Structural adjustment in Nepal

NUMBER 122 *ED- Precisis9 Operations Evaluation Department June 1996 Structural Adjustment in Nepal In the 1980s, Nepal launched a mod- cretionary authority, continually But the design of SAL II had sev- ernization program, which the World slow progress in investment eral problems. The credit was ap- Bank supported through two struc- projects. proved before the preparation of tural adjustment credits (SALs). An the important irrigation and finan- OED audit* of the second SAL finds The Bank's first structural cial sector components was com- that many of the program's initiatives adjustment credit (SAL I) was plete. As a result, it was necessary have begun to take root, especially in launched in 1986, partly in the to rely on technical assistance be- opening up foreign trade and liberaliz- hope that it would mobilize stron- fore firming up action plans, which ing the financial sector, helping to ger political support than invest- led to vague conditionality. And increase private investment. But gov- ment projects had done. SAL I although the credit addressed im- ernment changes and trade disputes emphasized sound macroeco- portant problems, line ministries with Nepal's major trading partner nomic management, effective and agencies whose support was plagued implementation, and wavering management of public finances, essential for successful implemen- government commitment and poor do- support for agriculture and light tation were not involved in design- nor coordination limited the program's manufacturing, liberalization of ing the loan and hence felt little institution-building efforts. trade, and a start at reforming ownership of the program. public enterprises. The audit notes that for the recent While the foreign trade compo- benefits to last over the long run, the The adjustment loan did indeed nent was well thought out, mea- reforms need to be extended and deep- succeed better than previous cred- sures to strengthen the tax system ened, especially in improving public its. In 1989 the Bank followed up and to eliminate waste and ineffi- resource management and establishing with SAL II, even though at the ciency in the management of public adequate regulation and supervision of time, Nepal did not face a balance resources were not. The action pro- the banking system. For the reforms to of payments emergency. The loan gram in the financial sector con- continue, government ownership of the was designed to consolidate and sisted largely of studies, because program becomes key-an element that reinforce the earlier operation: to of inadequate knowledge of the could be facilitated through improved revamp the tax system, rationalize measures needed there. And some donor coordination and the involve- the management of development potentially effective conditions (af- ment of line ministries and govern- spending, restructure two large ment agencies in program design. state-owned banks and open up the - - financial sector, improve the distri- | Project context and goals bution of fertilizer, and make irri- *Perfon?,tce ludit report gation more effective. Nepal: Secondit Structural Adf- Foreign assistance supports g o tstinent Credit. bit LOi; roughly two-fifths of Nepal's gov- Design and implementation Landu. Repo0rt No. 14813. ernment spending. Like other as- Illlle 30 1995. Per(ortinace sistance agencies, the World Bank SAL II was designed as a fast- iudi,it reports ,are aua,ilable to has had difficulty implementing disbursing $60 million credit. It Banik executiwe direclors and l projects in Nepal. Weak institu- was structured to disburse in three staff fromii thle Internal Docn- tional capacity, wavering govern- tranches, instead of the usual two, mients Utiit ,ipid fromrz Re,gional ment commitment, and fragmented giving Bank staff leverage to press lnfortnation, Services Centers. authority among ministries, com- for reforms during the implementa- Pricis written bV Pa7t McNees. I bined with highly centralized dis- tion period. _  fecting fertilizers, irrigation, and solvent. The program also helped funds and attention with a few banking) were formulated in vague strengthen the role of privately high-priority investment opera- terms. Fortunately, however, effec- owned banks and financial institu- tions that take a long time to be tive supervision helped to over- tions. In 1995, ten joint ventures completed. come these weakness, bringing and private banks were operating about some degree of implementa- in Nepal, compared with three be- Lessons tion of the needed reforms. fore the program. There were 24 nonbanking finance companies, Given the extremely adverse Unexpected problems plagued mostly leasing and mutual funds, conditions in Nepal during 1989- implementation. A dispute with compared with a handful before. 92, the adjustment programs' India in early 1989 seriously dis- The banks offer loans to creditwor- achievements were noteworthy. rupted trade, creating shortages thy borrowers in trade, tourism, and The experience offers some and losses in output. A revolution manufacturing, and are introducing important lessons: in mid-1990 and a succession of modern banking technologies and administrations after that made practices. By contrast, the other large * To increase the government's own- continuity of policies increasingly state-owned bank (Rastriya Banijya ership of reforms, the line ministries difficult. And part of the technical Bank), which did not go through re- and other government agencies need assistance from donors was wasted structuring, remains technically to participate more fully in the design because of donors' disputes over bankrupt. And inadequate pruden- of reforms. Better aid coordination is jurisdiction and Nepal's weak in- tial regulations and weak bank su- urgently needed. Efforts to better stitutional capacity to absorb the pervision threaten the stability of coordinate donor activities have assistance. the banking sector. not succeeded, so resources are wasted, efforts are duplicated, and It is thus remarkable that despite Responding to the progress jurisdiction is disputed, undermin- the plethora of problems, many of made in freeing the fertilizer distri- ing aid effectiveness. Better donor the reforms were implemented and bution system, the number of pri- coordination could be facilitated the credit was fully disbursed (al- vate dealers rose fivefold between by increasing the role of the Bank's beit with delays). The Bank's con- 1989 and 1992. But restrictions and resident mission. tinuing dialogue with successive other controls still favor official trad- administrations had helped to ers. The program had some success * The Bank should not call for reform develop among many officials a in convincing the government to without good knowledge of the mea- growing understanding of the shift from large- to small-scale irri- sures needed. If the SALs had been need for structural reform. The gation projects. And farmers were more thoroughly prepared, condition- program's most important suc- allowed some involvement in the ality might have been better defined, cesses were in helping to liberalize management of local water re- calling for more specific measures trade (domestic and international) sources. But too little of the irriga- such as a new value-added tax, and the financial sector. tion budget is spent on operating, reduced subsidies, or specific rehabilitating, and maintaining the banking reforms, rather than for Results irrigation system. studies. Conditionality was am- biguous because reforms were The reforms stimulated an ex- Although the achievements have called for before problems in the pansion of private enterprises been significant, the shortcomings financial and irrigation sectors engaged in export-oriented man- show the need to deepen the re- were fully understood. Given the ufacturing, commerce, tourism, forms. For example, the tax structure well-known difficulty of imple- and banking. Although serious remains inelastic and dependent on menting projects in Nepal, the problems remain, important many low-yield specific taxes and on Bank should have called for achievements were also realized domestic customs levies that inter- actions that were feasible despite in finance and agriculture. fere with local trade. The manage- the country's institutional weak- ment of public resources has not ness and the limited political sup- In finance, the restructuring of improved and many projects of port for measures that affect vested the Nepal Bank helped it become doubtful justification vompete for interests. OED Precis is produced by the Operations Evaluation Department of the World Bank to help disseminate recent evaluation findings to development professionals within and outside the World Bank. The views here are those of the Operations Evaluation staff and should not be attributed to the World Bank or its affiliated organizations. This and other OED publications can be found on the Internet, at http:// www.worldbank.org/html/oed. Please address comments and enquiries to the managing editor, Rachel Weaving, G-7137, World Bank, telephone 473-1719. Internet: rweaving@worldbank.org June 1996