Business not happy with the IMF

In a move more reminiscent of the days of IMF structural adjustment conditionalities in Latin America, Nepal’s business community has bristled at what it called “interference” by the International Monetary Fund in Nepal’s domestic economic policy.

In January 2022, the IMF  granted Nepal concessional loans worth $395.9 million under its Extended Credit Facility (ECF) following multiple discussions with Finance Ministry officials in Kathmandu under the previous government.  

At the time, Nepali officials were alarmed at pandemic-induced fall in foreign exchange reserves and increasing current account deficit due to high imports, and agreed to accept the IMF’s conditional loan which extends until February 2025.

 The conditions included deep reforms to Nepal's financial system, and public finance management, including amending the law to make Nepal Rastra Bank autonomous, a banking regulatory mechanism, preparing a blueprint to prevent misuse of loans, conducting external audits of the ten big commercial banks, and maintaining transparency by making tax exemptions granted by the government available to the public.

 In the past, those closely associated with Nepal’s communist parties have criticised global financial institutions like the World Bank and the IMF for their pursuit of ‘neoliberal and imperialistic policies. But now it is the business community expressing their contempt, accusing foreign donor agencies of interfering in Nepal's internal economic policy.

 Nepal's economy is beholden to foreign donor agencies and the small loans that they have provided us,” said the Federation of Nepalese Chambers of Commerce and Industry (FNCCI) president Chandra Prasad Dhakal during a recent panel attended by Prime Minister Pushpa Kamal Dahal. “If our economic indicators are positive, we should pay off those loans.”

Dhakal claimed that Nepal’s economy is in crisis on account of the country having to follow strict conditions put in place by the IMF for its loans, and that paying them off would mean that the terms and conditions of the ECF agreement would cease to apply. 

ECF provides medium-term financial assistance to low-income countries with protracted balance of payments problems, granting loans at zero interest rates to nations where the amount of money leaving the country exceeds the amount coming into the country. 

The Confederation of Nepalese Industries (CNI) was even more direct. Chair Rajesh Kumar Agrawal warned the IMF to “stay in its lane” following a meeting with its representatives in September. 

Chairman Agrawal highlighted the fact that undue pressure must not be put on Nepal because economic policies and principles of other nations are not entirely applicable to Nepal's economy, which has its own unique characteristics,’ read a statement released by the CNI after the meeting.

And while the government has initiated some reforms stipulated by the IMF in the loan agreement, major terms remain unmet— such as granting autonomy to the central bank. 

The IMF withheld the third instalment of the ECF loan, and the funds were eventually released after Finance Minister Prakash Sharan Mahat assured the IMF in October that Nepal would make necessary reforms per the loan agreement. 

These commitments have now put the government at odds with the private sector, which has expressed dissatisfaction over NRB’s new loan classification as well as the new provision of a six-month wait for non-performing loans to be upgraded. 

Industrialists have taken special issue with the recently implemented guidelines on working capital loans, per which the NRB banned the practice of industries taking out current capital loans to clamp down on borrowers who take loans for industries and invest them elsewhere. 

The NRB eventually revised the guidelines to make them more flexible for borrowers after the private sector lobbied against the provision, arguing that the guidelines — which they claim is the result of interference by the IMF—could not be implemented when Nepal is in a ‘difficult economic position’. 

Panicked bankers— who are suspected to have colluded with internal auditors to hide that they were in cahoots with businesses and industries— have also been trying to stop the central bank from implementing the IMF-stipulated international audit of the ten biggest commercial banks. 

All of this has led the private sector to attribute Nepal’s economic slowdown to increased regulation of financial institutions by the NRB.

“Our economy is where it is because we have implemented financial and economic policy directives given by Western lenders without contextualising suitability and effectiveness for Nepal’s economy,” CNI chair Agrawal said last month. 

But officials at the Nepal Rastra Bank say that the IMF is being unfairly blamed for trying to prevent the misuse of loans and blocking laws and policies pertaining to financial governance and transparency. “The private sector is trying to block economic reforms in order to protect their own interests,” one NRB executive told Nepali Times. 

A former secretary at the Finance Ministry says that economic policy terms and conditions set by the IMF expand its influence and force economically weaker countries to implement its norms, thereby distorting such countries’ economies, adding that the IMF is putting similar pressure on Nepal. 

But Rastra Bank Governor Maha Prasad Adhikari says that Nepal is making amendments on its own even though they might inconvenience the private sector. Former Finance Minister and governor Yuvraj Khatiwada also doesn’t agree that the IMF is interfering in Nepal’s economic policy.

“The mandate of these agencies includes giving advice for financial stability and external sector reforms—issues like economic growth and credit expansion are not within their purview,” notes Khatiwada, adding that Nepal has no obligation to implement IMF’s suggestions. “Instead of pointing fingers at the IMF, the government must set policies that prioritise Nepal’s financial and external stability and economic growth.”

IMF representatives were unavailable for comment.