Washington, DC (BBN)- The International Monetary Fund has projected Nepal’s economic growth rate to touch 4.50 percent in the fiscal year (FY) 2013-14 from 3.5 percent in the previous fiscal following recovery in agriculture, strong services, and rising public spending underpinned by timely budget approval.

“Growth is recovering, and inflation is moderating. Output growth is expected to pick up to around 4.50 percent in 2013-14, driven by a recovery in agriculture, strong services, and rising public spending underpinned by timely budget approval. Inflation is projected to moderate further from recent levels but remain high, at 8.0 percent (year-on-year). Growth of remittances is expected to moderate, but international reserves should continue to rise,” IMF representative Alexander Pitt said in a statement on Thursday.

The IMF official also said key external risks to the outlook stem from a possible slower-than-projected recovery in India, or a slowdown in countries that host Nepali workers. “Domestic risks arise from the financial sector, especially cooperatives. On the other hand, decisive reforms to increase public investment would likely strengthen confidence and private investment, raising growth beyond baseline projections.”

The IMF official also notes that the level of the exchange rate appears broadly in line with fundamentals, if remittances are taken into account.

However, remittances skew domestic activity to non-tradables and contribute to reducing the competitiveness of agriculture and industry. “The peg to the Indian rupee serves as a useful and transparent anchor, and continues to benefit Nepal in view of its close economic relationship with India. Moreover, the depreciation of the Indian rupee has created an opportunity to benefit from enhanced competitiveness vis-à-vis third countries.”

He also said harnessing the financial sector and remittances to support economic development is difficult. “Care must be taken to preserve financial sector soundness, and it needs to be recognized that monetary and macroprudential policies alone cannot compensate for a lack of infrastructure and other structural impediments to growth. In this context, the volatility and level of excess liquidity should be reduced, and policies implemented to facilitate monetary management, and to lean against inflation.”

BBN/SSR/AD-25Apr14-4:29 pm (BST)