Nepal - Poverty Reduction Strategy Paper (PRSP) joint staff assessment

Document of The WorldBank FOR OFFICIAL USEONLY Report No. 26674-NEP NEPAL Joint StaffAssessment of The PovertyReductionStrategy Paper October 16,2003 Preparedby Staffs ofthe InternationalDevelopmentAssociation andthe InternationalMonetaryFund This document has a restricted distribution and may be usedbyrecipients only inthe performanceo f their official duties. Its contents may not be otherwise disclosed without World Bank authorization.  FOROFFICIAL USE ONLY THE INTERNATIONALDEVELOPMENT ASSOCIATION AND INTERNATIONALMONETARY FUND NEPAL Joint StaffAssessmentof the PovertyReductionStrategyPaper Preparedby Staffs o fthe International Development Association (IDA) and the InternationalMonetary Fund(IMF) Approved by Prahl Pate1and Gobind T. Nankani (IDA), andWanda Tseng andAnthony R.Boote (IMF) October 16,2003 I. Overview................................................................................................................................. 1 11. The ParticipatoryProcess.......................................................................................................2 111. PovertyDiagnostics ................................................................................................................ 2 IV. The PovertyReduction Strategy............................................................................................. 3 A. Targets, Indicators, andMonitoring............................................................................. 3 B. GrowthandMacroeconomic Framework ................................................................... C. PrioritizationinPublic Expenditure............................................................................6 4 D. Governance andDecentralization.. .............................................................................6 E. Sectoral Policies..........................................................................................................7 F. Risksto the Strategy and Mitigating Factors.............................................................10 V. Conclusion ............................................................................................................................ 11 This document has a restricted distribution and may be usedby recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.   I.OVERVIEW 1. Despite decades of development efforts, Nepalremains one of the poorest countries in the world with per capita income of about US$250. Economic performance improved during the 1990s and per capita income grew by an average annual rate o f about 2% percent. Duringthe second half o f the 1990s, however, the pace o f reform implementation slowed, as politics grew more fractious and diverted attention from the development effort. This, together with sharply escalated conflict since 2001 related to the insurgency, slowed growth over the last two years. The Maoist insurgency is, in part, a reflection o f the rising disenchantment with inefficiency and corruption in the public sector, large persistent inequalities including along ethnic and gender lines, and poor delivery o fpublic services. 2. Against this background, the Poverty Reduction Strategy Paper (PRSP) has been prepared to reinvigorate the reform effort and achieve high sustained growth. The PRSP has been prepared by a series o f governments since 2000, and reflects a reform vision shared by key political forces. It is based on extensive consultations within the public sector as well as with civil society. Furthermore, the reform process is being championed by a growing body o f reform- oriented senior officials. It i s reflected in the ten point priority agenda the current government has committed to and resonates with the popular demand for better governance. This reform vision comprises four broad pillars: (i) generating broad based economic growth; (ii) improving service delivery; (iii)promoting social inclusion; and (iv) improving governance. 3. The PRSP has a number of strengths. Among these are: (i) appropriate focus on an accelerating income and employment growth in rural Nepal, where a majority o f the poor live; (ii)inclusion of alternative growth scenarios that take into account downside risks; and (iii) the introduction o f explicit mechanisms to expedite reforms in critical areas to address the weak implementation track record. These mechanisms include: prioritizing public expenditures through a Medium Term Expenditure Framework (MTEF) and aligning budget allocations to performance-based cash release to high priority projects; improving social service delivery through devolution o f management o f basic education and health sectors to local communities; and reducing corruption through strengthening institutions such as Commission for the Investigationo f the Abuse o f Authority (CIAA) and improvingpublic procurement. 4. There are shortcomings and challenges to be addressed by the PRSP in the coming year. These include: (i) identifying sources o f growth and their linkages to poverty reduction through rigorous analytics incorporating lessons learned from past experience; (ii) improving costing of individual public policies as inputs to annual budget processes; (iii) developing the MTEF further to sharpen prioritization and cover all government spending under the prioritization exercise; (iv) implementing a coherent monitoring and evaluation strategy, including building capacity for poverty monitoring and developing an institutional framework for its implementation; and (v) further elaborating pro-poor rural strategies underpinned by past policy lessons and robust analyses to ensure social inclusion through special targeted programs andimprovements across all the sectors inpublic service delivery. 5. There are also major challenges and risks from exogenous shocks and the uncertainties posed by the security and political situations. These factors could stall or severely affect the reform process. Furthermore, risks to reform implementation could arise from constraints incapacity within the government.  11. THEPARTICIPATORYPROCESS 6. The PRSP,presentedas an executivesummary of the Tenth Plan, is a productof an inclusive participatory process and marks a significant departure from traditional development planning.Inpreparing the Interim-PRSP, the Approach Paper o f the Tenth Plan, and the PRSP, the authorities consulted widely with major political parties, private entrepreneurs, local governments, beneficiaries including those from remote communities and ethnic minorities, civil society, and the donor community. This is a departure from a long- standing tradition o f preparing periodic development plans centrally driven by the National Planning Commission (NPC). The previous nine five-year plans were prepared by the NPC based on an approach paper prepared by the National Development Council, an overall resource framework provided by the Ministry of Finance and inputs from line ministries. There was little involvement o f other stakeholders. 7. The PRSP documents the process of consultations during its preparation and providesa synopsis of feedback that was received.Inparticular, regional andother workshops were held from mid-2001 with nearly 4,000 participants and their recommendations were incorporated in the final approach paper, which was discussed with donors at the Nepal Development Forum inFebruary 2002. The process o f consultation demonstrates openness o f the government to stakeholders' feedback and concerns. However, the PRSP includes limited description o f how the poverty strategy has been modified as a result o f the consultation. In addition, recent developments-including the intensification o f the security problem that led to announcement o f the state o f emergency at end 2001 and the dissolution o f local governments in2002-reduced the capacity o f the government to engage wider civil society groups and local leadership, particularly inthe later stages o f finalizing the PRSP. The staffs recommend that His Majesty's Government o f Nepal (HMGN) reactivate and institutionalize mechanisms for continued consultations inthe coming year. 8. The government intends to deepen the participatory approach to the implementationand monitoringstages of the PRSP.The authorities have placed the PRSP on the government's website and are starting an initiative to promote public understanding o f its reform agenda. The initiative includes further consultation with stakeholders in preparing the annual Immediate Action Plan to implement the PRSP agenda and provision o f wider access to the PRSP and related documents such as those o f the MTEF. These measures would enable local leaders and beneficiaries to better understand and closely monitor implementation o f the PRSP strategy. Staffs encourage the govemment to formalize the institutional arrangements and effectively implement such a communication initiative in the coming year. Staffs also note that to ensure effective dissemination, many PRSP documents that are now available inEnglish only would benefit from translation into Nepali and languages o f the major ethnic groups for whom Nepali is a second language. 111. POVERTYDIAGNOSTICS 9. The PRSP presents a comprehensive description of the levels and spatial distribution of poverty.This description is basedon the most recent surveys-the Nepal Living Standards Survey (NLSS) 1996, and the Demographic and Health Survey, 2001-and draws on insights from the Poverty Assessment completed in 1999 and the Human Development reports 2  o f 1996 and 2001 by the United Nations. The PRSP benchmark for consumption poverty (38 percent headcount) is, however, not survey based, as acknowledged by the PRSP, but rather based on simulations. Moreover, methodological differences between previous surveys conducted in 1976, 1984, and 1991, and the first NLSS in 1996render a trend analysis o f poverty incidence difficult except in drawing a general consensus that poverty has not decreased between 1984/85 and 1996. The new NLSS survey, to be completed by March2004, will be useful in clarifying these issues. Staffs recommend that the authorities utilize the results o f this survey to set the baseline for monitoringthe progress on reduction inpoverty. 10. The analysis of the diagnostics of poverty is generally sound. The PRSP notes that poverty is largely a rural phenomenon, and there are strong regional differences with higher incidence in the mountains and remote areas. Similar pattems also persist for human development indicators. In addition, poverty diagnostics include discussions o f gender, ethnic and caste-based social exclusion, as well as the impact o f the insurgency on these vulnerable groups. Staffs welcome these discussions inthe PRSP as the issues o f caste and ethnicity-based disparities have been considered particularly sensitive with open discussions on them rare in the past. 11. While the document offers a good discussion of the correlates of poverty, the causal analysisis weak due to data constraints.While the PRSP discusses the nexus betweenpattems of growth and poverty especially in rural areas and the importance o f agricultural growth, discussion is limited on causal links between policies and changes in poverty levels. Similarly, there is no explicit link between the past policies or programs and implications for prioritization. Analysis o f such linkages would clarify and strengthenpriority rankingo f anti-poverty measures inthe coming years. Staffs encourage in-depth analysis ofthese issues when the new NLSS data becomes available. Staffs also recommendthat the government begin a poverty and social impact analysis in some o f the priority policy areas identified in the PRSP, such as agriculture and infkastructure and incorporate the results inthe first PRSP annual progress report. IV. THEPOVERTY REDUCTION STRATEGY 12. The governmenthaspresenteda broadstrategy for poverty reductioninitsmultiple dimensions-focusing on growth, particularly in rural areas, combinedwith an emphasis on social inclusion, improved governance, and better delivery of social and economic services. The strategy, although ambitious, is backed by the MTEF (introduced in2002/03), which provides a crucial link to feasibility, indicating how trade-offs are being handled in the face o fresource constraints. A. Targets,Indicators, andMonitoring 13. The PRSP highlights indicative targets for the period of the Tenth Plan (ending 2006/07) in all areas covered by the MDGs. The indicative targets include poverty headcount and indicators in the areas o f education, health, and infrastructure, and promise to make significant progress towards achievement o f the MDGs by 2015. However, refinements are needed-some further disaggregation o f indicators by region, ethnicity, caste, and gender would be welcome especially given the insights obtained through the poverty diagnostics. Furthermore, a clearer definition o f intermediate indicators that are consistent with programs and budgets will 3  be essential to track progress. This will require close collaboration with sectoral and line ministries at the regional level. In addition, information available through household s w e y s needs to be complemented with indicators that are available annually, like budget allocation and execution, and indicators that track access, satisfaction, and use o f priority social and infrastructure services. In summary, more work will be needed in terms o f developing clear and achievable indicators and targets, andthis should receive the highestpriority inthe coming year. 14. While the medium term goals defined in the PRSP appear feasible, they depend critically on achieving growth and well-defined baselines need to be set. For example, the goal o f reducing poverty incidence to 30 percent would require growth o f around 5 percent a year (an average o f the low and normal cases), and avoiding increases in inequality. For other social indicators, particularly in health, there appear to be significant discrepancies between the baseline figures presented indifferent places within the PRSP, such as those inobstetric services and contraception prevalence rate. An exercise o f rationalization o f baselines would be very important to set consistent targets and track progress. 15. The staffs urge the government to assess data availability, enhance statistical capacity and strengthen statistical systems at both national and local levels. The PRSP acknowledges the need for strengthening the monitoring o f public expenditures as well as outcomes as a key priority, Given the importance and urgency for improving the monitoring system, to achieve this objective, the first order o f business i s to set out clear institutional arrangements for accurate and timely monitoring. In this regard, the PRSP outlines the arrangements to undertake and oversee the establishment o f a viable system for monitoring reform implementation, as well as progress inpoverty and social indicators. The document also acknowledges the need for significant capacity-building assistance that will be sought from donors to enhance monitoring and evaluation capacity at the central, line ministry and local levels. B. GrowthandMacroeconomicFramework 16. The PRSP stresses the authorities' commitment to sound macroeconomic management and structuralreformimplementationto foster growth and alleviate poverty. Continued prudent fiscal policies will help ensure macroeconomic stability. These policies are to be complemented by structural reforms in key areas-financial sector, public enterprises and govemance-to improve growth prospects. 17. The inclusionof alternative macroeconomic scenarios in the PRSP, which take into account risksto the mediumterm outlook, enhancesitsflexibility.The "normal" case aims at an ambitious increase in average annual real GDP growth to 6% percent over the medium term, while the "lower" case scenario envisages average annual real growth o f 4% percent. The higher growth rates are based on improvements in the domestic security situation and a pick up in external demand. The inclusion of a lower growth scenario enhances the credibility o f the PRSP. The PRSP's growth target appears reasonable, especially given the trend GDP growth rate o f nearly 5 percent in the 1990s. However, since growth rates in the last two to three years have been considerably less, the staffs' assessment is that attaining even the lower growth will require concerted reform effort by the authorities, as well as progress towards achieving sustained peace. In this regard, staffs note that the PRSP mentions, but does not discuss details o f the 4  government's third scenario, the "lowest" case (for example, due to severe deterioration o f the security situation), stating that there are mechanisms such as the MTEF to adjust to a weaker outturn. Nevertheless, giventhe economy could still face difficult security or external situations, staffs recommend that the next progress report discuss the policy response to a combination o f serious downside risks. At the same time, the progress report should also discuss the authorities' response to upsidepotentials such as highforeign aid associatedwith early successwith peace. 18. The PRSP scenarios form the basis of a "realistic" medium term macroeconomic frameworkbeingdiscussedfor a PRGF-supportedprogram.Growthtargets underdiscussion for the PRGF are close to the "lower" case scenario, but public investment i s more in line with that in the "normal" scenario reflecting the staffs judgment that significant infrastructure and social sector investment i s required to support even the more modest growth rates. Domestic budget financing is lower inthe PRGF framework than inthe "normal" scenario inview o f the potentially large contingent liabilities, which would need to be borne inthe context o f financial sector andpublic enterprise reforms. 19. The PRSP makes clear that productivity gains and increasedprivate sector activity are the key sources of broad-based growth in all sectors. Robust agricultural growth i s requiredfor poverty alleviation, giventhe concentration ofthe poor inrural areas. Inthis context, the PRSP stresses the need to accelerate agricultural productivity growth through improved rural infrastructure and diversification into cash crops and livestock. The PRSP also recognizes that the manufacturing, trade, tourism, and transport sectors have beenmajor sources o f growth inthe past decade but that social disorder and weak external demand have recently dampened growth inthese sectors.Therestoration ofpeaceandthe plannedrehabilitationandreconstructionefforts are expected to provide a basis for significant recovery in these areas. The PRSP identifies the leading role o f the private sector in generating growth, while acknowledging that much needs to be done to improve the private business climate through structural reforms in several key areas including labor legislation. Failure to implement these reforms could reduce private investment andjeopardize achievement ofthe PRSP goals. 20. Key fiscal policychallenges are to improverevenuemobilization,prioritizespending and contain domestic borrowing.The 2003/04 budget includes significant reform measures to streamline the tax system; and tax and customs administration are to be strengthened with the IMF and donor technical assistance to raise the revenue-to-GDP ratio. Over the medium term, revenue is projected to increase from about 12%percent o f GDP in2002/03 to 13%percent in2005/06. Capital spendingcan be increased in a prioritized manner along the lines set inthe MTEF. Over the medium term, net domestic financing is to be reduced to %percent o f GDP. The framework is contingent on a significant increase in external financing, which in turn depends on a demonstrated track record o f implementation. Donor assistance is projected to rise from 3 percent o f GDP in2002/03 to 4% percent o f GDP in2005/06. 21. Monetaryand exchangeratepoliciesneedto remaingearedto supportingthe pegto the Indian rupee. The PRSP envisages maintenance of the peg arrangement, as the peg continues to serve Nepal well given close ties with India. However, the level o f the peg should remain under review given an evolving external environment, including World Trade Organization (WTO) accession andphasingout o f the Multi-FiberArrangement by 2005. 5  22. Despite its liberal trade regime, significant constraints impede Nepal's trade prospects. These constraints include delays in customs and transshipment, a rigid formal labor market, poor infrastructure, and ineffective and unpredictable public sector. The PRSP does not sufficiently emphasize the critical importance o f trade and export growth in driving growth nor the challenges that Nepal's export and trade will confront inthe coming years. The Nepal Trade and Competitiveness Study provides specific recommendations to improve trade policy, export promotion, customs, transport, the labor market and the investment climate. Staffs encourage the government to follow through on the recommendations identified in the study and develop a corresponding policy agenda inthe annual progress report. C. PrioritizationinPublicExpenditure 23. The PRSP's public expenditure program is appropriately based on the MTEF, which will help prioritizeexpenditures.The MTEF currently covers all development spending and represents a significant improvement over past practices. Under the framework, development expenditures have been prioritized inthree categories (P1,P2, and P3) and a performance-based hnd release mechanism has been implemented for projects. With this prioritization, 40 percent o f the development budget has been allocated for social expenditures, 40 percent for infrastructure and the rest for agriculture development; and over 60 percent o f the development budget has been allocated to P1 projects with assured funding. To facilitate implementation o f priority activities, budget allocations for agriculture/rural and humadsocial service delivery developments are protected under alternative growth scenarios. Extending the MTEF concept to all resources, including donor resources, will be a challenge. Although such efforts are underway-for instance in health-a serious reprioritization (which is likely to bring about significant efficiency gains), will require both strong leadership by the government and willingness by donors to adjust the existing programs. 24. Lookingforward, staffs encourage the authorities to take steps to further improve public expenditure management. Specifically, staffs recommend: (i) costing delivery o f key activities (primary education, management o f health posts, district hospitals to be transferred to local stakeholders) and ensuring adequate allocations for these activities starting in2003/04; (ii) extending prioritization to regular expenditures; (iii) classifying spending into recurrent and capital; (iv) developing the fiscal decentralization framework and holding local institutions accountable for achieving targets; (v) implementing the Development Action Plan under the Country Financial Accountability Assessment and Country Procurement Assessment Report on a timely basis; and (vi) as discussed above, developing a comprehensive tracking system that covers public spending on all projects inthe PRSP. D. GovernanceandDecentralization 25. Critical governance challenges need to be addressed to effectively develop and implement the PRSP policies. The government's strategy to improve governance covers: (i) civil service reform (supported by the Asian Development Bank), (ii) financial management and accountability; and (iii) decentralization. W h l e HMGN has made some progress in improving human resource management practices over the past few years-most notably through the creation o f a computerized personnel information system-the PRSP recognizes that additional 6  progress i s neededto make the civil service more efficient, accountable and transparent. Future actions include: (i)reforming public employment, through introduction o f merit-based recruitment and evaluation systems and a long-term pay policy, as well as right-sizing, improving the capacity and skills mix, and introducing an affirmative action program; (ii) improving financial management and accountability through among other things, implementing the recommendations o f the recent Country Financial Accountability Assessment; and (iii) implementing the anti-comption strategy, in part through the enactment of an Anti-Money Laundering Act and strengtheningo f key institutions charged with fighting corruption, including theNationalVigilance Center andthe CIAA. 26. The economy wide governance efforts need to be complemented by measures in specific sectors including finance, infrastructure, health and education. The PRSP is admirable in its intent to foster the mainstreaming o f deprived communities and increasing the emphasis on social inclusion through normal sectoral programs supplemented by targeted initiatives. Moving forward, however, the main challenge for the govemment will be to restore representative local government so that it can effectively play a role in serving and representing local communities. Inthe coming year, the government would need to support this process by developing the administrative mechanisms for transfening resources, building capacity at the local level, and implementingthe monitoring systems for the new arrangements. The first annual progress report should include an evaluation o f the early experience with decentralization. E. SectoralPolicies 27. The PRSP recognizes the importance of infrastructure development in facilitating privateinvestment.To this end, it gives priority to the strategic road network, maintenance of major roads and highways, and the expansion o f infrastructure in power and communications. Examples o f reforms both already initiated or planned inthe near future include establishment o f an autonomous Roads Fund Board and transferring to District Development Committees the responsibility for rural roads; inpower, the internal unbundlingo f Nepal Electricity Authority's (NEA) activities and the initiation of an explicit subsidy policy for grid-based rural electrification to improve efficiency and coverage in the rural areas; and in communications, conversion o f the Nepal Telecommunication Corporation into a public company and opening up general and rural telecommunications to the private sector. Staffs endorse these initiatives and recommend parallel initiatives, particularly in the power sector, focused on developing a legislative framework to support the internal unbundling and commercialization o f NEA's activities, with a view to formalizing its commercial orientation and reducingthe risk o f political intervention in its activities. Staffs also recommend implementing the regulatory policies contained in the Hydro Power Policy, with a particular focus on mechanisms for sustaining predictable, cost-recovering tariffs, and facilitating entry to the sector. With regard to subsidization o f expanded access, staffs recommend consideration of subsidy schemes focused on capital costs (ie., requiringcoverage o f recurrent costs), and open access to both on-grid and off-grid service provision, by a range o f service providers (including the private sector, cooperatives andNGOs). 28. The PRSP also recognizesthat a strongfinancialsystem is criticalfor privatesector growth and macroeconomic stability. Staffs fully endorse the government's moves underpinnedbythe Financial Sector Strategy Statement. Inthe mediumterm, awithdrawal o fthe 7  government from the ownership o f banks is foreseen replacing this role with a stronger supervisor and regulator over the entire system. To this end, the government's initial efforts within the sector have focused on strengthening the central bank (Nepal Rastra Bank-NRB) in its key supervisory and monetary policy functions. Both the World Bank and the Fund have provided technical assistance to strengthen its on- and off-site supervisory functions and accounting capacities, and to organizationally restructure the bank and re-engineer its human resourcemanagement to assist a transition to a modem central bank. 29. The government has also taken measures to deal with the problems in commercial banks. The two largest commercial banks-Rastriya Banijya Bank (RBB), fully owned by the public sector, and Nepal Bank Limited (NBL),where the public sector holds 40 percent o f the shares-have suffered from weak management; poor accounting capacities; considerable political interference; and high levels o f nonperforming loans. The government has brought in two extemal management teams to take over these banks (NBL in August 2002 and RBB in January 2003). The management teams are making progress in recovering nonperforming loans and have produced updated financial accounts. They are also revamping human resource management, improving treasury management, and installing an information technology platform. The results, to date, have been encouraging with an increasing recognition within Nepal that loanrepayments would be enforced; interest rates that have become more competitive (with increasing indications o f a reduction in the overall rate structure); and declining service charges as a result o f increased competition. This process has been further bolstered by the establishment o f a Debt Recovery Tribunal inmid-July, which is expected to deal speedily with loan defaulters. 30. Staffs urge the government to continue to deepen the financial sector reform process. This would require further strengthening o f the central bank and the ultimate privatization o f the two largest commercial banks. Staffs also recommend that further measures be taken to address issues o f access to bank credit, particularly for small businesses and the rural population. The next steps inthe financial reform program include issuance o f the Banking and Financial Institutions Ordinance, ensuring capital adequacy, implementing cost cutting measures in RBB and NBL (including voluntary retirement schemes to reduce excess staffing), commencing the privatization process, andrapid re-engineering o f the NRB. 31. The main focus of the PRSP on reinvigorating income and employment growth in rural areas through agriculturaldevelopment is welcome and appropriate. There is still a considerable potential for agriculture productivity growth, which will have an immediate impact on income o f the poorest communities. In that respect the Agriculture Perspective Plan (APP) represents a useful framework to work with, and around 20 percent o f development resources have beenallocated for implementing the APP. However, on poverty grounds, the challenge will be to focus not only on agriculture, but also on how to improve access to markets, assets and nonfarm income opportunities. In particular, issues o f access to land, credit and basic services would need to be given increased emphasis. Finally, on security grounds, investing inrural areas is urgently needed to make any peace effort sustainable and to bridge the increasing disconnect and deterioration o f human and physical capital after years o f neglect and poor governance. The PRSP highlights the right components that need to be addressed in the agriculture and rural sectors, including the need for diversification, private sector development and deregulation. However, the government will need to devote particular attention to the composition and the 8  quality o f public spending in the sector. In particular, while pursuing APP objectives, the government should refrain from introducing price distortions in the incentive structure for agriculture andimgation. 32. The strategy in education is pro-poor and aims to be more realistic and credible.It acknowledges weaknesses in past implementation performance, including unrealistic targets, lack o f counterpart fimding and prioritization, and shortfalls inmonitoring leadingto leakage and inefficiencies. More can be done, however, to analyze the implications o f the lessons learned for future planning and implementation, and the plan could benefit from greater clarity in setting priorities. For example, in the current "lower case" scenario, it is not clear how the government would weigh the relative levels o f investment across the subsectors to minimize financing distortions, or make decisions about which interventions within any subsector would bring the greatest benefits. 33. To improve access to and quality of primary education, the strategy consists of the transfer of managementof governmentschoolsto local communitiesand provisionofblock grants to these community-fundedschools. This provides a reasonable basis for achieving the goals o f efficiency and improved governance within schools. Management o f 8,000 government schools i s to be transferred to local communities duringthe TenthPlanperiod. Inaddition, more specific strategies to address structural impediments, which hinder social equity and quality improvement (i.e., teacher deployment, equitable distribution o f resources, timely delivery o f free textbooks, poor teacher qualifications), are required. 34. At the level of higher education, one focus is on cost recovery to produce a skilled labor force. Higher education is beset with a number of structural and financing problems, and this single strategy may not be adequateto achieve the subsector goals. Quality improvement is a prerequisite before moving towards higher cost recovery. To achieve this, upfront investments and greater autonomy for academic institutions are required, as well as financial assistance to poor students. 35. The health strategy in the PRSPis underpinnedby a comprehensive health reform agenda.The strategy was developed by HMGNinAugust 2002, with the primary objective o f extending essential healthcare services to all, with special emphasis on poor rural populations. The focus on implementing a package based on preventive care, maternal and child health and family planning, i s appropriate andbased on the diagnostics inthe sector. There i s also increased focus on improving access to safe drinking water to cover 85 percent o f the rural population by2005/06. Improvements in health service delivery are expected to occur through a gradual process o f devolving health facilities-starting with health sub-posts-to local communities and working increasingly with the private sector and NGOs. This process i s already underway in a number o f districts and results are visible interms o f improvedperformance through community participation, transparent service provision and performance-based fund release. As the process o f devolution scales up, the increasing and complex challenge o f improving access and quality will require a stronger emphasis on assessing staffing and other financing implications, and buildingcapacity for implementationandmonitoringat the local levels. 9  36. The PRSPmakes a welcome shift away from almost exclusivedependence on special targeted programs towards a consistent effort to "mainstream" the poor, women, and excluded caste and ethnic groups by ensuring them access to regular sectoral programs. This concem with social inclusion is integrated throughout the PRSP's four pillars, especially humandevelopment and govemance. However, inclusion o f all targeted povertyprograms under the single umbrella o f the Poverty Alleviation Fund and phasing out older ineffective programs seems to have been weakened somewhat as the Ministries o f Local Development, Education, Health and Agriculture will continue to implement separate targeted programs. This is a matter of some concem and reflects the continued reluctance o f the line ministries to relinquish control of programs or budget which stall the decentralizationprocess. F. Risksto the StrategyandMitigatingFactors 37. . The staffs consider that the strategy is subject to risks: Progress towards peace i s critical for achieving the growth targets and reducing poverty. The insurgents' basic goals-provision o f better social and economic services and representation for the poor-are consistent with the PRSP. Therefore, reforms envisaged by the PRSP-such as higher spending for social sectors and deprived groups, and structural reforms, especially govemance reforms towards devolution o f delivery o f services-are intended to mitigate the basis for the insurgency over the medium term. There is a large distance between the insurgents and the govemment on the political . agenda, as recently demonstrated by the withdrawal o f the insurgents from the peace talks. Uncertainties remain on how the political standoff between the government and major parties will be resolved. As regards economic policies, however, the parties have been involved intensively in the PRSP preparation process, and steps have been taken during . successive rounds to incorporate their views. As a result, the risk that economic policies would change drastically ifthese parties came to power is expected to have been reduced. It may be difficult to sustain the fiscal framework ifthere are revenue shortfalls or a need for higher spending on, for example, security. External aid shortfalls would also complicate fiscal management and reduce poverty related spending. Stronger revenue efforts-in particular increases inthe VAT rate-or spending cuts in line with the MTEF can be undertaken to sustainthe framework inthe event these downside risks materialize. An adverse external environment would dampen growth prospects. The key risks include an increase in oil prices or a reduction in remittances and tourism arising from a prolonged global slump. The impact o f these developments may be difficult to offset in . the short run.However, structural reforms should help diversify exports and improve the economy's resilience to shocks over the medium term. Weak implementation capacity and governance pose continuing constraints to full utilization o f development budgets and poverty alleviation. Govemance reforms and decentralization are intended to address these shortcomings. 10  38. The staffs view the reformprocess as a collective risk mitigation measure against the riskofwidespreadinternalconflictandthe breakdownofthe developmentprocess.The underlying causes o f these risks-the insurgency, patronage-based politics, institutional weaknesses, and the failure o f public service delivery-have generated the current situation in Nepal. The PRSP reforms have emerged, inpart, as a response to this crisis. Based on its early efforts, which were somewhat disparate, the government has developed the PRSP as a coherent strategy to carry the reforms forward. Their strategy appears to have pushed the reforms far enough in a short time so that new norms and standards are set for public sector performance. Once the public begins to expect higher levels o fperformance and accountability, it i s hoped that itwould becomepolitically difficult to reverse the reforms. V. CONCLUSION 39. The strategy outlined in the PRSP provides an adequate framework for the country's efforts towards sustainable growth and povertyreduction.It has been prepared in a participatory manner, underpinned by the Tenth Plan o f the government and through consultation with civil society. The strategy i s coherent, comprehensive and explicit in its emphasis on implementation. However, as the assessment highlights, the success o f the PRSP process is contingent o n peace and political stability which, in turn, is key to a sustainable macroeconomic framework to protect pro-poor expenditures, and improving governance and the overall policy environment. The immediate challenges for implementation are strengthening capacity to execute the envisaged programs, improving expenditure planning and control through an improved public expenditure management system, and building an effective monitoring system. The Joint Staff Assessment has also identified some shortcomings o f the PRSP that could be addressed over time and reflected inthe annual progress reports to ensure the strategy is fully effective andoperational. 40. The staffs of the World Bank and IMF consider that this PRSP provides a credible poverty reduction strategy and an adequate basis for IDA and Fundconcessional assistance. The staffs recommend that the Executive Directors o f the World Bank and IMF reach the same conclusion. 11   THETENTH PLAN (Poverty ReductionStrategy Paper) 2002-2007 Summary His Majesty's Government National Planning Commission Kathmandu, Nepal May 2003   Foreword The Tenth Plan is government's main medium-term strategic planning document and this summary provides a sharply focused strategies o f the Plan for poverty alleviation The Plan has formulated a poverty reduction strategy based on four pillars -broad based high and sustainable growth, social sector development with emphasis on human development, targeted programs with emphasis on social inclusion and improved governance. The Plan is an outcome o f extended nation-wide consultation participated in by a large numbero fpeople from allwalks of life. The participatory approach adopted inpreparingthe Plan, inclusion o f the logical framework, identification o f prioritized programs and projects and identification of monitorable indicators are some o f the important features. Besides, the simultaneous p-eparation o f the Medium Term Expenditure Framework has provided an effective mechanism to link the Plan with the annualbudget The Plan has emphasized on effective implementation and monitoring mechanism. Some o f the mechanisms formulated include (i)preparation o f annual poverty monitoring report (ii) initiation o f special monitoring mechanism for social inclusion and regional development (iii) development and monitoring o f four monthly intermediate output indicators o f major public expenditure components (iv) initiation o f immediate action plm- a list of critical policies for quick implementation (v) designing o f a policy matrix to linkpriority activities o f the plan with output indicators and (iv) decentralization. The implementation modalities initiated are expected to succeed particularly in delivering basic services, enhancing the quality o f life o f the poor people and promoting economic and social inclusion o f deprived communities andregions. We would like to express our gratitude to parliamentarians, ministers, educationists, experts, politicians, members o f civil society, and bureaucrats, who have been directly or indirectly involved in the process o f formulating the plan We are also grateful to the donor communities for providing cooperation and support inthe process o f preparing and finalizing this document. July 2003 Shankar P Sharma Vice-chairman National Planning Commission   National Planning Commission Rt. Hon'ble Prime Minister Mr.Surya Bahadur Thapa Chairman Dr.Shankar PrasadSharma Vice-chairman Dr.Yubaraj Khatiwada Member Chief Secretary Dr.BimalPrasadKoirala Ex-officio Member Secretary o f Finance Mr.BhanuPrasad Acharya Ex-officio Member M iBhoj Raj Ghimire Member Secretary iii   Acronyms ADDCN AssociationofDistrictDevelopmentCommitteesofNepal AGO Auditor General's Office AIC Agriculture InputCorporation APP Agriculture PerspectivePlan BOOT BuildOwnandOperate Transfer BOT BuildOperate andTransport CAAN Civil Aviation Authority of Nepal CBS CentralBureau of Statistics CFAA Country Financial Administration Assessment CIAA Commissionof Investigationof Abuse of Authority CTEVT Center for Technical Education& Vocational Training DC Dalit Commission DDCs District DevelopmentCommittees DDWSS District DevelopmentWater Supply schedule DIMC DecentralizationImplementationMonitoring Committee DNPWC DepartmentofNational Parks&Wildlife Conservation DOA DepartmentofAgriculture DOC Departmentof Commerce DOE DepartmentofEducation DOH DepartmentofHealth DOHS DepartmentofHealthService DO1 Departmentof Industry DOL Departmentof Labour DOLIDAR Departmentof Local InfrastructureDevelopment and Agriculture Road DOR Departmentof Road DOSCI Departmentof Small andCottage Industries DPS Departmentof Postal Services DWSS DepartmentofWater Supply & Sanitation ERP Economic Reform Program FCGO Financial Comptroller General's Office FPAN Family PlanningAssociationofNepal GDP Gross Domestic Product HDI HumanDevelopmentIndicators HHS HouseholdSurvey HRC HumanRights Commission IAP ImmediateAction Plan ICOR IncrementalCapitalOutputRatio INGOs InternationalNon-government Organizations i  IPRSP InterimPovertyReductionStrategy Paper ISDP Intemal Security and DevelopmentProgrammes JEMC Janak EducationMaterialCenter LBFC LocalBodiesFinance Commission LM Line Ministry LSGA Local Self GovernmentAct M 1 Narrows Money M2 BroadMoney MCH Maternity ChildHealth MDAC Ministerial DevelopmentAction Committee M I S ManagementInformation System MLD Ministry of Local Development MOAC MinistryofAgricultureandCooperatives MOCTCA Ministry o f Culture, Tourism and CivilAviation MOES MinistryofEducationand Sports MOF Ministry of Finance MOGA MinistryofGeneralAdministrative MOH Ministry of Health MOICS Ministryof Industry, Commerce & Supplies MOLJ MinistryofLaw andJustice MOLTM Ministry of Labour andTransport Management MOPPW Ministry of PhysicalPlanningandWorks MOST Ministry of Science andTechnology MOWR Ministry ofWater Resources MOWSW Ministry ofWomen and SocialWelfare MTEF MediumTerm ExpenditureFramework NARC Nepal Agriculture ResearchCouncil NDAC National DevelopmentAction Committee NDC National DevelopmentCouncil NEA Nepal Electricity Authority NER NationaVEcologicaYRegional NERG NationaYEcologicaYRegionaUGender NERGS National/EcologicaYRegional/Gender/SocialGroups NERS National/EcologicaYRegional/SocialGroups NERUGS NationallEcologicaYRegional/urbdGender/Social Groups NERUR National/Ecological/egional/Urban/Rural NERUS NationaYEcologicaYRegionaKJrbdSocialGroups NFC Nepal FoodCorporation NGOs Non-governmentOrganizations NHRC National HumanRights Organization NLSS Nepal Living StandardsSurvey NOC Nepal Oil Corporation NPC National PlanningCommission ii  NRB Nepal Rastra Bank NTB Nepal Tourism Board NTC Nepal Telecommunication Corporation Nwssc NepalWater Supply andSanitationCorporation P A C Public Account Committee PAF Poverty Alleviation Fund PERC Public Expenditure Review Committee PIUS Project ImplementationUnits PRSP Poverty Reduction Strategy Paper PSC Public Service Commission RDBs Rural Development Banks RNAC Royal Nepal Airlines Corporation SAFTA South Asian Free Trade Arrangement SAPTA South Asian Preferential Trading Arrangement S M E S Small and Medium Enterprises SOE Statement o f Expenditures T C A Telecommunication Authority TPC Trade Promotion Center UNDP UnitedNations Development Program VAT Value Added Tax VDC Village Development Committees WTO World Trade Organization WUA Water User's Association iii  1. Introduction-The Socio-Political and Economic Context 1 The TenthPlan's Challenge 2 The Organization o f the Summary Paper 3 2. The Tenth Plan Preparation Process 5 Traditional Planning Process 5 The TenthPlanPreparation 5 3. Review of Past Development Efforts 9 Introduction 9 Economic Reforms in the Early Nineties 9 The NinthPlan 10 Growth Performance 11 Progress in Poverty Reduction and Human Development 11 Physical Infrastructure 12 Macroeconomic Performance 13 Progress inPolicy Reforms 17 Lessons from Past Experience 21 4. The PovertySituation - Its Key Dimensions And Determinants 23 Introduction 23 Recent Poverty Trends 23 Current Poverty Situation and Its Characteristics 24 Present Social Disorder and Its Implications 34 Conclusion 35 5. The Tenth Plan-Goals, Targets and Strategies 37 Introduction 37 Key Goals and Targets 39 The Tenth Plan's Poverty Reduction Strategy 40 Macroeconomic Stability 42 Structural Reform Agenda 43 Broad-Based Economic Growth 44 Social Sector Development (including HumanDevelopment) 52 Social Inclusion and Targeted Programs 56 Good Govemance 60 Improving Financial Management and Accountability 61 Decentralization 63 6. Financing The Tenth Plan 64 iv  Introduction 64 Macro-economic Framework 65 The Normal Case 66 The Alternative Case I O Medium Term Expenditure Framework (MTEF) 12 7. Implementation Modalities 77 Introduction 11 Monitoring and Evaluation Arrangements 80 Conclusion 84 Annex 1 Policy Matrix 88 Annex 2 Immediate Action Plan 117 Annex 3 Macro-Economic Indicators 118 V  List of Tables Table 1: TheNinthPlan-GDP and SectoralGrowth Rates ....................................................... 11 Table 2: NinthPlan-Key Poverty andHumanDevelopmentTargets and Achievements Table 3: Vital Physical Infrastructure-Targets andAchievements.......................................... 13 Table 4: Ninth Plan-Macroeconomic Performance, 1996197-2001/02 .................................... 14 Table 5: 1995/96 Survey: Income Poverty Indicators .. ......................................................25 Table 6: HumanDevelopment Indicators, 1996and2000* .................. 26 Table 7: Gender Disparities inKey HumanDevelopmentIndicators, 1996and2000. ..........28 Table 8: HumanDevelopmentby CasteandEthnicity, 1996...................................................... 29 Table 9: HouseholdDistribution by Their Access to Agriculture Inputs, 1996....................... 32 Table 10: Sources o f Income o f RuralHouseholds, 1996.. Table 11: Indicative Targetsofthe TenthPlan....................................................................... Table 12: Investmentrequirementsof The Tenth Plan (Normal Case) ............................. Table 13: SectoralAllocation o f DevelopmentExpenditure-Normal Case .............................. 68 Table 14: The TenthPlanMacroeconomicProjections-Normal Case Scenario .... Table 15: The Tenth Plan-Macroeconomic Projections-Alternative Scenario ... Table 16: MTEF-Budget Allocations for Priority Sectors, 2002/03-2004/05 ......................... 74 Table 17: Major Poverty RelatedDevelopmentExpenses ....... ...................... 1.......................... 75 Table 18: Key OutputlOutcomeiImpact andProcessIndicators ...... ....... 85 vi  Introduction-The Socio-PoliticaI and Economic Context 1 The overriding objective of development efforts inNepal is poverty alleviation. Inspite o f noticeable progress achieved over the past decade, there is still widespread poverty. The Tenth Plan represents a renewed commitment by His Majesty's Government o f Nepal to this all-important task. Its sole objective is to achieve a remarkable and sustainable reduction in the poverty level inNepal from 38% o f the population at the beginning o f the Plan period to 30% by the end of the Tenth Plan, and to further reduce the poverty ratio to 10% in about fifteen years' time. 2 The reduction o f poverty to 30% by the end of the Tenth Plan i s a daunting task by itself. It has been made even more challenging by several recent developments in the country. Among these, the following are particularly important: First, poverty inNepal has persisted for decades, and it is recognized as a deepseated and complex phenomenon, for which there are no quick andeasy solutions. What has changedparticularly over the last decade is the socio-political situation inthe country. Following the Democracy Movement o f 1990, peoples' expectations have risen; but the economy and government actions, although successful in many areas, have largely failed to fulfill the expectations o f poverty alleviation. Significant progress that was made especially in the early nineties was also not sustained. Thus, wide disparities persist inregard to income distribution, social andeconomic infrastructure and employment opportunities, particularly for an expanding young population. The main reasons for these less than expected outcomes with regard to poverty alleviation are discussed insection IV. Second, Nepal is currently experiencing complex socio-political situation, which has intensified over the past few years. It has created considerable insecurity in many parts o f the country, made difficult for the government agencies and development partners to carry out development activities in such areas. The situation also pre- empted a significant and rising share o f the govemment's limited financial and administrative resources for maintaining peace and security inthe country. The costs so far in terms o f human lives, destruction o f property and infrastructure, increased security expenditures and foregone development and economic activities have been considerable. There are many underlying causes for the present situation, some o f which are political and ideological in nature. Nevertheless, there is little doubt that 1  among others, the underlying causes include poverty and its manifestations, (interms o f regional, gender, ethnic and caste-related inequalities), as well as poor govemance, and the failure to deliver adequate and essential social services and infrastructure to rural communities and marginalized groups. To bring about a lasting solution to the present problem, the nexus o f poverty, poor govemance, and marginalization need to be carefully and urgently addressed. A "Ceasefire" inlate January andthe subsequent resumption o f peace negotiations now provide considerable hope for resolution o f these tensions. However, any serious disruption o f the peace process will destabilize the fiscal situation, severely erode the country's capacity to carry out development work andpose a major threat to social andpolitical stability inthe country. Nepal has little time to lose. 5) Third, the TenthPlan's campaignaganst poverty reduction is beinglaunched against the backdrop o f a fragile economy. After a decade o f fairly robust growth, Nepal's real GDP growth became negative (-0.6%) in 2001/02, for the first time in nineteen years. Inpart, this has been due to: (a) The global recession and the aftereffects o f September 11 (2001) events. [b) More importantly, the present turmoil has been an even bigger destabilizing factor, through increased insecurity, destruction o f physical assets/infrastructure, bandhs [strikes) and loss o f working hours and loss o f business confidence, among others. Together, these developments have adversely affected activity levels invirtually every sector o f the economy-industry, trade, construction, tourism, exports, services etc,---as well as savings and investment levels and overall economic growth. Inparticular, the effects o f the disorder on the government budget have been disastrous, [due to slowing revenues and a sharp rise in security-related expenditures) at a time when substantially m r e (domestic and extemal) resources are needed to vigorously implement the developmentlpoverty reduction agenda. The TenthPlan's Challenge 3 Nepal is caught up in a vicious cycle o f poverty and economic stagnation at present. Poverty is providing a fertile ground for the disorder, which intum is pushing the economy into a downward spiral, undermining its capacity to vigorously pursue the poverty reduction agenda. The challenge for the Tenth Plan i s therefore, to break out o f this vicious cycle by designing and forcefully implementing an appropriate strategy to reduce poverty and to eliminate the root causes o f the disorder. 4 Notwithstanding these constraints, His Majesty's Government stands ready to take on the challenge o f poverty reduction. The Tenth Ran recognizes that, in view o f the existing turmoil, ways and means must be found quickly, despite budget constraints, to effectively implement the development agenda aimed at addressing the underlying causes o f poverty and regaining public support and confidence, while concurrently pursuingpossible approaches to sustain peace andrestore law andorder. 2  5 Inthis context, as discussed below, the TenthPlanhas formulatedanappropriate poverty reduction strategy based on four pillars-to promote faster and prepoor economic growth, equitable access to social and economic infrastructure and resources for the poor and marginalized groups, social inclusion and targeted programs and improved governance. The Planemphasizes effective implementation to ensure better delivery o f outputs andservices to rural communities. To do so, within a tight budget constraint, it has adopted cross-cutting approaches-limiting the role o f the public sector and prioritizing public interventions; enhancing the participation o f the private sector, NGOs, INGOs, and community-based organizations in development activities; developing alternative delivery mechanisms, particularly through greater devolution o f functions, responsibilities and resources to local bodies; and greater community involvement in the formulation and management o f key programs aimed at meeting the needs o f the rural population. The Planalso emphasizes good govemance to minimize leakages and irregularities, and ensure greater accountability through better monitoring mechanisms. To bringabout the necessary changes inthese areas, economic reforms in a broad range o f areas and sectors have been formulated, together with a time- bound plan o f critical immediate and medium term actions for their implementation. To ensure public acceptance o f and support for it, the Tenth Plan has been prepared through a highlyparticipatory and consultative process. 6 The Tenth Plan provides a comprehensive framework, supported by detailed sectoral programs, to carry out this strategy over the next five years. Given the richness o f detail o f the Plan-over 600 pages inlength-a shorter, more sharply focused summary -the PRSP-has been prepared. The latter, apart from its usehlness to domestic audiences, can be readily used byNepal's development partners as the basis for supporting the Tenth Plan's implementation. The Organizationof the Summary Paper 7 The Summary Paper begins with a brief discussion o f the Tenth Plan's preparation process and highlights its key elements in this regard-country ownership, participatory preparation and the dissemination and feedback process involving virtually all key segments o f the Nepali public (Section 11). Section I11reviews the development efforts undertaken in the recent past, particularly through the NinthPlan (1997198-2001/02), and the key lessons learned from this experience. The dimensions o f Nepal's poverty problem, its manifestations and determinants, and its linkages with the ongoing social disorder are then discussed in Section Iv.Section V outlines the poverty reduction strategy of the Tenth Plan, its key sectoral programs and activities, andcomplementary policies andreforms, which are deemed necessary to achieve them. The macroeconomic frameworks within which the poverty reduction strategy, programs and activities will have to be implemented, and how these programs will be adjusted from time to time, given the inherent uncertainties o f predicting resources, are then discussed in Section VI. That section also briefly discusses how the government intends to cope with the inherent downside risks which are difficult to predict at this stage, and how it will protect priority programs and activities in order to maximize the 3  poverty-reducing impact of the Plan. The implementation, monitoring and evaluation modalities that are necessary to ensure effective implementation o f the Plan, and key tools and instruments, which will be used inthis regard, are discussed in Section VII. The policy matrix o f the Plan linking the overall poverty reduction strategy with sectoral programs and activities and the Government's Plan of key Immediate Actions (IAP) are shown as Annex 1 and 2. The macroeconomic framework with projected indicators of the Tenth Planhas been presented inAnnex 3. 4  TraditionalPlanning Process 8 Nepal has a well-established process for preparing periodic development plans, having prepared nine such plans earlier. Typically, the preparation o f the new plan starts with the mid-term review o f the ongoing plan, which serves as a base for the Approach Paper for the new plan. The Approach Paper, which provides broad guidelines andtargets and an indicative resource framework for the new plan, is approved by the National Development Council (NDC). The planis then prepared and finalized by the beginning o f the new planperiod, after discussion and approval first by the National Planning Commission and then by the Cabinet. Traditionally, the planpreparation is led by the National Planning Commission ("C), which inconsultation with the Ministryof Finance sets out the overall resource framework for the plan, sectoral allocations and broad guidelines for the preparation o f sectoral programs; while the line ministries themselves are formally responsible for the preparation o f sectoral programs. Although the plan typically focuses on the next five years, the Ninth Plan (1996/97-2002103) also included for the first time a long-term (twenty year) perspective. 9 Though well established, this process has been subject to numerous criticisms: (i) Typically, plan preparation has been a "top down" process, with little involvement o f local governments, beneficiaries, civil society or development partners. (ii)There was little participation of, and feedback from, the key stakeholders; and wider societal ownership o f the plans was lacking. (iii) While the plans contained overall development and broad sectoral strategies, they were not often well integrated. (iv) They were ambitious and tried to do too much, without adequately recognizing resource or implementationcapacity constraints. They also did not adequately focus on implementation, monitoring or evaluation mechanisms. (v) Inaddition, the plans were not anchored to a sound fiscal framework; and they did not have any built-inmechanisms to adjust programs and activities from time to time, as needed. As a result, there was no clear linkage between resource allocations inthe annual budgets andplan activities andtargets. Consequently, they were often viewed as unrealistic from the beginning andtheir usellness as a development tool for povertyreduction was limited. The TenthPlan Preparation 10 The Tenth Planrepresents a major effort to address these shortcomings. Its distinguishing features include the following: (i) It has adopted a participatory and relatively more "bottom up" approach; (ii)is the product o f an extended nation-wide consultation process over two It years; and the feedback from the such consultations has been interactively utilized for finalizing the plan's objectives, targets, policies; andprograms; (iii) It focuses strategically on 5  the overall poverty reduction strategy and seeks to prioritize sectoral programs and activities accordingly; (iv) It emphasizes results and effective implementation and monitoring mechanisms; (v) It incorporates a credible macroeconomic framework by utilizing alternative scenarios; (vi) The latter is supplemented by a rolling Medium Term Expenditure Framework (MTEF), which will be updated every year, and provides for the first time in Nepal, an effective mechanism to link the annual budget with the Five Year Plan and to make periodic adjustments in programs as needed; and (vii) Finally, as the product o f a highly participatory process, it can claim a far higher degree o f national ownership and acceptance than earlier plans. 11 Ofparticular importance, the Tenth Plan's formulation benefited from the preparation of additional, closely related, documents-Interim Poverty Reduction Strategy Paper (IPRSP) and the MTEF. When the preparation o f the Tenth Plan was initiated in mid 2001, the govemment decided to prepare an IPRSP, which would be an important input into the Approach Paper for the Tenth Plan; and that the Tenth Plan itself would be the government's 111Poverty Reduction Strategy Paper (PRSP). A Steering Committee was set up under the Vice-chairman, NPC to provide strategic leadership, while technical committees headed by the Secretaries o f the line ministries coordinated the formulation o f sector strategies and programs, leading to strong inter-agency participation and ownership. The MTEF and the Tenth Plan were prepared concurrently by the same line ministry teams, ensuring close coordination. 12 An extensive consultation process was initiated at various levels to discuss, and solicit feedback on, the ideas and recommendations presented in the drafts o f the various papers- IPRSP, Approach Paper, MTEFand the draft Tenth Planitself. 13 At the time o f IPRSP preparation, five consultations were held including two exclusively with women's groups. Three public consultations held inthe months o fAugust and September 2000 in eastern, central and western Nepal included representatives from all 75 District Development Committees (DDCs), mainly their Chairpersons or Deputy Chairpersons, representatives from socially backward classes, mayors from municipalities, academia from campuses and schools, representatives from NGOs and CBOs, representatives from major political parties and the private sector, women, and ethnic minorities, and participants from remote areas. About 25% o f the participants inthese three consultations were women. The other two consultations exclusively with women's groups - one ineast Nepal and the other in west Nepal - were held inthe months o f September/October 2000. Participants were drawn from members o f DDCsNDCs and municipalities and representatives from NGOs, There were also significant representations from backward communities, ethnic minorities including dalits, andremote areas. It is worth noting that women participated actively inboth mixed and exclusive women's group discussions, with forcefid opinions provided o n different social and economic issues that need to be dealt with at the national and local levels. In all these consultations, brief papers were presented, followed by group discussions and additional feedback provided by participants by filling-up a questionnaire. There were 112 participants inthethree mixedgroupsand94participantsinthe womenonly groups. 6  14 These consultations were characterized by frank discussions on broad features andcauses o f poverty, strategies for poverty reduction, reasons for poor implementation, and measures for ensuring gender equality. Broadly, they emphasized empowering and strengthening local bodies, empowering women, modernizing and commercializing agriculture, promoting basic and technical education, providing basic health and drinking water facilities, reducing corruption, and the need for an efficient and effective bureaucracy. Participants from west Nepal inparticular emphasized the need for infrastructure development intheir region. 15 Similar consultations were also organized subsequently to solicit opinions from all concerned when the IPRSP was developed as the draR Approach Paper o f the Tenth Plan. Thus, inJune 2001, five regionalconsultations were held. Participants numberingbetween60 to 80 in each o f these consultations in five Development Regions included all ChairpersonsDeputy Vice Chairpersons o f DDCs, representatives from ethnic minorities, backward communities and areas, government officials, representatives from academia and private sector, NGOs and CBOs. Inview o f the need for preparing periodic district plans, and to identify ways to establish linkages between such district plans and the national plan, another discussion was organized in October 2001 in collaboration with the Association o f District Development Committees o f Nepal with chairpersons and deputy vice chairpersons from all 75 districts o f the country. A separate consultative meeting was also organized for the parliamentarians o f the country. 16 Major recommendations from these consultations included the need for prioritization o f development programs, need for giving greater emphasis to mid and far west regions in development efforts, modernizing agriculture, more effective coordination o f the roles o f the government, private sector and NGOs, promoting ecetourism, and the development o f basic health facilities and drinking water inrural areas etc. 17 Basedon all these consultations, the draft Approach Paper was finalized, and submitted to the National Development Council (NDC) for its comments and approval. The meeting o f this national body was held in January 2002. The NDC is composed o f all the ministers, representatives from all political partks, chairpersons o f different committees o f House o f Representatives, Secretaries o f line ministries, Vice Chancellors, representatives from private sector and academia, ethnic minorities, labor unions, women, NGOs and CBOs at the national level. The Council approved the Approach Paper with some revisions, emphasizing in particular the prioritization o f development programs, and effective monitoring o f progress in program implementation andpoverty reduction. 18 Inaddition to the above, consultations held specifically inthe context o f the PRSP/Tenth Plan preparation. The PRSPPlan also benefited from a large number o f consultations organized from time to time by various agencies (such as the ADDCN, various HMG line ministries, donor agencies, NGOs and CBOs) for developing key sectoral programs, thematic chapters and background papers. For example, informulating the Local Self Government Act (LSGA), the Agriculture Perspective Plan (UP), Water Resource Strategy, Financial sector reforms, Long Term Health Planand programs for decentralization o f primary education and primary health centers, among others, extensive public discussions have been held at national 7  andregional levels. These have helpedto evolve a broad consensus and wide support for the poverty reduction strategy andstructural reforms incorporated inthe PRSPiTenthPlan. While the conflict may have constrained the consultation process insome parts o f the western and far-westem regions at that time, HMG intends to expand the future consultation p-ocessto include all key stakeholders inthese areas as an ongoing process. 19 As noted, the Tenth Plan incorporates detailed altemative macroeconomic scenarios; which i s a significant departure from Nepal's traditional plan preparation process. It recognizes the need for a more realistic and credible framework for guiding resource allocation decisions inthe current environment of social disorder and a fragile economy. It is also supported by a rolling MTEF, which would be updated andrevised annually with strong monitoring mechanism. The MTEF represents the first serious effort to prioritize the public expenditure program inNepal; and provides, ina situation of unpredictable resource flows, an in-built mechanism to ensure that limited resources would be channeled to the Tenth Plan's highest priority sectors and activities through the annual budget. The goal o f poverty reduction will be evaluated by monitoring the track record o f implementation as well as the output indicators. The progress o f these activities will help in achieving the Millennium Development Goals. Inaddition, the Tenth Plan is supported by two other key initiatives: (a) The Economic Reform Program (ERP) and (b) The Immediate Action Plan (IAP). The ERP represents the Government's efforts to revitalize a flagging economy andto get the Tenth Plan off the ground. And closely related to it, the IAP reflects the emphasis, which the Govemment places on the quick and effective implementation o f the Plan. By identifying critical policies, programs and activities in key areas, and a specific timetable for their implementation, the IAPprovides a monitorable checklist for the Plan's implementation, whichwould be updated on an annualbasis as an effective operational tool. 8  Review of Past Development Efforts Introduction 20 Though poverty has always been an overriding concern o f development efforts inNepal, it was explicitly stated as an objective only from the Seventh Plan (1985/86-1989/90) onwards. The latter, however, was the first attempt to formulate a separate plan with a long- term poverty alleviation perspective. Towards the end o f the Planperiod, it was derailed by the Trade and Transit crisis and the resulting economic dislocation in the late eighties. The transition to democracy in 1990, by raising popular expectations and aspirations, gave a new impetus to poverty reduction. The development plans which were formulated subsequently- the EighthPlan (1992193-1996/97) and the Ninth Plan (1997/9&2001/02)-specifically had poverty reduction as their main objective. The NinthPlan also established long-term targets and development indicators for all sectors basedontheir potentialfor alleviating poverty. EconomicReforms in the Early Nineties 21 To reduce poverty by accelerating economic growth and expanding employment opportunities, the government in the early nineties initiated an extensive economic reform agenda. Reforms were introduced, for example, to liberalize trade, investment and foreign exchange regimes, unify the exchange rate, rationalize the tariff structure and the tax system, promote exports, strengthen financial and capital markets, foster private sector development, andstrengthenpublic expenditure management. 22 These efforts yielded impressive results early on. They helped to transform the Nepalese economy from a highly regulated to a more open, market-oriented economy; create an energetic private sector and expand its role insuch areas as manufacturing, industry, exports, education, health, air transport, finance, and power; and b improve the country's macro- economic hdamentals. In particular, it helped to accelerate economic growth in non- agriculture sector (trade, transport, tourism, manufacturing and services); an annual rate o f 7.5%, inreal terms, inthe first halfo f the nineties; and the share o f non-agriculture rose from 51%to 59% o f overall GDP in that period. A s noted below, this helped to create increased employment and income-earning opportunities inurban areas, and kept urban poverty at low levels. According to the 1996Nepal Living Standards Survey, urbanpoverty was estimated at 23%, and in the urban KathmanduValley at only 4%, compared to overall national poverty incidence o f 42% o f the population. However, these early reforms didnot touch the important agricultural sector ina significant way; and consequently had little impact on rural poverty. 9  The Ninth Plan 23 The Ninth Plan's stated goal was to reduce (income) poverty from 42 percent to 32 percent o f the populationby the end o f the Planperiod, andto 10 percent by 2016/17. Several other indicators o f human poverty-such as illiteracy, infant mortality rate, maternal morality rate, average life expectancy at birth-were also identified and targets set for them (Table 2). To attain this goal, the NinthPlan postuhted a threepronged strategy: (i) Achieving a high, sustainable and broad-based economic growth rate (a minimum o f 6% p.a. GDP) through liberal and market-oriented policies; (ii) Developing social and rural infrastructure; and (iii) Introducing targeted programs for those communities and areas left behindby the mainstream development process. The Plan also sought to bring down the unemployment rate to 4% and underemployment to 35% by the end of the Plan period. The Ninth Plan accorded high priority to the neglected agricultural sector; and its centerpiece-the Agriculture Perspective Plan (APP), formulated in 1995 with a long-term vision-sought to raise agricultural growth rate to 4.0 percent for the Planperiod and to 4.9% over the next 15 years. The APP envisaged increasing cereal and cash crop production inthe Terai and livestock products and other high value crops inthe hills, through increaseduse o f modem inputs, irrigation, improved research and extension services, rural roads and marketing network In the non-agricultural sector, emphasis was placed indeveloping tourism, labour-intensive manufacturing, hydropower and the transport and communications network. 24 The NinthPlan's implementation, (particularly towards its end), was severely disrupted by the adverse domestic and extemal developments noted in para 2 above. The resulting dislocations in terms o f slowdown in economic growth, diversion o f resources for security needs, reduced availability o f resources for Plan activities and the difficultie s in carrying out development work in the affected areas severely constrained plan implementation. These apart, as discussed below, there were other important factors, which hampered the Plan's performance. 25 By and large, the NinthPlan's performance has been mixed. Given the ambitious nature of the Plan, achievements generally fell short o f targets. Nevertheless, as outlined below, significant progress was made in some important areas. For example, some key human development indicators showed notable improvement, while some progress was also made early on in reducing poverty. Key macroeconomic indicators, such as the balance o f payments, monetary growth, and control o f inflation indicate good progress, while some actions have been taken in implementing policy reforms in key sectors, such as education, health, power etc. which hold considerable promise for the future. Nevertheless, progress ina number o f areas has been below expectations, for example inreducing poverty and inequality, infiscal management, inimprovingthe quality anddelivery of essential social services and rural infrastructure, and the effective implementation o f announced policies and programs, all o fwhich were critical to the attainment o f the primary goal o fpoverty reduction. 10  Growth Performance 26 Compared to a Plan target of 6.0% pea,overall GDP growth averaged only 3.6% p.a. (Table 1). Agriculture grew at the rate of only 3.3% p.a, and non-agriculturalsector at 3.9% p.a, comparedto a Plantarget of 7.3%. Allowing for populationgrowth, (estimated at 2.25% p.a), per capita income grew at 1.3% p.a, well below the 3.7% rate envisaged in the plan as beingnecessaryto makea significant dent onpoverty. Table 1:The Ninth Plan-GDP and Sectoral Growth Rates (In percent per annum) NINrH PIANTARGET ACHIEVDAENT GDP (at factor cost) 6.0 3.6 Agriculture sector 4.0 3.3 Non-agriculturesector 7.3 3.9 Industry,geology, and mines 9.1 2.0 Electricity,gas and water 10.4 6.1 Construction 5.9 4.1 Trade, hotels and restaurants 7.4 1.4 Transportand communication 8.7 6.0 Financeand real Estate 5.8 4.0 Socialservices 7.0 6.6 GDP (at market prices) 6.5 3.6 27 Weather-related fluctuations in output in the first and last years of the Plan dampened agriculturalas well as overalleconomic growth.Agriculturalproductionwas also affectedby ongoing social tension, as a result of insecurities that have beencreatedand disruptions inthe supply of key inputs, labour, and marketing and cropping arrangements. Equally important has been the failure to follow through with the effective implementation o f the APP by providingadequate support for its key elements (seebelow). 28 Growthinthe non-agriculturesector was initially good; but it declined sharply inthe last two years of the Plandue to the deterioratingindustrialenvironment. Initially, Nepal's exports as well as manufacturingactivity hadgrownstrongly inthe first three years of the Plan. But, subsequently the global slowdown and, even more importantly, the deteriorating security situation at home, have adversely affected virtually all the sectors and activities+xports, manufacturing, as well as tourism, commerce, industry,services, constructionetc. Investment levelsinboth agricultureandnon-agriculture sectors also declined. Unplannedcuts inpublic investment/development spending (whichis an importantsource of demandfor private sector activities)also affectednon-agriculturalgrowthinthe last two years. Progress in Povetty Reduction and Human Development 29 Inthe absence o f recent nationallevelhousehold data, (the last Nepal Living Standards Survey-NLSS-was carried out in 1996),it is difficult to providean accurate andup-to-date measure of the NinthPlan's progress inreducing poverty. Preliminary estimates made nthe context of the mid term review of the Ninth Plan suggest that the poverty ratio declined modestly from 42% at the beginning of the Plan to about 38% in 2000101. This is not surprising, given the slow growth of per-capitaincomes, especially inrural areas, inview of continued weak agriculturalperformance. It is also highly likely that since then, given the 11  sharp decline (by about 3%) in per capita income during 2001-02 and the continued disruptions to investment and economic activities caused by the violence, that the poverty situation inrural areas may have deteriorated significantly over the last year. 30 Progress achieved in Human Development as measured by key indicators, though generally less than the NinthPlan targets, i s commendable in many areas. For example, the infant mortality rate had been reduced from 75 per thousand at the beginning of the Plan period to 64 by FY 2002 (Plan target 61.5), maternal mortality rate from 439 per 100,000 to 415 (Plan target 400), and life expectancy rose from 56.1 to 61.9 (Plan target 59.7). Other notable achievements include: lowering the total fertility rate from 4.6 to 4.1 (exceeding the Plan target o f 4.2) and the overall population growth rate to 2.25 (i.e. below the plan target o f 2.38). Largely reflecting these achievements, Nepal has been recognized as one o f the "successes" interms o f its recent progress inmoving up the HumanDevelopment Indicators Index. However, it should also be noted that the recent gains have been made from a relatively low base; and that Nepal will need to continue to improve further to catch up with other (smaller) South Asian countries. In other areas, progress has been less impressive: for example, inregard to adult literacy, the Planachievement is only 49.2% (compared to a target of 70%), while the women's literacy rate is still low at 35.6%. Similarly, the net primary school enrolment ratio is 80.4% (Plan target 90%) while the percentage of the population supplied with drinkingwater is only 71.6% (Plan target was 100%). In addition, there also major concerns about the quality and effectiveness of education, health, drinking water and other social services delivered to communities; and major improvements in these areas are necessary in order to improve living standards and quality o f life, particularly of rural communities. Table 2: Ninth Plan- Key Poverty and Human Development Targets and Achievements Objectives Base Year Ninth Plan 1996197 Target Achievement 2001102 2001102 Percentage of Population Below the Poverly Line 42.0 32.0 38.0 Literacy Rate (Age 15+) in percentage 37.8 70.0 49.2 Net Primary School Enrollment 69.4 90.0 80.4 Infant Mortality Rate (per 1000) 74.7 61.5 64.2 Maternal Mortality Rate (per 100,000) 439.0 400.0 415.V Total Fertility Rate 4.58 4.2 4.1 Population Growth Rate 2.3 2.25 Average Life Expectancy 56.1 59.7 61.9 Drinking Water Supply (population in percentage) 61 100 71.6 * As estimated by the National Planning Commission. This figure will be revised when actual data become available. Physical Infrastructure 31 Progress in providing essential infrastructure, such as roads, irrigation, telephone and electricity services, to communities has been mixed. In electricity generation, Plan targets were accomplished. Another major achievement has been the effective implementation of a 12  framework for the involvement o f the private sector inpower generation; and a number o f projects involving substantial private investment have been either completed, or are under construction. In the road sector, a major achievement has been the active involvement o f District andVillage Communities inroad construction, utilizing development grants from the central government. However, the quality o f construction in these projects is weak; and if appropriate measures are not taken to improve quality, there is a danger o f increasing environmental problems. Moreover, in the road sector, although the Plan target in terms o f K M s o f roads constructed has been exceeded, most o f these roads are low priority roads. The primary objective of linking district headquarters by roads has not been achieved, as only 4 districts were connected during the Plan period. Also, progress with regardto operation and maintenance o f the road system--one o f the highest priorities in the sectors-has not been satisfactory. Progressintelecommunications and irrigation sectors have beenbehindtargets. Table 3: Vital Physical Infrastructure-Targets and Achievements Units Target Achievement Total Roads Km 13564 15905 Total Irrigation Thousand hectares 1198 1121.4 Total number of Telephone lines Thousand 643.7 328 Telephone service Per thousand population 25 14 Electricity supply capacity Mw) 590 504.5 Population benefiting from electricity Percent 20 40* *including 7%from alternate energy Macroeconomic Performance 32 Macroeconomic performance duringthe NinthPlanwas reasonably good. Duringmost of years of the Plan period, the balance o f payments continued to strengthen, and fiscal, monetary and price stability was maintained (Table 4). However, inthe last year o f the Plan period, weakening global demand and the domestic violence took their toll. Overall GDP growth, exports and government revenue slowed down, puttingpressure on the budgetandthe balance o f payments. The macroeconomic situation has continued to deteriorate during 2002- 03-the f r s t year of the Tenth Planperiod (see below). 13  IC U U U U c1 U P T c f T r c a .. 0  33 Why then were these good indicators not translated into better poverty reduction and development results duringthe NinthPlan? A number o f factors help explain the NinthPlan's modest performance. Following a quick review of the main macroeconomic developments in the next few paragraphs, the key cross-cutting issues which hampered the attainment o f better development results are discussed briefly below. Reform actions taken by the Government in the last two to three years in response to the deteriorating economic conditions are then discussed. A detailed review o f performance in the key sectors is made in the respective sectoral chapters o f the Tenth Plan. 34 Saving and Investment. Overall savings performance was reasonably satisfactory. Even though domestic savings fell somewhat, the national savings rate exceeded the Plantarget, as remittances by Nepalese working abroad more than trebled duringthe Planperiod. However, the overall investment was significantly (16%) below the Plan target. Private investment fell even more andreachedonly about 80% o f the NinthPlantarget. Although some areas such as hydropower, airlines, health, education and tourism initially attracted substantial private investment, the overall investment climate was affected by weak domestic demand, political instability,insecurities created by the violence, and administrative/ bureaucratic hurdles. 35 Balance ofPayments. A major achievement duringthe first four years o f the Planperiod was (i) rapid growth o f exports from 8% o f GDP in1996/97 at the to nearly 14%o f GDP the by 2000/2001. Most o f this growth reflected increased exports to India-vegetable ghee, jute products and light consumer goods (e.g. toiletries and processed productsFas Nepal was able to take advantage o f the 1996 Indo-Nepal Trade and Transit Agreement, under which India granted duty-free access to certain imports from Nepal. Exports to third countries-in particularly garments, pashmina products and carpets-also increased steadily through 2000/2001. However, exports decelerated sharply in 2001/02 due to the global recession, quota restrictions on Nepal's exports to India, and the deteriorating security situation at home. Nepal's exports to third countries now face an uncertain future due to possible effects o f the phasing out o f the MultiFiber Agreement and loss o f cost-competitiveness in part due to domestic disruptions. (ii) The slowdown inthe economy, weak public and private investment, and the deteriorating security situation affected Nepal's imports even more. Imports in 1996/97 prices in fact declined at an annual rate o f 2.8%, compared a planned increase o f 8.6% p.a.. (iii) With increasing migration abroad o f Nepalese workers in recent years, remittances however have risen rapidly. (iv) Accordingly, the current account deficit (before grants) improved sharply from around 9% o f GDP in 1996/97 to around 3.4 to 8.6% o f GDP over the NinthPlan period. (v) Even though foreign aid inflows (net o f debt repayments) as a percentage o f GDP gradually declined from about 6% to around 4% over the Plan period, (reflecting the poor implementation o f development programs), nevertheless, Nepal's gross foreign exchange holdings rose steadily from about $ 850 million in 1996/97 to about $1.7 billion, (the equivalent o f 13 months' imports o f goods and services), in 2001/02. However, the sustainability o f this position is questionable, given the growing uncertainties for both exports andthe demand for Nepali-workers abroad. 15  36 Monetaryand Price Developments.Based on GDP (at factor cost) growth o f 6% p.a., an inflation rate o f 6.5% p.a. and a monetization rate o f 0.5% p.a., the NinthPlan targeted Narrow Money (Ml) to grow at 13% p.a. and BroadMoney (M2) at 14.8% annually. During the NinthPlan, M1actually grew by 16.5% p.a. andM2 by nearly 20% p.a. The faster growth o f money supply was mainly due to the rapid increase in foreign exchange reserves, at an annual rate o f 21.9% (compared with a Plan target o f 9.1% p.a.). Domestic credit grew by 16.6% p.a., more or less inline with Plantargets. Credit to the private sector grew less rapidly than expected, (given the slowdown in private investment and activity levels), offsetting increasedpublic sector borrowing. A sluggish economy, weak domestic demand, and the free flow o f goods across the openborder helped to keep inflation incheck, at 6.3% p.a. compared to a Plantarget o f 6.5% p.a. 37 FiscalPerformance. The NinthPlan had envisaged an ambitious development program, which it sought to finance through large increases inrevenue and external aid, while limiting domestic borrowing in order to maintain macroeconomic stability. While it succeeded in achieving the latter goal, it failed to effectively implement the development program. This was due to a number o f factors: (i) Although the revenue/GDP ratio rose by one percentage point from 10.8% to 12.0%, revenue collections fell 19% below Plan targets due to the weakening o f the economy and imports, deteriorating industrial environment and security situation, and weaknesses in the tax structure. (ii) Regular expenditures rose significantly faster than revenue growth from 8.6% o f GDP to 10.7%, as security expenditures increased sharply, particularly inthe last two years. (iii) Consequently, the revenue surplus available for financing the development programs, was sharply reduced from a Plantarget o f Rs.63 billion in1996/97 prices, (equivalent to 33% ofplanneddevelopment expenditures), to only about one-third o f that level. (iv) Similarly, disbursements o f foreign assistance (grants and loans) fell far short o f the Plan target o f Rs. 111.5 billion in 1996/97 prices, to Rs. 71.9 billion, i.e. 35% less than expected. Unrealistic aid targets, counterpart funding shortfalls and poor implementation o f donor-assisted programs were the major reasons for this shortfall. All o f these factors together created a major shortfall infmancing the developmentbudget,which was cut back by two percentage points o f GDP over the Plan period. In 1996197 prices, actual development spending reached only about two thirds o f the Ninth Plan target. Thus, many programs/activities were significantly under-funded. Agriculture, irrigation and forestry, which are crucial for the alleviation o f rural poverty, were the most severely affected. While the government was generally able to protect the social sectors' share in development spending, the absolute level o f spending on these programs still fell far short o f Plantargets. 38 Apart from financing shortfalls the Ninth Plan's mixed implementation performance was also due to several other reasons. mt,continued political instability from the mid nineties onwards created a poor environment for development. With frequent changes o f governments and officials, little attention was given to the effective implementation o f the plan and economic reforms, which were critical to attaining its goals. Second, public expenditure management itself was poor. Apart from having ambitious targets, the Plan included too many activities, which were not sufficiently prioritized; and the Plan lacked an effective mechanism (such as a rolling MTEF), to make adjustments as necessary to the resource constraints. m d , there were serious governance problems. Corruption and leakages 16  increased, as did the politicization o f the civil service, and misallocation. Fourth, service delivery by public sector agencies was weak. Although decentralization o f central government functions and responsibilities to local governments and communities was expected to help improve service delivery, this did not happen as rapidly as envisaged. Fifth, monitoring mechanisms to ensure effective implementation o f programs/activities and accountability were weak. s,These deficiencies in turn contributed to the unsatisfactory aid disbursement performance. In many areas even committed aid h d s could not be utilized because of slow progress o f projects and programs. 39 Agriculture-the major focus o f the Plan's poverty reduction strategy-is an excellent typology of, the Plan's mixed performance. There were significant improvements within the sector: output growth was satisfactory inthe middle three years o f the Plan, a noticeable shift to cash crops was takingplace, and progress has beenmade ininvolving the private sector in input distribution, among others. But, there were also major shortcomings: (i)Agriculture sector, as noted, was severely under-funded. (ii) The key inputs, which are central to the APP strategies were not effectively provided. For example, the groundwater (shallow tubewell) development program was poorly implemented both because o f differing Irrigation sector priorities and inconsistent subsidy policies. Similarly, the development o f agricultural roads network lagged behind; and the pocket extension and research approach, (which is essential for developing high value horticultural products insuitable locations inthe hills), was poorly implemented. (iii) Inaddition, a major problem was the fragmentation of responsibilities for APP implementation among a number o f ministries and departments, and the lack o f c e ordination among them. 40 Private sector development has been an important part o f the NinthPlan Strategy; and the mixed performance o f the Plan also reflects the lack o f sufficient progress in this area. While political instability, attacks on some business establishments andthe implosion o f some industrial sub sectors have eroded business confidence; the poor implementation o f policies governing the private sector continues to be an important constraint on private investment. A survey o f private sector firms carried out in 1999 identified several such impediments including, among others, excessive bureaucratic delays in the provision o f government services, lack o f clarity o f laws and unpredictability in the enforcement o f government policies, discretionary implementation o f tax laws, excessive documentation requirements, and labour laws that prevent retrenchment o f workers (encouraging f m s to employ m r e casual labour). To address this situation a regulatory framework reflecting clarity o f laws and predictability o f government policies, procedural simplification and reduction indiscretionary powers o f the authorities will be made the basis for making the private sector vibrant and dynamic. Progress in Policy Reforms 41 Although important policy changes were initiated insome areas, by andlarge, progress in implementing critical reforms was slow, given the continuedpolitical uncertainties andweak commitment. The NinthPlan's progress inthis regard is discussed briefly below. 17  Governance, Decentralization and Civil Service Reforms 42 Decentralization was a major thrust o f the NinthPlan. Interms o f creating a legal and institutional framework, considerable progress has been made: For example, the Local Self Governance Act (LSGA) was enacted in 1999. This was followed up with more specific recommendations by PERC. A high level Decentralization Implementation Monitoring Committee (DIMC) was set up to oversee its implementation; and it has approved the fiscal decentralization framework. Capacity building programs were undertaken with donor assistance in selected districts to strengthen local bodies; and 45 districts have already prepared periodic district development plans. However, progress in implementing decentralization during the NinthPlanhas been limitedby : (i) The overall resource constraint at the national level; (ii)Delays in transferring functions and responsibilities to local governments, and lack o f agreement on operational modalities; and (iii) Institutional capacity andaccountability considerations, among others. 43 Civil service reform. The proposed measures aimed at: (i) right-sizing the civil service by reducing staff, decentralizing functions and responsibilities, contracting out some peripheral activities to private sector and streamlining government departments and offices; (ii) improving incentive structure through wage reforms and merit-based performance and promotion system; and (iii) improving efficiency and accountability o f civil servants. There has been some progress in implementing the reforms. These include restriction o f frequent transfer o f civil servants, computerized data base in the civil service records department, freezing o f more than 12,000 vacant positions, initiation o f voluntary retirement scheme and streamlining o f government's central organization and establishment o f civil service rewards and development o f evaluation center. A civil service census has been under preparationand public sector salaries were increased substantially in 2001. Inthe meantime, the Government has also initiated a long-term and comprehensive Governance Reform Program (GRP) with the objective o f making the civil service more results and people criented. Lack o f political commitment andresources, andpolitical changes have hampered effective implementation so far; but renewed commitment to implementation is necessary to improve public sector efficiency. 44 Governance has continued to be a persisting problem resulting to inefficiency in utilization and leakage o f public resources. Although Nepal has good public accountability mechanisms including an active Public Accounts Committee (PAC), an independent Auditor General's Office (AGO), a Financial Comptroller General's Office (FCGO) and an independent Commission for Investigation o f Abuse o f Authority (CIAA), follow up actions to enforce their effectiveness have been limited. Towards the end o f the NinthPlan Period, four antkcorruption legislation were passed by the parliament, which was a significant step towards addressing corrupt practices. Inaddition, a Judicial Property Probe Commission was also established to address the problem o f corruption. Some o f the recommendations made by the Public Expenditure Review Commission (PERC) were adopted and the recommendations made by a recent Country Financial Accountability Assessment are being implemented. The CIAA has already initiated actions to combat corruption, which hold considerable promise for the future. 18  45 Tax Reform. To improve revenue collection, a major tax reform program was introduced. Its main elements included: (i)The introductiono f a Value Added Tax (VAT) and extending its coverage to include many small and medium enterprises; (ii) Improving the import valuation system for customs and requiring payments to be made through banks; (iii) Revising the Income Tax Act in order to consolidate tax laws and simplify payments procedures; (iv) Strengthening the tax administration by amalgamating the Departments o f Taxation andVAT into one; and (v) Strengthening anti corruption measures. These measures, however, had little impact in the short term in improving the Ninth Plan's revenue performance. But, they should help improve the elasticity and transparency o f the tax system over the medium term. 46 Public Expenditure Reform. Several important steps to strengthen public expenditure management, in the last two years. A Public Expenditure Review Commission (PERC) was set up in2000/01; and its key recommendatbns have been subsequently implemented. These included, among others: (i)Streamlining and rationalizing the role o f the government, ministries and departments with a view to improving service delivery; transferring h c t i o n s and responsibilities to local governments, and reducing administrative costs; (ii) Prioritizing the public expenditure program and reducing the number o f projects andprograms; (iii) Civil service/governance reforms to improve accountability and right-sizing key government ministries and departments; (iv) Strengthening cost control, financial management and internal auditing systems; and (v) Accelerating the decentralization program, especially in education , health and agricultural extension services. PERC also recommended the formulation o f Medium Term Expenditure Framework, which was subsequently adopted as the basis o f the 2002/03 Budget. The MTEF introduced important reforms, including a more realistic budget framework, a serious prioritization involving a major reduction inthe number o f projects/ programs, greater focus on implementation and monitoring o f expenditures, and linking fund releases to performance. The MTEF is expected to be a regular part o f the budgeting and planning process, and now provides an extremely useful mechanism for adjusting the Tenth Planand the budget to the changing resource situation. 47 Financial Sector. Reforms in this sector have been deemed essential for ensuring solvency o f the banking system and for providing adequate and predictable credit flows to sustain a vibrant private sector. However, for a variety o f reasons, the implementation o f the reforms has been slower than expected. A Financial Sector Strategy Statement was prepared in 2001 and its key recommendations are now being implemented. These include: (i) Strengthening the autonomy and authority o f the Nepal Rastra Bank; (ii) Enhancing its capacity for supervision and regulation o f commercial banks; (iii) Concurrently, the two major banks (which own nearly 60% o f the banking assets) have been placed under external management in order to address their deeprooted management and financial problems and possible restructuring needs. However, much remains to be done to complete the reform program. 48 Infrastructure Reforms. During the Ninth Plan, important reforms were initiated to encourage private sector participation in infrastructure, particularly in power, telecommunications, education, health and rural infrastructure. These hold considerable 19  promise for the future, even though their impact during the Ninth Plan Period has been uneven among sectors. The more important initiatives include the following: Hydropower policy was revised to allow the private sector entry into a 111range o f power sector activities i.e. generation, transmission and distribution. Considerable private investments have already taken place under the previous policy ina number o f power generation projects. But progress has been constrainedby the insecurity caused by the civil disorder. Telecommunications progress has been made n opening up the sector for private investment. A new Telecommunications Act was enacted to introduce competition in basic, cellular and value added services and the private sector is now involved intheir provision. A private operator was also selected to provide basic telecommunications services to 534 rural communities i.e. roughly one-fourth o f the rural communities which are under-served. Thus the monopoly which the public sector agency-Nepal Telecommunication Corporation (NTC)--enjoyed has been broken; and a Telecommunications Authority has been set up to oversee the sector. In Education and Health, private sector participation in providing alternative educational and health care services increased significantly over the plan period. However, the quality o f education services provided particularly through the public sector needs to be enhanced. But the coverage in health sector has significantly increased. To improve service delivery through community participation and management, handover o f village level schools and health facilities to communities i s being implemented in a phased manner from 2002/03 in selected districts; and as experience is gained, it is expected to be replicated in other areas. In education, the govemment has also announced new programs to: (i) provide free education upto tenth grade for all girls and for those boys o f oppressed, backward andbelow poverty line; (ii) providing education inmother languages (of communities) upto the primary level: (iii)regulating fees in private schools; (iv) providing scholarship in privatehoarding schools to students from "oppressed and backward communities" and (v) the setting up Rural Education Development Fund (finance by a levy o f 1.5 percent o f the income o f private/boarding schools) which would be utilized for fundingthe education o fmarginalizedcommunities. In Transport, new policies initiated to meet the Ninth Plan's goals included the creation o f a separate institutional mechanism (DOLIDAR) for the construction o f agriculture roads, delegation of responsibility and resources to local authorities to construct local roads; and the formulation o f a Public Infrastructure Construction and Transfer Policy to promote private sector participation. These initiatives so far are yet to produce the desired results. While there has been considerable progress interms o f road construction by local bodies, considerable technical support and supervision are necessary to ensure appropriate planning and road quality in order to avoid environmental problems. InAgricultureandIrrigation, as notedearlier, importantpolicy changes have been introduced to promote private sector participation in input supply and investment, 20  with mixed results. Private sector participation infertilizer and seed distribution has increasedsignificantly with the removal o f subsidies (andthe monopoly) given earlier to the Agricultural Inputs Corporation. However, there are a number o f problems to be overcome, (for example, ensuring better quality o f private supplies), in order to effectively implement this policy and increase fertilizer usage. Lessons from Past Experience 49 The NinthPlanwas not an unqualified failure or a success. As noted, its performance was mixed. There was some initial good progress in terms o f economic growth and macroeconomic stability, and some promising reform initiatives late in the Plan period. Nevertheless, the Plan did not achieve good results in relation to its primary goal o f substantially reducingpoverty. 50 Some interesting lessons have been,leamt from the NinthPlan's experience, which can be helpful to make the Tenth Plan successful. These include, among others, the following: (i) Three essential requirements for ensuring good progress inpoverty reduction are (a) political stability; (b) strong government commitment and political will to effectively implement the poverty reduction agenda; and (c) good govemance, interms o f service delivery, transparency and accountability. All three are closely inter-connected; and they collectively provide a conducive environment in which development efforts can produce good results. However, they could not be realized, (instead, they deteriorated) during the Ninth Plan period. (ii) Within such an environment, the Plan itself needs to be credible and realistic, and f m l y anchored to the realities o f resource availability. Otherwise, a Plan cannot be implementable and becomes a wish-list o f projects and activities. This was also largely the case with the NinthPlan. (iii) make it operational in such an environment, a Plan needs to be well To prioritized and supported by mechanisms (and political will) which would allow the key priorities to be protected and h d e dwithin the resource constraints. This did not happen, and a considerable part o f actual public spending was diverted to lower priority activities inmany sectors. (iv) To ensure progress towards poverty reduction, the Planwould need to be result- oriented, specify actions to achieve outputs and service delivery targets, and include mechanisms to monitor progress and ensure accountability. Such mechanisms were weak. (v) Finally, recognizingthat the role o f the central government and its agencies would needto be limited, (if for no other reason than capacity constraints), the Plan had envisaged decentralizatbn to local governments and the active involvement o f communities (as well as the private sector, INGOs, NGOs and CBOs) in the management and delivery o f essential services. This would have also helped to ensure wider participation in, and ownership of, the poverty reduction agenda. However, despite the creation o f a good legal framework, there was little progress in effectively implementing these promising approaches. 51 Some further lessons have been leamt from the implementation o f the NinthPlan. First, broad-based economic growth is a must for poverty reduction; and without reasonable growth inagriculture and rural economic activities, GDP growth can not be broadbased. Second, liberal economic policies provide opportunities for private sector development; but appropriate interventions are also necessary for inclusive development, i.e. targeted programs 21  focusing on the deprived, poor, vulnerable and socially excluded groups. Third, along with economic growth, access to education, health, safe drinking water and rural infrastructure (like roads, electricity and irrigation) are important for better human development outcomes. And fourth, without good govemance, these initiatives can not ensure delivery o f goods and services in an equitable, effective and efficient manner. Allocation o f resources and creation o f institutions alone have not helped to enhance access o f the people to basic services. These issues have to be adequately addressed to achieve any meaningful reduction inpoverty. These are the reasons why the Tenth Planbuilds its poverty reduction strategy on four basic pillars: (a) broad based economic growth, (b) social sector development including human development, (c) targeted programs, including social inclusion, and (d) good govemance for effective, equitable and efficient delivery o f public goods and services. These are discussed in detail inthe subsequent sections. 22  The Poverty Situation - Its Key DimensionsAnd Determinants Introduction 52 Poverty inNepal is widespread with 38% o f the population living below the poverty line. Segments o f the poor are hardcore poor barely eking out subsistence on fragile, vulnerable ecosystems; and large areas o f the country lack even the most basic infrastructure. And there are wide variations in poverty levels based o n rurakurban divide, geography, gender, and ethnic groups and occupational castes. 53 This section analyses the dimensions o f the poverty situation in Nepal and its key determinants. It begins with a brief discussion o f data sources and poverty trends. It then reviews the poverty situation from a multi-dimensional perspective, including income poverty, human development indicators, and gender, ethnic and caste-related differences, which help to bring out the social exclusion aspects o f the poverty problem. The major causes o f income and humanpoverty and exclusion are then discussed. The concluding sub-section discusses the possible linkages between the poverty situation and the ongoing civil disorder. 54 Most o f the data on which the analysis is based are derived from the Nepal Living Standards Survey (NLSS), which was carried out in 1996. Another NLSS has been recently carried out inearly 2003 but its results will not be available for several months. Inthe context o f the mid-year evaluation o f Ninth Plan, a smaller sample survey was undertaken in 2000; but it is not comparable with the 1996 survey, nor adequate to provide the basis for poverty analysis. (Thus PRSP benchmark o f 38% poverty head count is not survey based, but estimated on the basis o f economic growth inthe last few years relative to the 1996 NLSS survey data. The poverty benchmark would be revised when the data analysis o f the current N L S S I1survey i s completed in early 2004). The humandevelopment indicators are based in Nepal HumanDevelopment Reports for 1996 and 2001 prepared by the United Nations staff. Sufficiently detailed published survey data are not available for analyzing gender, ethnic and caste-related poverty differentials; and the analysis in this section relies on the findings o f researchers who usedthe 1996NLSS and other sources. Recent Povetty Trends 55 Assessing what happened to poverty over time is useful for understanding the current poverty situation in Nepal. But in the absence o f comparable survey data, it is hardto reach definitive conclusions. There were three nation-wide surveys before the 1996NLSS. The first in1976177estimatedthat 33 percentofthepopulationfellbelowthepovertyline, thatpoverty was mostly prevalent inrural areas, and that it was most intense inthe MidWestem and Far 23  Western development regions. The 1984/85 household survey estimated the poverty rate at 42 percent, and concluded that the disparities among geographical and development regions remained more or less the same as before. The third survey in 1991 covered only the rural areas. It also indicated widespread rural poverty, and that it was most severe among the landless and small farmers. However, these surveys were not directly comparable with the 1996 NLSS, or with each other, since they all used different methodologies to collect data on incomes and consumption andto define measures o f poverty. Butwhen different methodologies are appliedto the 1996 NLSS data to replicate as closely as possible the methodologies used inthe earlier surveys in order to obtain broadly comparable estimates, some tentative conclusions can be drawn: (i) There is n o evidence o f a decline in poverty in Nepal as a whole between 1976177 and 1995/96; and (ii) is also no evidence o f a decline in poverty between 1984/85 and There 1995/96. Infact there i s some evidence o f an increase inpoverty during that period, but such anincrease cannot be stated with a highdegree o f confidence. (iii) is some evidence o f There a decline inrural poverty between 1991 and 1995/96.This suggests that while there may have been some improvement inrural areas inthat period, it was not enough to compensate for the deterioration that took place inthe previous fifteen years. 56 Apart from poverty incidence, a few other conclusions emerge from the Poverty Assessment with regard to overall trends: (i) The absolute numbers of the poor appear to have increased sharply. Assuming a constant incidence o f 42 percent in both 1976 and 1996 and with population growing at an average o f 2.6% p.a. inthe intervening period, the number o f the poor is estimated to have grown from 5.7 millionin 1976 to about 9.2 million in 1996-an increase o f about 3.5 million. (ii)In regard to urban-rural differentials, urban areas, particularly the Kathmandu Valley, appear to be better o f f in 1995/96 than in the earlier decade. Incontrast, rural areas generally appear to have been worse o f f than in 1984/85,but better o f f in 1995/96 than in 1991.This evidence suggests as noted, a significant deterioration inthe late eighties, followed by some improvement inthe early nineties. Some rural area+ central hills andcentral Terai-appear to have benefited from the rise inper-capita incomes in the Kathmandu Valley. However, other areas, notably the MidWest and Far Westem regions, appear to have become worse off, or least not any better. These areas, the poorest in 1984/85, also remained the poorest in 1995/96 also. (iii) Poverty Assessment also indicated that The the distribution o f income appears to have become more unequal everywhere between 1984/85 and 1995/96. This was also true o f the distribution o f consumption, but to a lesser degree. Current PoveQ Situation and Its Characteristic2 Income Poverty 57 Apart from its high incidence, poverty situation in Nepal is characterized by wide variations between urban and rural areas, ecological zones, development regions, gender and 2This analysis is based on the 1995196NLSS data, as it is the latest nation-widesurvey available. 24  ethnic and caste groups. The 1995/96 Household Survey data provide useful information in this regard (Table 5). Several important conchions can be drawn from Table 5. Poverty inNepal is largely a rural phenomenon. In 1995/96,44% o f the rural population was living inpoverty. Poverty was significantly lower, only 23%, inurban areas. Indeed in the KathmanduValley, (where the vast majority o f the population falls inthe upper quintiles o f the national income and consumption distribution), the poverty rate was only 4%; poverty in other urban areas (excluding the Kathmandu Valley) was about 34%, still significantly lower than the nationalaverage (42%) andrural poverty incidence. Judging by the absolute numbers o f the poor, the predominantly rural nature of the poverty problem is even more striking. According to the survey data, over 90% o f the poor live inrural areas! When ecological zones are compared, poverty in both the (low land) Terai and the Central Hills is close to the national average. But poverty inthe Mountain region is much higher-56%. The survey data also show wide variations in poverty within rural areas. For example, poverty rate i s the highest inthe more remote rural areasthe Mid-Westem and Far-Westem hills andmountain regions where it is as high as 72%. The rural Mid-Westem and Far-Westem Terai regions are also muchpoorer (53% incidence) than the national average. Table 5: 1995/96 Survey: Income Poverty Indicators (Poverty Line: Rs. 4404 per person per Year) Ecological Zone Poverty Incidence-Percentage of Poverty GapDepthl Severity of PeopleLiving Below Poverty Line (%) Intensity of Poverty % Poverty YO Mountain 56 18.5 8.2 Hill 41 13.6 6.1 Terai 42 9.9 3.4 RuraINrban Urban 23 7.0 2.8 Rural 44 12.5 5.1 Nepal 42 12.1 5.0 Source: WorldBank (I999)Nepal; Poverty at the Turnof TwentyFirst Century. 58 Table 5 also shows the depwintensity o f poverty and its severity. The poverty gap analysis shows how far below the poverty threshold income/consumption level the poor are concentrated on average, i.e. whether they are close to, or significantly below, the poverty line, Thus, larger the poverty gap, greater is the depwintensity o f poverty. The severity measure is similar to the poverty gap measure in construction, but gives greater weightage to those who are further below the poverty line (ie, the hard core poor). Again, higher the numerical value o f the index, the deeper andmore severe is poverty. The estimates inTable 5 show that while the poverty gap and severity measures are only 7.0% and 2.8% respectively for urban areas, the corresponding values are over 12% and 5% for all o f Nepal, and are far higher for the Hills(13.6% and 6.1%) andthe Mountain areas (18.5% and 8.2% respectively). Thus, all three estimates (incidence, intensity and severity) suggest that poverty is more rampant,deeper and severe inrural(as compared to urban) areas, andthat it is much worse in the Hills andthe Mountains as compared to both urbanareas, as well as the (rural) Terai. 25  Human Development Indicators 59 Apart from income levels, poverty levels can be measured more broadly in terms o f access to basic social and economic infrastructure, which help improve the quality o f life at various levels o f income. Among these, education is by far the most important, since it would enable the poor to climb out o f poverty over time; but others such as access to healthcare, safe drinking water etc. contribute to improved living standards and life expectancy. Nepal has made significant progress over the past two decades in terms o f such human development indicators. Table 6 below (derived from Nepal HumanDevelopment Reports 1996 and 2001) shows boththe current situation andrecent progress inthis regard. Table 6: Human Development Indicators, 1996 and 2000* Adult Literacy Average Life : Percentageof ; Human Development Rate (above 15 ::Expectancy ; Population Having : Indicators (Index years) I DrinkingWater 1.OO) 1996 2000 : : : I 1996 2000 1996 2000 1996 2000 Ecology Zone : :: I : I I :: : 9Mountain 27.5 44.5 52.7 49.8 79.2 0.271 0.378 9Hili 40.2 55.5 58.0 65.1 -- 76.2 0.357 0.51 Terai 35.9 46.8 59.5 62.4 !I - 83.4 0.344 0.474 UrbanlRural I I I I I Urban 63.5 0.616 48.0 ; 53.7 69.0 ;I 55.0 71.1 ;I 62.0 92.3 ;I 0.518 Rural 34.5 58.7 61.0 78.1 0.306 0.446 Nepal 36.7 50.7 ; 55.0 59.5 : 61.0 79.9 :: 0.325 0.466 Dev. Region I I I :::j I I I Eastern 43.4 ;I 62.0 I 77.7 ; I 0.484 Central 47.1 61.3 85.1 ; 0.493 i i 9Western 48.3 ! 62.8 83.8 ; 0.479 9Mid-West 50.4 53.2 65.5 0.402 Far-West 42.6 1 52.1 ; 82.3 ; 0,385 *As the data for this table was derived from different reports, they may not tally with similar other data reported in other sections of this document. Source: Nepal Human Development Reports, 1996and 2001 60 Despite significant progress in recent years, human development indicators are still low for Nepal; and they show significant urbdrural and geographical variations which duplicate the income poverty differentials noted earlier. For example: (i) The HDI for urban areas (0.616) far outstrips that for rural areas (0.446), because o f far better access inurban areas to services, resources and opportunities. (ii) Similarly, there are significant differences among ecological zones. HDI for mountains (0.378) is far below that for the hills (0.51). The broad scattering o f communities inthe mountains sharply limits access to services andresources and severely disadvantages people who live there. Humandevelopment inthe hills i s higher than inthe Terai (andthe national average), inpartbecausemany largetowns andcities (including Kathmandu Valley) are located in the hills. (iii) Among the development regions, HDI is highest for the central region (0.493), followed closely by the Eastern (0.484) and Westem (0.479) regions. This is largely due to the fact that most o f Nepal's trading centers and productive economic activities are concentrated there. In contrast, the Mid-Westem (0.402) 26  and Far-Westem (0.385) regions, far from the center o f power, have been traditionally neglected. Despite recent efforts to include them inthe country's modemization process, these areas (except for Mid-Westem Terai) have also made the least progress interms of the level o f improvement inHDIbetween 1996 and 2000. Gender-Based Disparities 61 Spatial disparities in incomes and human development are important elements o f the poverty profile in Nepal; but its complexity cannot be comprehended without looking at major undercurrents, which cut across spatial patterns-such as gender, ethnicity and caste- related differentials-which exacerbate the intensity and depth o f poverty for the affected groups. 62 Inregard to income poverty, since the NLSS data have been collected at the household rather than the individual level, it is difficult to establish directly that women as a group are poorer than men in terms o f per capita income. However, NLSS data do show that female- headed households are poorer than male-headed households. They also spend less on consumption. While female-headed households constitute 13.2% o f all households at the national level, there are 13 districts-mostly inthe mountains and more remote hill areas (where there is high male migration)-in which the ratio i s higher than 20%; and this is probably one o f the factors contributing to the higher poverty incidence in the mountain region noted earlier. 63 Women's active participation in paid employment is limited in Nepal. They currently account for only a third o f the paid labor force. And when they enter the labor market, their wages even for the same type o f work continue to be lower than men's. Adjusting for differences in hours worked per day, women agricultural workers earn 20 percent less than men. 3 64 For the majority o f women who live in male-headed households, there are sociological factors, which constrain their access to household income and resources. Although the structure o f gender relations varies significantly among different social groups in Nepal, generally it is men who traditionally inherit family land, and who, for the most part control the allocation o f household income and assets. Women's legal right to inherit parental property is still limited. In addition, in most rural areas customs and social practices can create greater vulnerability for women thanfor men. A woman's share inhousehold assets and income (and even basic food security) is far more uncertain than a man's. 65 Human development indicators show existing male/female disparities clearly. Nepal has made sigmticant progress in increasing female life expectancy as well as in improving female literacy levels, and primary and secondary school completion rates. Yet, large gender gaps remain (Table 7). For example, despite recent improvements, the adult literacy rate for women in2000 was just over halfthat o f men. This was also true o f the indicator for average years o f schooling. However, in the case o f life expectancy at birth, females have finally caught up with men, reversing an aberration in health statistics which Nepal earlier shared with a few countries inthe world. 27  Table 7: Gender Disparities in Key Human Development Indicators, 1996 and 2000. Life Expectancy (years) Adult Literacy(YO) Average SchoolGoingYears 1996 2000 1996 2000 1996 2000 Male Female Male Female Male Female Male Female Male Female Male Female Mountain 52.7 50.4 48.6 51.1 44.2 11.8 61.9 26.6 2.27 0.71 3.71 1.33 Hill 58.0 55.5 65.4 64.7 58.4 24.3 72.3 39.5 3.42 1.61 3.97 2.18 Terai 59.5 57.0 61.7 63.2 52.3 19.9 60.2 32.5 3.10 1.25 3.71 1.93 Urban 63.2 60.3 71.4 70.8 76.7 51.5 81.2 56.9 5.63 3.88 6.01 3.80 Rural 53.7 51.3 58.2 59.3 52.0 19.5 63.6 32.3 2.93 1.15 3.40 1.66 Nepal 55.0 52.4 59.3 59.8 54.3 21.3 65.8 35.4 2.55 1.13 4.45 2.25 Source: Nepal Human Development Reports, 1996and 2001. 66 Interms o f the empowerment dimension o f poverty reduction, Nepali women are still largely without influence inthe public domain. Their representation inNepal's influential civil service and in all three levels o f elected government lags far behind men. Women make up only a little more that 7 percent o f the civil service and only 4% o f the officer level staff. And for those accepted as officers, progress to the higher levels is evidently slow. As in many countries throughout the developed and developing world, women are also under-represented inNepal's elected government. ARer the last elections they made up only about 6 percent of the lower house and 15 percent o f the upper house (where some o f the seats can be nominated by the King). Inthe lower District andVillage levelbodies, women have evenless voice. The Local Self Governance Act requires a minimum representation o f women in the District Councils and the District Development Committees, most o f the women representatives are those that are nominated by their parties to meet the quota. And, very few o f them end up in the District Development Committees or any o f its sub-committees where budgetary decisions are made; andtherefore have little influence on program and expenditure priorities. Ethnicity and Caste-Based Disparities 67 Nepal is a pluralistic society with diverse ethnic, caste, linguistic and religious communities-the consequence o f several waves o f migration over 2000 years. Nepal has about 60 recorded caste and ethnic groups (mostly Indo-AryanandMongol) and 70 languages and dialects (mostly Indo-Aryan and Tibeto-Burman). There are many indigenous ethnic ("Janajaties") and caste ("Dalits") groups who have been historically disadvantaged, and who continue to lag behind intheir income and asset levels, educational achievements and human development indicators, and to the extent to which they are represented inthe power structure. 68 Some o f the key data sources, such as the NLSS, aggregate data for groups (such as Newars and Madeshi) which actually contain different castes and ethnicities. This makes it difficult to establish accurately income levels o f all castes and ethnicities. There does not seem to be a simple straightfonvard one-to-one correlation between rank in the traditional caste system and poverty level; but there are broad linkages. The poverty level among the upper social castes (Newars, Brahmins and Yadavs) is generally much lower than that o f the groups which are lower inthe social ladder. Ingeneral the Janajati groups have higher poverty levels (ranging from 45 to 59 percent) thanthe national average, while the Dalits have poverty levels as high as 6568%. There are some notable deviations from this generalization. The upper caste Chhetris have an above average poverty rate o f 50%, while the Muslims, although  low in the social hierarchy, are relatively better off in terms o f poverty incidence. And the indigenous Limbus have the highest rate o fpoverty (71%). 69 The data inTable 8 @uman DevelopmentIndicators for these differentgroups) tell a similar story. For every indicator, Janajati groups fall below the national average and well below that for the Brahmins, Chhetris and Newars. The situation with the hillDalits is even worse. Taking the average Human Development Index for Nepal as 100, the ratio o f Brahminsand Newars is 135.9 and 140.7 respectively compared with 92.2 and 73.6 for hill Janjatis andDalits. 70 While most o f the Dalits inNepal can certainly be classified as disadvantaged, there is considerable variation inthe welfare status of different Janajati groups. Janajati groups like the Gurungs, Limbus and Rais who traditionally went for service inthe Indianand or British army have higher educational and income indicators as do groups like the Thakali and Sherpas who have done well intrading and other businesses.It i s likely that if these groups were removed from the tabulations in Table 8 above, the HDI indicators for other Janajati groups would be considerably lower. Among the more disadvantaged Janajati groups with large populations are the Tharu, Tamang and Kham Magars; along with 16 other smaller groups. Table 8: Human Developmentby Caste and Ethnicity,Hill 1996 Human Dev. Nepal Bahun Chhetri Newar Madhise Hill Muslim Other Indicators Janjatis Dalit Life Expectancy (vrs) 55.0 60.8 56.3 62.2 53.0 58.4 50.3 48.7 54.4 Adult Literacy i%) ' 36.7 58.0 42.0 54.8 35.2 27.5 23.8 22.1 27.6 Mean yrs Schooling 2.3 4.7 2.8 4.4 2.0 1.7 1.2 1.4 1.9 Per Capita Income (NR) 7673 9921 7744 11953 6607 6911 4940 6336 7312 HDI Indices Life Expectancy Index 0.500 0.597 0.522 0.620 0.467 0.557 0.422 0.395 0.490 Educational 0.295 0.490 0.342 0.462 0.280 0.221 0.186 0.178 0.226 Attainment Index lnwme Index 0.179 0.237 0.181 0.289 0.152 0.160 0.110 0.145 0.170 Human Dev. Index 0.325 0.441 0.348 0.457 0.299 0.313 0.239 0.239 0.295 Ratio of National HDI 100 135.9 107.3 140.7 92.2 96.3 73.6 73.7 90.9 Source: 'X Strategy to Empower Nepal's Disadvantaged Croups",Document 7, Page 7 (based on data of the Nepal Human DevelopmentReport, NESAC, 1999. 71 Caste andethnicity-based disparities ineducation are also striking. For example, in 1991, there were 6 ethnic groups and 16 caste groups with adult literacy ratesbelow 25%, compared to a national average o f 39.6% .There are also similar disparities ineducational attainments at the graduate level. According to the 1991Census data, 89% ofthe graduate population came from high and middle ranking castes (including the Newars) from the hills and Terai, while the traditional ethnic groups accounted for only 6% of the total and Dalits another 3%.It is likely that with the social awakening following the political changes in 1990 this situation may have improved somewhat; but more recent information is not available to confirm it. 72 With the restoration of democracy in 1990, efforts were made to assist Janajati groups in their economic and social development and to voice their concerns. The number of civil society groups dedicated to welfare, advocacy and political action on behaF o f both groups has grown exponentially. In response to the demands o f these groups, the government established a Dalit Development Commission during the Ninth Plan. Similarly a National 29  Janajati Development Committee was established in 1997 and recently restructured to a more p o w e f i l and independent Adibasi Janajati Utthan Pratisthan (Indigenous and Ethnic Groups U p l i h e n t Academy) in2002. 73 Yet, neither the civil society groups nor the government bodies have yet had much success insignificantly improving the educational, economic or welfare status o f the Dalit and disadvantaged Janajati population. Neither group has had much success injoining the civil service nor gaining elected office at any level o f govemment. Rough estimates o f ethnicity- wise participation in the civil service, public office and political leadership in the country show that participation o f communities inpublic office is not reflective o f Nepal's caste and ethnic profile. For example, highcaste Brahmins andChhetris have more than twice the level o f participation in relation to their population share and the Newars nearly three times their population share. Incontrast, the hillJanajati have only 32 percent andDalits even less-only 3 percent o f the participation they would have if they were represented inproportion to their population share inthe country. Determinants of Poverty-Proximate Causes 74 Given its complexity and diversity, it is difficult to fmd a few simple explanations for Nepal's poverty problem. Among the obvious ones which contribute to it are such factors as limited resource endowment, illhealth a land-locked and rugged terrain, and centuries o f political and economic isolation, all o f which have kept the economy at a subsistence level without, (until a few decades ago), even the minimum social and economic infrastructure. While these factors explain the low initial economic base and its mirror image-widespread poverty, they alone cannot explain the lack o f progress in combating poverty, particularly over the past two decades. 75 The experience o f other countries which have been successful insubstantially reducing poverty clearly demonstrates that achieving sustainable, high and prepoor growth is a necessary condition for poverty reduction. In conjunction with a deceleration o f the population growth rate, (an additional requirement for countries like Nepal which are already burdened with high population growth), it would help increase per-capita incomes steadily. This however, has not happened in Nepal consistently across the economy, even though respectable overall economic growth rates were achieved inthe early nineties. As noted, real GDP at factor cost rose at an annual rate o f 4.9% through the early nineties, and at a slower rate o f 3.6% p.a. during the Ninth Ran period. But, notwithstanding recent progress in reducing birth rates, the population growth rate (2.25% p.a.) still remains high; and consequently, per capita income has risen at about 1.9% p.a. since the early nineties. This is still not a poor achievement! 76 From a poverty reduction perspective, however, the pattem o f growth has not been pro- poor. Much o f this growth took place outside agriculture, and outside rural areas where 86% o f the Nepali population and over 90% o f the poor live. Over the past I2 years, non- agricultural activities (which in Nepal are primarily centered inurban areas, particularly the KathmanduValley) grew by almost 6% p.a. inreal terms even with the recent slowdown. In contrast, the agricultural sector grew at an annual rate of only 2.3% p.a. on average, about the 30  same rate as population growth. Thus there was no perceptible improvement in rural per capita incomes for a long period to make a difference inreducing rural poverty. 77 This differential growth pattem over the last two decades helps to explain the prevailing urban-rural divide. The non-agricultural sector (manufacturing, trade, tourism and services) grew rapidly in the early nineties, driven by the growth o f exports, public investment and demand for urban services. Thus, incomes and employment opportunities rose rapidly in urbanareas. This is probably the major explanation for the extremely low poverty rate (4%) in the Kathmandu Valley, and the glaring poverty disparities between urban and rural areas. In addition, since the urban areas (particularly Kathmandu) are also viewed as centers o f investment, with rising property values, financial services and infrastructure, most o f the substantial inflows o f remittances noted earlier eventually end up in urban, rather than m a l areas. 78 Notwithstanding some improvements over the past few years inthe use o f modem inputs and some diversification into cash crops, overall agricultural growth has remained low. An important reason for this is the slow growth, and inthe case o f some crops even a decline, in productivity. A review o f agricultural data for major food crops from 1985/86 through 1998/99 shows that both production and productivity stagnated or only marginally increased, except for wheat which showed a modest gain. But wer a longer period from 1961-63 to 1991-93, yields actually decreased by 0.07 percent. And, among the three ecological regions, the yield levels are the lowest inthe mountains, followed by the Hills while the Terai has the highest yield. Inthe case o f major food crops, area expansionhas also been quite limited. 79 Several factors have contributed to both these trends: small uneconomical farm size-the median land holding in 1996 was only 0.65 ha-lack o f progress in providing year-round irrigation, (only 15% o f the cultivated land is irrigated year round resulting in excessive exposure to the vagaries o f the weather), low use o f modern inputs (fertilizer and improved seeds) and extension services, among others. As noted, during the NinthPlan, the APP sought to addressthese constraints, but with little success, as it was poorly implemented. 80 These factors help to explain the poor performance o f agriculture and why ruralpoverty is worse than urban poverty. But, they by themselves do not explain the disparities within the rural economy. Table 9, based o n the 1996 NLSS data, provide usehl insights on rural income disparities. The poorer households in the rural economy are consistently more handicapped than others in terms o f the quality o f the land they cultivate and access to and use o f inputs. For example: (i) median landholding o f the bottom 25 percent o f The households is only 0.51ha, only about three-fourth o f the rural average; (ii) Within that, the proportion o f ploughed land suitable for growing rice is cnly about 37%, i.e about one-fourth less thanthe rural average; (iii) Year-rounds irrigation is available only for about 11%o f the land, (i.e. about one-third less than the average; and (iv) Their use o f modem inputs and access to institutional credit are substantially less than the rural average. (v) While access to Extension and Veterinary agents have been limited for most rural households, the poor have far less contact (less than half) compared to the household average. (vi) N o t surprisingly, the poorer households are located further away from roads, i.e. they have less access to markets 31  for their products, as well as to all o f the inputs noted earlier. (vii) Also, incomes from agriculture are positively correlated with the level o f schooling completed by the head o f the household. And yields are positively correlated with levels o f education above primary. In other words-"while the poor do not differ from the rest (in rural areas) in terms o f their dependence on agriculture, they do differ interms their opportunities to make a living o f f the land. Poor land quality and limited access to inputs limit returns from agriculture for the poor". Table 9: Household Distribution by Their Access to Agriculture Inputs, 1996. HouseholdIncome Ploughed(Khet) Year-Round Chemical Percent of LandofasTotal Percent LandIrrigated Fertilizer Householdwith As Percent Boughtfrom Institutional Cultivated Land of Cultivated Land AIC (in kglha) Loans Bottom25 Percent 37 11 10 8 25-50 Percent 53 14 19 16 50-75 Percent 57 15 30 16 Upper 25 Percent 54 18 39 16 Average 51 15 26 14 Sample Household (No.) 2550 2550 2679 3373 Source: World Bank (I 999):Nepal Povertyat the Turn of the TwentyFirst Century. 81 All rural households, though deriving much o f their household income from agriculture (including earnings as paid farm labor), also earn from non-agricultural sources through self- employment and wage employment (Table lo). But the dependence on agriculture is significantly higher for the poorer households. This is also suggestive o f the fact that opportunities for non-agricultural employment are limited in rural areas; and with their low educational achievements and skills, it is difficult for the poor to obtain higher-paying non- farmemployment andbreak out ofthe poverty cycle. Table 10: Sources of Income of Rural Households, 1996 AgricuIture Non-agriculture Self- Wage- Self- Wage- Other Employment Employment Employment Employment Sources Bottom 25 Percent 50 19 5 16 10 25-50 Percent 48 18 7 12 15 50-75 Percent 49 13 8 13 16 Top 25 Percent 43 7 11 15 23 Averaae 47 14 8 14 16 Source: NLSS, 1996 82 Despite recent progress, the level o f social development inNepal is low even by South Asian Standards. This in turn has had a direct impact, (as evident from the human development indicators noted earlier), on poverty andinequalities inliving standards between different geographical regions and socio-economic groups inNepal. Inadequate social service delivery is seen to be one o f the primary reasons for the poor to remain poor inthe rural areas. The key social and economic infrastructure such as health, education, drinking water and 32  energy show the following general characteristics: (a) the poor ingeneral have less access to social services; (b) except for access to primary schools, no other services are comparable in terms o f rural coverage; and (c) even in the primary schools, accessibility, enrolment rates, dropout rates, etc, are significantly worse inrural areas. Inthe like manner, internal efficiency o f social service delivery is also low. Only about 18% o f the primary school children complete the primary cycle on time. The situation is similar in the secondary schools also. Approximately 60% o f primary school teachers are still untrained. School supervision system is weak andnon-wage expenditure ineducation is extremely low. Similarly, health services at the rural health institutions are either unavailable, or their quality is very poor, mainly due to the absence of health personnel andmedical supplies. 83 Public expenditure programs have played a key role in most countries in accelerating economic-growth and addressing poverty incidence. In Nepal, the effectiveness o f public interventions has been undermined by a number o f deficiencies: weak prioritization, inadequate project screening, weak monitoring and supervision andlack o f results orientation, among others. Public resources have not been consistently allocated and spent to support poverty reduction in rural areas. To the contrary, public expenditure programs have been generally urbmbiased. For example, education sector's budget that goes in primary education has remained inadequate and 30 percent o f the public expenditure in health was allocated until recently to urban hospitals. Despite significant growth in the budget for the social sectors including health and education, per capita expenditures on these sectors i s still low, as compared to most developing countries; and they need to be made more equitable to address rural needs. 84 Political instability and weak governance have been major impediments to effectively addressing rural poverty. Frequent changes in governments with short time horizons have weakened the administration, increased corruption and leakages and lack o f accountability, and undermined the effective implementation o f programs. The worst casualties in this process have been rural communities, who are far removed from the center o f power. Although there have been recent efforts to promote decentralization and community participation, these are only now beginning to show results. 85 All o f these factors which have led to differences in poverty levels between urban and rural areas apply equally to regional income and human poverty differentials across the development regions. In addition, a few other factors help explain the depth o f regional variation, particularly inthe Mid-western andFar-Western regions: i) Geography and its consequences-inaccessibility andrelative isolation-have been a primary cause. Until the East-West Highway was completed in the late nineties, there were no road links with these two regions. Indeed, until that time, access to them was possible mainly through (north-south road links with) neighboring India. Even now, within Nepal nortksouth road links with the mountain areas ofboth regions are lacking. The consequences have been continued isolation, lack o f integration with the Nepalese economy, poor access to markets for their limited products, and little development activities there-hence poor infrastructure, education andhealth facilities, drugs andmedicines andeven basic food to ensure food security. 33  And public sector agencies which have been given the responsibility (and transport subsidies) for supplying basic food and supplies (NFC) and agricultural inputs (AIC) have remain highly inefficient. Given the high transport costs, and thinly spread population lacking resources, the private sector has had little incentive and interest to operate inthese regions. Incontrast, the Eastern region is well served with road links not only with Nepal but also with neighboringcountries, facilitating trade, commerce and industry; and its proximity to relatively developed educational centers in India has served as a catalyst for social development, and education inparticular. As noted inTable 6, the Eastemregion's human development indicators are almost as good as (andinsome respects better than) the Central region's. ii) The Mid-western and Far-Western regions, being sparsely populated have less political representation inParliament, lack sufficiently large power blocks and, being far removed from the center o f power, the ability to influence resource allocation decisions. It is not surprising that between 1996/97 and 2000/01, these two regions together received only 11-12% o f total government expenditures. 86 These regions thus have beentraditionally neglected, and not because o f their ethnic and caste characteristics. Infact, except for ethnic belts inthe mountains (Bhotes) and inthe Terai (Tharu), most o f the two regions are inhabited by Nepali language speakers, with the upper caste Chhetris being the most numerous. Thus, all communities in these two regions have suffered; and this probably is an important factor contributing to the relatively high poverty incidence inthese regions. 87 While all o f these factors have equally affected the ethnic andcaste-based communities, a major additional factor contributing to their relative backwardness has been the effects of social stratification noted earlier. In an isolated and closed society, generally those in the upper rungs o f the social ladder had better access to social and economic infrastructure and opportunities for economic advancement. Those at the lower levels, particularly the Dalits, were left behind. And, when the modernization process began in the fifties, the urban- centered development pattem that emerged left the isolated regions and the socially disadvantaged communities firther behind. A major element o f the poverty reduction strategy o f the Tenth Plan i s to begin to close this gap as rapidly as possible by mainstreaming the deprived communities and regions inthe development process. Present Social Disorder and Its Implications 88 The prolonged national crisis has remainedas the biggest threat to national development. Starting in 1996 from Mid-Western districts, the violence spread rapidly to many parts o f the country. UntilJanuary 31,2003, when a truce was arrived at. It severely disrupted economic activity and development work in many areas. Moreover, a prolongation cf the present situation could seriously impede the government's efforts to substantially reduce poverty over the next few years. This section briefly reviews the genesis o f the disorder, its linkages with the prevailing poverty and inequalities, and its implications for the Tenth Plan strategy. 34  89 While there are undoubtedly social and economic grievances contributing to the present situation o f disorder, its causes are far more complex. 90 Whatever the motivation for the beginning o f the social disorder, there is little doubt that persistent poverty and inequalities have provided a fertile breeding ground for the present crisis. Some o f the reasons which helped fuel the crisis could be: (i)Weak impact o f various development activities on some areas o f the country; (ii)Inadequate delivery o f social services in some o f the remote and isolated areas; (iii)The slow pace o f decentralization and inadequate community involvement; and (iv) Inadequate resource allocation for the remote areas andregions. 91 The changing social and political situation in the country has enormous implications for the Tenth Plan. To prevent further turmoil and violence the government is committed to establish peace and security as its highest priority, and concurrently win back the faith and confidence o f its public. It can do so only by showing that it is trying to be different- efficient, functional andable to deliver basic services to the poor, and that it is trying hardto meet the expectations o f its citizens. It will make special efforts to roll back poverty and reduce inequalities, and bring the deprived regions and communities into the mainstream o f development. The Tenth Planprovides the government with the means to do so--a workable strategy, modalities to implement it, and the tools to monitor progress-within the severe resource constraints Nepal is facing. Conclusion 92 The foregoing analysis clearly indicates that poverty inNepal i s a widespread, complex and multi-dimensional phenomenon. Poverty is deeper, more intense, and more severe inrural (as compared to urban) areas; and even more so inthe hills andmountains andinthe Western andFar Western regions. There are also clear gender, ethnic (and regional) disparities. Other indicators of human poverty (as measured through key social indicators) also closely correspond with, and confirm this rural, gender, ethnic and regionally oriented poverty pattern. The analysis also shows a clear nexus among the key variableddeterminants o f poverty. The level and intensity o f poverty is closely linked to the pace and pattern o f economic growth in urban and rural areas and economic/income generating opportunities associated with such growth. (Rural poverty is worse primarilybecause agricultural growth - the primary source o f income and employment generation in the rural economy - has stagnated inper capita terms over the past few decades). Even within rural areas, the poorer segments o f the population have less access to fertile land, irrigation, modern inputs, credit, andmarketing androadinfrastructure. Similarly, a key determinant o f the level and intensity o f both income and humanpoverty is access (or the lack o f it) to basic social and economic infrastructure. The rural areas are badly underserved interms o f quality and coverage o f basic education, healthcare, drinking water, roads and access to other infrastructure and markets. Poverty is also closely related to the degree o f social, political and economic inclusiodexclusion. Women and ethnic groups by and large are left out o f the mainstream o f development, because they lack voice, empowerment, representation and access to economic opportunities and resources. Similarly the remote districts and regions are M e r away fiom centers o f power and influence and are the most neglected. Another key determinant, which 35  cuts across and exacerbates the impact o f these factors on the poverty pattern, is weak governance, which includes ineffective government, poor resource allocation, week implementation and service delivery performance, and corruption and leakages, among others. To effectively address this complex problem and to bring about a significant and lasting reduction in poverty, a comprehensive well-designed strategy, which will be effectively implemented and monitored, has been formulated by the Government. This strategy is discussed inchapter V. 36  Plan-Goals, Targets and Introduction 93 The foregoing evaluation o f the NinthPlan andthe poverty situation clearly demonstrates that past development efforts have fallen behind to meet the expectations o f poverty reduction. Poverty is more widespread particularly in rural areas; and that it i s deeper and more severe among women, ethnic groups and Dalits, and those living in backward areas- Midandthe FarWestern andMountainareas. Poverty could not be reduced to a desired level due to the failure to achieve highand sustained broad-based economic growth particularly in rural areas; inadequate humandevelopment commensurate with heightened desires and needs o f the people, m large part due to less than satisfactory implementation of public actions to effectively provide essential social and economic services and infrastructure to the poor and backward communities and areas; poor accountability, economic malpractices, and poor implementation and monitoring o f development programs. The impact o f development on the deprived areas and communities has been limited. In the absence o f effective policies for ensuring social and economic inclusiveness, the poor and deprived communities could not come to the mainstream o f the development process. In addition, the recent spells of violent activities and disorder have badly slowed down development activity and service delivery by the govemment. They have also adversely affected the poor and backward areas and communities even more than others. 94 In this context, the Tenth Plan's sole objective is to bring about a remarkable and sustainable reduction in the poverty level inNepal over the next five years. To this end, His Majesty's Government has formulated a "four pillar" poverty reduction strategy, which squarely addresses the main causes and determinants o f poverty identified in the preceding poverty analysis. The strategy, which is discussed in more detail below, is based on four overarching approaches: achieving sustained high and broad-based economic growth, focussing particularly on the rural economy; accelerating human development through a renewed emphasis on effective delivery o f basic social services and economic infrastructure; ensuring social and economic inclusion of the poor, marginalized groups and backward regions in the development process; and vigorously pursuing good governance both as a means o f delivering better development results and ensuring social and economic justice. Particularly noteworthy, the Tenth Plan seeks, as an integral part o f its poverty reduction strategy, to bring the marginalized sections of the population and backward regions into the mainstream o f development, andto make visible progress inreducing existing inequalities. 95 In designing and carrying out its poverty reduction strategy, the Tenth Plan/PRSP has adopted a number o f new approaches and initiatives, which represent a radical departure 37  from past plans and strategies. The more important o f these, discussed ingreater detail inthe next few chapters, include the following: (a) The poverty reduction strategy itself is significantly different. (i) emphasizing sustainable higheconomic growth as inthe past, While the PRSP focuses more sharply on accelerating income and employment growth inthe rural economy where the majority o f the poor live. (ii) The emphasis on social inclusion and on improving govemance is altogether new. (iii)So is the commitment to effective implementation o f programs and better delivery o f social and economic services and infrastructure as the primary means o f accelerating humandevelopment, particularly among the poor andneglected groups and areas. (b) Incarrying out the strategy, the Tenth P l d R S P explicitly recognizes the fiscal and implementation constraints, unlike previous plans, which sought to do everyhng. This pragmatic approach has led to the identification o f new modalities o f implementation and service delivery for ensuring better development results: (i) Inparticular, the role ofthe Government has beenredefined; andpublic interventions willbe limited and focussed on areas where they can yield the maximumsocial benefits (ii) The Plan relies heavily o n the private sector, NGOs, INGOsand Community Based Groups (CBOs) for carrying out economic activities, infrastructure development and service delivery wherever possible, both in partnership with central and local governments and agencies and to complement the role o f the government. (iii)Strong emphasis is also placed on decentralization and maximizing the involvement o f local governments and community groups for identifying development activities and allocating resources for them inaccordance with people's needs, for strengthening service delivery and for ensuring better program management, accountability and transparency through people's participation. (c) The PRSP also seeks to ensure strict adherence to a sustainable macroeconomic framework, setting annual budgets and spending plans within realistic leveh. For this purpose, alternative macroeconomic scenarios have been developed as a broad framework to guide future spending decisions. (d) The PRSPRenth Plan also place strong emphasis on prioritizing resource allocations annually through a rolling Medium Term Expenditure Framework, so that the key poverty reduction priorities can be protected despite shortfalls inresources. (e) To bring about the necessary changes in key areas, detailed structural and sectoral reform programs have been developed, together with a program o f key Immediate and MediumTerm reform actions. (0 Finally, reflecting its emphasis o n better implementation and service delivery, the Tenth Plan stresses the need for effective monitoring and evaluation arrangements, together with appropriate benchmarks and intermediate goals/targets for key activities, so that performance can be evaluated andmonitored on a regular basis. 96 The rest o f this Section outlines the Tenth Plan's objectives andtargets, the main elements o f its poverty reduction strategy, and policies and programs in key sectors to support this strategy. Alternative macroeconomic scenarios and mechanisms for adjustment o f the public expenditure program are discussed inSection VI. Section VI1outlines the implementation and monitoring modalities which are necessary to ensure that the Plan will be able to achieve its goals, outputs andresults inreducing poverty. 38  Key Goalsand Targets 97 The Tenth Plan's key goals andtargets are set out inTable 11. The Normal Case scenario aims to reduce the overall poverty ratio from 38% estimated at the end o f the Ninth Plan (2001/02) to 30% by 2006/07. Indicative targets for key human development variables include: raising literacy to 63 percent, reducing the infantmortality rate to 45 thousand births, raising life expectancy to 65 years, increasing access to drinking water for 85 percent o f the population, electricity to 55 percent, and telephone facility to almost all village development committee. Ifthese social and infrastructure goals are achieved, a 10percent improvement in the human development indicators is possible. To reduce the overall poverty rate through the creation o f income and employment generating activities in the key sectors, an overall GDP growth rate o f 6.2% p.a. at factor cost i s also envisaged, together with a substantial improvement inagricultural growth to around 4.1% per annum. 98 These should be regarded as indicative targets only. Some o f these targets, particularly, those for education andhealth, are ambitious. Inorder to achieve them, much stronger efforts than in the past will have to be made by providing the necessary inputs and resources. Nevertheless, the Tenth Plan recognizes that the availability o f resources, the extent to which the planned programs can be implemented andthe degree o f commitment with which they are pursued will have an important bearing on whether these targets will be achieved or not. Given the uncertain fiscal prospects and the security situation, an alternative Lower Case scenario i s therefore assumed inthe Tenth Plan. This lower case scenario will be used as the basis for formulating the budget andthe MTEF, and as the resource situation improves, it will be appropriately adjusted. While every effort will be made during the preparation o f annual budgets and mid year reviews to protect the Plan priorities, nevertheless, it is realistic to assume that achievements with regard to economic growth, service and infrastructure delivery and poverty reduction will be lower under the Lower Case (Table 11, column 4). Thus, the incremental targets in the Lower case are expected to be lowered by about 15% for infrastructure and by about 10%for the social sectors. This is broadly inline with the reduced availability o f resources under the Lower case and the efforts that will be made to give priority to the social sectors inresource allocation under such a scenario. Table 11: Indicative Targets of the Tenth Plan 39  Ninth Plan Tenth Plan End 2006107 End 2001102 Normal Case Lower Case Overall Poverty Level (percent of Population) 38 30 33 Real GDP Growth (at factor cost-percent p.a.) 3.6 6.2 4.3 Agriculture 3.3 4.1 2.8 * Non-agriculture 3.9 7.5 5.2 Per-capita Income Growth (percent p.a.) 1.3 4.1 2.2 Social Indicators Infant Mortality Rate (per thousand) 64.2 45.0 47.0 Total Fertility Rate % 4.1 3.5 3.6 Maternal Mortality Rate (per 100000) 415.0* 300.0 3.5 Rate of Contraceptive Users (in percent) 39.3 47.0 46.0 Obstetric Services by Trained Manpower (percent) 13.0 18.0 17.0 Average Life Expectancy (years) 61.9 65.0 64.0 Population growth Rate (percent) 2.25 2.1 2.1 Net Enrolment in Primary Level (above 6 years, 80.4* 90.0 89.0 percent) Literacy (above 15 years, percent) 49.2 63.0 61.O Female Literacy (above 15 years, percent) 35.6 55.0 53.0 Drinking Water (population benefited, percent) 71.6 85.0 83.0 Human Development Index (HDI) 0.466 0.517 0.512 Human Poverty Index (HPI) 39.2 34.0 34.5 Physical Infrastructure Number of districts With Access to Roads 60.0 70.0 70.0 IrrigatedArea ('000of hectors) 1121.4 1417.0 1375.0 Telephones (per '000 of Population) 14.0 40.0 36.0 V.D.C.s with Telephone Facility 1761.0 All 3590.0 V.D.Cs Connected With Computer Networks NA 1500.0 1275.0 Population Having Electricity (percent) 40.0 55.0 53.0 V.D.C.s Having Electricity 1600.0 2600.0 2450.0 0 Araicultural and Rural Roads (kilometers) NA 10000.0 8500.0 * As estimated by the National Planning Commission. These figures will be revised when actualdata become available. The TenthPlan's Poverty Reduction Strategy 99 Given the nature o f Nepal's poverty problem and the sociallpolitical context, the Tenth Plan's poverty reduction strategy has been guided by a few key considerations: First, as noted, the poverty reduction strategy needs to be ruraioriented. While supporting other areas o f the economy with strong potential for income andemployment growth, the growth strategy will need to be broad based and prepoor, and focus on rurallagricultural growth. Second, priority should be given to actions and interventions, which can give quick results, as compared to investments that may take a long time. This requires careful balancing o f short term as well as longer term needs. Third, given the country's lmited administrative and implementation capacity, (as well as implementability o f programs in some areas), the Plan will need to have a strong strategic focus; and concentrate on a few important approaches and supporting interventions which, if effectively implemented, can deliver quick results to the 40  rural poor. Fourth, the Plan will need to be interpreted as a strategic and flexible document. While the overall strategy provides a broad framework and strategic interventions for poverty reduction, and the key priorities themselves will need to be protected in terms o f budget allocations and funding, such interventions andpolicies will need to be reassessed from time to time, andrevised ifnecessary, inorder to achieve the poverty reduction goals. A number o f such initiatives have already been taken in the first year o f the Plan, such as the MTEF, education sector reform package and, the emergency reliefprogram, among others. 100Cognizant o f these needs, the Tenth Plan's poverty reduction strategy is built on o f four pillars: (i) based economic growth; (ii) sector development including human Broad Social development; (iii) Targeted programs including social inclusion, in order to bring the poor and marginalized groups into the mainstream o f development, together with targeted programs for the ultra poor, vulnerable anddeprived groups (who may not adequately benefit from the first two pillars); and (iv) Good governance. All four pillars are essential for improving the lives o f the poor, and for mainstreaming the very poor deprived groups, and thus for promoting inclusive development. Inimplementing the four-pillar strategy, the Plan also stresses strategic crosscutting approaches with regard to: (a) redefining the role o f the State, and limiting public interventions; (b) enlisting the private sector to play a leading role in employment and income generation and together with NGOs, INGOs and CBOs, in complementing government efforts in service delivery functions in key areas, as well as in implementing key activities; (c) promoting community participation in and management o f activities at the local levels; and (d) accelerating the decentralization process, which is also a key element under good governance. 101These four pillars o f the poverty reduction strategy should not be seen as separate and self-standing. To the contrary, they are closely inter-related. For example, international experience clearly demonstrates that improvements in literacy and health and nutritional status, by enhancing skills and productivity and reducing family size, contribute to higher economic and per-capita income growth. Conversely, without achieving sustainable high growth rates, it may not be possible for Nepal to undertake the planned levels o f public (and private) spending that are needed to undertake basic social and physical infrastructure development programs inrural areas. Second, the four pillars address different aspects o f the same problem-poverty, broadly defined to include income poverty, human poverty and exclusion. Thus, while the first pillar tries to address income poverty directly, the second pillar tries to expand access to basic services and amenities which help to improve quality o f life and human capability at given income levels. Both are equally important for mainstreaming the poor. The third pillar is not an isolated attempt to address the needs o f the poor and deprived through targeted programs alone. It should be viewed as part o f an integrated approach to bring the poor within the mainstream o f development. Finally, the fourth pillar is essential for ensuring that the programdactivities included under the first three pillars achieve their intendedresults. Indeed, without good governance, (control o f corruption and leakages, andmechanisms to ensure accountability), the objectives o f other pillars cannot be really achieved. In addition, the fourth pillar, which also includes participatory involvement o f local governments and communities in the development process, will help considerably in addressing social exclusion aspects o f poverty also. H o w the four-pillar 41  strategy will be implemented and their implications for sectoral programs and activities are discussed inmore detail below. Macroeconomic Framework 102A poverty reduction strategy emphasizing high and sustaned economic growth can be pursued only if public action can help build policies and institutions needed for higher growth. Economic growth requires a framework, which can encourage and expand private investment and activities. Inthis context, creating an appropriate enabling environment and incentive framework are the main elements for fostering private sector development. And, to this end, ensuring macroeconomic stability is o f paramount importance. The latter is also necessary for assuring sustainable kvels o f public investment to support the key elements o f the poverty reduction strategy, (such as humandevelopment andsocial inclusion programs). 103The Tenth Plan has been prepared at a difficult time. GDP is estimated to have declined by 0.6% inthe base year o fthe Tenth Plan2001/02. Political instability, violence, and social disorder have challenged the economic situation in the country. Extemal demand for goods and services andtourist arrivals have remained volatile for Nepal especially after the event o f September 11,200 1.The pace o f recovery o f the domestic economy will depend on both the attainment o f sustained peace inthe country and a rebound inthe global economy. 104Recognizing these constraints and risks, the Tenth Plan has incorporated a sustainable macroeconomic framework to support high and broad-based economic growth with low inflation. Two alternative scenarios projecting possible upper and lower boundaries with regard to resource availability and implementability are discussed in Section VI. These assume that the Nepalese currency will continue to be pegged to the Indian currency, the Government's domestic borrowing will be managed conservatively, and that foreign exchange reserves will be maintained at a level o f nine months o f merchandize imports. The overall fiscal deficit is projected to be at around 5% o f GDP, financed largely through foreign aid. Macroeconomic policy will be accompanied by a deepening o f structural reforms inkey areas including the financial sector, public enterprises and trade competitiveness which are crucial for removing constraints to private sector-led growth; and reforms will be undertaken to improve the efficiency and quality o f public administration and services. An integral part o f this macroeconomic framework is the Medium Term Expenditure Framework, which the Government introduced in FY 2003 (for the first time in Nepal) in order to implement the Tenth Plan in a difficult macro-fiscal environment. The expenditure prioritization in the MTEF and how it helps to protect the Tenth Plan's poverty reduction priorities are discussed insome detail inSectionVIbelow. 105The importance o f macroeconomic stability can hardly be overemphasized for promoting either economic growth or poverty alleviation. Maintenance o f satisfactory macroeconomic fundamentals is also a necessary precondition for the operation o f a market- oriented economy and also for promoting private investment. The core objectives in this regard, as outlined in the Tenth Plan, are to maintain fiscal discipline, ensure efficiency o f 42  public resources, sustain monetary and external stability and, as discussed below, strengthen the financial system. 106To maintain fiscal discipline, prudent expenditure policies will be pursued and domestic resource mobilization will be improved. The annual budgets will be set at realistic levels consistent with implementation capacity and resource projections and borrowing targets outlined inSection VI. To ensure efficiency o f public resources, the MTEF will be widened to cover all ministries, and the prioritization o f projects/programs improved so that the key poverty reducing prepoor activities identified in the Tenth P l d R S P are indeed given priority (as Pls) in the expenditure program. The MTEF will be linther expanded to cover regular expenditures (which are currently excluded); andthe expenditure classification will be improved on the basis o f recurrent and capital expenditures. To improve domestic resource mobilization, the recommendations o f the fiscal commission for tax reforms will be implemented, tax exemptions and tax rebates will be reduced, customs valuations will be revised periodically, and tax administration will be strengthened through a move towards an autonomous tax administration. Besides, government arrears to/fiom the public utilities will be cleared. To maintain monetary and extemal stability, a prudent monetary policy will be pursued: (i) supply growth will be contained at a desirable level. (ii) domestic Money Both borrowing as well as bank financing o f the government will be limited in line with the macroeconomic framework outlined in Section VI. (iii) Open market operations will be used as a major instrument; and any excess liquidity inthe economy due to inflow o f foreign assets will be mopped up by issuing Central Bank bonds. To strengthen the external sector, greater autonomy o f the Central Bank in exchange rate formulation and the management o f the foreign exchange regime will be encouraged. Structural ReformAgenda In order to bring about economk transformation, public actions have to be made more efficient and effective. Constraints which inhibit private sector's competitiveness need to be removed andprograms to improve the conditions o f the poor should be given priority. To this end, the Government will strengthen the reform programs already initiated inmany areas and introduce new reforms geared to supporting rapid growth. Some o f these reforms are: (i) expenditure management, (ii) financial sector reform, (iii) reform, (iv) measures aimed fiscal at improving the competitiveness o f the private sector including foreign trade and labour reform, (v) governance, including civil service reform and decentralization, and (vi) promoting private sector's involvement ininfrastructure development. These reforms will help reinforce and strengthen the market-oriented strategy followed by Nepal inthe past decade. They will also help in focusing the role o f government on areas where markets function poorly or would result ininequitable outcomes. 107Ensuring nacroeconomic stability and improving the incentive framework particularly through reform programs mentioned above will enhance the environment for higher investment and cost effective service delivery. Itwill also help increase opportunities for, and capabilities of, the poor to earn a decent income. A growing economy increases income- 43  earning opportunities for the poor. The role o f the state in fostering an environment conductive to growth is pivotal inthis regard. 108The government will also promote opportunities for growth through coordinated efforts in key sectors, such as agriculture, irrigation, tourism and infrastructure development. Rural infrastructure-such as roads, electricity, telecommunication facilities-not only will help in improving access to markets and inputs, but also help increase accessibility andthe quality o f living and service delivery in the remote areas of the country. The growth o f agriculture, which is the source of livelihood o f most o f the people in rural areas, will assist the poor by increasing income generating activities and gainful employment opportunities. The benefits o f eco-tourism are enormous in a country like Nepal, where the potential for tourism is immense; and accordingly, the Government has given highpriority to it. 109Poverty impact o f growth, however, cannot be maximized until the income earning capabilities o f the poor are improved by addressing the deficiencies inhuman development such as low education and illhealth. The removal o f these deficiencies i s not only a means o f reducing income poverty, but also o f improving their social well-being. Therefore, programs to support effective delivery o f education, primary health, and enhanced access to clean water have been given priority. Broad-Based Economic Growth l l O T h e E e d for high and broad-based growth does not require much explanation. The experience o f Nepal and other countries shows that growth has a positive impact on poverty alleviation. Growth that improves income distribution appears to further reinforce the positive impact o f growth o n poverty. Inthis context, a growth strategy that can benefit all income groups (including poor and deprived segments o f society) will have two major components. First, since more than 80 percent o f the population are engaged in agriculture, agriculture must be made to grow by at least 4 percent p.a.; and second, private sector led non- agricultural growth must also be emphasized, for the reasons mentionedearlier. 111Thesources of(higher)growthwouldbe increased productivity inbothagriculture and innon-agriculture sectors, anda recovery inmanufacturing, exports andtourism, along with the expected improvement inthe domestic and external environment. Similarly, the adoption o f policies to boost trade and industrial sectors and improved public resource management, among others, would help trigger higher and sustainable growth. Inthe case of agriculture, improved irrigation facilities, uninterrupted supplies of chemical fertilizer and expansion o f rural credit, along with the rural roads and higher resource allocations would help achieve annual agricultural production growth o f the order o f 4.1 percent. Creating a better environment for private sector development, including macroeconomic stability, would also help accelerate private sector investment inthe country. Industry,tourism andservices activities would also benefit from the improved law andorder situation, increased demand in rural areas (associated with higher agricultural growth), and higher public investments associdted with increased development activities andrehabilitation andreconstruction needs. Inparticular, measures to promote domestic and internal trade can 44  be an important source o fnon-agricultural growth. These include ongoing initiatives such as: (i) tradetransportcoststhroughdevelopingInlandContainerDepots,strategicroads lowering development, and implementing the multimodal transport strategy; (ii) improving customs administration; (iii) developing power for potential exports towards the end o f the Plan period; and (iv) carefully negotiating accession to World Trade Organization to bindNepal to the global community in an advantageous manner. Under the normal case, these factors are expected to raise non-agricultural growth to 7.3 percent per year. Of course, if some o f these crucial assumptions, particularly with regard to the improvement o f internal security and the extemal environment remained unrealized, the economic growth would tum out to be lower, as suggested inthe Lower Case scenario. 112Prioritizing and refocusing policies and activities in the agriculture, irrigation, forestry andpower (rural electrification) sectors are crucial for achieving agricultural growthtargets. The major objectives set for the agriculture sector are to increase agricultural production, productivity and incomes, both to reduce poverty o f rural farmers and increase food security. The Tenth Plan also seeks to promote agro-biodiversity conservation and environmental protection, in addition to encouraging the adoption o f need-based technology. Likewise, one o f the major objectives i s to promote domestic agreproducts in local as well as in foreign markets. 113The growth strategies for agriculture are to modernize, diversify and commercialize crop and livestock production by expanding the use o f technology, and increasing the access of farmers to modern agricultural inputs and credit. Similarly, promoting the participation o f private sector and NGOs/INGOs in service delivery, market promotion and infrastructure development are other major strategies. 114The major thrust in the agriculture sector will be directed at ensuring the successful implementation o f the Agriculture Perspective Plan (APP). The APP aims to increase cereal and cash crop production in the Terai and develop livestock, horticulture and specific high value crops in the hills. The main activities in this regard include package programs that promote smooth supply o f fertilizers, provision o f irrigation facilities, and expansion of rural agricultural roads, rural electricity and improving the marketing network. Policies and activities conducive to carrying out research and development will also be adopted. 115The major outcomes which are expected from the effective implementation o f programs in the agriculture sector are that the production systems will be more diversified and agricultural growth will increase by 4.1 percent p.a., and livestock by 4.9 percent p.a. Food insecurity and malnutrition will also be reduced. Market access for agricultural products, as well as farmers' incomes and consumption levels, will increase. 116The major objectives in the Land Reform and Management sector are to ensure sustainable land use and management, update and maintain land recordshfonnation, and increase access o f the poor to land resources and ensure effective utilization through enhancement o f their skills. Main strategies that will be pursued to achieve these objectives are: preparation o f land use guidelines and policies; and effectively implementing new land ceilings, together with resettlement o f freed "Kamaiyas" (bonded labor) on surplus land. The 45  key policies and programs that are envisaged include the following: Prepare integrated land use policies, guidelines andActs, (for example, to discourage keeping landfallow, discourage fragmentation o f holdings, developing new legislation to promote co-operative and contractual farming etc); Develop a national geographic information system, carry out plot surveys, and establish a computerized land information system; (this would also help eliminate dual land ownership and prepare the basis for progressive taxation o f land); and Strengthen land management, manpower development and training programs. It i s expected that the implementation o f these policies and activities would help strengthen the institutional basis for agricultural development (by improving landuse and management), establish an up- to-date land information and mapping system, and help develop effective land management services. 117The core objectives o f the Irrigation sector inthe Tenth Plan are to promote year round irrigation inthe arable land area o f the country and to ensure the sustainable management o f developed irrigation systems. 118The main strategies adopted by the Plan to achieve these objectives are to expand new irrigation facilities with focus o n APP where year-round irrigation is feasible, and to rehabilitate and strengthen public and community based irrigation systems, focusing attention on the preservation and full utilization o f the existing irrigation systems. 119The major policies and activities to achieve these goals include: (i) expanding small surface irrigation in the hills and surface and ground water facilities in the Terai; and (ii) repairhehabilitate and maintain the existing farmer managed and public irrigation systems. Irrigation laws will be revised to grant W A Sthe legal powers to collect irrigation charges. In the case o f large and medium scale public irrigation systems, their management will be increasingly transferred to the private sector. Increasedinvolvement o fNGOs and the private sector innew irrigation development will also be encouraged. 120The expected outcomes are that 50 percent o f total irrigated land will receive year round irrigation facilities by 2005, while farmers/WUAs will be able to manage irrigation systems upto 500 ha duringthe same period. Inthe longer run,maintenance, efficiency andutilization o f irrigation facilities are expected to improve significantly. 121Rural electrification has an important role to play in accelerating both agricultural and rural development. It could have a catalytic effect on agricultural growth by accelerating shallow tubewell irrigation. Inaddition to supporting for the development o f agro business, the extension o f rural electrification would also help modernize cottage industries and improve the living standards o f rural households. Accordingly, key programs are aimed at expanding grid-based rural electrification, promoting small projects where grid-based expansion is not possible, and enhancing the capacity o f cooperatives for management at local levels. To achieve the objective o f increasing rural coverage from 40 to 55% over the Plan period, the government's strategy envisages internal unbundling o fNEiA's activities as well as initiating an explicit subsidypolicy for grid-based rural electrification. 46  122The development o f the forestry sector is especially important for promoting livestock, making compost fertilizer, conserving environment and for watershed management by conserving ground water resources. Community and Leasehold Forestry programs have been very successll inthe country increating income-generating opportunities for the poor. Inthis context, the 'user-group approach' is particularly useful inmainstreaming poor and deprived communities in forestry sector activities. Given its high success, the leasehold programs would be M e r expanded. Integration o f the concept o f sustainable development in all the development processes for balancing population and environment and identification o f comparatively advantageous areas for achieving high and sustainable economic growth through adaptation o f community-based natural resource conservation, utilization and improvement are focused inconsideration o f strategic environment assessment andcapability enhancement. Various program interventions will be carried out so that land use is planned and managed at the national and local levels such that resource bases and ecosystems are improved, with complementarity's between high- and low- lands, that forest biomass grows, that agricultural and forest lands are protected from urban sprawl, and that biodiversity is conserved at the landscape level by recognizing threats from habitat fragmentation, m a n a g e d solid waste and loss o f forest cover. Air, solid waste and water quality monitoring will be maintained to reduce humanhealth hazards. 123To achieve the desired growth in the agriculture sector, increased investments will be required from both private and public sectors. In parallel, public expenditure on key sub sectors and activities will be streamlined and refocused in line with the APP, to ensure adequate funding. Similarly, improved modalities o f implementation will be adopted by emphasizing polycentric institutional arrangements to ensure greater participation o f private sector and NGOs in activities such as input delivery, marketing, research and extension services. Inthis regard, the activities o f inefficient public enterprises involved inthese areas such as AIC, will be either restructured or phased out. Also, existing policies which inhibit agricultural growth, (such as those governing ground water development) will be reviewed, in order to make appropriate corrections. 124The non-agriculture sector includes a number o f important subsectors such as manufacturing, trade, tourism, transport, construction and financial and social services. Activity levels inmost o f these sub-sectors have been depressed inthe last 2-3 years because o f the present domestic social disorder, and weak export demand. It is reasonable to expect that the ceasefire declared inJanuary 2003 would lead to a quick rebound ina number o f sub- sectors, especially tourism, manufacturing, construction and services, where substantial under-utilized capacity exists. And, a pick up indevelopment activity and rehabilitation and reconstruction efforts would also help provide a quick stimulus. Over the medium term, a ' revival o f business confidence andprivate investment, increased domestic demand (associated with rural/agricultural growth), continued reasonably highgrowth inneighboring India, (trade with India has increased rapidly inthe last few years), and the beneficial effects o f ongoing structural reforms, (such as financial sector, trade and institutional reforms), would kelp to achieved a growth rate close to the level achieved over the past decade. 47  125However, the impending internal security issues and gloomy global economy will have implications for Nepal's private sector promotion. Inthe mean time, Nepal can do a number o f things to promote private sector development, enhance competitiveness and boost the gowth o f the non-agricultural sector. The core objective o f private sector development is to enhance the scope for private participation in economic activities through h e creation o f a private sector friendly environment, so that the private sector can make a meaningful contribution to poverty eradication. The major strategies to achieve this objective include: the acceleration o f economic reforms; ensuring policy-wise consistency in order to create a n investor friendly environment; simplifying entry and exit procedures for businesses; enhancing competitive environment by providing equal opportunities and facilities, and sectoral reforms. As per liberal economic policy, h e government will gradually reduce its role ineconomic activities, while private involvement will be encouraged in a wide range o f economic activities, such as investments in social and economic infrastructure and service delivery. As discussed elsewhere, policies have been already formulated and announced to facilitate private investment in power, roads, telecommunications and other infrastructure development. To create a level playing field, the privatization o f public enterprises will be accelerated and those areas will be fully opened to the private sector. The Government intends to increase the involvement o f the private sector in a number o f public enterprises including Nepal Electricity Authority, Nepal Telecommunications Corporation and the Royal R p a l Airlines, among others. Efforts will be made to streamline the regulatory processes and to make them more transparent, for example by reducing complicated documentation requirements for exports; and improving tax administration so as to reduce discretionary power o f tax officials. A fiscal reform commission (which is currently sitting) i s expected to make important recommendations in this regard. Legal reforms will be initiated and new liquidation, merger and bankruptcy laws will be enacted. Finally, reforms currently under way in the financial sector (aimed at creating an efficient and competitive banking system and transferring state-owned banks to private management and ownership, among others), will help considerably infacilitating private sector development. 126Nepal's trade, tourism and industrial regime i s quite liberal. However, the size o f the private sector is small and inefficient, and lacks competitiveness. The country needs to expand output capacity and improve the efficiency o f the private sector through the adoption o f appropriate measures. As Nepal is also seeking to join the World Trade Organization, it needs strong efforts to strengthen its international competitiveness. Therefore, in order to create a favorable environment to achieve private sector led growth, the government will focus on removing impediments to private sector development. In this regard, a strong promotional package especially for export-oriented industries, measures to increase incentives for investment, and an appropriate technology and information program will be introducedto enhance competitiveness. Concurrently, steps will be taken to reduce costs o f exporting. For example, as noted earlier, initiatives are underway to reduce trade transport costs (through the multimodal transport strategy and developing internal container depots); while improving customs and tax administration and tax policy reforms also will help in this regard. In addition, programs in the trade sector aim to increase the number o f private sector "aged 4a  customs terminals, expand technical assistance programs for export commodities and revise existingActs and regulations to makethem compatible with WTO and SAPTA requirements. 127In order to provide employers more flexibility to adjust their labour requirements with due compensationto those affected, the TenthPlanwill take a number ofmeasuresto reform existing labour laws. The major objective outlined in the Tenth Plan for the labour sector is to ensure a congenial industrial environment by maintaining a flexible labour market while safeguarding the basic rights o f workers. The major strategies adopted inthe Planto achieve this objective are: the initiation o f timely reforms in labour laws to promote private investment, promotion ofbetter industrialrelations, increasing productivity andelimination o f child labour. The Government will also give even greater emphasis to its present policy o f encouraging foreign employment. Similarly, to make Nepal free from child labour, legal measures would be dopted along with strict monitoring; and the ongoing programs for rehabilitation o f child labour would be strengthened. 128With the effective implementation o f these policies and programs, it is hoped that both productivity and rights o f labour would be enhanced and that industrial relations will improve. Existing child labour would be eliminated. 129Infrastructure development has a major role to play in facilitating the development o f the private sector. Despite significant progress inthe expansion of road density, penetration o f telephone and electricity is still low. The government will give priority to strategic road network, maintenance o f major roads andhighways andexpansion o f electricity and national communication infrastructure. The government, however, inthe mediumterm, will gradually reduceits involvement, especially inthe areas where private sector can increasingly take over, including telecommunications, hydroelectricity and roads, among others. Legislation has already beenenactedfor this purpose and encouraging progress has beenmade to date. 130The main objectives o f the Tenth Plan inthe road sector are to develop and manage the road transport network to support the socio-economic development efforts and to promote private sector participation in the construction of new road networks and their maintenance. The major strategiesto be adopted inthis regardinclude increasedparticipationo f the private sector in road construction and maintenance, enhancing institutional capacities o f both the roads department and the private sector to ensure cost effective sustainability o f the road network, and transferringto DDCs the responsibility for rural roads. To encourage increased private involvement in the road sector, legislation will be enacted for the implementation o f BOT and BOOT policies. A framework will be established for improved road maintenance, the RoadFundBoardwill be made fully operational andfinanced by aroadlevy. Measuresto buildcapacities of the DepartmentofRoads and the private sector will be undertaken. At the end of the Plan period, 1025 kms o f road will be added. An additional ten district headquarterswill be connectedby road, takingthe numbero f HQshaving road connections to 70. Private sector will actively participate inthe construction and maintenance o f roads. 131The Tenth Plan's key objectives in the power sector include: expanding electricity coverage in a sustainable and environmental friendly manner by generating low-cost power; acceleratingrural electrificationto promote economic growth and improve living standards in 49  rural areas and to develop hydro power as an important export item. The major strategies o f the sector include promoting private sector participationinpower generation and distribution, unbundling the activities o f NEA and improving its financial viability, integrating rural electrification with rural economic development programs, and strengthening power infrastructure. Major initiativedactivities to be undertaken to improve power sector development include the establishment o f a Power Development Fund; the creation o f an independent regulatory authority; initiation o f an explicit subsidy policy for grid-based rural electrification; and promotion o f small, medium and storage hydropower projects. The major expected outcomes are that the proportion o f populationhaving access to electricity will increase from 40 percent to 55 percent by the end o f the Plan period, and adequate power will be supplied as needed to support economic growth. 132In the informationand communications sector, the Tenth Plan's main objective is to improve the access o f people to information and telecommunication facilities, facilitating their participation ineconomic activities, as well as personal development. The major sector strategies are to enhance private sector participation in the expansion o f information and communication network and facilities, and clarify the roles and responsibilities o f private and public operators and to give them (as well as the postal service) functional autonomy. Regarding policies and activities, necessary steps for the promotion o f private sector involvement in telecommunications will be taken. NTC will be converted into a public company under the Company Act, and general andrural telecom services will be opened up to the private sector. A policy o f expanding broadcasting services will be adopted. A legal framework for functional autonomy o f postal services will be finalized by FY 2004. With the effective implementation o f these policies and activities, it is expectedthat the telecom market will be liberal and competitive. All VDCs will have access to telecom services with penetration risingto 40 lines per 1000 inhabitants. Broadcasting services will be available to all. Likewise, ICT services will be available invarious urbanareas. 133Apart from its contributionto economic growth andthe balance o f payments, the tourism sector can be an important instrument of poverty reduction by increasing employment opportunities directly and indirectly inurbanas well as rural areas, particularly inthe hills and mountain areas along trekking trails and tourism sites. A major objective o f the Tenth Plan i s to increase the contribution o f the tourism sector to the national economy through the expansion o f tourism activities and generation o f greater employment opportunities. Similarly, conservation and promotion o f historic, cultural and religious sites, and the development o f a safe reliable and easily accessible air transportation system are other objectives inthe sector. The sector strategy aims to develop andmarket new tourism products, and to improve tourism facilities and services for promoting faster growth o f the sector. Accordingly, the ongoing promotional activities will be further expanded, focussing on regional markets; developing and conserving national heritage/religious sites will be emphasized; andnew areas will be opened up for rural tourism. Developing infrastructure and institutions particularly for emtourism, and solid-waste management will be given priority. Likewise, RNAC will be divested, measures will be taken to improve air safety, and the 50  immigration systemwill be simplified. With the effective implementation o f the policies and activities, it is expected that the total number o f tourists coming into the country and the average length o f stay will increase. Thus, the contribution o f the tourism sector to the economy will rise. With effective promotion and the spread o f tourism into rural areas, and resulting increasesinincomes and employment generation, tourism will positively contribute to reducing ruralpoverty. 134The core objectives o f the Tenth Planinthe industrial sector is to acceleratethe pace o f industrialization through increased participation o f private sector and to create additional employment in both rural and urban areas to reduce poverty. The main strategies to achieve these objectives are: improving policies to attract domestic and foreign investment, strengthening the role of SMEs in national production and improving the overall industrial environment. Tariffs will be further rationalized, and existing policies and Acts relating to foreign investment and industrial development will be revised.Upgradationprocess o f SMEs through technological improvements and policy o f sub-contracting will be further accelerated. Incentives to improve backward linkages o f industries will be continued; and information technology development will be given emphasis. The effective implementation o f these policies and activities during the Tenth Plan will help improve industrial competitiveness, expand industrial production and employment generation, and raise the contribution of the industrial sector to GDP. 135The major objective o f supply sector in the Tenth Plan is to improve the supply and distribution of essential commodities throughout the country, to discourage illegal hoarding and black marketing, and to ensure food security for these purposes. The main strategies adopted are to improve food availability and supplies in remote areas and promote market based pricing mechanism for petroleum products. Accordingly, the government will rationalize the activities o f Nepal Food Corporation and focus on enhancing food supply and distribution, particularly in food-deficit areas. Also, the management capacity o f Nepal Oil Corporation (NOC) will be strengthened, and measureswill be introducedto reduce leakages and to ensure private sector participation in the activities of NOC. The effective implementation o f these policies and activities should help increase food security in deficit areas, ensure uninterrupted supplies o f essential commodities and enable NOC to become financially viable. 136Measures will also be taken to attract more foreign investment, along with appropriate technology, particukly in areas o f comparative advantage in order to enhance competitiveness. As noted, policy and legal framework will be improved in line with the market economy; administrative mechanisms will be streamlined and made more efficient; and necessary physicalinfrastructure and human resource development will be undertaken. Ensuringmacroeconomic stability (thereby assuring repatriatibility of capital and dividends) and a stablefinancial system will also help inthis regard. 137In parallel, similar reforms are dso needed in corporate and financial governance. Nepal lacks sound accounting and reporting standards. Disclosure requirements for companies are inadequate and information available to lenders is incomplete, and sometimes 51  inaccurate. Similarly, institutional capacity for regulation and supervision is weak. Improvements inthese areas will help increase trust and confidence inthe private sector and inturnreducebureaucratichassles. 138Strengthening the financial system is o f critical importance for private sector development, to ensure that national savings would be mobilized and intermediated at competitive interest rates to meet the private sector's financing needs, as its role in the economy progressively expands. Nepal's financial sector is in a critical stage. The main problems o f the banking system are inefficiency, inadequate financial discipline, as well as political and other influences inlending decisions. These have resulted in poor loan quality, high spreads and high lending rates to borrowers, and increasing non-performing assets. To address these problems, a Financial Sector Strategy has been prepared and is being implemented. The reform agenda inthe financial sector, currently underway, involves, among others: (i) restructuring and privatizing state owned banks, (ii)improving auditing and accounting standards, (iii) strengthening monitoring and regulatory fimctions and capacity o f the NRB, (iv) strengthening legislative and institutional framework for effective loan recovery, and (v) improving loan quality and banking discipline. The reform program in the non-banking sector is expected to include the restructuring o f the two government owned development banks, (Agricultural Development Bank and Nepal Industrial Development Bank), as well as ensuring healthy growth o f the finance companies and the micrefmance sub-sector. They will be brought under a transparent and more accountable regulatory framework. And the Government will also reform the rural development banks with a view to minimizing its involvement inrural finance. Social Sector Development (including Human Development) 139The development o f human resources is essential for reducing human poverty and improvingthe quality o f life in rural areas. While humandevelopment has many dimensions, education, health, rural drinking water and sanitation are particularly important. In addition, basic infrastructure such as access to (even low-quality) roads, electricity and telephone communications (particularly inremote areas) can help improve living conditions for the poor inrural areas. As noted above, improvements inthese areas are mutually reinforcing, and have benefits well beyond their direct impact. Ensuringequitable access to these services and facilities is especially important for mainstreaming the very poor, and deprived communities. 140Recognizing the importance o f ensuring the effective delivery o f services (and basic infrastructure programs), the government has adopted in the Tenth Plan innovative approaches which cut across all the key social sectors: (i) The role o f the government will continue to be particularly important inthe social sectors because there are many programs where costs o f providing services cannot be fully captured by private providers, even though the social returns from such programs and activities may be high, (for example, preventive programs). (ii) But, the government is committed to increasingly decentralizing to local govemments the responsibilities for primary education and health care, and involving local communities in the management o f primary schools and health centers. (iii)Greater involvement o f the private sector, INGOs, NGOs and CBOs is being actively promoted in a 52  variety o f activities in these areas, both to supplement existing publicly managed activities and also to increase the outreach and effectiveness o f these programs. In the case of rural drinkingwater, the implementation o f this approach involvingNGOs, CBOs anduser groups is already well advanced andhas shown good results; andit will be expanded and extended to other sectors. (iv) These approaches will be utilized for improving access o f the very poor and deprived communities to social services (mainstreaming), together with better ceordination, technical assistance, supervision and funding from the central government agencies to ensure satisfactory progress. 141Guided by the objective o f 'education for all', the educationsector inthe Tenth Plan aims at improving the access to and quality o f primary education. The Plan also has among others, the objective o f expanding literacy programs to improve the livelihoods o f deprived groups, especially girls, dalits and disadvantaged children. The Plan objectives also include development and expansion o f secondary education, production o f middle-level technical manpower through the expansion o f vocational and technical education and production o f higher level skilled manpower through the development o f higher education. 142The major strategy adopted by the Tenth Plan to fulfill the education objectives is the decentralization o f the management o f local schools by handing it over to school management committees at the local level, and changing the role o f district and central level agencies to that o f facilitator, monitor and evaluator. Improving and expanding teacher training programs to upliftthe quality o f education andstrengthening school monitoring and supervision system, inadditionto mitigatingsocial, culturalandfinancialbarriers inorder to ensure easy accessto education are other major strategies. Similarly, promotion o f vocational courses and private sector involvement inextending basic andmiddle level technical education also from a part o f the Tenth Plan strategies. Inhigher education, cost recovery would be adopted as a guiding principle. 143Transferring schools to school Management Committees has already beeninitiated under the Yh Amendment to the Education Act; and this policy will be further accelerated and expanded. School Management Committees will be made responsible for the recruitment o f new teachers. Teacher training at both primary and secondary education levels will be expanded. The government will also provide partial grants to community schools that do not receive government funding, and encourage the private sector to undertake production and distribution o f textbooks to ensure adequate supply and timely distribution. The government will take steps to expand adult literacy by setting up Community Learning Centers with the increased participation o f CBOs, NGOs and local bodks. It will also expand the policy o f granting scholarships to fist child or fist girl o f poor families from which none o f the members have completed primary education. Effective system to provide middle level technical education for the poor will be introduced. With the effective implementation o f proposed activities in the education sector, the net primary school enrolment is expected to increase to 90 percent from the existing 82 percent. Accessibility and the quality o f education will improve significantly; while the percentage o f primary school repeaters will decline. The expanded literacy program is expected to increase the adult literacy rate to 63 percent. Enrolment o f girls and disadvantaged children at primary level will increase significantly. 53  Reforms in higher education with a view to enhance financial sustainability and market relevance will be supported. 144Education reforms announced by the government recently will help to expedite the implementation o f this agenda. As noted, the handover o f management responsibilities to School Management Committees together with adequate funding through District Development Councils has been startedinitially inselected districts. The government has also announced a new program to: (i) provide free education y to tenth grade for "oppressed, backward and below poverty line students"; (ii) providing education inmother languages (of communities) up to the primary level; (iii) regulating fees in private schools; (iv) providing basic facilities in privatehoarding schools to students from "oppressed and backward communities" and (v) the setting up o f a Rural Education Development Fund (financed by a levy o f 1.5% o f the income o f privatehoarding schools) which would be utilized for funding the education o f marginalized communities. 145The health sector i s o f critical importance for human development, improving living standards inrural areas andfor mainstreaming marginalized groups and communities. Despite significant progress in recent years, service delivery in the health sector remains weak. Although an extensive network o f primary healthcare centers has been constructed nation- wide, it has not been functioning well inmany rural areas due to lack o f trained staff, drugs and medicines, etc. The sector's overall performance has suffered due to inadequate funding for essential recurrent expenditures, misallocation o f resources and limited capacity for supervision and, for co-ordination o f the activities o f other agencies providing health care services. 146To address the health sector needs, the government formulated a Health Sector Strategy in August 2002, which provides a coherent strategic framework to involve all the stakeholders. The key sector objectives are: (i) Extending essential health care services to all, with special emphasis on the poorer population living in rural areas; (ii) Management o f the growing population by enhancing the accessibility o f rural population to family planningservices and expanding maternal and child health services; and (iii)Ensuring effective control o f communicable diseases, such as Malaria, andTuberculosis, as well as HIV/AIDS. 147The Tenth Plan has adopted a number o f strategies to achieve these objectives: (i) Expansion o f primary health centers and district hospitals, and strengthening out-patient services inhospitals; (ii) Development and retention o f trained healthpersonnel inrural areas; (iii)Increased supply of essential drugs andvaccines; (iv) Improveddelivery ofhealth services, publicly, through decentralized managemenddelivery, through increased participation o f the private sector, INGOs and NGOs, or through public -private partnerships; (v) Improvedregulatory mechanisms to ensure the quality and accessibility o fhealth services; and (vi) improving humanresource devebpment andmanagement andhealth care financing. 148The major policies andprograms to implement these strategies include, among others, the following: As noted, primary health centers and outpatient facilities in hospitals will be expanded. In order to mainstream the marginalized groups and regions, efforts will be made to ensure access to a facility within one hour's walk to all, and to initiate special programs in 54  the Midand Far Westem regions. Giventhe inadequate staffingand quality of health facilities inrural areas, the government will make recruitment andtransfer process ofhealthworkers transparent; and adopt an incentive mechanism to encourage them to work inremote areas. The policy o f transferring the management o f sub-health posts and health posts to local communities will be further intensified; andrecruitment o f health workers andprocurement o f drugs will be done at the local level. The community drug program and human resources development program to produce trained health manpower will k further expanded. Focus programs particularly for immunization, safer motherhood and control and prevention o f communicable diseases such as HIV/AIDS, as well as a Health Insurance Scheme will be initiated. Family planning and nutrition programs will be expanded and made more effective. MOH is also developing an annual work plan within the framework of the MTEF and the Tenth Planthat would help implement these key reform actions identified inthe Health Sector Strategy as a part o f a sector-wide approachto improve performance. It is expected that with effective implementation o f these policies andprograms, the existing infant mortality rate will come down to 45 and life expectancy will increase to 65 years from the current 61.9 years. All sub-health posts, some o f the health posts, and some hospitals will be managed by local bodieskommunities by the end o f the Plan. 149The new implementation modalities inthe education and health sectors should be seen as a logical extension o f the decentralization process. Indeed, they represent the operationalization o f the commitment the government made two years ago to transfer increased functions and responsibilities to local governments and communities, starting with education, health, rural roads and agricultural extension services. While the management o f primary schools and primary health centers in specified areas are being transferred to community management committees, funding for them will be channelled through local governments-DDCs and VDCs. The community management committees will be answerable to, and be monitored by the DDCsNDCs for ensuring effective use o f and accountability for resources, while technical support for the management committees will be provided by the district offices o f the line departments, since the DDCs and VDCs do not have sufficient capacity inthis regard at present. Moreover, inboth education and health, the pace o f transferring management to the communities will be gradual, taking into account the management capacity and readiness o f communities to take on such responsibilities, the degree o f availability o f support through NGOs and CBOs, and implementation constraints created by the domestic disorder. As conditions improve, particularly as peace anda degree o f normalcy return to the affected areas, it would be possible and necessary to develop new implementation modalities involving local groups, NGOs and CBOs in order expand the community management approach to those areas also. 150The core objectives o f the DrinkingWater supply and sanitation sector are to increase sustainable access to basic drinkingwater inrural areas and basic sanitation inboth rural and urban areas. Similarly, upgrading basic drinkingwater services inurban and semi-urban areas through private sector involvement and checking water-induced diseases through the supply o f safe drinking water are other major objectives. The main strategies o f the sector are to encourage NGOs, CBOs and the private sector to actively participate in the planning, designing, implementing, operating and maintaining water supply and sanitation schemes 55  with the support from NGOsandthe private sector andto formulate andimplement necessary legislative reforms and cost recovery policies, among others. Among the major policies and activities adopted by the Tenth Plan, the government will revise the 1998 rural sub-sector policy to specify clear roles and responsibilities for the various sector actors. It will also reform and consolidate the institutional mechanisms and approaches to facilitate the implementation o f demand driven community managed programs and projects by making operational a sector monitoring and evaluation system within the line ministries. Likewise, the government will formulate an Act to ensure the autonomy o f the RWSS Fund Development Board. With the completion o f proposed activities, about 3.8 millionpeople will have access to safe and sustainable drinking water services. Girls will have better opportunity to go to schools due to time saved infetching water. Incidence o f water borne diseases will be reduced considerably. SocialInclusion and TargetedPrograms 151As discussed earlier, the Tenth Plan seeks to address gender and ethnickaste -related disparities and facilitate social inclusionby mainstreaming such efforts, i.e. by taking actions under all four pillars o f the poverty reduction strategy, instead o f simply relying o n targeted programs. Accordingly, in implementing key sectoral programs, attention will be paid to ensuring equity o f access to such programs for all, with special attention (and monitoring o f such actions) to assuring access of women and deprived communities, with the explicit objective o f reducing the existing gaps between these groups and the rest o f the population. The following paragraphs briefly summarize the Plan's expectations inthis regard. 152Gender mainstreaming will require a shift away from the traditional reliance on welfare measures to ensuring equal access for women and children to social and economic infrastructure and income and employment generating opportunities created by the broad- based growth process. In addition, to ensure equitable access, women will need to be empowered by removing the social, legal, economic and other constraints, which have traditionally hampered their access to and use o f resources. H o w the Tenth Plan will try to achieve these goals is briefly discussed below. 153The agricultural growth strategy will help landless women (as well as deprived community groups) through its emphasis on the production o f highvalue crops (horticulture, bee keeping) and livestock, which require less land. Irrigation policies supporting shallow tube well development (complemented by strong support to the poor and women) will have similar effects. Inforestry, community and leasehold forestry development based on the user group approach will help to significantly expand income generating opportunities for women, as well as for deprived groups. As discussed, the government also will explore the possibility o f helping the poor to acquire land (through a landbank and/or low cost loans or grants), and improve their access to agricultural inputs and credit. Increased agricultural production and productivity would also help expand wage employment and improve wage levels in rural areas. Attention will also be given to reducing wage differentials between men and women through appropriate revisions in minimum wages. And, ongoing targeted programs for women (for example, entrepreneurship development and skills training, income generation 56  programs, production loans and marketing programs) will be expanded, with priority given to women heads o f households, all o f which would help increase incomes o f women. 154Similar interventions will be undertaken in the social sectors. In education, literacy programs for women will be expanded, with the objective o f raising female literacy to 55%. As noted, scholarship programs for girls will be significantly expanded; and measures will be adopted to increase school attendance by girls and hiring o f more female teachers; and the existing gender bias inthe school curricula will be corrected. In the health sector, the major thrusts o f the p r o g r a w m p h a s i s on MCHprograms, family planningservices, HIV/AIDS control,-should all help women. Mobile clinics will also be used for this purpose. In drinking water, the community user group and demand based approach will significantly expand the role o f women inthis area, through increased voice (minimum40% representation in user groups) and influence in decision-making. And the construction of rural roads and trails, (together with access to drinking water), would contribute significantly to improve quality o f life and increased access to schools, health facilities and markets for women and girls. 155Other key areas where planned actions will significantly help women include: (i) Eliminating legal discrimination against women, by revising existing discriminatory laws; providing legal assistance to women to enforce the provisions o f the newly revised Muluki Ain (inheritance laws); (ii)Affirmative action to increase women's role in public office, administration and community level participation and management, all o f which will contribute to women's empowerment; and (iii) Introducing legal and other changes to prevent disorder against women, including a social education process, involving information campaigns and public discussions about the role o f women and their rights. Women's development will be regarded as a cross cutting theme which runs across the four pillars; and each o f the key ministries which will be responsible for program implementation will be requiredto specifically monitor the impact o f their sectoral programs on women. Inaddition, the Ministry or Women, Children and Social Welfare, and the Poverty Monitoring Unit withh the NPCwill also monitor their progress (see below). 156The approach to mainstreamingthe deprivedcommunitieswill be broadly similar: the emphasis will be on ensuring social inclusion through normal sectoral programs and activities, supplemented by targeted initiatives; for example, with regard to service delivery and infrastructure development, (such as primary schools, health facilities, drinking water etc.), the respective line ministries will be required to give equal attention to deprived communities to ensure that they are served as well as others. They will also be required to monitor and report progress achieved annually. Similarly, in targeted programs, equal opportunities will be provided for deprived communities (for example, in skills training, income generation activities, etc.). The Ministry o f Local Development, together with Nepal Dalit Commission and the National Academy for the upliftment o f indigenous people, which will be created, will monitor these activities. At the VDC level, VDCs will be required to include in their periodic Plans specific measures for meeting the needs o f deprived communities, and report annually o n their implementation. Affirmative action ina number of important areas (such education, health, participation in public service, administration, 57  political life and at the community level) would be taken to help achieve progressive results in this regard, untilsuch time as these communities become sufficiently empoweredto stand on their own, and fight for their rights. 157Targeted Programs. Broad-based economic growth humandevelopment and efforts to achieve social inclusion will benefit the poor. But, despite such efforts, there will be specific groups o f people who may either be unable to escape the poverty trap or take anunacceptably long time to do so. Many o f them lack education, knowledge, skills, and access to resources and opportunities to benefit from general development programs. These groups can be the hard-core poor, assetless, disadvantaged groups, indigenous communities, people living in remote areas, female-headed households andwomen. 158In the past, several programs have been started under both EighthandNinthPlans to meet the needs o f these diverse groups. However, despite some successes, the plans failed to achieve the desire results. Too many fragmented interventions, lack o f ceordination and follow-up, inadequate resources and commitment and lack o f poor-targeted programs were the main deficiencies. 159Along with efforts to mainstream the poor and deprived communities and areas, the Tenth Plan is bringing out a number o f special programs to meet their needs. The basic objective of the targeted programs is to design and implement the programs in such a way so that they benefit the poor. The strategy underlying these programs will be to develop appropriate modalities for the selection or targeting o f the beneficiary groups. The coverage and outreach will be increased inthe case o f successful projects. However, various income cut-off points, geographical targeting, group or self-targeting modalities will be used for various compensatory, market-based and facilitation programs. These measures will help in administering safety net andtargeted programs fairly andequitably. ' 160To improve their effectiveness, the Tenth Plan has adopted some new approaches: (i) Targeted programs o f similar nature, (which were earlier implemented by different agencies with different modalities), will be merged and implementation modalities will be simplified. (ii) centralgovemment agencies asMinistries ofLocalDevelopment, Education, While Health and Agriculture will continue to operate some o f the programs, the government has initiated a Poverty Alleviation Fund (PAF), which will be used as an umbrella program in order to strengthen target-oriented programs. Proposed poverty interventions will be widely discussed with the grassroots organizations, local govemments and the general public inorder to strengthen ownership o f the programs and ensure successful implementation. This will also help ensure that targeted programs will not undermine local governments and that they will correctly target the very poor. (iii) PAF will increasingly utilize NGOs and CBOs as The support groups for the target groups. (iv) Improved modalities will be put inplace to ensure effective monitoring o f the mainstreaming efforts by central government ministries, as well as o f targeted programs. Poverty monitoring will be institutionalized; and a central monitoring unitunder a Joint Secretary has beencreated inthe Nationalplanning Commission (NPC) for this purpose. Also, poverty mapping will be initiated to provide a database for both mainstreaming by the line ministries and targeted programs in order to better identify 58  beneficiary groups and targeting modalities. (v) Additional resources will be provided to the backward regions by the adoption o f a population-based resource allocation formula, with possible additional fhding to reduce existingdisparities. This inturn should enable a number o f programs (such as skills training, literacy etc) to be expanded, in consultation with local communities. And, (vi) actions will be taken to empower the poorer and deprived groups by increasing their representatiodparticipation at various levels of public office and political process. 161The targeted programs envisaged in the Tenth Plan include (a) mult< dimensionallintegrated area development programs for construction o f infrastructures as drinking water, small irrigation, schools, health posts, and trails inbackward areas with the support o f training, credit and technical support activities; as well as (b) group programs, aimed at improving the access of target groups to resources, skills and opportunities for income generation. These include programs such as women's group formation and empowerment, income generation activities, non-formal education, skills training, technology adaptation and advisory services in agriculture and livestock, food for work in famine-hit areas, and occasionally cash grants for food and supplies, among others. Many o f these programs already exist, sometimes overlapping and generally not efficiently run. As noted earlier, they will be streamlined and merged where possible. They will be supplemented by additional programs to ensure availability o f food stuffs (food security) in remote areas, improved access to education for deprived groups, (through scholarship programs) and to rehabilitate people suffering from disorder inaffected areas. 162Targeted programs will also help to increase employment opportunities for the poor. For this purpose, the effectiveness of existing training and skill development programs will be improved, by making such programs more cost-effective and relevant for acquiring the skills neededfor self-employment and for wage employment. For example, migrant workers who go abroad as unskilled labor from poor and deprived groups will be assisted to significantly increase their earning capacity through short duration training in appropriate skills. Other target groups would include youth, dropouts from schools and colleges andthose affectedby the disorder situation needing rehabilitation. Similarly, labor intensive public works and minimum needs programs using local labor will be utilized to help increase income generation in rural areas. Reconstruction and rehabilitation o f damaged infrastructure and other structures will provide a major opportunity in this regard when the law and order situation improves. The Government will also explore the possibility of providing assistance to the landless poor to acquire land through arrangements such as a land bank or cash subsides. 163Mainstreaming the very poor, deprived communities andbackwardregions through faster growth and social and infrastructure development are very essential. However, it will take time, if only because o f limited capacity o f central government agencies. Therefore, alternative ways must be explored to achieve quicker results. A possible approach would be to involve local governments andcommunity groups inarea development efforts and to channel the additional allocations for "infrastructure development in backward areas" through the DDCsNillage Committees themselves. This will be accompanied by mobilization o f deprived 59  (beneficiary) groups through NGOs and CBOs, earmarking funds for deprived groups, involving them and ensuring that they are adequately represented in the decision making process. Good Governance 164The government recognizes that good governance is one area where effective actions will help to make the Tenth Plan different from previous plans. Indeed, as noted earlier, without significant progress in this area, it will be virtually impossible to achieve the objectives outlined under the first three pillars o f the poverty reduction strategy. It is worth noting that Nepal has made significant progress in creating institutional mechanisms and strengthening procedures to improve key governance aspects; for example, accounting and auditing functions within the government are clearly separated, an independent Auditor General's office and an active Public Accounts Committee exist, strong antkormption legislation and institutional mechanisms are in place, and considerable progress has been achieved in computerizing fiscal accounts and strengthening procurement procedure. Notwithstanding these improvements however, the effective enforcement o f procedures and institutional arrangements remains weak, and governance problems abound. T o achieve good progress in terms o f poverty reduction and development, improvements are recessary over a broad spectrum o f public actions, for ensuring the efficiency o f the civil service, assuring accountability, reducing corruption and leakages, and accelerating decentralization as an important vehicle for better delivery o f services, with greater accountability and beneficiary/community participation. The key elements o f the Tenth Plan's strategies inthese respects are discussed below. 165Civil service reforms were started two years ago, but as noted, progress to date has been slow. The Tenth Planseeks to accelerate reforms inthis important area. Its main objectives in this regard are to: (i) accordance with the overall strategy o f streamlining the role o f the in government and transferring responsibilities to local levels, to "right-size" the government and to reduce the growth o f financial administrative overheads; and (ii) make the civil to service efficient, accountable and transparent. (iii) Relatedto the last objective i s the need to strengthen institutional capacity to combat corruption. 166Inregard to the first objective, a number o f actions have already beentaken inthe last two years. On the basis o f the recommendation o f the Public Expenditure Review Commission (PERC), a number o f offices o f line ministries and departments have been merged or closed down, temporary staff have been eliminated or regularized, and several permanent posts have been abolished. A policy o f utilizing surplus permanent staff in development activities conducted by other agencies o f the government, as well as mt creating new posts (hiring freeze) have been adopted. A civil service census o f existing staff to help update personnel records and to match them with the payroll, as well as computerization o f personnel records by the Ministry o f General Administration are under way, while a voluntary retirement scheme has been initiated. The completion o fthese activities, together with austerity measures introduced recently, would also help restrain the growth o f current expenditures. 60  167The reform program to make the civil service efficient, accountable and transparent will involve actions on two fronts: (a) recruitment, transfers and promotions will be merit-based, with transparent criteria (to be finalized by the Ministry o f General Administration), backed upby anannualperformance evaluation system. (i) long-termpay policy will be introduced A together with appropriate decompression o f the pay scales, together with additional economic incentives based on work performance in order to encourage the evolution o f a motivated, honest and independent civil service cadre. The pay structure has already been increased by 5040% 1999 as a step in this direction. (ii) a necessary complement to "right sizing", As capacity and skill mix within the civil service will be improved, with a view to enhancing staff productivity; and adequate training and career development opportunities will be provided for this purpose. (iii) to ensure adequate representation o f women and deprived groups, affirmative action will be introduced. (b) Inparallel, to ensure accountability for work performance, (i)annual work plans and service standards (for delivery o f services/work performance) will be set for central and local level administrative units, together with the publication o f a Citizens' Charter. (ii) Accountability measures (discussed below) will be implemented in order to ensure service delivery, and strengthen supervision, monitoring and compliance with fiscal regulations and standards. (iii) civil service Act will also be The revised inorder to insulate civil servants from political interference and hold them responsible for matters, which fall under their preview. (c) Finally, as an essential part o f civil service reform, the institutional capacity in the govemment for effectively carrying out anti- corruption programs will be significantly strengthened. Improving Financial Management and Accountabiiity 168Nepal already has a good institutional framework for ensuring sound financial management and accountability, including well established regulations and administrative procedures, institutions for their enforcement, for independent auditing and reporting and for ultimate review/oversight by the parliament. However, as noted earlier, these arrangements have not worked well inpractice, leading to considerable corruption, leakages and misuse o f resources and poor development results. Correcting these weaknesses i s critical to the effective implementation o f the Tenth Plan. 169Govemment has taken a number o f steps over the last two years to address these issues, including the formulation o f a comprehensive Financial Accountability Regulations Act in 1999, the adoption o f the recommendations o f the PERC, the Local Self Government Act and the recent Country Financial Administration Assessment (CFAA); and strict enforcement o f these regulations. These collectively represent a systematic approach to significantly improve the budgeting, expenditure management and monitoring system. In this regard, some important measures have already been implemented, while the others are expected to be enforced over the next 1-3 years. The key reforms include the following: (i) The budgeting process is being strengthened. The development budget was prioritized in2002, (as part of a three year MTEF), and the number o f projects/programs was significantly reduced. Priority projects are required to prepare trimesterly work plans with detailed output/physical achievement targets and expected results. (ii) Fundreleases by the FCGO are being linked directly to work programs and the provision o f expenditure reports (on a trimesterly basis) for 61  previous releases. Importantly, the discretion previously allowed to line ministries and agencies to transfer funds between programs and activities will now be restricted. The regular budget will be integrated with the development budget in 2004 and subjected to the same prioritization discipline, and the new expenditure reporting and fund release procedures linking them to performance will be extended to all projects/activities. (iii) Expenditure monitoring capacity within the government is being significantly strengthened; (iv) Together with the enhancement o f the capacity o f internal audit agency (Financial Comptroller General's Office-FCGO), extemal auditor (Office o f the Auditor G e n e r a M A G ) and the Public Accounts Committee. (v) The Government has agreed to the implementation o f the Development Action Plano f the CFAA as per agreed time frame; (vi) Efforts are under way to reform the public procurement system through the enactment o f a IEW procurement law andrevision ofprocurement regulations along the lines suggested inthe recent CPAR, andto enhance capacity building in this regard. (vii) Similarly, steps are being taken to ensure accountability o f local governments for activities that will be transferred to them (see below). (viii) Similarly, to ensure transparency andaccountability, information on budget allocations, expenditures and outputs will be published, and made available to the public. Inthis context, a web portal for HMG/N has been created, with links to govemment departments forms information on programs and activities; (ix) a Political Party Law was enacted in 2002 requiring the Auditor General to audit the accounts o f all political parties; and (x) to create increased public awareness, FMradio programming has been opened up to the private sector, while freedom o f Information Legislation i s expected to be enacted, and the National Vigilance Center is to be strengthened by mid 2004. Finally, a series o f actions have already been taken to reduce corruption and misappropriation; and a comprehensive Anti-Corruption strategy have been approved and action planfor the implementation is being worked out. 170Effective implementation o f the government's Anti-CorruptionStrategy is important to ensure good governance. Inits drive against corruption, the Tenth Plan's main objective i s to prevent corrupt practices and leakages in order to ensure proper use o f public resources and improved service delivery. The major strategies being adopted for this purpose are to formulate and effectively implement an anticorruption strategy, and strengthen the judicial system andinstitutional arrangements for prevention of corruption. 171An important start has been made recently in taking effective actions in this area. Legislation to strengthen the Commission for Investigationo f Abuse o f Authority (CIAA) has been enacted, a special court for speedy handling o f corruption cases has been established recently, and a Judicial Commission for investigating into holding o f property and financial assets by politicians and senior government officials was established and the report has been submitted to the government. An Antimoney laundering Act will be enacted soon to discourage andcontrol corruption. Similarly, National Vigilance Center will be activated and strengthened, while the Commission for Investigation o f Abuse o f Authority (CIAA) will be strengthened by increasing its budgetary, physical, human and technological resources, and the establishment o f district'regional CIAA offices. With the effective implementation o f these programs, corruption will be reduced considerably leading to efficiency in resource allocation and service delivery. Delivery o fjustice will become effective while the integrityo f the public service will also improve. 62  Decentralization 172Decentralization is an important means o f bringing development closer to the rural poor-by involving local communities in developing appropriate programs which are best suited to their needs and in implementing them, ensuring greater accountability for use o f public resources, and mainstreaming the poor and deprived groups. The local Self Governance Act (LSGA, 1999) provides a framework for decentralization, which the government has agreed to implement in a phased manner. The Local Bodies Finance Commission (LBFC) has also recently made recommendations for fiscal devolution. A Decentralization Implementation and Monitoring Committee was also set up to oversee effective implementation. But progress so far has been hampered by institutional capacity and fiscal constraints, andmore recently by the dissolution o f elected local bodies. 173The main objectives o f the Tenth Plan in this area are to ensure greater participation o f people in the governance process to accelerate the development process by implementing fiscal devolution in a phase-wise manner as envisaged inthe LSGA; and creating necessary institutional mechanisms including the formation o f a Local Service Commission. The main strategies being adopted to achieve these objectives include: the devolution o f basic service delivery functions, capacity building o f local bodies and decentralization o f certain revenue mobilization functions to local bodies. The major activities being undertaken to carry out this strategy include the transfer o f the management and operation o f DIDO, schools, healthposts, postal service, agriculture and small irrigation projects, as well as rural roads, to local bodies. The government will constitute local service cadres and enhance the planning, management and evaluation capacities o f the local bodies by providing the necessary training and equipment. Revenue collection and fiscal management o f local bodies will be improved and auditing and accounting system refined. As a result o f these initiatives, it i s expected that over the Plan period, 25,000 primary schools, all sub-health posts and agriculture extension services will be transferred to local bodies. The share o f local revenue in the local bodies' budget will rise, transparency and accountability will increase and service delivery to communities at village levels will improve considerably. 63  n Financing The Tenth Plan Introduction 174The formulation o f a well-designed strategy through extensive nation-wide consultations i s a major milestone in the drive to reduce poverty and mainstream the poor. The real test o f this strategy, however, depends on: (a) whether it is credible and realistic in relation to the socio-political challenges andresource constraints facing the nation, and (b) whether it can be effectively implemented in order to deliver the expected results to the poor. This section briefly reviews the financing aspects o f the Plan, while its implementation and monitoring aspects are discussed inSection VII. 175In the present circumstances, it is possible to take different approaches to the (Tenth) Plan's development strategy and its macroeconomic framework. One could be a "business as usual" approach, setting higher targets and ambitious goals. However, this is very risky, because the Planmay not be implementable inthe absence o f domestic and external resources that are needed. A second approach would be to be very conservative, even err on the side o f caution, and project the current gloom into the future in the belief that the situation will get worse before it begins to improve, and that donors' support would gradually erode. Such an approach based on "low case" projections however i s equally undesirable and self-defeating; they could lead to a self-fulfilling downward spiral, inwhich poverty may only get worse. A third would be to chart a course inbetween: accept fully the current constraints for the short term, but take the difficult steps that are needed to move the economy on to a higher path as quickly as possible and win the support o f stakeholders in that process. This would require limiting development activities to resource availabilities right now, but as the situation improves and more domestic and external resources become available through positive and pro-active actions, expand development/poverty reduction programs to higher, sustainable levels. This is what the Tenth Plan tries to do. 176It is also important to keep the Plan's objectives inperspective. First, the Plan is expected to meet the needs of multple audiences. The donor community-Nepal's important development partners-are a vital part o f that audience. The Plan is also for domestic constituents. A Plan which offers only gloom and doom and continued sacrifices for the latter, without a ray o f hope for the future is a recipe for social and political disaster. Second, the Planhas beenunder preparation for nearly two years now; and given the rapidity with which recent events have unfolded, the Plan drafts have already been revised several times. Taking more time again to revise the Planinline with the latest developments as they unfold is a "no- win proposition", because it can be an un-ending process. Third, it is not necessary to do so. As indicated elsewhere in this report, the Tenth Plan should k seen as a flexible strategic 64  document, not as an immutable Master Plan. It has built-in mechanisms to adjust its size, priorities in terms o f projects/programs and activities, and resource allocations and expenditure levels to actual resource availability on an annualbasis, (or even more frequently, ifneeded). Ifresource availability is less, budget allocations especially for lower priority activities can be reduced; and, if the resource situation improves, Plan expenditures can then be increased accordingly. As discussed below, the Government has already clearly demonstrated its willingness and ability to adjust the public expenditure program to resource availabilities and prioritize it to protect the PRSP's key poverty reduction priorities through the MTEF; and in actual implementation managed it even more tightly during the course o f this fiscal year. 177Accordingly, the rest o f this section briefly reviews the Tenth Plan's strategy with regard to its financing. It starts with the "normal case"-what the government would like to do, if resources are available. Even here though, the program for the first year has been sharply reduced, (reflecting the present resource constraints), but picks up quickly thereafter. Recognizing that the resolution o f the present fiscal and socio-political constraints may take more time and the Plan's targets and expenditure programs may have to be scaled down for a longer period, a "lower case" scenario, (which is really a base case) is then presented. The lower case scenario is indeed the operational basis at present, and will be adjusted every year through the MTEF as resource availabities and development needs change, (for example as may be required with the progress o f the peace negotiation process). And, as and when resource availabilities improve, the Government will try to move up to the normal case scenario to the extent possible. The remainder o f this section will discuss how future expenditure adjustments will be made in practice, (through the MTEF, expenditure prioritization etc); as well as the actual adjustments that have been made so far in this year's budget to f m l y anchor the Tenth Plan to resource availability and to protect its poverty reduction priorities through the MTEF. A third "low case" scenario is not separately discussed, because these built-inmechanisms will help reduce the Plan expenditures further in a systematic way, ifneeded. Macro-economic Framework 178The macreeconomic framework o f the Tenth Plan has been set taking into account the economic growth target, the financial resources required to meet that target, and the incremental capital output ratio estimated at 4.3:l. Given the fact that resource availability, implementation capacity and Plan outcome will be heavily influenced by the law and order situation in the country, the macro economic framework has been designed o n the basis o f two scenarios for targeted economic growth. The first-Normal Case-assumes that restoration o f peace within the first year o f the Planwould provide room for a GDP growth o f 6.2 percent per annum. The investment requirement to attain this growth, given the incremental capitaloutput ratio, would be about Rs. 610 billionfor the entire Planperiod. As private sector i s expected to contribute about 72 percent o f this investment, the required government investment for attaining the growth target would be Rs. 170 billion for the Plan period. The corresponding development outlay by the Government would be Rs. 234 billion. 65  The annual decomposition of this development outlay is inline with the MTEF, which was formulated in FY 2003. Starting from Rs. 32.5 billion in the first year o f the Plan, development expenditure would reach Rs. 51.5 billion inthe thirdyear of the Plan. 179In case the restoration o f sustainable peace takes a longer time, the 'normal' economic growth would be difficult to attain. A risky investment climate for the private sector, resource constraints in the public sector and constrained Plan implementation capacity would hamper the growth potential. Accordingly, economic growth in the constrained environment is expected to be confined to only 4.3 percent per annum under this altemative 'low case' scenario. The investment requiredto attain the lower growth target would be Rs.457 billion. O f this, the investment to be made by the government would be Rs. 129 billion; and the corresponding development expenditure level would be Rs. 178 billion for the five year Plan period. Accordingly, from Rs. 29 billion inthe first year, the development expenditure will rise to Rs. 40.5 billion inthe thirdyear of the Plan. 180The key assumptions underlying these two scenarios are discussed in some detail below. However, it is worth noting that maintaining a sustainable macroeconomic framework and ensuring macroeconomic stability are built inas key imperatives under both scenarios. The major differences between the two scenarios are with regardto the scope for mobilization o f govemment revenue and domestic/national savings, (both o f which will be closely related to the levels of economic activity/growth), andthe feasible levels ofextemal assistanceinflows. Under both scenarios, prudent monetary, fiscal and exchange rate policies designed to keep domestic inflation at around 4.5% p.a. and foreign exchange reserves at comfortable levels (nine months' imports equivalent) will be pursued; and the overall fiscal deficit (after grants) is expected to remain at a sustainable level o f about 5 percent o f GDP throughout the Plan period. Much of this deficit would be financed by concessional extemal loans; and domestic borrowing will average only about 2.0 percent of GDP per annum over the Planperiod. Such a fiscal deficit would not pose any serious threat to price and balance o f payments stability o f the country. Financing this defic it through the planned level o f domestic borrowing also will not lead to a substantial rise inthe debt burdenof the govemment. Debt servicing will remain within affordable limits. TheNormal Case 181The Normal Case Scenario is basedon a number o f critical assumptions: (i) security The situation will improve beginning in the second half o f 2002103, helping to bring about a modest revival in tourism and domestic economic activities. (ii) The agriculture sector is expectedto grow at a modest rate. These will helpthe economy to achieve a 3.3% growth rate in2002/03. (iii) economic conditionswill alsoimprovein2003/04, helpingto achieve Global faster GDP growth from then on---6.l% in2003/04, rising to 7.5% in2006/07. (iv) Lower revenue growth will initially constrain development spending in 2002/03 to only about Rs. 32.5 billion; but will recover strongly after that. (The revenue/GDP ratio will rise from 12.0% in FY 2002 to 14.0% inFY 2007). (v) Savings and investment rates, after a slow start in 2002103, are expectedto grow by 11%and 9% per annumrespectively duringthe Plan period. (National savings will rise from 17.4% o f GDP in FY 2002 to 23.1% in FY 2007). (vi) 66  Prioritization o f projects and improved monitoring will increase the effectiveness of public expenditure and bring positive results; and (vii) Accelerated reforms will help attract more foreign assistance and raise growth rates further, especially during the last 2 years o f the Plan period. 182Investment requirements o f the Tenth Planhave been estimated by usingthe Input-Output methodology. A number o f strategic choices made inthe Plan, (for example, the needto focus on investments which can give quick results, the emphasis on agricultural and social development as the mainstay o f the poverty reduction strategy, and the need to make the administration efficient and cost-effective), influence these estimates. Similarly, other cross- cutting themes which runright through the Planstrategy, such as limitingpublic interventions andfocusing them on critical areas where they can make the most beneficial impact, (such as social sector development), increasing the reliance o n the private sector for the development o f infrastructure etc., also have a significant impact o n the pattern o f investment. (These, as well as the prioritizing o f activities to be included in the Tenth Plan are discussed in some detail inthe sectoral chapters). 183The investment requirements for the normal case derived on this basis and their broad sectoral composition are summarized in Table 12. A few comments help to clarify some of the numbers presented in that table: (i) agriculture sector's share o f total investment The (13.8%) includes its direct share only. There are additional investments which contribute to increasing agricultural production andproductivity, (such as agricultural and rural roads, rural electricity etc), which are included under the programs o f those sectors. (ii) Similarly, apart from the social sector investment (of 31.5% shown inTable 13), there are large expenditures o f a recurrent nature in these sectors. (In education, for example, recurrent expenditures account for nearly 70% o f total sectoral expenditures, and inhealth, about one-half). (iii) The construction sub-sector's share also represents only its direct investment, since capital expenditures on large projects (such as those for electricity generation and surface irrigation) are included under those sectors. 184Subject to these caveats, Table 12 shows that: (i) total gross capital formation o f about Rs. 610 billion would be required to implement the poverty reduction strategy and attain the targets and goals set under the normal case. (Gross investment, including stock changes, would be about Rs. 641 billion). This level o f investment is equivalent to 25.9% o f GDP projected under that scenario, about two percentage points above the somewhat disappointing investment/GDP ratio which was actually achieved during the NinthPlan. (ii) The larger part o f the investment (roughly 72%) is expected to be undertaken by the private sector, with the public sector undertaking the remaining 28%. This is higher than the past ratio o f 63% during the NinthPlan; but it reflects the Tenth Plan's strategy o f reducing public interventions except incriticalareasandthe increasedrelianceonthe privatesector. (iii) sectoralcomposition The o f proposed investment strongly reflects this structural shift. Public investment is expected to focus mainly on the social sectors and agriculture-related activities, transport and electricity and water, where there are still a number o f large ongoing public sector projects, (such as Marsyangdi Hydropower and Melamchi). The private sector, on the other hand, is expected to contribute the dominant share o f investment in finance, servic es, construction, manufacturing, 67  trade, tourism, hotels and restaurants etc. Its share inagriculture, electricity and transport and communications (where the public sector role has traditionally been important) is also expectedto grow rapidly. Table 12: Investment requirements of The Tenth Plan (Normal Case) (Rs. billion, in 2001/02 prices) Gross Of Which Sectors Capital Fixed Percent Government Private Sector of Total Formation Amount Percent Amount Percent Agriculture, IrrigationAnd Forestry 84.4 13.8 31.8 18.7 52.6 12.0 NonAgriculture 525.4 86.2 137.9 81.2 387.5 88.0 Social Services 131.3 21.5 64.1 37.8 67.2 15.3 Industryand Mining 36.7 6.0 1.4 0.8 35.3 8.0 Electricity, gas and Water 86.1 14.1 33.3 19.6 52.8 12.0 Construction 13.2 2.2 0.0 0.0 13.2 3.0 Trade, Hotels and Restaurants 44.6 7.3 2.0 1.2 42.6 9.7 Transport and Communication 122.3 20.1 34.4 20.3 87.9 20.0 Finance, Real estate, Services 91.3 15.0 2.7 1.6 88.6 20.1 Total Fixed Capital Formation 609.8 100.0 169.7 100.0 440.1 100.0 185Inaccordance with the poverty reduction strategy, pubic sector development expenditures (Table 13) are expected to focus mainly on agriculture, irrigation and forestry (24%), social sectors (39%), transport and communications (16%) and dectricity and water (15%). The combined share o f agriculture and social services is expected to rise from 55% of development spending under the NinthPlan to 63% under the Tenth Plan. Table 13: Sectoral Allocation of Development Expenditure- Normal Case (Rs billion in 2001/02 Prices) Sectors Ninth Plan Target Ninth Plan Estimate Tenth Plan Target Amount Percent Amount Percent Amount Percent Agriculture, Irrigation and 67.4 27.1 32.7 19.2 56.2 24.0 Forestry Non-agriculture 181.9 72.9 138.2 80.8 177.8 76.0 Social Service9 83.0 33.3 61.I 36.0 90.4 38.6 Industry and Mining 2.1 0.8 2.7 1.6 2.3 1.o Electricity, Gas and Water 46.6 18.7 30.8 18.1 36.0 15.4 Trade, Hotel and Restaurant 3.8 1.5 3.2 1.9 3.5 1.5 Transport and Communication 43.8 17.6 29.8 17.6 36.4 15.6 Finance and Real Stateb 0.3 0.1 6.6 3.9 2.7 1.2 Miscellaneousc 2.1 0.9 2.9 1.7 6.5 2.8 Total 249.3 100.0 169.8 100.0 234.0 100.0 a Including targeted programs. b Including financial sector reform program. c Administration reform, plan, statistics, science and technology, labor and supplies are included. 186Table 14 helps to explain how total investment in the economy and government development expenditures are expected to be financed under the normal case (Annex 3 provides the annual break-down o f these numbers). While total investment is expected to rise by about four percentage points of GDP between 2001102 and 2006107, it is expected to be matched by a similar increase in domestic and national savings. Higher economic growth 68  would enable significant increases in both per-capita consumption and domestic savings, while the continued growth o f remittances by Nepali workers abroad would help to further augment national savings. And, the evolution o f a more efficient and dynamic financial system (as a result of ongoing financial sector reforms) would help intermediate such savings for private investment. However, it is important to recognize that the assumed ICORs, and the associated investment and savings estimates, may be too high, ifthe potentialefficiency gains from the new emphasis on implementation and service delivery, public expenditure prioritization and greater private involvement are realized. Table 14: The Tenth Plan Macroeconomic Projections- Normal Case Scenario (In 2001/02 Prices) Ninth Plan Tenth Plan Tenth Plan Change 2001102- End 2001102 End 2006107 Average 2006107 (% of GDP) Economic Growth GDP Growth (real) p.a. -0.6 7.5 6.2 4 . 1 9 Per Capita GDP Growth (real) p.a. -2.9 5.4 4.0 4 . 3 Investment and Savings (%of GDP) 0 Total InvestmenC 24.4 29.0 25.9 4 . 6 Gross Fixed Capita formation 23.2 27.7 24.6 +4.5 Private 13.2 19.9 16.7 +6.7 Public 10.0 7.9 8.0 -2.1 Total Consumption 88.4 83.8 86.1 -4.6 0 Domestic Savings 11.6 16.2 13.9 4 . 6 National Savings 17.4 23.1 20.4 c5.7 Balance of Payments (% of GDP) Exports of Goods & NFS 16.1 17.9 18.5 +I .a Imports of Goods & NFS 28.9 30.7 30.5 1.a Factor lncomeb 5.4 6.5 6.5 +I .I 9 Current Account Balancec -7.0 -5.9 -5.5 +1.1 Government finances (%of GDP) Government Revenue 12.0 14.0 13.0 +2.0 Government Expenditure 19.3 21.3 20.4 +2.0 Regular 11.7 9.7 11.0 -2.0 Development 7.6 11.5 9.5 C3.9 Government Budget Balancec -7.3 -7.3 -7.4 Gross Foreign Aid 4.7 5.9 5.4 t1.2 Grants 2.1 2.0 2.2 -0.1 Loans 2.6 3.9 3.2 +I .3 Domestic Borrowing 2.6 1.4 2.0 --1.2 Inflation (% p.a.) 2.9 4.6 4.5 a Includes changes in stocks. bIncludes net transfers. cExcluding grants. 187The Plan strategy recognizes the importance o f sound fiscal management for creating a sustainable basis for continued higheconomic growth and social development by maintaining macroeconomic stability and reducing the excessive dependence on foreign and domestic borrowing in order to mitigate the rising debt burden. To this end, it seeks to accelerate revenue growth, reduce the growth o f current expenditures, and limit development expenditures to sustainable levels. 69  Accordingly, under the Normal Case, anearly resolution of the conflict, togetherwith efforts to "right size" the administrationand reducedadministrativecosts, would help to bring down the regular expenditure/GDPratio from 12.7% this year (and 11.7% in 2001/02) to the pre- conflict level of around 10% by 2006/07. Similarly, a recovery in economic activities and strong efforts to improve revenue collections (for example, by strengthening tax administration, and making it autonomous, revising and periodically updating customs valuation, reducing tax exemptions and rebates, widening the tax net etc.) would help raise the revenueratio gradually (from 12.0of GDP in2001/02to about 14%by 2006/07. The Plan also seeks to encouragethe donor community to provide more grant funding, and inline with the govemment's Foreign Aid Policy (2002), to invite foreign loan assistance primarily to support poverty reducingpriority activities. While a modestrise inthe foreign aid/GDP ratio to 5.9% in 2006/07 is projected, as a matter of policy, domestic borrowing will be reduced (from 2.6% of GDP in 2001/02) to about 1.4% of GDP by 2006/07. However, increased revenue surplus (higher revenues, lower current expenditures) and aid inflows would allow developmentspendingas a percentage of GDP to rise from 7.6% of GDP in2001/02 to about 11.5% by 2006/07 under this scenario. During the Tenth Plan period as a whole, foreign financing would be equivalent to 58% of the development budget-about the same ratio (56%) under the NinthPl-while domestic borrowing would finance 21%, andthe revenue surplus the remaining21% (See Table 14). 188The TenthPlanrecognizesthat there are considerableuncertaintieswith regardto the key assumptions made inthe normal case scenario, andthat ifthese assumptions are not realized, it would be difficult to attain the poverty reduction targets. The major risks inthis regard include the following: (i) restoration of internal law and order will take more time. This The will slowdown and prolong the recovery of the economy; and (ii) Resource constraints will continue to hamper development efforts for a longer period. Revenue growth will be lower (due to slower economic recovery) and current expenditures cannot be reducedquickly (due to continuationof the disorder); (iii) recovery of the global economy may also take more The time, so that externaldemandfor commodity and labor exports from Nepal may remainweak, and this will leadto slower growth of domestichational savings. The overall impact of such developments would be to significantly slow down economic growth, overall investmentand government's development activities, and consequently development results in terms of poverty reduction. In such a situation, the government will need to pursue the economic reform agendaevenmore vigorously. TheAlternative Case 189Recognizingthat some of these risks outlinedabove may indeedmaterializeand constrain resource availability and the potential for economic recovery and growth, the Tenth Plan incorporatesan altemative lower case scenario to indicate how the governmentwill deal with such a situation (Table 15). The key assumptions of the lower case scenario include the following: (i) security situation will improve late in (beginning in the last quarter of) The 2002/03; (ii) The recovery in the domestic economy will be slower and take longer, with a slower rate of growth in exports and remittances reflecting slower recovery o f the 70  international economy also. (iii)Revenue growth will be slow, reflecting the continuing weakness in the economy. The revenue/GDP ratio, after an initial decline (from 12.0% in 2001/02) to 11.8% in 2002103, will rise slowly to 13.0% by 2006/07, averaging only 12.4% p.a. for the Tenth Planperiod. (iv) Current expenditures will decline marginallyfrom 11.7% in 2001/02 and 12.6% in 2002/03 (reflecting the need to sustain some security-related expenditure) to 11.1%of GDP by 2006/07, and average 11.9%p.a. of the TenthPlanperiod. (v) Gross aidinflows will increase only modestly (from 4.7% of GDP in2001/02 to 5.7% in 2006/07); (vi) but, the govemmentwill continue to limit domestic borrowingto limit the debt burden; and such borrowingwill fall steadily from 3.2% of GDP in 2002103 to only 0.8% in 2006/07. (vii) The cumulative effects of these assumptions are that resource availability for financing development spending by the govemment will remain very tight. For example, in 2002/03 development spending is assumed to be only Rs. 29 billion (equivalent to 6.5% of GDP) compared to a budget target of Rs. 38.3 billion and actual spending ratio of 7.6% in 2001/02. Moreover, development expenditure/GDP ratio will rise only gradually to 8.4% by 2006/07, averaging 7.6% of GDP p.a. over the Plan period. (viii) Under this scenario domestic/ nationalsavings and overall investment levels inthe economy will decline below the 2001/02 levels, reflecting a sharp decline in these variables during the current year (2002/03), followed by a very modest recovery in the next few years. Thus, nationalsavings are expectedto reach only 16.1% of GDP by 2006107, and total investment in the economy only 21.8% by 2006/07 (Table 15). Therefore, to attain a growthrate of 4.3% p.a. over the Plan period, a significant improvement in the efficiency of the use of resources will be required. This is of course what the Tenth Plan strategy tries to do by prioritizing expenditures, focusing on quickretums andresults interms of output andservice deliveryand improvingaccountability andmonitoring. 190Giventhese assumptions, the economy's performance interms of GDP growth, social and infrastructure developmentandpovertyreductionwill be significantly lower under the Lower Case thanunder the Normal Case (Table 12, last column). For example, GDP growthwill be only about 2.0% in 2002/03, and rise slowly thereafter to 4.0% and 4.5% in the next two years, though picking up thereafter to 6.0 % by 2006/07. For the Tenth Plan period as a whole, GDP growth will average4.3% p.a., permittingper-capitaincome growth of about 2.0 YOper annum. This is still better than the GDP and per capita income growth rates of 3.6% and 1.3% respectively achieved during the Ninth Plan, but not good enough from a macroeconomic perspective to achieve significant progress in poverty reduction. Not surprisingly, development programs, activities and results in virtually every area would be constrained. However, qualitativeimprovementsinthe public expenditureprogramand supporting private sector investments can still make a significant difference in terms of development/poverty reduction results. For example, prioritizing the public expenditure program and directing limitedpublic resources to the most important areas for poverty reduction,channellingdonor aid and private initiatives to support the same objectives, and focusing intensively on the effectiveimplementationof these programsto ensure better service delivery will help achieve better development results from the same resources and growth efforts. Accordingly, the government has initiated, andbegunto vigorously implement, an extensive economic reform 71  agenda (including the MTEF and related public resource management measures), which is summarized inthe Immediate Action Plan. Table 15: The Tenth Plan-Macroeconomic Projections-Alternative Scenario (In 2001/02 Prices) Ninth Plan Tenth Plan Tenth Plan Change 2001102- ~ End 2001102 End2006107 Average 2006107 (% of GDP) Economic Growth GDP Growth (real) p.a. -0.6 6.0 4.3 hQ.9 Per Capita GDP Growth (real) p.a. -2.9 3.9 2.1 hQ.9 Investmentand Savings (%of GDP) 9 Total Investments 24.4 21.8 20.8 -2.6 Gross Fixed capita formation 23.2 20.5 19.5 -2.7 Private 13.2 12.0 11.1 -1.2 Public 10.0 8.6 8.4 -1.4 Total Consumption 88.4 90.8 90.9 +2.4 DomesticSavings 11.6 9.2 9.1 -2.4 National Savings 17.4 16.1 15.7 -1.3 Balance of Payments(% of GDP) Exportsof Goods & NFS 16.1 14.8 16.5 -1.3 Imports of Goods & NFS 28.9 27.4 28.2 -1.6 0 Factor lncomeb 5.4 6.5 6.6 +1.1 Current Account Balancec -7.0 -5.7 -5.1 +I .3 Government finances (%of GDP) Government Revenue 12.0 13.0 12.4 +I .o Government Expenditure 19.3 19.5 19.5 +0.2 9 Regular 11.7 11.1 11.9 -0.6 Development 7.6 8.4 7.6 4 . 8 Government Budget Balancec -7.3 -6.5 -7.1 +0.8 Gross Foreign Aid 4.7 5.7 5.1 t1.0 Grants 2.1 2.2 2.2 4 . 1 Loans 2.6 3.5 2.9 +0.9 Domestic Borrowing 2.6 0.8 1.9 -1.8 Inflation (% D.a.1 2.9 4.6 4.5 a Includes changes in stocks. bIncludes net transfers cExcluding grants Medium Term ExpenditureFramework (MTEF) 191Recognizing the fiscal deterioration and the need to revise the Tenth Planaccordingly, the Government initiated the preparation in parallel of a Medium Term Expenditure Framework(MTEF)inlate 2001. The key objective o fthe MTEFwas to beginto implement the Tenth Plan from the beginning of the fiscal year 2002/03, without waiting for the formal finalization o f the Plan. Accordingly, the key projects/programs and activities that are considered essential for achieving the Tenth Plan's poverty reduction goals and their resource requirements for the next three years were to be identified, and were to be given priority in terms of budget allocations in the 2002/03 budget. Additional considerations guiding the MTEF, inview o f the fragility of the fiscal situation, were: (i)ow to streamline the budget H 72  which was already overextended well beyond resource availability, with over 600 ongoing activitieshudget lines? (ii> H o w to protect the Tenth Plan's key priorities in the event o f further shortfalls inresource availability? and (iii)H o w to ensure that the resources allocated and released for priority activities would be effectively utilized? The MTEF was expected to be the principal instrument for operationalizing the Tenth Plan, by prioritizing the proposed Plan activities according to the changing resource situation, and firmly linking the annual budget process andthe Plan. 192Thus, a three year MTEF was prepared in early 2002 by virtually the same line ministry teams responsible for Tenth Plan preparation, using similar methodology for ranking and prioritizing activities, (but with a sharper focus on implementability, short term financing needs and results). On the basis o f the MTEF, (i) the 2002/03 development budget was initially set at a significantly lower level-Rs. 38 billion, compared to Rs. 50 billion in the 2001/02budget; andthe number o fbudget lines were reduced from over 600 to 430. (ii) Even more importantly, all activities were classified into three groups according to their priority (P, being the highest priority and P3being the lowest); and (iii) principle was established that The the priority classification would be strictly followed in releasing funds for development activities. Thus, P,s will receive fust priority inbudget releases; andP2andP3will get funded only if funds are still available after providing for P,s. This has established clear criteria and methodology for adjusting resource allocations on the basis o f Tenth Plan's priorities, in line with changes in the resource situation. (iv) Finally, resource allocation was linked to expenditure reporting andperformance, inorder to ensure satisfactory results. Thus, under the new system that has been evolved, activities which do not provide statements o f expenditures (SOEs) for the preceding trimester will not be given additional funds, until they provide the SOEs. (Section VI1discusses these inmore detail). 193The MTEF and the associated budget reforms now provide an effective mechanism to adjust the annual expenditure program to the changes in the government's resource position, while protecting the Tenth Plan's priorities. For example, the resource position appears to have become even more difficult duringthe months following the announcement o f the 2002- 03 budget; and accordingly, the MTEF and its macroeconomic scenarios have been further revised and updated to facilitate expenditure management. As noted above, the Lower Case scenario assumes development spending o f Rs. 29 billion for this year, inline with this fiscal deterioration, compared with Rs. 32.5 billion assumed in the Normal Case scenario and the Rs.38 billion in he FY 2003 Budget which was announced last July. The prioritization classification (Pl-P3) has been fiu-ther sharpened to protect the poverty reduction priorities. This i s summarized in Table 16 below, which shows the MTEF allocations for key priority sector activities under the revised Normal Case and Lower Case scenarios. Thus, (i) the budget allocations for the key sectors which are at the center o f agricultural/rural development and human developmentiservice delivery strategies (namely agriculture, irrigation, forestry, roads, electricity, education, health, drinking water and local development) have been increasingly protected; and their combined share is projected to rise from 65% o f total expenditures in FY 2003 to 74% in FY 2005 under the Normal case and from 71% to 76% under the Lower case (Table 16). (ii)Similarly, within these sectors themselves, the key poverty reducing activities are being increasingly emphasized. Thus, within the key sectors, P1 activities as a proportion o f sectoral expenditures are projected to rise from 62% in FY 73  2003 to 72% inFY 2005 under the Lower case, and from 64% to 67% under the Normal case. (iii)Similarly, all P1 activities as a proportion o f total development expenditures would rise from 55% inFY 2003 to 66% inFY 2005 under the Lower case and from 52% to 59% under the Normal case. (iv) It is also important to note that the actual release o f funds is being managed tightly, with funds being released so far only to P1 activities (186 out o f 430 budget lines inthe 2002103 budget). Others will get funded, as noted, only if there are funds available after meeting the needs o f P,s. This mechanism also provides upside flexibility to the government to expand the development program ifthe resource situation were to improve, for example by releasing such additional funds to the next sub-set o f activities in terms o f priorities. This has also obviated the need for another "Low Case" scenario, as discussed earlier, while considerably strengthening the government's capacity to control and manage the development/expenditure program ina difficult environment. Table 16: MTEF-Budget Allocations for Priority Sectors and Activities, 2002/03-2004/05 2002103 2003104 2004105 NormalCase Total DevelopmentExp (Rs. billion) 32.5 40.9 51.4 0 Share of Key Sectors* in Dev. Exps.(%) 65.2 74.5 73.9 Share of PISin Key Sectors (%) 64.2 62.5 67.2 Share of PISin Total Dev. Exps.(%) 51.6 55.2 58.5 LowerCase Total DevelopmentExp (Rs. billion) 29.0 35.0 40.5 Share of Key Sectors* in Dev. Exps.(%) 71.4 73.5 75.5 Share of PISin Key Sectors (%) 616 66.0 71.a Share of PISin Total Dev. Exps.(%) 54.9 59.4 66.2 * Includes Agriculture, irrigation, forestry, roads, electricity, education, health, drinking water and local development. Source: The Medium Term Expenditure Framework (MTEF). 194Eventhough the Tenth Planhas been implemented ina difficult period andthe MTEFhas beenprepared under a resource constraint, it is important that to meet the objective o f poverty alleviation, prepoor activities are protected and the poverty related expenses are increased. Table 17 shows the budget estimates o f prepoor activities identified inMTEF.Although, the given poverty related resource projections have to be reviewed and strengthened, allocation reflects the commitment o f the government for prepoor economic activities. The table shows that the percentage o f prioritised poverty expenditure will increase from 67.6% inFY 2003 to 80.1% in FY 2005. Emphasis o f the poverty focused expenditure has been mainly in enhancing agriculture focused economic growth, human development and targeted program for streamlining the deprived communities. 195Thus, the MTEF represents a major step forward in operationalizing the PRSP/Tenth Plan. It is an extremely useful instrument for managing downsidehpside risks, protecting the key poverty reduction priorities o f the Planand for ensuring tight fiscal management. Indeed, Nepal is currently the only country inthe South Asia Region, which is rigorously utilizingthe MTEFas animportant operational instrument. Notwithstanding the progress, which has been achieved over the past year, however, there are a number o f weaknesses in MTEF preparation, which need to be addressed: (i)The MTEF at present focuses only on development expenditures o f the Government. To make it more useful, the Government intends to expand it to include regular expenditures also, and to improve the expenditure 74  classification to conform with international norms, on the basis recurrenthapita1 (instead o f regular/development) expenditures. (ii)Unit cost estimates which are used for costing programs and activities need to be improved. Unit costs can and do vary significantly for similar activities between urban and rural areas and between regions; but the information currently available within most sectors are not robust. The government intends to improve such estimates by undertaking field surveys and developing sector and activity-specific estimates in the future in order to improve expenditure estimates, as well as monitoring o f progress. In this context, an important start has been already made towards improving personnel costs through the computerization o f personnel records as noted earlier. (iii) The prioritization o f activities needs to be significantly improved by consistent application o f the ranking criteria, so that the MTEF accurately reflects the PRSPRenth Plan's poverty reductionpriorities. MTEF developed and implemented inFY 2002/03 was a good start, more can and will be done on the next round o f the MTEF to improve the prioritizatiodranking process. (iv) Finally, to enhance its operational usefulness, the resource estimates underpinning the MTEF will need to be revised and updated regularly. While this is being done now, the estimates o f aid inflows are still subject to considerable uncertainties; andthese needto be forecastedandmonitoredbetterwith the co-operation of external donors. Table 17: Major Poverty Related Development Expenses(Rs. billion) Sector Budget Projection FY2002103 FY2003104 FY2004105 Education Basicand Primary Education, Scholarshipand Women's 2.34 2.57 2.83 education Health 0 BasicHeaim and FamilyPlanning 1.55 1.78 1.97 DrinkingWater Supply and Sanitation 3.53 4.74 9.93 Rural Electrification Rural ElecbificaPon and disbibution alternate energy 1.47 2.21 2.42 Agriculture - Programsfor increasingagricultureproductivib,crop 2.06 2.44 2.73 diversification, research, extension and hining Irrigation 2.58 2.35 2.98 Incomegenerating forestry activities 0.15 0.16 0.17 Rural InfrastructureDevelopment 5.20 5.64 6.53 Grant to local communities 2.87 2.96 3.42 Skill Development 2.77 3.02 3.28 (Only of Ministry of Educafion, Minisby of lndusbyand Ministry of Labour) Poverty Alleviation Fund 0.17 0.5 1.o MicroCredit 1.47 1.74 2.08 Total 26.16 30.11 39.34 Total Development Budget 38.68 43.07 49.1 (%of PrioritizedPoverty-Expenditure) 67.6 69.9 80.1 196The potential fiscal stress emanating from the current as well as prospective external and domestic developments even under the Lower Case scenario underlines the need for continued revisions to andupdating o fthe MTEF.A major potential impact of risk i s the Iraq war, on the global economy and implications both directly and indirectly for Nepal's commodity and labor exports, remittances, tourism earnings, oil imports and transport costs, and economic growth, as well as for the mobilization o f government revenues and domestichational savings. Similarly, a continuation o f the domestic conflict, associated high security spending and constraints on mobilizing adequate domestic revenue for financing development activities would be even more o f a concern. The recent pause in hostilities and 75  the initiation o f peace negotiations however hold considerable promise in this regard; and over the past two months, there is evidence o f some pick up ineconomic activity, tourism and revenue collections, as well as considerable optimism for a recovery ineconomic growth and development implementation. Nevertheless, there are also significant potential upside risks in this regard. Even as peace is restored, considerable additional resources than that envisaged in the initial MTEF would be required for undertaking rehabilitation, reconstruction and reconciliation activities. Such expenditures could be considerable and would need to be undertaken as a matter o f priority inparallelwith the prioritized development activities inkey areas already identified (under Pls) in the MTEF. To finance such activities, considerable additional external assistance will be needed; and it is reasonable to expect that such assistance might be forthcoming in the event that the peace process is consolidated. Nevertheless, it is unlikely that such requirements will be hlly covered by external aid alone, while there will also be uncertainties about the timing as well as the form o f such assistance. More domestic resources will be needed to trigger additional external aid (through counterpart funding) as well as for undertaking urgent rehabilitation needs by the government itself. These risks call for continued review o f the MTEFto make it a dynamic process whereby the spending needs coming out o f the peace process could be incorporated into it. While revisiting the MTEF, as noted earlier, efforts will be made to make unit cost estimates o f activities more robust; to build in recurrent expenditures into the h4TEF to ensure better understanding o f the expenditure demands and to make the budgetary system more predictable; and to improve the forecasting o f resource availability for development works. The prioritization o f development programs and projects will also be reviewed and low priority projects will be dropped as needed. For all these reasons, the MTEF process will be strengthened and institutionalized, and made an integral part o f the planning and implementationprocess. 76  U Implementation ModaIities Introduction 197As noted earlier, the effective implementation o f the Tenth Plan's poverty reduction strategy in an environment o f disorder and fiscal stringency is the biggest development challenge the government has faced in decades. The Tenth Plan will only be as good as its implementation; and its success or failure will be measured by the extent to which it will have succeeded in delivering basic services and infrastructure to the poor, enhancing their quality of life and promoting economic and social inclusion o f backward communities and regions. Accordingly, the Tenth Plan lays strong emphasis o n implementation, monitoring progress towards the attainment o f key poverty reduction goals including those inthe context o f Millennium Development Goals, and ensuring that the feedback received from intended beneficiaries and target groups is effectively utilized for improving poverty interventions. This section discusses the arrangements that are being put in place for the effective implementation o f the Plan's core activities, for monitoring progress and for evaluating their impact on beneficiaries; as well as the need for capacity buildinghechnical assistance efforts at various levels. The key actions, (including institutional and policy reforms), which are required inall these areas, are summarized inthe Policy Matrix (Annex 1) andthe Immediate Action Plan (Annex 2), which should be viewed as the implementation strategy o f the Tenth Plan. 198The poverty reduction strategy will be implementedby many actors, including the central government and agencies, local bodies, community groups, the private sector, INGOs, NGOs, CBOs etc. Among these, the central government and its agencies will have primary responsibility for carrying out much o f the development budget andreform measures. But the Tenth Plan will also rely on alternative mechanisms to improve service &livery. Major part o f the reform agenda is aimed at facilitating private sector involvement inwidening range of areas and activities. Accelerating the decentralization process by increasingly transferring additional functions and responsibilities to local governments is one approach. Utilizing the FundBoard approach (which has proved to be very successful in setting up drinking water facilities in rural areas), and expanding it to other areas wherever possible is another. Also, NGOsandCBOs will be enlisted for service delivery functions at the locallevel, (for example by contracting out specific tasks in such areas as health and drinking water), and for community mobilization. Even more important, the local communities themselves will be directly invoked inthe management o f village level service delivery aspects inkey areas (see below). With regard to the development budget, the major thrust o f the implementation strategy is to, within a sustainable fiscal framework, (i) Identify the priority activities which are essential for poverty reduction; and (ii) Provide adequate funding for them to ensure their 77  early completion. (iii) midyear budget review will be institutionalized so that a sound fiscal A framework will be adhered to; (iv) The MTEF would be annually revised and updated for the purpose o f rankingandprioritizing all budget-fmanced activities andfor ensuring that priority activities would be protected from funding shortfalls. The scope o f the MTEF would be expanded in 2004105 to cover both recurrent and capital budgets, so that the resource needs for service delivery as well as for operation and maintenance can be fully provided for. (v) Also a project screening system will be introduced to ensure that only those activities with acceptable rates o f retum will be included inthe development program. (vii) To ensure better utilization o f funds, accountability and development results, procurement system and fimd release procedures have already been changed (see below). 199The Tenth Plan emphasizes the increased involvement o f local bodies - DDCs and V D C e a n d communities in the planning, implementation and management o f local level activities for ensuring that public money is spent properly to meet the people's needs, andfor improving service delivery and accountability. Accordingly, more functions, responsibilities and resources will be transferred to local bodies. Agricultural extension and rural roads programs will be handed over to local bodies in 2003104. In addition, each ministry will be required over the next five months to review their activities, anddevelop a detailed work plan, indicating what activities could be transferred to local bodies and when, and what resources andtechnical support would be neededto ensure a reasonably smoothtransition. Similarly, a poverty-based formula will be adopted for providing development grants to DDCs andVDCs, and additional "catch up" grants would be provided to the Mid-Western and Far-Western regions from 2003104 onwards. Within these allocations, separate amounts will be earmarked for deprived communities to ensure that they will have equal access to public resources; and their representatiodparticipation in community management committees will be assured through affirmative action. To provide a greater degree o f self reliance for local bodies, the recommendations o f the Local Bodies Finance Commission's report will be implemented ina phased manner, starting with the stronger DDCs in terms o f tax potential and management capacity. 200A major recent innovation inthis regard is directly involving the communities themselves in the management of primary schools and health facilities. Community management of primary schools and primary health centers was started in a few districts this year, by setting up village level management committees, giving them the responsibility for their operation andmanagement, and providing funds for them through the DDCs and VDCs and technical support and supervision through the district offices o f the concerned ministries. This approach will be expanded into other areas and other activities. Programs are underway to transfer all public primary schools to the communities during the planperiod. 201Related to this issue is the need to similarly ceordinate the activities o f INGOs and NGOs.Undoubtedly, they play a very usefulrole inmanyareas inthe rural economy; andthe Tenth Plan, as discussed, intends to involve them even more in service delivery and social mobilization functions. However, the activities o f many such organizations are not transparent, particularly interms o f their sources o f funding and the use o f such fimds; nor are they accountable to local communities. They will need to be subject to similar standards o f  transparency and accountability as the central and local government agencies and communities they work with, as indicated in the recent Foreign Aid Policy (2002) o f the Government. 202Although the main objective o f the Tenth Plan is to set the overall framework, principles andmain strategies for poverty reduction, the Policy Matrix presentedinAnnex 1, provides a more detail view o f major strategies activities and outcome. The Matrix also clarifies the relations between public strategies and actions and poverty reduction. The structure will be usehl inthe implementation of poverty reduction strategy o f the country. 203 The implementation o f the Tenth Plan is not a separate exercise, but will be carried out primarily through actions in each sector, MTEF and the annual budgeting exercise. An exercise to develop prioritized through the detailed annual plans within each sector will be carried out by individual line ministries. The exercise will also refine and sharpen the output indicators which are indicated in the Policy Matrix. This work o f designing the detail action plans and refinement o f output indicators will be completed by December 2003. This action planwill help to set a goodtrack record on implementation. 204In order to ensure, good implementation expedite reform programs and improve public service delivery, HMG/N has started an intermediate implementation modality called ImmediateAction Plan (IAP). The first IAP (Annex 2), which was initiated and implemented in the FY 2002/03, was well-anchored in the Tenth Plan. The IAP was successfully implemented and the result was encouraging. The second IAP i s being developed to W h e r strengthen the implementation o f the Tenth Plan. Implementationprogress i s being monitored by a committee -the Reform and Development Group (RDG)--comprising representatives ofNPC,MOF and donor agencies. The IAP, inaddition to specific actions, sets out the time frame over which the actions are to be implemented, immediate indicators and expected outcomes. The I A P has proved to be an unique tool in the effective implementation o f the Tenth Plan. 205The prevailing disorder situation in the country presents special challenges in terms o f implementation. However, a ceasefire has recently taken place, and peace process is in progress. There i s considerable optimism that a retum to a more normal situation will enable the govemment to deliver services better and undertake reform measures. Though it seems unlikely, if the peace process is to be injeopardy, the govemment will adopt a multgpronged approach to implementation inthe disturbed areas: (i)Where important development projects will need to go on, the government will carry out such activities within "shield and support" programs, for example, sealing o f f large project construction sites and carrying out the work. (ii)similarapproachwillbeadoptedforcriticalroadconstructionwork, (for example, A where explosives will need to be provided and used for rock-blasting purposes). The use o f mobile teams for service delivery and for undertaking repairs are some other examples. (iii) Where it is possible to carry out development activities ina larger area with security presence, Integrated Security and Development Programs (ISDP) will be carried out; for example, the Gorkha district has been selected initially for significant ISDP activities. (iv) Inareas where government agencies will have difficulty in actively engaging in service delivery, but it is 79  possible to use NGOs and local CBOs to carry out essential development activities (for example, providing food and medicines to avoid starvation and epidemics), the government will utilize such channels. (v) In other areas, where there is less problem of security, the government will make serious efforts to implement programs to deliver quick results, inorder to prevent further alienation and to win public support. In these areas government interventions will seek to provide employment and income generating activities for the poor, for example through rehabilitation programs, road construction and work for food programs. Such interventions will add extra costs to the normal development activities; but they will have to be accepted (within reasonable limits) to maintain government presence and to prevent further erosion o f public sympathy and confidence. Monitoring and EvaluationArrangements 206Traditionally, monitoring o f development activities in Nepal has focused largely on expenditure monitoring only. Although there have been attempts to monitor physical progress andresults, this has not been consistently done. This deficiency inevitably ledto leakages and misuse o f public resources and poor development results. Although budget allocations and releases were spent on activities, their results interms o f outputs and service delivery were not commensurate with expectations. Ministerial Development Action Committee at the ministry level andNational Development Action Committee at the Prime Ministerial level are responsible for rectifying development policies andprograms based on the monitoring reports from respective ministries and for some mtional level core projects from National Planning Commission. However, due to the absence o f effective management information system, monitoring, the actions from these Action Committees have still to be fruitful. There is a need for strengthening management information system, and define an integrated frame for monitoring progress o f development programs, link them with resources spent, and evaluating them for their effectiveness inreducing income poverty and promoting humandevelopment. 207Monitoring capacity within the government has been weak up to now, inpartbecause o f the lack o f interest on the part o f political leadership inthe past and the consequent disuse o f even the existing institutional arrangements. Strong efforts will be made to revitalize and strengthen monitoring capacity. Rather than creating new institutions for this purpose, existing arrangements will be reinforced, as necessary, by new initiatives: (i) the primary responsibility for supervision and monitoring is with the line ministries. The existing Project Implementation Units (PIUs) within the line ministries will be significantly strengthened for this purpose. As noted, the line ministries have already beenmade responsible for monitoring and certifying both financial and implementation (work program) progress o f agencies under them. (ii) NPC has an overview supervisory role, if only to carry out crosschecks on the The accuracy o f progress certifications by line ministries inorder to ensure proper accountability. More importantly, monitoring progress towards poverty reduction will remain a NPC mandate. The Central Monitoring Division and recently established Poverty Monitoring Section o f the NPC needto be significantly strengthenedto carry out this role andto function as the servicing body for the higher (national) level supervisory institutions. Members o f the NPC, who are responsible for various sectors, will be given additional responsibility o f 80  monitoring and supervision inone o f the Development Regions o f the country, (iii) sector The level and national level review committees will be reinvigorated. Thus the Ministerial Development Action Committee (MDAC), chaired by concerned Ministers will review sector progress every two months; while the National Development Action Committee (NDAC), chaired by the Prime Minister, will review both sector implementation and progress towards poverty reduction and key human development goals every four months. K e y data and information for poverty monitoring will be derived from surveys to be conducted by Central Bureau o f Statistics for which institutional structure and humanresources of the CBS will be significantly improved. 208To improve the effectiveness o f the existing set-up and new initiatives as noted earlier, considerable capacity building will be required at all levels o f the government-line ministries, startingwith the NPC, FCGO, as well as the statutory bodies involved inensuring public accountability, such as the Auditor General's Office and the Public Accounts Committee. This is because the nature o f proposed implementation arrangements will be significantly different from current practice and the scale o f monitoring efforts envisaged is far larger than the existing capacity o f the government. Additional staffing, training and resources therefore will need to be devoted to these activities. Apart from traditional project/program monitoring, skills will need to be developed inthe key ministries for poverty monitoring. In addition, the ceordination o f sector activities and programs involving the private sector, NGOs, CBOs etc. in such areas as health, education and drinking water will demand new management skills from the government staff. An assessmentwill be undertaken o f the capacity buildingneeds at various levels o f the government as an essential part o f the monitoring framework that would be developed by December, 2003 (see below). And, substantial donor assistance (in the form o f technical assistance) as well as the government's own resources will needto be providedfor this purpose, once such a framework is developed. 209The government has introduced monitoring o f both financial and physical progress from the beginning o f fiscal year 2002/03. Fiscal reforms announced inthis year's budget require the implementing agencies, for all priority activities (classified as Pl), to (i)prepare detailed work programs on a trimesterly basis and, on that basis, formulate monitoring/output indicators for each activity. (ii)Fund releases for priority projects by the Financial Comptroller General's Office (FCGO) will be directly tied to the submission o f statements o f expenditures by the implementing agency, and certification o f satisfactory performance o f the agreed work program by the supervising line ministry. This system, though a bit cumbersome initially, is expected to ensure that actual expenditures on priority activities are matched reasonably closely with physical progress, or outputhervice delivery performance. Apart from providing greater financial discipline, it will also facilitate the preparation o f reimbursement claims to donor agencies and help improve aid disbursements. Eventually, as the monitoring capacity within the government ministries improves, these monitoring requirements will be extended to all budgetary activities. 210For activities undertaken by local governments, similar monitoring arrangements will be adopted. The Local Self Government (Administration) Rules 1999 provide guidelines in this regard. The reporting requirements will be simplified and strictly enforced, with the Ministry 81  o f Local Development (MOLD) responsible for overall supervision. The same trimesterly reporting procedures with regard to expenditure reporting andwork programs will be initiated and applied, with MOLD providing the certification on satisfactory performance to FCGO before the release o f funds can take place. Similarly, for primary schools and health centers that have been transferred by Ministries o f Education and Health respectively to village communities, the District Offices o f these ministries could provide the supervision and monitoring andthe certification that is needed for the trimesterly release o f funds by FCGO. 211Accelerating the decentralization process and ensuring its success will be an important challenge for both the central government and local bodies. To make the decentralization process effective, it is necessary not only to transfer functions and responsibilities to local governments, but also to enhance their capacity buildingto carry out the delegated functions, including the provision o f requisite technical, management supervision, monitoring, as well as accounting andreporting skills. Untilthese capacities are builtup at the local levels, technical support and supervision from central and district level agencies will be essential. While considerable progress has been made in several districts inbuildingthe capacities o f DDCs and VDCs through donor-supported programs, these efforts will need to be deepened and extended to other districts. This overall capacity building effort in the Government (both central and local) is one area where donor assistance will be needed to ensure the success of the Tenth Plan, perhaps even more than traditional project support. Since various technical assistance programs already constitute a significant proportion o f donor aid to Nepal, these programs will be reassessed inorder to re-direct such assistance to the national priorities for development, as suggested above. 212Given the record so far with regard to capacity and accountability o f some local government bodies, additional measures will be adopted to ensure greater accountability and transparency: (i) o f the public to information is critical for ensuring better service Access delivery and accountability. Accordingly, information on resources made available to VDCs, for what purposes, planned activities, andhow the money has been spent so far will be posted outside each VDC. Also, access o f the public to the reports made by VDCs and DDCs on their trimesterly work programs, SOEs and outputs/service delivery performance will be made available, so that the communities themselves can act as watchdogs over V D C performance. (ii) willbebackedbyperiodicsurveysaimedatassessingcustomersatisfactionwiththe This functioning o f local, as well as, central government agencies (see below). (iii) To ensure participation of the poorer and deprived groups in decision-making and management processes at the village level, affirmative action will be taken to ensure their participation. Citizens' charters will be posted. Budget and expenditure status will be put in the web to encourage citizens' direct involvement inthe progress monitoring. 213Considerable data is being collected at present by various agencies and development partners for poverty monitoring purposes (including the assessment o f income poverty and humandevelopment trends); but there has been no effort to integrate them into a systematic frameworlddatabase for poverty monitoring on a regular basis. Accordingly, efforts will now be made to develop such a framework for systematically monitoring and evaluating progress towards the overall goals set for poverty reduction, human development and mainstreaming a2  the poor and deprived communities. Poverty monitoring will be closely integrated with the monitoring o f the PRSP's implementation and assessing the country's progress towards achieving MillenniumDevelopment Goals. Several actions are beingtaken inthis regard (a) Establishing a special poverty monitoring system within the government, as djstinct from normal project/program monitoring. For this purpose, a Poverty Monitoring Section has already been created in the NPC, with the mandate o f monitoring and analyzing poverty trends, progress towards key human development indicators and the implementation o f measures to ensure social inclusion, and undertakingperiodic reviews. (b) Efforts are under way to develop intermediate indicators, with assistance from the line ministries. Indeed, as noted above, work programs and output targets/ intermediate indicators have been developed inmany areas, to whichbothfundreleasesandactual expenditures will belinked.While this will enable evaluation of short term implementationprogress andfinancial accountability, (c) considerable work remains to be done to develop a framework for assessing the outcomes and impacts o f development actions over the medium to longer term on the incomes and livelihoods o f people, human development and social progress, among others. This will require significant efforts to evaluate existingdata sources, to collect additional data that will be neededfor poverty monitoring, to decide on institutional responsibilities andthe frequency of collecting such data, and to strengthen institutional capacity, as well as to assess funding needs for such efforts. As indicated in Table 18, apart from data that will be routinely collected for MIS purposes, it would be necessaryto conduct detailed NLSS surveys every 5- 6 years. These will be supplemented inthe intervening periods by household surveys carried out every 2-3 years. Inaddition, additional sector surveys (such as those conducted by the Department o f Health Services) will be undertaken from time to ascertain progress incritical areas, especially the social sectors. Annual surveys will be carried out focusing particularly on backward regions and deprived communities, to assess year-to-year progress. While these would help evaluate progress over time in reducing poverty reduction and reaching social development goals, other efforts will be launched inparallel to improve the effectiveness of public (and private) programs and activities, for example, through participatory monitoring exercises, expenditure tracking, and client satisfaction surveys inspecific sectorsand areas. It is expected that such a framework for poverty monitoring and tracking PRSP's progress would be finalized by December 2003. 214As an initial step, the NPC will undertake a Poverty Mapping exercise, to identify the poor and marginalized groups, to provide a good basis for locating basic social sector infrastructure facilities inbackwardareas. A new roundo f the Nepal Living Standards Survey will be carried out in 2003, and its coverage will be broadened to provide additional informationrequired for poverty monitoring. To ensure the effective dissemination o f poverty reporting, an annual report on progress on poverty reduction and mainstreaming will be prepared (drawing also on regular monitoring reports by line ministries), by the Poverty MonitoringUnit, under the direction of the Vice-chairman, NPC, for review by the National Development Action Committee (NDAC). This Annual report will be evolved as a Country Report on the Progresson Millennium Development Goals. Utilizing available information on various dimensions o f income and humanpoverty, the first issue o f such a report has already beenbrought out. 83  215Table 18 below summarizes the indicatorskey actions that are presently envisaged for monitoring both PRSP implementation and progress inpoverty reduction. The Table focuses on key areas where progress ineffective implementation o f the PRSP is critical, but it should be regarded as preliminary. A more detailed set o f indicators to track progress in PRSP implementation and poverty reduction will be formulated when the work program for setting up a monitoring framework is completed inDecember. Conclusion 216Recognizing the importance o f effective implementation and monitoring of the poverty reduction strategy, His Majesty's Government is developing a comprehensive participatory implementation, monitoring and evaluation strategy, with technical support and assistance fkom the development partners. The current work program has focussed on the initial requirements for monitoring the implementation o f key work programs and activities and the intermediate indicators o f outputs from such activities, together with specification of institutional responsibilities and formats and time schedules for reporting. This phase o f the work program including necessary budgeting, planning and procedural changes; the establishment o f a central poverty monitoring unit; and supervisory arrangements at the national and highest political levels to oversee progress has been largely completed andmade operational. Work is now under way to develop comprehensive institutional arrangements for measuring and evaluating the impact and outcomes o f poverty reduction efforts over the medium to longer term, to put in place effective arrangements to collect relevant data and information o n a sustainabk and regular basis, to analyse and effectively utilize them for policy purposes, for institutionalizing dissemination and feedback mechanisms and for developing and strengthening the necessary institutional capacity at all levels to carry out these tasks. Developing such a comprehensive framework, with donor support, is a major undertaking; and it is expected that the exercise would be completed by December 2003. 84  -m 5  -mc .- 0 P W .- m m m m m m m c c c c c c c W 0.p .o 0 0 0 0 m 1c m m m m m m m a 'a.a'a'3 z z z z z z z c0   .  . . . m m . 1 al m . . . . . . . . I 3 ._ c m eE . . .  m lY z -mwcn s . . . . u u- o o UT 0 2H 2 5 . s . . . . 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U .   Annex 2 Key Actions of the Immediate Action Plan, 2002 (IAP) ArealAction Prioritizing Public Expenditures Prioritizationof all expenditures-especially development activities- to make the budget more realistic and reflect increased security requirements. Resource allocations to be made consistent with decentralization by: 1. Allocating block grants to local bodies in FY 03 in an amount not less than FY 02 allocations. 2. Channeling funds to agricultural extension, sub-health posts and basic and primary education through local bodies. 3. Developing poverty-based formula for block grant allocations to local bodies and implement in FY 04 budget. Priority projects (PIS)to be assured of full funding, with release of funds to be tied to meeting agreed performance indicators. Measuresfor Improving Service Delivery Education . 1 Formulation of procedures for transferring management of primary schools to communities. Begin the initial phase of transferring public primary schools t, community management and block grants to School Management Committees (SMCs). 1 Health ... Recruitment of primary school teachers handed over to SMCs. Freeze on recruitment of primary school teachers by central Government. Management of sub-health posts (SHPs) by Local Health ManagementCommittees. 1 VDC verification of staff attendance at SHPs before issuance of pay checks. Compulsory public notices in SHPs stating the range of services, fees and hours of operation. Civil Service Reform 4. Gradual eliminationofvacant civil service positions. Measuresfor FightingCorruptionand Improving Accountability 1 Publish annual budget and report of actual expenditure (by local bodies and by line agencies). District analysis to be carried out at least quarterly. . 1 Make arrangements for posting budget allocations and expenditures at DDCNDC offices, SHPs and schools. Carrying out expenditure tracking to establish extent to which public funds are actually reaching the points of service delivery. .. 1 No significant increase in the arrears of public utilities (electricity, telecommunications and drinking water). Adoption of time-bound action plan for implementing major recommendationsof Country ProcurementAssessment Review (CPPR). Public Works Guidelines (PWGs) to be made operational. . 1 Adoption of time-bound action plan for implementing major recommendationsof Country Financial Accountability Assessment (CFAA). Develop comprehensive Anti-Corruption Strategy (ACS) and make progress in its implementation. 117   2 P L .. 5 aJ rc 0 U S m I- I  c . 3 a33Y 3 a33U n 3 D 3 ij is 3 3 3 Y 3 U 0 3 : D 3 E 3 v 3 U ;i 3 933 3 Y 3 U -- 1 3 3 P33Y 3 333Y X W 3 m L o N O b 0 v 2 n m m m m Y ?-a! Lo *.Fa! o?o?a! 2 a D b m - m - o w -Nz s o 3 Lo 3 v 3 Y