Nepal - Country assistance strategy progress report - public information notice

Report No. PIN90 Nepal CAS: Public Information Notice World Bank Board Discusses Nepal Country Assistance Strategy Progress Report On December 19, 2002 the World Bank's Board of Executive Directors discussed the International Development Association's (IDA) Country Assistance Strategy Progress Report for Nepal. The last full CAS for Nepal was discussed in December 1998. The Bank Group had planned to prepare a full CAS for Board discussion during FY03, but decided to wait until Nepal's Poverty Reduction Strategy Paper (PRSP) is ready later this fiscal year so as to accomplish full alignment between the two documents. Thus, the next full CAS will be prepared in FY04. Country Context In recent months, the political landscape in Nepal has been extraordinarily unstable. With the escalation of the Maoist insurgency, there was an imposition of a nine-month state of emergency and political instability-which has plagued the country for years-has continued. This resulted in the dismissal of the Deuba Government by King Gyanendra on October 4, 2002 and the formation of an interim Government. On October 11, 2002, veteran politician Mr. Lokendra Bahadur Chand was appointed by King Gyanendra as the new Prime Minister-Nepal's eleventh in the last seven years and the fourth since the 1999 elections. Nonetheless, this picture of instability and uncertainty is incomplete without noting that amidst all the turbulence, His Majesty's Government of Nepal (HMGN) has been implementing a wide range of reforms over the last year or so. These reforms are being pushed by a persistent core group of committed technocrats who seem to have gained momentum and more space to move forward the reform agenda since the caretaker Government came into being in October. Notable progress has been made in developing the country's Poverty Reduction Strategy (PRS) and in implementing reforms in the financial sector, the fight against corruption, public expenditures, infrastructure regulatory environment and with the development and implementation of the Immediate Action Plan (IAP). The IAP- announced by HMGN in June 2002-aims at effective management of public resources, prioritization of development projects/programs, enhancement of accountability and more effective delivery of public services. The IAP is being implemented with an uncommon vigor and seriousness. On the economic front, since the last CAS Nepal's economy has gone through a cycle of accelerated growth and relatively strong macroeconomic position to rapid deceleration and increasing fragility. Aggregate GDP grew by 5.2 percent per annum between FY99 and FY01, but growth in FY02 dropped to 0.8 percent. The recent slowdown is pervasive, but principally led by contractions in manufacturing and tourism, and a deceleration in agricultural growth and exports. Increasing fiscal stress-potentially hitting development expenditures hard-also challenges economic management. Revenue collections have fallen due to the economic slowdown and at the same time security-related expenditures have increased causing a sharp increase in domestic borrowing. HMGN designed and unveiled a comprehensive reform program for poverty reduction at the Nepal Development Forum (NDF) held in Paris in April 2000. The reform program places priority on addressing the key constraints hampering economic  growth and poverty reduction, including: (i) fiscal policy and economic management; (ii) governance, including civil service reform and decentralization; (iii) private sector development and the financial sector; and (iv) improving aid effectiveness. These reforms were placed in the context of: (i) the human development agenda; and (ii) environmental management. Recognizing the urgency of initiating the financial sector reforms in particular, the Ministry of Finance (MoF) made this sector the "rallying point" for reform. Nevertheless, in general, the implementation of reforms has been uneven and much slower than expected, in large part due to the continuing lack of strong political leadership. As the economy has slowed since the second half of FY01, the threat of the insurgency intensified and fiscal pressures built, HMGN has become increasing more serious about reform implementation. As noted, the reform efforts have intensified recently in several areas, including the financial sector, the fight against corruption, public expenditure reform and decentralization. To reinforce the reform agenda, HMGN has announced that it will make the 10th Five Year Plan its Poverty Reduction Strategy (PRS) and will back it up with a Medium-Term Expenditure Framework (MTEF). The IAP, the FY03 budget presented in mid-July and the Economic Reform Program 2002 announced in late-October all reconfirm the Government's resolve to move ahead in the right direction. World Bank Strategy The CAS identified poor governance as the fundamental constraint restricting Nepal's development, and proposed a two-pronged approach for the Bank, specifically: (i) bringing resources to the grassroots levels through mobilization of social capital; and (ii) improving the effectiveness of the Government's development program. To effect this approach, the strategy proposed that the Bank would: (i) support HMGN's policy of greater decentralization by providing funding for projects designed to bring more resources to grassroots levels; (ii) encourage reforms at the central level of Government by linking the overall lending level to progress in improving Government effectiveness; and (iii) strengthen donor coordination so that the Bank's strategic focus would be shared more widely. The fundamental challenge- governance-remains the major challenge and the two-pronged approach will continue to guide the Bank Group's strategy into FY04. The Bank's strategy will be adapted to take into account the following: (i) an even greater focus on outputs/results; (ii) more emphasis on being a "facilitator of change," as opposed to focusing on specific project interventions-i.e., this implies working more closely with change agents to ensure that irreversible steps are taken to improve public service delivery systems and governance; (iii) a gradual move towards a more "programmatic" approach, to be fully developed in the next CAS upon completion of the PRS; and (iv) continued emphasis on strengthening the process of donor coordination and building partnerships. These shifts imply an increasing emphasis on economic and sector work supporting the new role of the Bank. The proposed program of financial assistance under the Progress Report could be anchored with a Structural Adjustment Credit (SAC) if the conditions are appropriate. A SAC would be contingent on implementation of a selective yet significant set of coherent reforms-contained in the Immediate Action Plan (IAP)-designed to further prioritize public expenditures, improve implementation of poverty programs, and improve accountability and transparency of the public sector, including specific measures to promote private sector development. As - 2 -  such, it is assumed that Nepal would continue to cement its track record on implementing reforms. This would be complemented by one or two investment loans annually that either pilot/test new approaches, support "one-off" reform activities, or are community-based projects. - 3 -