is a persistent theme: capital spending fell 4.7 percent in the first eight months of the current fiscal year, driven by a slowdown in civil works following the change of government.

Tax revenue grew 5.9 percent in the same period, weighed down by income tax collection, while current spending rose 9.9 percent, largely driven by social security.

Public debt is projected to peak at 49.6 percent of GDP this fiscal year before declining gradually thereafter.

How strong is Nepal’s external position and why does the IMF assess it as stronger than fundamentals would imply?

Nepal’s external position is assessed by the IMF as substantially stronger than the level implied by medium-term fundamentals and desirable policies, which is a technical finding indicating the current account surplus is running unusually large relative to what underlying economic conditions alone would produce.

The current account surplus reached 6.7 percent of GDP in the fiscal year ending mid-July 2025 and is projected at 6.9 percent in the current fiscal year. The surplus reflects three things happening simultaneously: imports growing more slowly than expected, exports surging, and remittance inflows continuing to rise strongly.

Workers’ remittances reached USD 15.196 billion in the current fiscal year, equal to 33.1 percent of GDP. Much of the export surge was driven by re-exports of processed soybean oil made from imported crude soybean oil, a trade arbitrage that generated strong numbers but that the IMF expects to fade.

Import growth in the first seven months of the current fiscal year came in at 13.6 percent, but was more than offset by remittances and export growth of 39.8 and 32.2 percent respectively.

What are the main risks the IMF sees threatening Nepal’s recovery?

The IMF is explicit that risks to the outlook are skewed to the downside. The primary external threat comes from the ongoing war in the West Asia, which hits Nepal through four distinct transmission channels.

First, Nepal is almost fully dependent on imported petroleum products sourced from India, which itself relies heavily on West Asian oil, so higher global fuel prices directly raise Nepal’s import costs.

Second, roughly 40 percent of all Nepali remittances originate from Gulf labor markets, so disruptions in that region weaken household income across Nepal.

Third, nearly 25 percent of all air travel to Nepal passes through Gulf transit hubs, putting tourism at risk.

Fourth, Nepal imports more than half of all its chemical fertilizer from three Gulf countries — Qatar, Bahrain, and Saudi Arabia — creating the risk of fertilizer shortages that would hit agriculture, which contributes about one quarter of GDP and employs over half the workforce.

The IMF’s adverse scenario modeling estimates that a severe, prolonged oil price shock above the baseline could push inflation more than 3 percentage points above the NRB’s target in the next fiscal year and cause a permanent output loss of about 2.5 percent relative to the baseline.

Domestic risks include uncertainty around policy continuity and persistently weak capital expenditure execution.

What is the state of Nepal’s banking sector and what did the Loan Portfolio Review find?

The banking sector carries serious vulnerabilities. Non-performing loans rose to 5.4 percent in January 2026, and the recently completed Loan Portfolio Review, conducted by independent international consultants applying existing NRB regulatory requirements and international best practices, found that actual loan quality is weaker than official figures suggest.

The review identified reclassification needs and additional provisioning requirements that banks have not fully recognized. The IMF’s Post-Loan Portfolio Review Roadmap requires banks to reclassify assets into adverse categories upfront, increase provisioning, and prepare realistic, time-bound capital restoration plans to return to minimum regulatory standards.

The NRB is required to categorize banks by capital needs by June 2026, issue the final LPR report to banks with directions by mid-July 2026, and require submission of capital restoration and NPL resolution strategies by mid-August 2026.

The IMF also flags the savings and credit cooperatives as a sector of serious concern. Thousands of these institutions operate outside proper regulatory oversight, and the IMF calls for developing a credible resolution regime that goes beyond the current practice of mergers and acquisitions.

What is the IMF’s assessment of Nepal’s monetary policy and what changes does it recommend?

The IMF assessed the Nepal Rastra Bank’s current accommodative monetary policy stance as appropriate given inflation levels and the comfortable reserve position. Inflation stood at 3.2 percent in February 2026, well below the NRB’s 5 percent target.

Nepal Rastra Bank office at Thapathali. Photo: Bikram Rai/Nepal News

The interest rate corridor operates with an upper bound of 5.75 percent, a policy rate midpoint of 4.25 percent, and a lower bound of 2.75 percent. Strong foreign exchange inflows driven by remittances have produced large excess liquidity in the banking system, which has kept the interbank rate pinned near the lower bound of the corridor rather than tracking the policy rate midpoint.

The IMF recommends that the NRB increase the volume of open market operations, particularly at longer maturities, to absorb excess liquidity and gradually bring the interbank rate up toward the policy rate.

It also recommends improving liquidity forecasting, particularly for foreign exchange inflows and government cash flows, and ensuring a clear separation between monetary policy formulation and its operational implementation, which would help align the interbank rate more closely with the intended monetary stance.

What is Nepal’s FATF grey list status and what needs to happen for Nepal to exit?

Nepal was added to the Financial Action Task Force grey list in February 2025 after assessments identified significant weaknesses in its anti-money laundering and counter-terrorism financing framework.

Being on the grey list means Nepal is subject to increased international monitoring and risks reputational and financial costs in cross-border transactions. Since the listing, Nepal has published implementation procedures and sectoral guidelines for banks and payment service providers on implementing UN Security Council resolutions, expanded supervisory resources for the banking sector, and issued directives for the real estate sector, all with IMF technical assistance.

The IMF describes this as meaningful progress but says sustained efforts remain essential. Remaining priorities include completing an updated national risk assessment covering entity transparency, ensuring effective implementation of the UN Security Council resolutions framework across all sectors, strengthening investigative and supervisory capacity, and enhancing the use of financial intelligence.

The authorities are also conducting a stocktaking exercise with banks and financial institutions to monitor the economic impact of grey listing on cross-border flows.

What does the IMF say about Nepal’s governance weaknesses and why does it matter economically?

The IMF links Nepal’s governance weaknesses directly to its economic underperformance. Nepal consistently ranks below most regional and income-level peers in government effectiveness, regulatory quality, and rule of law, according to the World Governance Indicators.

The gap between policy formulation and actual implementation — driven by limited administrative capacity, frequent political and bureaucratic turnover, and coordination failures — has prevented reforms from delivering their full impact.

Nepal is the second country in the Asia-Pacific region to undergo the IMF’s Governance and Corruption Diagnostics exercise, which focuses on four areas: fiscal governance, financial sector oversight, rule of law, and anti-money laundering and counter-terrorism financing frameworks, as well as the effectiveness of the anti-corruption framework.

The IMF’s own staff analysis estimates that implementing governance reforms to raise public investment efficiency, strengthen VAT collection, and reduce distortions facing private investment could boost real GDP by 13 percent over ten years.

These reforms, if combined, could also stimulate private investment, reduce consumption inequality through employment creation, and improve public debt dynamics.

What does the IMF project for Nepal’s growth and what would it take to reach potential?

Growth in the current fiscal year ending mid-July 2026 is projected at 3 percent, reflecting the September 2025 protests, weaker agricultural output, subdued private investment amid pre-election uncertainty, and spillovers from the West Asia war.

Recovery is projected to strengthen to 4.6 percent in the next fiscal year and 5.3 percent the year after, supported by the smooth transition of power following the March 5, 2026 elections that produced Nepal’s first single-majority government since 1999.

The IMF views this political stability as an important enabler. An expansionary fiscal stance for the current and next fiscal year is deemed appropriate to support demand, to be followed by gradual, growth-friendly consolidation over the medium term.

Capital expenditure execution is a high priority. The fiscal year 2026/27 budget includes new powers for government agencies to reallocate funds from stalled projects, begin procurement before the close of the current fiscal year, and impose sanctions on agencies that delay decisions.

Medium-term growth is projected at around 5 percent, underpinned by infrastructure investment — particularly hydropower — stronger private investment, and governance improvements.

What happens now that the ECF program has ended, and what is Nepal’s relationship with the IMF going forward?

With the seventh and final review completed on June 5, 2026, the Extended Credit Facility arrangement formally concludes, having disbursed the full SDR 282.42 million over four years. Nepal’s relationship with the IMF shifts from a program arrangement to standard surveillance.

The next Article IV consultation will take place on the regular 12-month cycle. Because Nepal’s outstanding credit to the Fund is expected to exceed 200 percent of quota during the fiscal years ending mid-July 2026 through mid-July 2028, the IMF will initiate a Post-Financing Assessment, which involves closer monitoring to ensure Nepal maintains sound policies and retains the capacity to repay on schedule.

The IMF will continue providing capacity development support across fiscal management, financial sector regulation, monetary operations, and governance.

Nepal’s authorities have expressed strong interest in the timely completion of the Governance and Corruption Diagnostics exercise and in using its findings, alongside recommendations from their own High-Level Economic Reform Advisory Commission, to design a sequenced, time-bound reform action plan.