IMF Reaches Agreement with Nepal for $43.2M Funding; Warns of Growth Slowdown Amid Rising Non-Performing Loans
KATHMANDU | February 26, 2026 — The International Monetary Fund (IMF) and the Government of Nepal have reached a staff-level agreement for the final disbursement of $43.2 million (approximately NPR 6 billion) under the Extended Credit Facility (ECF). This agreement follows the successful conclusion of the 2026 Article IV consultation and the seventh review of Nepal’s economic reform program.
While the funding marks a vote of confidence in Nepal’s policy direction, the IMF’s mission, led by Sarwat Jahan, issued a sober outlook on the nation’s immediate economic future, citing a combination of domestic political uncertainty and systemic financial risks.
Economic Growth: “Well Below Potential”
The IMF has revised Nepal’s growth projection for the Fiscal Year 2025/26 downward to a range of 3.0% to 3.5%. This is significantly lower than earlier estimates of over 5%, reflecting what the Fund describes as a “challenging domestic environment.”
The mission highlighted three primary factors weighing on the growth engine:
-
Waning Private Sector Confidence: Recent political transitions and protest-related damages have deterred investment decisions.
-
Subdued Domestic Demand: Despite a record-low inflation rate of 2.4% in January 2026, the IMF noted that this is largely a symptom of “weak demand” rather than organic market stability.
-
Capital Expenditure Lag: Delays in the execution of public capital projects continue to hinder the multiplier effect needed for broader economic recovery.
Banking Sector: The Rising NPL Crisis
A central theme of the IMF’s warning was the “intensified vulnerability” of the financial sector. Non-Performing Loans (NPLs) in the banking system climbed to 5.4% in January 2026—crossing the critical 5% threshold—and are expected to be revised even higher following the recently completed Loan Portfolio Review (LPR).
The Fund emphasized that asset quality issues are eroding banks’ capital buffers. “Rising financial sector vulnerabilities warrant increased vigilance and a comprehensive strategy to improve bad loan recovery,” the mission stated. The health of Savings and Credit Cooperatives (SACCOs) was also flagged as a major risk area requiring urgent regulatory intervention.
Key Reforms and Policy Recommendations
To unlock the final $43.2 million and stabilize the economy, the IMF has mandated several critical structural reforms:
-
NRB Act Amendments: Urgent submission of amendments to the Nepal Rastra Bank (NRB) Act to Parliament to bolster central bank autonomy and governance.
-
Anti-Money Laundering (AML): Accelerated progress to exit the FATF “Grey List,” which remains a threat to international banking relationships.
-
Loan Classification: Strict adherence to international banking standards in asset classification to prevent “evergreening” of bad loans.
External Sector: A Silver Lining
Despite the domestic headwinds, Nepal’s external position remains exceptionally strong.
-
Remittance & Tourism: Buoyant remittance inflows and resilient tourism receipts have propelled foreign exchange reserves to levels comfortably above adequacy.
-
Foreign Reserves: Currently standing at record highs, these reserves provide a robust shield against global economic shocks.
The Road Ahead
The IMF mission concluded that a “peaceful political transition” and accelerated capital spending are the two most vital catalysts needed to restore business confidence. While the $43.2 million payout (bringing total ECF support to ~$384.4 million) provides immediate fiscal relief, the real challenge for Nepal in 2026 will be cleaning up bank balance sheets and reviving an engine of growth that is currently stuck in low gear.
Analyst Note: The completion of the ECF program signals a milestone in Nepal’s reform journey, but the transition to a high-growth, inclusive economy remains contingent on how the government addresses the “twin challenges” of political instability and financial sector fragility.
