Risk and Resilience Assessment Nepal

2017

1

NEPAL RISK AND RESILIENCE ASSESSMENT

TABLE OF CONTENTS

MAIN ABBREVIATIONS AND ACRONYMS 2

EXECUTIVE SUMMARY 4

I. INTRODUCTION 7

II. HISTORY AND PRESENT CONTEXT 13

III. ASSESSMENT IN KEY DOMAINS 18

A. Politics and Governance 18

i) Fluid elite bargains and centralized political 18

system

ii) Capture, political patronage and corruption 19

iii) Transition to federalism 20

iv) Security and justice 22

B. Equity and Inclusion 24

i) Horizontal and spatial inequities 24

ii) Challenges and capture in service delivery 26

iii) Participation and voice 33

C. Economic Competitiveness and Jobs 34

i) Challenges and capture in key sectors 34

ii) Labor migration and remittances 39

iii) Youth 40

iv) Urbanization 40

D. Exogenous Factors 41

i) Disaster risk and climate change 41

ii) Regional engagement 42

IV. TRIGGERS FOR FRAGILITY, CONFLICT, AND 42

VIOLENCE

V. SOURCES OF RESILIENCE 45

VI. RECOMMENDATIONS 47

ANNEX 1 – Updated IDA operations (FY17-18) 68

ANNEX 2 –List of consulted experts 69

BIBLIOGRAPHY 71

2

MAIN ABBREVIATIONS AND ACRONYMS

APM All Party Mechanism

CA Constituent Assembly

CDO Chief District Officer

CIAA Commission for the Investigation of Abuse of Authority

CIEDP Commission of Investigation on Enforced Disappeared Persons

CPA Comprehensive Peace Agreement

CPN-MC Communist Party of Nepal (Maoist-Center)

CPN-UML Communist Party of Nepal – United Marxist Leninists

DAO District Administration Office

DDC District Development Committee

FCHV Female Community Health Volunteers

FDI Foreign Direct Investment

FUG Forest User Group

FY Fiscal Year

GDP Gross Domestic Product

GNI Gross National Income

GON Government of Nepal

HFOMC Health Facility Operation and Management Committee

ILO International Labor Organization

INGO International Non-Governmental Organization

LB Local Bodies

MW Megawatt

NA Nepal Army

NC Nepali Congress

NEA Nepal Electricity Authority

NGO Non-Governmental Organization

NHRC National Human Rights Commission

NNRFC National Natural Resources and Fiscal Commission

SC Supreme Court

SLC School Leaving Certificate

SMC School Management Committee

TRC Truth and Reconciliation Commission

UG User Group

UNDP United Nations Development Programme

VDC Village Development Committee

WBG World Bank Group

YCL Young Communist League

3

MAP OF NEPAL

4

EXECUTIVE SUMMARY

1. Nepal is a low-income, landlocked nation engaged in an extended political transition

process. Nepal’s path towards democracy, sustainable peace, and shared prosperity over the

last quarter century has been challenging. The country is attempting multiple complex and

contested transitions at once: from monarchy to democracy; from civil conflict to peace;

from a unitary to a federal state; from a state and society built on exclusion to one that is

inclusive; from a feudal economic structure to a modern state; and from a Hindu to a secular

state. Given this ambitious agenda, Nepal’s achievements over the last 10 years have been

significant. 1 However, serious concerns for the future remain. A highly centralized,

exclusionary, and elite-driven political system that relies on extensive capture and corruption,

together with persistent horizontal and spatial inequities, constraints in key economic sectors,

dependence on labor migration and remittances, and high vulnerability to natural disasters

and climate change all come together to create the potential for prolonged fragility and

possible future crisis or conflict. This Risk and Resilience Assessment (RRA) is intended to

provide an understanding of the fragility, conflict, and violence stresses facing Nepal and the

potential role of the Bank in helping to mitigate and address these risks.

Risk assessments in key domains

2. Cluster 1: Politics and Governance

• Nepal’s transition has been characterized by frequent government changes and its

political culture remains highly exclusionary and elite-driven;

• Nepal faces serious challenges due to entrenched corruption, a robust system of political

patronage, and an elite class that has a generally extractive relationship with the state;

• The transition to federalism poses multiple risks including: potential exacerbation of

political and social polarization; key aspects of the new system require further definition

and may be contested; possible replication of concerning practices to the sub-national

level; and an expected resource crunch;

• There is a general acceptability of low-level political violence and a historical nexus

between politics, crime, and state security forces in some areas.

3. Cluster 2: Equity and Inclusion

• Geography and identity continue to play a role in determining access to power, resources,

and opportunities and have become a political mobilizing force that could lead to

increased fragility and possible violence, particularly in the Tarai;

1 These include a successful peace process bringing the decade-long conflict to an end, two post-conflict elections with

corresponding peaceful transitions of power, and the promulgation of a new – but highly contested – constitution.

5

• Positively, service delivery in primary education and health has improved over the last

decade.2 However, significant work remains to be done to reduce inequalities, mitigate

elite capture, genuinely decentralize, and increase human resource development;

• New mechanisms for increasing citizen engagement and representation for vulnerable

groups exist, but continued work is needed to further strengthen participation and voice.

4. Cluster 3: Economic Competitiveness and Jobs

• Growth in key sectors is weak, and poor infrastructure poses a major constraint. Political

interference, anti-competitive behavior, and rent-seeking predominate;

• Nepal is dependent on labor migration and remittances, which add roughly 30% to the

country’s GDP and serve as a “pressure release valve” due to the lack of domestic

opportunities.

5. Cluster 4: Exogenous Factors

• Nepal is highly vulnerable to climate change, and regularly occurring disasters such as

landslides and flooding create constant vulnerabilities and hamper development;

• The country also faces significant geopolitical vulnerabilities due to the competing

strategic interests of its two large neighbors India and China. Nonetheless, stronger

integration into the regional economy could reduce vulnerability and increase the national

income.

Potential triggers for unrest or violence and sources of resilience

6. Potential triggers. The constitutional process has been the largest source of tension since the

end of the Maoist conflict and this is likely to continue for the foreseeable future. Positively,

the first phase of local elections conducted on May 14, 2017 was largely peaceful, despite

over 100 election-related incidents reported in the pre-election period and a small number of

violent clashes reported on Election Day.3 The second phase of local elections, currently

planned for June 14, 2017, remains uncertain due to ongoing disputes over the current

provincial boundaries and other issues. Holding the second phase of elections without

Madhesi party support is a potential trigger for increased fragility, while any steps to amend

the constitution (or not to do so) also pose a risk given high emotions on both sides of the

debate. Additionally, as well as the second phase of local elections, two other elections

(provincial and federal level) must take place by January 2018 to avoid a constitutional crisis.

Finally, a significant change in the demand for Nepali migrant workers could also contribute

to instability if not properly managed, as could the country’s legacy of politicized violence.

2 For example, government primary school enrollment rates have increased from 81% to 93.7% between 2000 and 2010 (Pherali,

Smith, and Vaux 2011) and maternal mortality rates dropped from 900 per 100,000 live births in 1990 to 258 per 100,000 in 2015

(World Bank data). 3 See incident reporting at nepalmonitor.org and election statements from Democracy Resource Center Nepal

6

7. Sources of resilience. There is a strong culture of political dialogue. The Nepali public has

low expectations of the state and citizens have banded together in formal and informal groups

in order to manage their own affairs. There is also a history of coexistence and

interdependence between people from different identity groups. At the institutional level,

both formal and informal institutions have served as stabilizing forces when needed. Sources

of economic resilience include a positive macroeconomic environment, recent gains in

education and health, and improvements in infrastructure. Labor migration and remittances

also provide some stability in the short term. Finally, India has supported the transition

process, but its actions have been highly controversial at times.

Recommendations

8. Current portfolio and RRA findings. The RRA found that the current Country Partnership

Strategy (CPS) is well focused on the key constraints to Nepal’s inclusive growth. However,

continuing challenges posed by the economic and political realities structuring governance in

Nepal, as well as the planned federal/devolution transition calls for further adjustments.

9. Key programming recommendations:

• Transition to federalism and sub-national governance support. The RRA recommends a

four-pronged approach: (a) scaled up diagnostic studies to support the devolution of

administrative functions, fiscal resources, and service delivery; (b) a sub-national

government (SNG) support program; (c) support to the transition planning process; and

(d) support to citizen engagement with the new SNG units;

• Support to domestic job creation efforts and labor migration. The RRA recommends two

key efforts: a) Additional financing and continued analytic work for jobs and migration

support, and b) consideration of labor-intensive public works as a possible “quick win” if

appropriate based on further analytic work;

• Support to the agriculture sector. The RRA recommends a program of agricultural

diversification and employment creation that could include applied research via grants to

small agricultural enterprises, support to basic export-oriented agro-processing, and

possible labor-intensive farm-related public works (such as irrigation and drainage main

system maintenance, and rural road construction and maintenance) if appropriate.

• Support to address persistent spatial and horizontal inequities. The RRA recommends

supporting improved service delivery to underserved and vulnerable communities as

well as a continued focus on citizen engagement and social accountability.

• Increased analytical work. The RRA recommends ASA on Nepal’s vulnerability to

natural disasters and climate change; political economy analysis in selected sectors to

identify constraints to efficiency, the affects of capture, and opportunities for reform in a

new federal structure; and to assess progress on horizontal and spatial inequality.