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theworld bankgroup
TO
INTERIMStrategy
NoteFoRNePALJune 2011
July 2009
The World BankNepal OfficeP.O. Box 798Yak and Yeti Hotel ComplexDurbar MargKathmandu, Nepal Tel.: 4226792, 4226793Fax: 4225112
Websites www.worldbank.org.np, www.bishwabank.org.np
Public Information Center1st Floor, West WingLal Durbar Convention CenterYak and Yeti Hotel Complex, Durbar Marg, Kathmandu, NEPALTel: (+9771) 4268195, 4249731, 4238545, Fax: (+9771) 4238546Email: [email protected]
theworld bankgroup
INTERIM Strategy Note FoR NePAL July 2009 TO June 2011
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theworld bankgroup
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INTERIMStrategy
NoteFoRNePALJune 2011
July 2009
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Nepal’s development agenda is closely intertwined with its peace building agenda. While hostilities have ceased, Nepal is still seeking to secure a robust peace. The Comprehensive Peace Agreement broadly defines key success criteria for achieving peace and development in Nepal, among others, as: (i) ending discrimination of all kinds; (ii) state restructuring and enhancing the state’s accountability to citizens, people’s empowerment, provision of fundamental rights and access to basic services; and (iii) better governance, including economic and social rights, transparency and anti-corruption.
This joint IDA-IFC Interim Strategy Note (ISN) was prepared under the guidance of Susan Goldmark, IDA Country Director, and Per Kjellerhaug, IFC Country Manager, by a team led by Philip O’Keefe, Task Team Leader (TTL) and Roshan Bajracharya, co-TTL. The IFC team integral to the development of the ISN was led by Shamsher G. Singh, Head of Strategy and Coordination, Rita Bhagwati, Senior Econo-mist and Rajeev Gopal, Operations Officer. The ISN Core Team included: Myrna Alexander, Stephanie Borsboom, Daniel Boyce, Sean Bradley, Chris-tine Kimes, Rajashree Paralkar, Hisan Shishido, and Rajib Upadhya. Core team support was provided by: Kiran Gautam and Lalima Maskey.
The following country team members and other colleagues have also made important contributions to the draft strategy: Gayatri Acharya, Rajendra Dhoj Joshi, Vikram Menon, Bigyan Pradhan, Tashi Tenz-ing, from IDA; Neeraj Gupta, Roger Handberg, Shaun Mann, Bradford Roberts, Rajesh Sinha, Nilesh Srivastava from IFC; and Edward Bell (consultant). The team also acknowledges the contribution and guidance received from the IDA-IFC Secretariat led by Nigel Twose and including Deepa Chakrapani and Vyajayanti Desai.
Special thanks are extended to the Government of Nepal counterpart team and World Bank Group development partners for their contributions.
Design:WordScape, 5521865, Kathmandu
Cover Photo: Hari Maharjan, ECS Media
Printer:Jagadamba Press, Kathmandu
theworld bankgroup
The last Country Assistance Strategy for Nepal (Report No. 26509-NEP) was discussed on November 18, 2003 and Interim Strategy Note was discussed on January 22, 2007
Currency and EquivalentsCurrency Unit = Nepali Rupee (NRs.)US$1 = NRs. 79.78 (as of May 5, 2009)
Fiscal YearNepal: July 16–July 15 (fiscal year starting on July 15, 2008 is designated as FY08/09)World Bank: July 1–June 30 (fiscal year starting on July 1, 2008 is designated as FY09)
IDA IFCWB Vice President/IFC Regional Director Isabel Guerrero Paolo M. Martelli
Country Director/Country Manager Susan Goldmark Per Kjellerhaug
Task Team Leader Philip O’Keefe Rita Bhagwati
Co-Task Team Leader Roshan Bajracharya Rajeev Gopal
INTERIMStrategyNoteFoRNePAL
Nepal is a country at crossroads, an “open moment” in its history. The key challenges facing Nepal at this juncture are to rebuild the legitimacy of the state, sustain the peace, maintain law and order, and deliver benefits to those traditionally excluded and to society at large.
INTERIM Strategy Note FoR NePAL | 8
Nepal presents a range of diversities which contribute to a rich cultural fabric but create challenges for state building. The country has huge ethnic and linguistic diversity and wide discrepancies in social and economic standing depending on geographic location, ethnicity, caste and gender.
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AAA Analytical and Advisory Activities
ADB Asian Development Bank
AGEI Adolescent Girls’ Employment Initiative
AIDS Acquired Immunodeficiency Syndrome
BOD Board of Directors
CA Constituent Assembly
CAE Country Assistance Evaluation
CAS Country Assistance Strategy
CDD Community Driven Development
CEA Country Environmental Analysis
CMU Country Management Unit
CPA Comprehensive Peace Agreement
CPAR Country Procurement Assessment Report
DFID Department for International Development
DPC Development Policy Credits
e-GOP e-Government Procurement
ESMAP Energy Sector Management Assistance Program
FY Fiscal Year
GAAP Governance Accountability Action Plan
GAC Governance & Anti-Corruption
GDP Gross Domestic Product
GEF Global Environment Facility
GFDRR Global Facility for Disaster Reduction & Recovery
GON Government of Nepal
GPF Governance Partnership Facility
GTEF Global Trade Finance Program
HIV Human Immunodeficiency Virus
ICA Investment Climate Assessment
ICRP Investment Climate Reform Program
ICT Information Communication Technology
IDA International Development Association
IEG Independent Evaluation Group
IFC International Finance Corporation
IFMIS Integrated Financial Management Information Systems
IMF International Monetary Fund
IMR Infant Mortality Rate
ISN Interim Strategy Note
JICA Japan International Cooperation Agency
LGCDP Local Government and Community Development Project
M & E Monitoring & Evaluation
MDG(s) Millennium Development Goal(s)
MOF Ministry of Finance
NC Nepali Congress
NDF Nepal Development Forum
NDSP National Development Strategy Paper
NLSS Nepal Living Standards Survey
NLTA Non-Lending Technical Assistance
NPC National Planning Commission
OECD Organization for Economic Cooperation & Development
PAF Poverty Alleviation Fund
PEFA Public Expenditure & Financial Accountability
PEM Public Expenditure Management
PER Public Expenditure Review
PFM Public Financial Management
PIC Public Information Center
PLA People’s Liberation Army
PPMO Public Procurement Monitoring Office
PPP Public Private Partnership
PRGF Poverty Reduction & Growth Facility
PSIA Poverty and Social Impact Analysis
PSM Public Sector Management
RTI Right to Information
SAWI South Asia Water Initiative
SEDF Small Enterprise Development Facility
SEZ Special Economic Zone
SIL Specific Investment Loan
SMC(s) School Management Committee(s)
SME Small and Medium Enterprises
SWAp(s) Sector wide Approach(es)
TA Technical Assistance
UCPN-M Unified Communist Party of Nepal - Maoist
UK United Kingdom
UML Unified Marxist Leninist
UNDP United Nations Development Programme
USA United States of America
WBG World Bank Group
ABBREVIATIONS AND ACRONYMS
ExECUTIVE SUMMARY 12
MOTIVATING THE INTERIM STRATEGY 18
A. COUNTRY CONTExT 22
(a) Political and Security Developments 23
(b) Economic Background 24
(c) Poverty and Social Development 31
B. GOVERNMENT OF NEPAL’S EMERGING DEVELOPMENT STRATEGY 32
C. THE BANK GROUP INTERIM STRATEGY 36
(a) Proposed Approach of the Strategy 38
(b) Principles Underlying the Strategy 38
(c) The Overarching Goal and Proposed Pillars of the Interim Strategy 41
(d) Proposed WBG Program and Instruments 64
D. ISN PROCESS 74
TABLES
Table 1: Indicators of Macroeconomic Performance, FY 04-08 26
Table 2: Selected Social Indicators for mid-1990s and 2000s, Various Years 29
BOxES
Box 1: The Pressing Challenges in the Tarai 25
Box 2: Nepal Development Strategy Paper and Growth Assumptions 28
Box 3: Community Service Delivery of School Education - a Unique Nepalese Tradition 31
Box 4: Observations from the Previous CAS/ISN Implementation 39
Box 5: Proposed ‘Peace Filter’ for Bank Group Operations in Nepal 43
TABLE OF CONTENTS
APPENDICES
Appendix I Debt Sustainability Analysis 78
Appendix II Donor Mapping at Sector Level 90
Appendix III Governance and Risks Assessment 92
Appendix IV IEG – Country Assistance Evaluation 95
Appendix V Summary of CAS Consultations 98
Appendix VI Country Financing Parameters 100
ANNExES
Annex A1: Key Economic & Program Indicators – Change from Last ISN 102
Annex A2: Nepal at a Glance 103
Annex B2: Selected Indicators of Bank Portfolio Performance and Management 107
Annex B3: IDA Indicative Program Summary 108
Annex B3: IFC and MIGA Program Summary 109
Annex B4: Indicative Non-lending Activities – IDA 110
Annex B4: Indicative Non-lending Activities – IFC 111
Annex B5: Poverty and Social Development Indicators 112
Annex B6: Key Economic Indicators 113
Annex B7: Key Exposure Indicators 114
Annex B8: Status of Bank Group Operations and Grants 115
Annex B8: Statement of IFC’s Held and Disbursed Portfolio 116
Annex B9: ISN Results Framework 117
INTERIM Strategy Note FoR NePAL | 12
While stable macroeconomic management and modest growth over the past decade are to Nepal’s credit, this performance underscores the opportunity costs that conflict imposed on the economy. Nepal has fallen behind its neighbors on many fronts.
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INTERIMStrategy
NoteFoRNePAL
ExECUTIVESUMMARY
INTERIM Strategy Note FoR NePAL | 14
i. Nepal is a country at a crossroads, an “open moment”
in its history. Nepal’s decade-long conflict formally ended in
November 2006. In 2008, the country voted in a Constituent
Assembly (CA), named a President, elected a Prime Minister,
formed a coalition government, and set about the task of
writing a new constitution by 2010, with a new round of
elections planned for 2011. It also abolished the monarchy
and declared Nepal a federal democratic republic, vastly
altering administrative and decision-making powers. Over the
next two years, the country will continue to confront long-
standing development challenges at a time of global economic
downturn. The challenges of the transition were highlighted
on May 4, 2009, with the resignation of the Prime Minister,
which is expected to result in a period of heightened political
uncertainty. The former Prime Minister, however, will head a
caretaker government until political realignments stabilize and
a new government is formed. The key challenges facing a new
Government at this juncture are to rebuild the legitimacy of the
state, sustain the peace, maintain law and order, and deliver
benefits to those traditionally excluded and to society at large.
ii. Nepal is one of the poorest countries in the world,
averaging GDP per capita of US$470, with adverse —
though improving — social indicators. There are wide
discrepancies depending on geographic location, ethnicity,
caste and gender. Nevertheless, progress on social indicators
in the last decade and more has been impressive: the
poverty rate and gap fell sharply, and a number of MDG
indicators improved markedly. However, inequality increased
sharply. Prudent fiscal management was pursued and
the economy grew moderately despite the conflict. Nepal
has been able to retain much of its basic infrastructure,
functioning bureaucracy and service delivery mechanisms.
iii. Significant challenges remain. A new government
needs to be formed, and the law and order situation remains
difficult, with continued regional, ethnic and political
tensions. By 2007, remittances approached 25 percent of
GDP, making Nepal vulnerable to a reversal which could fuel
unrest. So far, all indicators are holding up. Nevertheless,
the impact of the global crisis may hurt exports, tourist
arrivals and remittances. So, even though Nepal has
many strengths, the pace and severity of crisis witnessed
elsewhere in the world — combined with Nepal’s already
fragile situation — strongly caution against complacency.
Draft National Development Strategy and the World Bank Group’s response
iv. Nepal’s development agenda is closely intertwined
with peace building. The Maoist coalition Government
produced a draft of its development strategy for the next
three years. This was built upon the previous government’s
Three Year Interim Plan which expires in July 2010. The
draft strategy contains a strong emphasis on spurring
investment, job creation and growth, while reducing
ExECUTIVE SUMMARY
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inequality and exclusion. Consistent with the previous plan,
the draft highlights investments in power, roads, education,
health, water supply and local development, and improved
social protection. Agriculture, rural finance and rural
institutions also play a significant role in the strategy.
v. Given the transitional nature of Nepal’s current
situation, with a new government to be formed, a
new constitution being drafted and elections for the
federal state expected in 2011, the Bank Group has
prepared an Interim Strategy Note (ISN) covering FY10
and 11. This joint IDA-IFC strategy aims to leverage Bank
and IFC resources and realize synergies. It builds on the
areas which have shown to be robust and to modalities of
implementation tailored to Nepalese traditions. Further, we
are also taking on board the lessons of working in countries
in post-conflict situations: to be modest and to keep it
simple. The strategy will improve our project’s sensitivity
to the root causes of the conflict and social tensions by
adopting a “peace filter”. In addition, we are prepared to
respond to possible effects of the global downturn and/or
sustained political fragility.
vi. The overarching goal is promoting the complementary
processes of pursuing peace and development. During
consultations with the Government, donors and civil society,
three thematic pillars emerged supporting that goal. Cutting
across these pillars is the unifying goal to help Nepal to
consolidate peace, the essential underpinning of development
and poverty reduction. Social inclusion runs across all of
these themes as one of the foundations for the new Nepal.
vii. The three intertwined pillars of the joint IDA-IFC strategy
are: (i) promoting capable state structures and systems and
fostering accountable institutions which addresses the cluster
of challenges in adapting and constructing the public systems,
institutions and capacities needed for the new Nepal; (ii)
laying the foundation for sustainable, inclusive and equitable
economic growth which focuses on over-coming constraints
in the productive sector in terms of job-creation, productivity,
connectivity and sustainability; and (iii) enhancing equitable
access to the benefits of growth, services and social inclusion
which concentrates on expanding and honing social programs
to increase opportunities and wellbeing, especially for the poor
and excluded.
Proposed Bank Group Program
viii. IDA: Nepal can benefit from an IDA15 allocation of
SDR488.8 million along with trust funds supporting global
and regional initiatives. The ISN covers last two years of
IDA15 (FY10-11) with the overall indicative envelope of
SDR332.3 million, with the average annual allocation of
about SDR166 million. IDA’s indicative lending program
Nepalis have shown remarkable resilience throughout their history. Thus, this is a period not only of risk but also great opportunity.
INTERIM Strategy Note FoR NePAL | 16
ExECUTIVE SUMMARY
Nepal’s traditional social relations marginalized many of its diverse social groups and a clear mandate exists for greater inclusion of all citizens in the “new Nepal”. Citizenship defined in terms of both rights and responsibilities — based on full inclusion of Nepal’s diverse social groups in political, economic and social life — can become a solid basis for national unity.
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envisages about four to five new operations per year that
would entail investment operations — some on the basis of
sector-wide approaches. A proposed series of Development
Policy Credit (DPCs) to address critical policy constraints
would only proceed if the triggers for such lending are
met. IDA’s lending program would be complemented with
non-lending services, adapted to Nepal’s expectations
of just-in-time advice and taking a more programmatic
approach. Consistent with the recommendation of the
recently completed Country Assistance Evaluation, we have
maintained flexibility in the proposed strategy which will
allow us to respond quickly to the changing circumstances
in the country. This includes possibility of project redesign
during supervision when this is required to achieve results.
ix. IFC: IFC expects to expand its exposure in Nepal
by potentially committing US$15-20 million on
average annually, depending on the availability of viable
investments and improvements envisaged in the business
climate. IFC’s investment program will be accompanied
by technical and advisory services in areas including
infrastructure, financial markets, improving the business
climate and capacity building. Most of these commitments
will potentially be in infrastructure (mainly hydropower)
and the financial sector. In addition, IFC will facilitate trade
by partnering with Nepalese banks under its Trade Finance
program and support projects that have a positive foreign
exchange impact in sectors such as tourism, airlines and
agribusiness exports.
x. Portfolio Management and Monitoring Results: Weak
governance and security risks make implementation
even more challenging at this juncture. A comprehensive
risk assessment, including governance and anti-corruption
(GAC)-related risks, was used to help design the proposed
strategy and to make portfolio management and business
processes more sensitive to those risks. The strategy includes
a partial results framework in keeping within the ISN’s
two-year timeframe that identifies key actions, processes
and intermediate outputs, more than indicators of specific
outcomes.
xi. Aid Management and Donor Harmonization: Thirty
eight donors operate in Nepal. Although the IMF’s last
program with Nepal ended in 2007, the Government may
consider renewed support. The challenge for donors is to
transition from scattered donor projects and programs outside
Government to harmonized delivery through Government
systems and institutions. However, Government needs to
strengthen its capacity to manage resources efficiently
with greater focus on results. Joint portfolio reviews occur
with the Government and include action plans to improve
performance. Sector-wide approaches are operating in the
health and education sectors, and are planned for rural roads,
rural water supply and sanitation, and possibly agriculture.
xii. The Decentralized Kathmandu Office: The Bank Group’s
presence in Nepal has increased substantially since the
end of conflict. The IFC re-opened its office, co-located
with the Bank, in 2008 and there has been an increase in
international and Nepalese staff based in Kathmandu. One
of the lessons of working in post-conflict countries is that
the Bank tended to have insufficient numbers of staff on
the ground. This had been the case in Nepal. Already, the
impacts on the timeliness and diversity of policy engagement
have been noted by the Government of Nepal (GON) and other
development partners in a number of cases.
xiii. Mitigating Risks: The Bank Group faces substantial
risks working in Nepal, but it is also a time of enormous
opportunity. The proposed strategy attempts to take
those risks into account, both in design and modalities of
implementation. Nevertheless, not all of the significant
political, social and economic risks facing Nepal can be
mitigated, and the ISN proposes approaches to the portfolio
in the event of more acute and/or sustained economic and
political difficulty. At the same time, Nepalis have shown
remarkable resilience throughout their history. Thus, this
is a period not only of risk but also great opportunity.
While many of the political, economic and social transitions
outlined in this ISN will not be completed in a two-year
period, the directions which are set and the progress made
in the coming years will be critical to these processes.
INTERIM Strategy Note FoR NePAL | 18
Despite the very real challenges, Nepal’s transitions present opportunities to move to the goal of a “New Nepal”.
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MOTIVATING THE INTERIM STRATEGY1. Nepal is a country at a cross-roads, an “open mo-ment” in its history, that if properly managed can change the nation. Over the next two years, the country
will continue to confront long-standing development chal-
lenges at a time of global economic downturn and in the
face of political uncertainties. Recent events suggest that
the coming period will be critical as a new government
is expected to be formed and political alignments stabi-
lize. The key challenge for the new Government will be
to rebuild the legitimacy of the state, sustain the peace,
maintain law and order, and deliver tangible benefits to
those traditionally excluded and to society at large. It
will be undertaking several difficult transitions at the
same time. Despite the very real challenges, together the
transitions present an opportunity to move to the goal of
a “new Nepal” which is stable and peaceful, inclusive of
all its citizens, prosperous and accountable to its people.
INTERIMStrategy
NoteFoRNePAL
INTERIM Strategy Note FoR NePAL | 20
The transitions include:• Moving from conflict to peace. While hostilities have
ceased, Nepal is still seeking to secure a robust peace. Con-
solidating peace remains the overarching priority for the coun-
try. Ongoing violence, regional tensions, civil disturbance and
considerable political fragility slow the consolidation of the
peace and create risks of escalation. At the same time, Nepal
did not have a typical conflict period collapse. The basic
administrative systems of the state continued to function dur-
ing conflict, growth slowed but remained mildly positive, and
progress on key social indicators and access to basic services
did occur. Policies to build a robust peace underpin develop-
mental policies, and successful implementation of develop-
mental policies will help to build sustainable peace.
• Defining the new republican Nepali state and “rules of
the game” in the post-monarchy era. Traditionally, Nepal
has had feudal political relations, with power concentrated
among certain social groups and geographically in the Kath-
mandu Valley. The conflict, the popular uprisings of Jana
Andolan II in 2006 and the 2008 election results provided a
mandate for changing the political dispensation and power
structures that was unimaginable only a short time ago.
While important steps have been taken — such as agree-
ment by all parties on a “federal” republic — recent events
indicate that defining the new state in the constitution will
present major challenges for building consensus across party,
regional, ethnic and social lines.
• Transforming social and economic relations. Nepal’s
traditional social relations marginalized many of its diverse
social groups and a clear mandate exists for greater
inclusion of all citizens in the “new Nepal”. The oppor-
tunity and challenge in light of this mandate is to create
a notion of shared citizenship which moves away from
traditional patronage politics and results in competing and
multiplying demands. Citizenship defined in terms of both
rights and responsibilities — based on full inclusion of Ne-
pal’s diverse social groups in political, economic and social
life — can become a solid basis for national unity.
2. None of the transitions underway in Nepal are
easy. The fact that the country faces them simultaneously
increases the challenges and associated risks. The situa-
tion is made even more difficult in the face of uncertainty
about the potential impacts of the global crisis on Nepal
and the timeframe over which such impacts are likely to
manifest. However, Nepalis have shown remarkable resil-
ience throughout their history. Thus, this is a period not
only of risk but also enormous opportunity. While many of
the transitions will not be completed in a two-year period,
the directions which are set and the progress made in the
coming years will be critical to these processes. In this
light, the preparation of the Bank Group’s Interim Strategy
Note (ISN) is timely.
MOTIVATING THE INTERIM STRATEGY
INTERIM Strategy Note FoR NePAL | 21
The social protection system in Nepal is characterized by fragmented interventions across different ministries and between the public and donor sectors. At the same time, enhanced emphasis has been placed on transfer programs to promote equity and protect the most vulnerable.
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Bika
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arki
, Re
publ
ica
The work of the Constituent Assembly in drafting a new constitution is expected to lead to dramatic changes to the state as it decentralizes. Ensuring the viability of new levels of government is a key element, as is making sure that the hierarchy of functions and responsibilities between the new layers of administration enhances service delivery, especially for the poor.
INTERIM Strategy Note FoR NePAL | 23
COUNTRYCONTExT
INTERIMStrategy
NoteFoRNePAL
(a) Political and Security Developments
3. A decade-long conflict between the forces of the Government of Nepal (GON) and the People’s Liberation Army (PLA) of the Unified Communist Party of Nepal-Maoist1 (UCPN-M) formally ended in November 2006 with the signing of the Comprehensive Peace Agreement (CPA). The armed conflict imposed a heavy toll in terms
of human suffering, with more than 14,000 killed, large
numbers displaced (with estimates ranging from around
25,000 to 100,000 people), and unknown numbers
wounded, tortured or “disappeared”. Major destruction of
social and economic infrastructure occurred, along with
further erosion of trust between the state (and its agents)
and the population at large, particularly where the fighting
was the worst.
INTERIM Strategy Note FoR NePAL | 24
4. Nepal’s progress since the end of the conflict
in maintaining peace and defining new political
arrangements has been significant, but is vulnerable
to setbacks, as recent events demonstrate. In 2008
the country made progress on several fronts: it voted in a
Constituent Assembly (CA), abolished a feudal monarchy,
named a President, elected a Prime Minister, formed a
coalition government, and set about the task of writing a
new constitution. The CA is by far the most diverse and
representative political body ever elected in Nepal. The
UCPN-M emerged as the biggest winner in the elections,
but fell short of a majority. Nepali Congress (NC), long the
dominant party, finished a distant second and formed the
opposition, while the Unified Marxist Leninist (UML) party
finished third and until very recently was part of the UCPN-
M-led coalition government, which also included Madhesi
parties. One of the CA’s first acts in May 2008 was to declare
Nepal a federal democratic republic. The Interim Constitution
gives the CA two years to 2010 (with no more than six
months extension) to deliver a new constitution. Political
parties have been cooperating to complete this complex
task, which will be followed by another round of elections in
2011. However, the resignation of the Prime Minister on May
4, 2009, and the attendant uncertainties as efforts are made
to form a new government, adds new dimensions to existing
challenges.
5. While the conflict has ended, the political and
security situation in the country remains challenging.
Key elements of the peace agreements are not being fully
addressed, and the political discourse around these issues
remains partisan. Three issues stand out as potential flash-
points for political discord. These are military integration
and the reform of the armed forces (with limited progress on
democratization and integration of the Nepal Army and the
People’s Liberation Army1); the role of and control over party-
affiliated youth groups (which have been intensifying their
tactics of violence and intimidation); and a surge in divisive
regional-cum-identity politics which also pose challenges to
state building and security. In the past two years, there has
been considerable unrest, mainly in the Tarai region (Box 1),
though also well beyond that, frequently bringing economic
activity to a standstill through rolling bandhs (strikes).
Government attempts to resolve this situation have been
unsuccessful. Finally, the political transition has created
opportunities for groups to mobilize support on the basis
of ethnic and caste identity, including Dalits and Janajatis.
Though several partners are advising on aspects of the
security sector, there appears to be little joint planning or
an agreed approach with the Government.
(b) Economic Background
6. The economy of Nepal has shown a great deal of
resilience, with modest growth averaging 3.35 percent
per annum realized from FY01/02 to FY07/08. This helped
social indicators to improve impressively.3 Prudent fiscal
management was pursued, notwithstanding strong pressure
for higher security spending (Table 1). As a result, when
peace arrived, growth rebounded to 4.7 percent in FY07/08.
This was also aided in part by good weather, the buoyant
regional setting and higher tourist arrivals, among other
factors.
7. During the conflict, the economy became increasingly
dependent on remittances from Nepalese workers
abroad, estimated as one-third of the working age male
population, or 3 to 4 million people. By 2007, remittances
from countries other than India exceeded US$2 billion
and, if estimated inflows from India are included, the
total approached 25 percent of GDP. These inflows kept
the economy afloat during difficult times. Remittances
contributed to higher consumption and spending on
education, housing and other real property investment. In
particular, half the reduction in poverty incidence noted
below is directly linked to remittances.
8. Some projections for FY08/09 put annual growth at
around 3.5 percent, less than the 4.7 percent achieved in
COUNTRY CONTExT
INTERIM Strategy Note FoR NePAL | 25
FY07-08. Besides the deteriorating economic environment,
growth in FY08/09 has been affected by floods during the
last monsoon season, poor rains this winter, and serious
power shortages across the entire country. Given the present
global uncertainties and labor unrest, growth for the next
two years or so will likely be less than what the Government
would like to see.4 On the fiscal side, projections for the
fiscal deficit in FY08/09 stand at about 4 percent of GDP,
in line with past performance. So far, FY08/09 has been a
banner year in terms of revenue collections, which have
jumped 34 percent largely reflecting the GON’s greater
collection efforts. At the same time, capital expenditures
have fallen by 17 percent, reflecting the learning curve that
the new GON was undergoing in managing its development
program. Because of the cash build-up, the GON suspended
its borrowing program for the last six months of the current
fiscal year. At the same time, Nepal’s balance of payments
continues to be in surplus, despite its chronic trade deficit,
thanks to remittances which have continued to increase to
date. Foreign exchange reserves remain ample — equivalent
to about nine months of imports. The banking system,
while underdeveloped, is sizeable relative to some other
countries in South Asia, with about one-third of deposits in
two large public banks. The past three years have seen a
rapid expansion of financial institutions and credit fueled by
loose monetary conditions and aggressive lending by smaller,
newer banks. Non-performing, politically motivated lending
and willful defaulters, along with weak regulation and
compliance, underscore the vulnerabilities of the system and
the need for continued strengthening of the financial sector.
9. While stable macroeconomic management and modest
growth over the past decade are to Nepal’s credit, this
performance underscores the opportunity costs that
conflict imposed on the economy. Nepal has fallen behind
its neighbors on many fronts. Domestic investment during
the past ten years has been low as compared to the 1990s.
This is particularly evident for public sector investment,
which was typically about 5-6 percent of GDP in the 2000s,
two percentage points less than in the 1990s. Private sector
investment fell quite sharply as the conflict expanded, but
has rebounded somewhat. Private investment increased two
percentage points of GDP in FY07/08, reaching around 18
percent of GDP, although there is concern that this might
have helped fuel a real estate price bubble. The structure of
the economy has shifted gradually over the conflict period:
agriculture now stands at about 33 percent of the economy
(down from 38 percent), industry at about 16 percent (down
from 20 percent), and services have grown to 51 percent.
The Tarai, the densely populated southern plains of Nepal, is where much of the country’s industry has traditionally been located. Twenty two districts make up the Tarai, which occupies 17 percent of Nepal’s land area and is home to nearly 48 percent of the total population. Because of migration from the hill regions and the porous border with India, the Tarai now has an extremely heterogeneous and complex population, the majority of which are Madhesi (who officially account for 31.2 percent of Nepal’s population), but with people of hill origin making up over one-third of the Tarai population. Apart from mainstream Madhesi political parties and representatives of other ethnic and linguistic groupings in the Tarai representing diverse interests (e.g. Tharus), armed groups have proliferated in the past two years, adding to the sense of lawlessness and impunity pervading parts of the country. The declared interest of some of these groups is to take control of the region, its resources, and associated political and economic power. While some of these groups are funded largely through extortion and derive their strength through intimidation, they also draw on long-standing feelings of exclusion from decisions made in Kathmandu. Violence has caused government administration to shrink back to district headquarters and civil servants and businessmen to fear living in or visiting affected areas. There is dan-ger that tensions between diverse political and social groups in the Tarai could deteriorate. If that occurs, the damage to Nepal’s main trading routes, invest-ment and livelihoods could be far worse than during the “People’s War” which was largely concentrated in Nepal’s hill regions.
The Pressing Challenges in the TaraiBox 1
INTERIM Strategy Note FoR NePAL | 26
This mirrors what has been happening in the labor force, and
the urban-rural shares of population: the rural population
has dropped to about 80 percent from 84 percent of the
total. Nepal continues to rank poorly on measures such as
“Doing Business”, and largely missed benefiting from the
robust growth of its two neighbors, India and China.
10. The dependence on remittances has made Nepal
increasingly vulnerable to the adverse impact of the
current global financial crisis. As Nepal is largely isolated
from international financial markets, the direct impact of
the crisis so far has been minimal.5 Nevertheless, indirect
negative effects are expected on export proceeds, tourist
arrivals and remittances, which could affect the balance of
payments, local consumption, savings and investment and
the overall fiscal position. Tighter liquidity, falling collateral
value and increased defaults could also potentially impact
the financial sector. Among these risks, a significant drop
in remittances would be the most serious. Not only are
remittances the country’s single largest source of foreign
exchange — with exports at only 7 percent of GDP — they
are a major source of income spent on consumer goods
(often imported), services such as health and education,
and investment in housing and small businesses. Cutting
COUNTRY CONTExT
Indicators of the Macroeconomic Performance, FY04-08
Annual Data Period Average FY04 FY05 FY06 FY07 FY08 FY95-99 FY02-06 FY07-FY09 FY04 Economic Growth:GDP Growth (Real) 4.7 3.1 3.7 3.2 4.7 3.9 3.1 3.9Per Capita GDP Growth (Real) 2.5 1.1 1.8 1.2 2.6 1.4 1.0 1.9
Government Finances:Government Revenue Growth 10.9 14.4 1.3 21.4 22.6 13.9 8.3 22.0Government Expenditure Growth 6.5 10.9 11.8 19.9 22.8 13.1 6.9 21.4Government Budget Balance/ GDP -2.9 -2.8 -3.8 -4.1 -4.0 -7.3 -3.5 -4.1
Balance of PaymentsExport Value Growth (in US$) 14.7 11.2 2.2 4.9 6.9 6.5 5.9Import Value Growth (in US$) 15.8 12.2 17.3 11.9 14.1 5.3 13.0Current Account Balance /GDP 2.7 2.0 2.2 0.5 1.2 -8.6 0.9Gross Foreign Exchange Reserves 8.2 7.4 7.6 7.5 7.0 7.3 7.3(In months of imports of goods and services)
Monetary dataBroad Money Growth 12.8 8.3 15.4 14.0 18.0 17.0 10.2 16.0Domestic Credit Growth 9.8 13.9 16.3 12.0 21.2 18.5 11.1 16.6
Inflation:Consumer Prices 4.0 4.5 8.0 6.4 8.0 8.0 4.8 7.2
memo: Nepal: Indicative External Debt Burden Indicators Indicative Threshold 2004/05 2005/06 2006/07 Projected Average (2007/08- 2027/28)NPV of debt, in percent of Exports 150.0 172.0 163.0 148.0 116.0 GDP 40.0 28.0 25.0 22.0 15.0 Revenue 250.0 213.0 211.0 163.0 114.0
Debt Services, in percent of Exports 20.0 9.0 9.0 11.0 7.0 Revenues 30.0 12.0 12.0 12.0 6.0
Table 1
INTERIM Strategy Note FoR NePAL | 27
During the conflict, the economy became increasingly dependent on remittances from Nepalese workers abroad. Remittances contributed to higher consumption and spending on education, housing and other real property investment. In particular, half the reduction in poverty incidence noted below is directly linked to remittances.
Um
esh
Basn
et, P
ower
Com
m
INTERIM Strategy Note FoR NePAL | 28
The draft National Development Strategy Plan (FY10-12) aims to “bring about visible positive changes in the lives of com-mon people through lasting peace and promoting economic dynamism with distributive justice”. The overarching goal of draft NDSP is to promote the complementary process of pro-moting development and sustaining peace though inclusive growth and expanded services to the people.
To meet the expectations of its people, the draft NDSP aims for an ambitious target of 7 percent GDP growth in FY10, rising to 8.5 percent in FY12. To achieve this outcome, it assumes that with peace and political stability, higher and more efficient expenditures can be made in social sectors and economic infrastructure. It also assumes that the private investment climate will improve significantly, with changes in industrial policy and institutional reforms that include improved law and order and increased flexibility in labor markets. IPPs would start investing in the power sector as impediments to investment are removed. Also assumed is fairly expeditious recovery of India and the rest of the world from the global recession and good weather conditions that support agriculture. With expansion of economic and devel-
Nepal Development Strategy Paper and Growth AssumptionsBox 2
COUNTRY CONTExT
opment activities, revenue collection and aid absorption capacity are also expected to increase. If most of these assumptions — particularly regarding policy improvements and stability — are met, growth can reach or even exceed 5 percent annually in the medium term.
But the Government recognizes that downside risks are signifi-cant in the coming few years. The growth scenario is at risk given the global downturn that affects Nepal’s major trading partners and destination economies for Nepali migrant workers. Internal disturbances could continue in the run-up to the next election as the new constitution is drafted, and the investment climate may not improve if labor militancy and load shedding continue.
A more conservative range of scenarios during the ISN period is presented below, taking into consideration these risks and the current level of economic activity, the impact of global downturn on Nepal’s major trading partners and the limited ability of the economy to take advantage of India’s growth. The lower ends of the ranges are realistic projections for the coming years and are the basis of the framework for the ISN period.
WB National Development Historical estimates Strategy estimates av. Av.2002 2009 2012 1990s -2007 2008 2009 2010 2011 2012 (est) (Average)
GDP growth (real) 4.9 3.2 5.3 3.6 3.5-4.3 3.8-4.8 4-5.5 3.9 8.1GDP per capita (US $) 194 313 468 461 487 516 548 GDP Deflator 69 118 146.1 161.2 172.5 182.8 193.8 Inflation (CPI) 10 5 7.7 12.0 7.0 6.0 6.0 5As percent of GDP Fiscal Revenues 9.0 11.2 12.8 15.0 15.2 15.5 15.5 14.5 16.7Grants 1.7 2.1 2.8 3.0 3.0 3.0 3.4 4.0 5.1Total expenditures 16.4 15.0 17.6 18.3 19.1 20.4 21.5 22.5 25.6 Current Exp. 10.3 10.5 11.2 13.3 13.5 14.3 15.0 14.6 15.0 Capital Exp. 6.8 4.8 6.5 5.0 5.6 6.1 6.5 7.9 10.6Deficit before grants 7.4 3.9 4.8 3.3 3.9 4.9 6.0 8 8.9Deficit after grants 5.7 1.8 2.0 0.3 0.9 1.9 2.6 4 3.8Financing 5.7 1.79 2.03 0.28 0.90 1.90 2.60 4 3.7 Dom. (net,incl.adj.) 2.3 0.4 0.6 (0.6) 0.4 0.9 1.1 2.6 1.7 External (net) 3.4 1.4 1.4 0.4 0.5 1.0 1.5 1.4 2
INTERIM Strategy Note FoR NePAL | 29
off this lifeline could have a serious impact on growth and
the ability of vulnerable groups to make ends meet. The
discontent of the unemployed, combined with returning
workers facing poor employment prospects in Nepal, might
spill over to an already delicate social situation. The risk of
further deterioration of law and order would only exacerbate
the weak investment climate, worsening the overall
situation.
11. Still, Nepal has a number of strengths as it manages
its economy over the next two years. The nature of Nepal’s
exports and its tourism sector, combined with available
data on remittances to this point, suggest that the impacts
on Nepal are likely to be gradual.6 To date, remittances,
tourist and export flows are maintaining the 2008 levels
although, in the case of remittances, it is too early to
say if recent inflows represent one-time repatriation of
savings.7 The balance of payments position now appears
manageable, as falling remittances are likely to feed into
lower demand for imports (and could even help cool an
overheated property market). Moreover, Nepal’s debt levels
are low by international standards, and its fiscal situation,
albeit fragile, benefits from impressive revenue growth and
liberal aid availability (80 percent of capital expenditure and
28 percent of the total budget). This ought to give Nepal
some room to run a counter-cyclical policy. Finally, despite
the conflict, Nepal retains much of the basic infrastructure,
functioning bureaucracy and local service delivery
mechanisms to meet many of the economic challenges for
inclusive growth. These are assets on which it can build.
Nonetheless, the pace and severity of the crisis witnessed
elsewhere in the developing world — combined with
Nepal’s fragile situation and the additional uncertainties
due to recent political developments — strongly caution
against complacency. Key indicators (in particular net labor
migration and remittances) require careful monitoring and
the Government and donors should develop contingency
plans. Box 2 discusses the country’s macroeconomic outlook
and challenges.
Selected Social Indicators for mid-1990s and 2000s, Various Years
Indicator Mid-1990s Latest availableHeadcount poverty rate 42% (1995-96) 31% (2003-04)Gini coefficient 34.2 (1995-96) 41.4 (2003-4) Net primary school enrollment 67.5% (1995) 89.1% (2007)Gender parity ratio in primary education 0.66 (1995) 0.96 (2007) Under 5 mortality rate (per 1000) 118 (1996) 61 (2006)IMR (per 1000 live births) 79 (1996) 48 (2006)Full immunization coverage 43% (1996) 83% (2006)
Table 2
Source: Nepal Poverty Assessment, 2006; DHS; and GON data.
The nature of Nepal’s exports and its tourism sector, combined with available data on remittances to this point, suggest that the impacts on Nepal are likely to be gradual.
ECS
Med
ia
INTERIM Strategy Note FoR NePAL | 30
The structure of the economy has shifted gradually over the conflict period: agriculture now stands at about 33 percent of the economy (down from 38 percent), industry at about 16 percent (down from 20 percent), and services have grown to 51 percent. This mirrors what has been happening in the labor force, and the urban-rural shares of population: the rural population has dropped to about 80 percent from 84 percent of the total.
COUNTRY CONTExTKi
shor
Sha
rma,
ECS
Med
ia
INTERIM Strategy Note FoR NePAL | 31
(c) Poverty and Social Development
12. Nepal is one of the poorest countries in the world,
with GDP per capita of US$470, and with adverse, though
improving, social indicators.8 In 2007/08, it ranked
142nd in the world on the Human Development Index,
with life expectancy of 63 years and adult literacy at 63
percent for 2008.9 In addition to its poverty, the armed
conflict which ran from 1996 to 2006 imposed a heavy toll
in terms of human lives. Nepal also presents a range of
diversities which contribute to a rich cultural fabric but
create challenges for state building. These include diverse
topography of mountains, hills and plains, with some of
the most remote and inaccessible areas in the world. The
country has huge ethnic and linguistic diversity and wide
discrepancies in social and economic standing depending on
geographic location, ethnicity, caste and gender.
13. While Nepal remains a very poor country, progress
on a number of social indicators has been impressive,
especially in light of the conflict (Table 2). Between the
Until 1939, only two government schools delivered modern education in Nepal. The establishment of the first community school in 1940 marked the beginning of community initiatives in education. Every school established in Nepal from 1940 to 1971 was a community school. In 1971, the government replaced community-based boards of directors with government-appointed committees. The most glaring negative consequences of government management of schools were teacher absenteeism and a serious funding gap. Responding to extreme public dis-satisfaction with school quality, the Parliament in 2001 amended the Education Act, paving the way for the transfer of public schools back to community management. The cornerstone of the amendment
Community Service Delivery of School Education - a Unique Nepalese TraditionBox 3
was the formation of school management committees (SMCs) comprised of parents, thereby making SMCs accountable to parents. SMCs have wide ranging pow-ers that include hiring teachers, mobilizing resources, power to approve budgets and all expenditure deci-sions. In 2002, the government announced a program of voluntary transfer of schools to communities with an assurance that it would continue to provide financial and technical assistance. To date, communities man-age over 20 percent of schools with the support of the donor community, including IDA, under an ongoing SWAp. Community management has benefits which include increased levels of resource mobilization, com-munity monitoring, community participation in school activities and greater commitment of teachers.
mid-1990s and mid-2000s, the poverty rate and gap fell
sharply,10 and MDG indicators such as primary enrollment,
educational gender parity, under-5 mortality, infant mortality
(IMR) and immunization coverage improved markedly.
However, some of these successes create new challenges,
such as meeting the “bulge” of children entering secondary
education, and some old problems (in particular, high
malnutrition rates among children) remain. Inequality has
risen to the highest level in South Asia and presents a major
challenge to contain and, if possible, reverse.
14. A distinctive feature of basic service delivery in
Nepal is the importance of community involvement. To
some extent this was always present in the absence of the
state in remote regions. Community involvement in service
delivery is increasingly evident in recent years in education,
health care, rural water and sanitation, micro-hydro and
community forestry. While in some areas the spread of
community management was accelerated by the challenges for
Government during the conflict, in sectors such as education
it built on a long tradition of community involvement (Box 3).
INTERIM Strategy Note FoR NePAL | 32
Nepal has embarked on the long road to reducing the risks of weak governance and systemic corruption by strengthening the country’s overarching governance framework and institutional capacity. Long-lasting peace also hinges on progress in these areas.
Am
ar R
ai, E
CS M
edia
INTERIM Strategy Note FoR NePAL | 33
GOVERNMENT OF NEPAL’S EMERGING DEVELOPMENT STRATEGY
INTERIMStrategy
NoteFoRNePAL
INTERIM Strategy Note FoR NePAL | 34
15. Nepal’s development agenda is closely intertwined
with its peace building agenda. The CPA broadly defines
key success criteria for achieving peace and development
in Nepal, among others, as: (i) ending discrimination of
all kinds; (ii) state restructuring and enhancing the state’s
accountability to citizens, people’s empowerment, provision
of fundamental rights and access to basic services; and (iii)
better governance, including economic and social rights,
transparency and anti-corruption. The theme of change is
one that the voters of Nepal have clearly endorsed, but what
this entails — and the constraints to be overcome — re-
main uncertain. The high hopes of the population create
challenges for policymakers in terms of expectations on the
scope, depth and timetable for change.
16. The Maoist coalition Government prepared a draft
development strategy built on the foundations of the
Three Year Interim Plan prepared by the previous seven
party coalition Government. The vision is to build a
peaceful, prosperous and just new Nepal. The Government
initiated preparation of this three-year National Develop-
ment Strategy Paper (NDSP) in November 2008. The idea
was to build on the existing Three-Year Interim Plan (which
ends in FY09/10), extending it to FY11/12. A draft strategy
was shared with the donor community in April 2009 for
comments.11 The National Planning Commission Vice Chair-
man drove the NDSP process, with technical teams focusing
on the macro framework, economic policies, social sectors,
infrastructure and governance. The NDSP will be further
reviewed and refined after the new government is formed. A
Nepal Development Forum is expected to be held sometime
thereafter.
17. The draft NDSP outlines GON’s approach to peace
and development in the country. It elaborates on the
peace building agenda and the mutually reinforcing linkages
between peace and development. The overarching vision
of the draft NDSP is a peaceful, prosperous and integrated
Nepal, which assures both efficiency and distributive justice
to its citizens. To this end, the objective of the draft NDSP
is “...to bring visible positive changes in the lives of com-
mon people through lasting peace, and promoting economic
dynamism with distributive justice”. The NDSP draft notes
that it builds on the Three-Year Interim Plan, the Interim
Constitution of Nepal and the Millennium Development Goals
(MDGs). In pursuing the vision and objectives, the draft
NDSP outlines the following priorities which reflect a high
degree of convergence with those in the Three Year Plan:
• Pursuing employment-oriented and broad-based high
economic growth.
• Improved governance and service delivery systems.
• Investment in infrastructural development (physical,
social and economic).
• Social development.
• Inclusive development and targeted programs.
• Sustainable peace building.
• Harnessing international cooperation and regional
economic prosperity for national development (including
trade integration and foreign direct investment).
18. In addition to these strategic priorities, the draft
NDSP identifies a number of more specific “major thrust
areas” which received wider support during NDSP consul-
tations. These include:
• Agricultural transformation, with a focus on commercial-
ization of agriculture and food and nutritional security.
• Specific infrastructure focus on hydropower, irrigation,
roads and airports, tourism, information and commu-
nications technology, institutional infrastructure and
reforms in trade and investment policies.
• Empowerment of the population in governance and
judicial reforms, and service delivery by governmental,
non-governmental and private sector actors.
• Emphasis on basic social services, notably basic and
secondary education, health services, and water and
sanitation.
GOVERNMENT OF NEPAL’S EMERGING DEVELOPMENT STRATEGY
INTERIM Strategy Note FoR NePAL | 35
• Emphasis on social security and inclusion, especially for
vulnerable groups such as disabled people, women, the
elderly and marginalized social groups, as well as com-
mitment to including such groups in the public sector
and developmental programs.
19. As is appropriate given Nepal’s recent history,
peace building receives special attention in the current
version of the NDSP. The draft NDSP notes that its peace
and development strategies are “intertwined in a holistic
and comprehensive framework of peace and development
so as to ensure synergies between the opposite faces of
the same coin”. The priorities under the peace building
pillar of the draft NDSP therefore reflect a mix of policies
and directions which are directly related to deepening the
peace process, and others which reflect broader objectives
of social harmony and equitable development, with an eye
towards promoting socio-economic conditions conducive
to avoiding future conflict. The measures specific to the
peace process include: delivering on the commitments under
the peace process, in particular the CPA; supporting peace
building institutions (including local ones), strategies and
processes; relief, rehabilitation, reconciliation and reintegra-
tion of conflict-affected persons; security sector reforms;
cantonment management; and transitional justice. The
broader “conflict prevention” priorities include: promoting
employment through public works; inclusive and democratic
state restructuring; having a “pro-peace” constitution; and
addressing socio-economic disparities in both spatial terms
and across social groups. The political developments of May
2009 highlight the importance of the peace agenda but also
the ongoing challenges and complexities that it involves.
The theme of change is one that the voters of Nepal have clearly endorsed, but what that entails — and the constraints to be overcome — remain uncertain.
Sanu
Shr
esth
a
INTERIM Strategy Note FoR NePAL | 36
Dummy Text: Nepal’s traditional social relations marginalized many of its diverse social groups and a clear mandate exists for greater inclusion of all citizens in the “new Nepal”.
Rabi
ndra
Pra
japa
ti, E
CS M
edia
INTERIM Strategy Note FoR NePAL | 37
THE BANK GROUP INTERIM STRATEGY
INTERIMStrategy
NoteFoRNePAL
INTERIM Strategy Note FoR NePAL | 38
(a) Proposed Approach of the Strategy
20. In light of the transitions currently underway
in Nepal, we propose to present an Interim Strategy
covering FY10 and FY11.12 The ongoing peace process is
still fragile, with many milestones yet to be met and risks of
further setbacks; the political transition will not be complete
until approval of a new constitution in 2010/11 and fresh
elections in 2011; the new Government to be formed after
elections will need time to translate its vision for the new
Nepal into specific policies and programs that the World
Bank Group could support. The current global economic
crisis adds further uncertainty. An Interim Strategy will
thus help the Bank Group and the Government exercise the
flexibility needed to deal with these uncertainties and lay
the basis for a full Country Assistance Strategy (CAS). As a
contingency in light of the electoral cycle, we are including
in this ISN a tentative outline of a FY12 program. This has
the added advantage of synchronizing with the three-year
planning horizon used by Government and the rest of the
donor community. This ISN follows the first Interim Strategy
for FY07-09 and the last CAS for FY04-06.13 The proposed
ISN reflects considerable continuity with both the last CAS
and ISN, emphasizing the areas of strength but suggesting
more flexibility to respond to opportunities and challenges
(see Box 4 and Appendix IV on the findings of Independent
Evaluation Group’s Country Assistance Evaluation).
21. We are also taking on board the lessons of working
in countries in post-conflict situations. The first lesson
is to be modest in terms of outcomes. While Nepalis have
demonstrated strong resilience, the current transition
is demanding on all actors in society. These demands
would only increase if Nepal were to confront at the same
time a significant economic downturn. We will focus on
fundamentals and step-by-step change, as Nepal’s capacities
will be stretched and could be diverted from long-term
development to immediate needs should the peace progress
falter and/or the impact of the global crisis manifest itself
in a sharp downturn. The second lesson is the need to
be sensitive to the root causes of the conflict and social
tensions. Some actors may value peace and stability over
efficiency and equity, while others may take advantage of
the transition to press for their own interests. This may
make structural reforms more difficult. The third lesson is to
remain flexible and open to changes in the lending program
as well as restructuring projects in response to evolving
circumstances. Analytical work must also be designed to
be timely and responsive to rapidly evolving needs. While
the above lessons are crucial, in many policy areas the Bank
Group can continue to share global experiences, help lay the
foundations for state building, and continue to help improve
basic service delivery for Nepal’s poor.
22. Nepal has been selected as a Bank Group-wide pilot
country for a fully integrated and enhanced joint strategy
which leverages Bank and IFC resources and realizes
synergies. Building upon the co-location of the IFC and
Bank offices, the past year has seen greater collaboration
and interaction between the Bank and IFC in Nepal,
particularly in financial markets, infrastructure and business
enabling environment. In preparing this joint strategy,
IFC and Bank staff held sector-specific consultations and
jointly participated in drafting and reviews. In addition,
private sector consultations led by IFC in Kathmandu were
coordinated with the Bank team and IFC advised on the joint
donor consultation agenda. Such interactions, supported
by the IDA-IFC Secretariat, are to continue during ISN
implementation.
(b) Principles Underlying the Strategy
23. In light of the above challenges the Bank Group’s
strategy should:
• Be driven by and aligned with country priorities. In
addition to grounding its thematic and operational
THE BANK GROUP INTERIM STRATEGY
INTERIM Strategy Note FoR NePAL | 39
The Independent Evaluation Group (IEG) has prepared a Country Assistance Evaluation (CAE) to be discussed with the Committee for Development Effectiveness in May 2009. The CAE examines whether: (a) the objectives of Bank assistance were relevant; (b) the Bank’s assistance program was effectively designed and consistent with its objectives; and (c) the Bank’s program achieved its objectives and had a substantial impact on the country’s development during this period.14 During the period covered (FY03-08), IEG considers that the goals of the Bank assistance program remained broadly aligned with the 2003 PRSP: improving governance and development effectiveness by bringing resources to grassroots levels, but with increased emphasis on growth and inclusion.
While recognizing that Nepal’s considerable political turmoil and changes had a major impact on CAS implementation during the period under review, one of the CAE’s conclusions is that little progress was made against CAS stated objectives in two of the four main strategic themes — achieving broad based growth and good governance. This was partly because specifi c objectives under these two pillars are considered by IEG to have been unrealistic and overly ambitious given country circumstances. on the other hand, IEG’s evaluation concludes that some progress was made in social inclusion, especially with regard to mainstreaming inclusion in sector projects and, to a lesser extent, achieving greater diversity in the civil service. IDA’s program was most relevant and successful in social development, particularly in improving and expanding health services, signifi cantly increasing access to basic education, and increasing access to safe drinking water in rural areas. In addition, even in those pillars showing less progress in meeting objectives, there were some notable achievements despite the very diffi cult country circumstances.
Based on these experiences and in light of the challenges ahead, IEG believes that IDA should
Observations from the Previous CAS/ISN ImplementationBox 4
inject more realism into future country strategy and program design, retaining fl exibility to adjust to changing country circumstances and consulting widely with national stakeholders and development partners throughout program design and implementation. In terms of sectors and instruments, the CAE recommends: making agriculture and rural development the centerpiece of the assistance program; establishing a mechanism to track the impact of the PAF on poverty and social inclusion (and adjusting its design as needed to optimize the benefi ts to the poor and socially excluded); and continuing support for public fi nance management and other institutional reforms through policy-based lending, if feasible, or through sectoral SWAps which have proven successful in health and education.
Regarding IFC’s operations in Nepal, the IEG notes that as the political and security situation deteriorated in 1999, IFC withdrew its local fi eld presence and had very limited activities from 1999-2006. IFC’s inability to develop successful investment projects through much of the decade can be largely attributed to the diffi cult investment environment. Since 2006, IFC’s gradual re-engagement in Nepal has resulted in two GTFP investments, an investment in a domestic airline, a pipeline of investment projects in the fi nancial sector, and a constructive dialogue with the government on business enabling environment issues. This approach of cautious re-engagement has the potential for replication in other post-confl ict countries.
INTERIM Strategy Note FoR NePAL | 40
While Nepal remains a very poor country, progress on a number of social indicators has been impressive, especially in light of the conflict. However, some of these successes create new challenges, such as meeting the “bulge” of children entering secondary education, and some old problems remain, in particular high malnutrition rates among children.
THE BANK GROUP INTERIM STRATEGYH
ari M
ahar
jan,
ECS
Med
ia
INTERIM Strategy Note FoR NePAL | 41
priorities in the Three Year Interim Plan and draft
NDSP, the strategy has followed a participatory process
to ensure that the alignment with country priorities
reflects a representative spectrum of views in Nepali
society. Joint consultations with ADB and DFID in
three regions of the country and Kathmandu gathered
the inputs of a wide range of civil society actors into
the strategy development process. An ongoing client
perception survey will also contribute to framing
how we implement the strategy. An overarching
element of the strategy is to be fully supportive of the
consolidation of peace in Nepal, which is the sine qua
non of stability and development.
• Beharmonizedandcoordinatedwiththesupport
provided by other development partners using common
management arrangements where feasible. For the ISN,
joint strategy consultations have been undertaken with
ADB and DFID. In addition, the Ministry of Finance is
completing a mapping exercise of donor support in all
sectors to provide the basis for discussions on how to
increase complementarity and selectivity across donor
programs. To provide an improved framework for aid
effectiveness, the Ministry of Finance has prepared a draft
new foreign aid policy inspired by the Paris Principles
and commitments made in Accra and Doha. An action
plan on aid effectiveness has also been developed and its
implementation will be monitored during the ISN period.
• Build on the Bank’s and IFC’s areas of comparative
advantage and capture synergies. Because of the strong
presence of other development partners and because of
our own capacity constraints, the Bank and IFC have to be
selective in Nepal, based on our strengths and areas where
we have the human and financial resources to deliver.
• Retain a degree of modesty, consistent with the country
and global environment and timeframe of the ISN. Given
the multiple uncertainties, the ISN should not propose an
overly ambitious program. Activities will concentrate on
areas where the Bank Group has demonstrated strengths
and a cautious “one step at a time” approach in areas of
expanded or new engagement. In addition, the program
needs to have a “do no harm” approach which places
emphasis on the sensitivity to conflict.
• Be flexible to respond to the fluid situation and Nepal’s
evolving needs. This is especially so in light of the global
downturn and Nepal’s complex political situation and
points to the need for “just-in-time” responses. Careful
monitoring of the impact of the crisis on the country
should conditions worsen will be critical. The short-run
responsiveness of the program to the uncertain impacts
of the crisis is unusually important and underlines the
need for careful attention to governance, enhanced
portfolio monitoring and risk mitigation strategies.
(c) The Overarching Goal and Proposed Pillars of the Interim Strategy
24. Reflecting the above challenges and principles
of engagement, three thematic pillars have emerged
that support the overarching goal of pursuing the
complementary processes of consolidating peace and
promoting development. Consultations revealed a strong
consensus on the three themes and the relevance of the donor
community in helping Nepal address them. There is also a
demand for strategies and approaches that would function
regardless of the risks that the country faces in the next
few years. This recognizes that progress on Nepal’s main
transitions is hard to predict, even more so in light of the
recent political developments and the current global financial
crisis. Nepal’s main transitions could proceed steadily (albeit
at different speeds), they could stall, or there may even be
deterioration with external developments exacerbating local
conditions. The proposed ISN program aims to be durable and
robust to these eventualities. The broad stance of the Bank
INTERIM Strategy Note FoR NePAL | 42
Group’s approach, the proposed pillars and options - with
peace and readiness to respond with emergency support as
cross-cutting themes - are outlined below.
25. In designing the ISN program, we have focused on
strengthening the implementation and performance of
the current portfolio. The overall emphasis is on “keeping it
simple”. Firstly, this means having a solid core of the program
which either involves completing existing operations or
building on past areas of effective engagement. This should
enhance the robustness of the program to the uncertainties
in the present environment. Secondly, it means continuing
the emphasis on community-based operations, while opening
cautiously in other areas. With new or expanded areas of
engagement, the strategy is to start small and expand based
on a track record of performance. Thirdly, it means minimizing
the number of projects which may place high demands on
project implementation capacity and fiduciary systems.
26. We have also structured the ISN to be prepared for the
contingency of a significant decline in economic growth
arising from the current global crisis. It this were to happen,
it would likely be triggered by a significant decline in foreign
exchange earnings, especially from remittances, Nepal’s area
of greatest vulnerability. This would fuel falling consumption,
revenues and liquidity, weakening both the state’s capacity
to respond to the crisis and the financial sector’s ability to
counteract the negative impacts. The slowdown in economic
activity would have the dual effect of increasing poverty and
aggravating social tensions. Hence, in preparing the ISN, we
were conscious of the need to preempt if we can and respond in
case an emergency response is needed, identifying those areas
which are amenable to quick turn-around and quick impact.
Overarching Goal: Building a Peaceful, Prosperous and
Just New Nepal
27. Cutting across the ISN pillars is the unifying goal
of helping Nepal to consolidate peace, the essential
underpinning of development and poverty reduction.
IDA’s direct contribution to the peace process has been
the financing for compensation to conflict-affected groups
through a transparent process under the on-going Emergency
Peace Support project. The Bank would also support South-
South knowledge exchanges on peace building efforts with
countries such as South Africa and Rwanda. As well, sector
operations such as education, health, rural roads, irrigation
and water supply, could address some of the immediate
needs for reconstruction of damaged public facilities. Based
on our engagement to date, comparative advantage and
the current programs and plans of other partners, it is
proposed that IDA continue to be selective in engaging on
other aspects of direct peace building support.15 Equally,
IFC’s contribution toward peace building would be via the
second order effects of its focus on investment, improving
the business climate and job creation, and could come in the
future through linkages and community programs associated
with its advisory and investment activities. Neither IDA nor
IFC envisage direct support for security sector reform.
28. In order to ensure that the ISN contributes to peace
building in Nepal, there will be a structured effort to
make the portfolio more conflict sensitive, taking into
consideration the underlying causes as well as consequences
of conflict. IDA is committed to trying to ensure that
all new interventions “do no harm” and, where possible,
enhance peace building, job creation, and social inclusion.
This would be done through social risk analysis that would
identify: (i) at the strategy level, inconsistencies between
the choice of instrument and program and the macro- and
micro-level context analysis; (ii) at project design level,
issues relating to selection of beneficiaries and locations
and to the real or perceived interests of other (indirect)
stakeholders; and (iii) at project implementation level,
concerns relating to implementation arrangements and their
consequences on voice and participation, the selection and
competence of contracted partners, and the transparency of
decision-making.
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INTERIM Strategy Note FoR NePAL | 43
29. A specific screening tool — or “peace filter” —
has been prepared and will be piloted in the coming
months for projects under preparation. It draws on best
practices of social mobilization and the extensive work by
the international community over the last 10-15 years,
including efforts by the Bank, on conflict. The peace filter
will help project teams to focus on a range of issues during
the preparation and implementation processes, including:
national and local level political dynamics; the security
situation in given areas of operation; transparency and
accountability in decision-making and resource use; and
inclusion, voice and benefit capture. In operationalizing
this tool, linkages will be made with other risk assessment
tools regarding governance, anti-corruption and fiduciary
risk assessment frameworks, as well as social mobilization
practices that promote inclusion. Since employment
generation is seen as a critical factor in maintaining social
stability, the peace filter would also track employment
effects in relevant projects. The approach of the proposed
peace filter is presented in Box 5 and is being piloted on a
sample of projects under preparation. Based on these pilots,
the filter will be refined.
The Strategy’s Three Pillars
30. Supporting the overarching goal of promoting peace
and development, the proposed strategy is organized
around the three interlocking themes that emerged
during consultations within the Bank Group and with
the Government, donor partners and civil society. These
The ISN proposes a peace filter tool for task teams to use in the selection, design and implementation of operations. The intention is to proactively seek opportunities to promote social harmony, build social capital and sustain and create jobs, as well as identify and mitigate potential sources of conflict. The filter identifies key conflict and political economy issues for task teams to consider early in project design, appraisal and supervision. The aim is to respond to those issues which: (i) are likely to affect project outcomes in the areas where benefits are being delivered; and (ii) may arise due to the project’s operating environment. In applying the filter, task teams will first disaggregate the different direct and ancillary benefits that will flow from the project and may be contested by different stakeholders. Against the backdrop of the project’s national and local context, the task teams will then identify who controls those benefits, the criteria on which they are allocated and how such information is circulated in the public domain. Teams would then integrate this information as appropriate into the risk identification worksheet developed during project preparation and appraisal. Mitigation actions to prevent harm and maximize positive impacts can then be prioritized and targeted accordingly.
Proposed ‘Peace Filter’ for Bank Group Operations in NepalBox 5
The first part of the filter, drawing on poverty and social impact analysis (PSIA) tools, identifies and qualifies direct and indirect project benefits. The second part helps task teams to better understand the national and local level environment in which projects will operate, and prompts them to seek information from internal and external sources. The final filter would provide guidance on where such information can be found in Nepal. The last set of questions focuses on the analysis of important direct and secondary benefits by the different beneficiaries, decision makers and other stakeholders in order to better identify the social dynamics around given aspects of the project as well as discuss any potential mechanisms to strengthen the positives.
The Nepal Country Management Unit is committed to supporting this conflict-sensitive approach to operations in the country. During the ISN period, a team with skills and knowledge in social and peace related areas of analysis should be available to support task teams to apply this filter, and, more importantly, assist in appropriate follow-up of operations during implementation.
INTERIM Strategy Note FoR NePAL | 44
are also consistent with priorities of the Three Year
Interim Plan. The first pillar addresses the cluster of
challenges facing the state in adapting and constructing
the systems, institutions and capacities needed for the
new Nepal. The second focuses on overcoming constraints
and bottlenecks faced by the productive sector, especially
in terms of productivity, connectivity and sustainability.
The third concentrates on expanding and honing programs
and activities that can increase opportunities and well-
being, especially for the poor and excluded. These three
pillars reinforce each other, with a more capable and
accountable state essential for building confidence and
policy predictability that then channels into an improved
business climate, which in turn generates employment and
demands for greater provision of public goods and services
by the state. Social inclusion runs across all of these themes
as one of the foundations for the new Nepal. Within each of
these pillars, the strategy identifies specific areas where the
Bank Group can make a difference.
Pillar 1: Promoting Capable State Structures and Systems and Fostering Accountable Institutions
31. The ISN period will be a crucial time for the country
as it moves towards sustaining peace and defining the
structure of a new federal state. Key political leaders
recognize that lasting peace depends on being able to
deliver tangible results, and that hinges on the effectiveness
of the state in delivering on its promises. In this period,
the country will seek to refine — and in some cases redefine
— public sector management systems and the institutional
framework and modalities for the interaction of the state
and its citizens. The Bank Group proposes to support
these processes through several channels, but with a clear
recognition of the need to focus on areas of comparative
advantage within an agenda that is very wide, contingent on
political consensus and where many development partners
are active.
32. In this light, the first pillar focuses on three
areas of engagement: (i) strengthening core public
sector management systems which are robust to eventual
decisions on the shape of the State; (ii) making selective
contributions on defining the institutional framework for
the new state, with a particular focus on decentralized
administration; and (iii) helping to articulate and
implement new “rules of the game”, including transparency,
accountability, and anti-corruption among key players,
including the private sector, and strengthening institutions
for regulation and governance. IDA will concentrate on
public institutions, while IFC will focus on corporate
governance in the private sector. IFC’s initial efforts
in raising corporate governance awareness in Nepal will
focus on the banking sector and on large founder-owned
firms. Improved corporate governance in the private
sector, followed by IFC investments, could be a powerful
demonstration to market leaders.
33. In consultations with the GON, development partners
and the country team, there is clear endorsement for
IDA remaining closely engaged on core public sector
management systems. This has been an area of strength
in IDA’s engagement to date and would include areas
such as public financial management (PFM) reform and
institutional strengthening, public procurement capacity
strengthening, core governance functions, and enhanced
monitoring and evaluation (M&E) systems. This support for
strengthening country systems would have added benefits
in terms of facilitating donor harmonization and enhancing
aid effectiveness (see para. 77). Consolidating and building
on past achievements in governance and public sector
management is seen by all players as a sine qua non for an
effective state and implementation of public policies. It is
therefore proposed to continue support through a mixture of
analytical and advisory activities (AAA) and policy dialogue.
The PFM agenda would also be a core element of the proposed
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INTERIM Strategy Note FoR NePAL | 45
Growth alone is insufficient if Nepal is to realize its goal of building a society which offers opportunities and inclusion for all its citizens. Moreover, given the vulnerabilities of the Nepalese economy to the global economic downturn and the continuing risks of set-backs in the peace process, it is doubly important for there to be strong social services and livelihood opportunities, especially for the poor.
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Development Policy Credits (DPCs) if triggers for budgetary
support lending are met (see para. 68).
34. In the field of PFM/financial accountability,
numerous challenges need to be addressed. This proposed
program builds on the PFM review carried out in 2005 and
the Public Expenditure and Financial Accountability (PEFA)
Action Plan which benchmarks Nepal’s performance in the
areas of fiscal discipline, strategic allocation of resources,
efficiency, transparency and accountable management of
public finances. That benchmarking showed that Nepal
was particularly lagging in managing payment arrears,
tax collections and the effectiveness of both internal and
external audits. A recent assessment of public sector
accounting and auditing further revealed the need to
accelerate movement towards internationally accepted
accounting and auditing standards. IDA will continue
to work closely with the Government and development
partners to consolidate achievements and prioritize actions
year by year. This includes sustaining technical support
on basic budgeting and treasury functions; outreach
and consensus building on the need for these reforms
among public and civil society stakeholders; leveraging
information technologies such as Integrated Financial
Management Information Systems (IFMIS); strengthening
the audit function of the Auditor General; and moving from
rules-based to principles-based accounting in line with
international standards. The ISN will also support a sound
institutional development plan and strengthen performance
monitoring. This will be supported through ongoing PEFA
Action Plan Implementation AAA and could be included in
the proposed DPCs.
35. In the area of public procurement, legal reforms
have been enacted but institutional capacity needs to
be further strengthened. Continuing reforms in public
procurement is a challenging task, as it requires concerted
efforts at all levels. In order to address these challenges,
IDA will work closely with the Government and development
partners to improve procurement performance, including
strengthening the capacity of the Public Procurement
Monitoring Office (PPMO) to implement the new procurement
law (developed with past IDA support), implementing
e-government procurement (e-GOP) systems, helping to
establish procurement performance monitoring indicators as
agreed in the PEFA action plan, and supporting movement
towards full alignment of the procurement law with
international standards. To this end, a joint Government-
donor review team has developed recommendations to
enforce a more effective procurement system in terms of
both policy and implementation, and IDA is committed
to implement the recommendations. IDA’s procurement
engagement is being supported through an Institutional
Development Fund (IDF) grant, and could be further
supported through PEFA Action Plan Implementation
AAA and inclusion in a DPC program. Finally, one of the
growing concerns is that public procurement processes are
being undermined at times by acts of intimidation to deter
competition. This could affect donor willingness to provide
resources through Government systems.
36. In addition to supporting core public sector
management, the ISN proposes to engage selectively on
the framework for effective decentralized administration
and service delivery. The work of the Constituent
Assembly in drafting a new constitution is expected to
lead to dramatic changes to the state as it decentralizes.
Ensuring the viability of new levels of government is
a key element, as is making sure that the hierarchy of
functions and responsibilities between the new layers of
administration enhances service delivery, especially for
the poor. This is particularly important in a country which
has a long tradition of community management and where
the capacities of local bodies — where they exist — were
weakened during the conflict. The CA has requested that
IDA contribute to the consultative process by providing
advice and analytical work on fiscal federalism, building
on the above work on public financial management and
THE BANK GROUP INTERIM STRATEGY
INTERIM Strategy Note FoR NePAL | 47
global knowledge. This would center on fiscal transfers,
equalization (horizontal and vertical), expenditure and
revenue assignment, and the economic viability of federal
states. The Bank team proposes to produce a series of
notes and workshops under a Fiscal Federalism AAA funded
by the Governance Partnership Facility (GPF) (see para.
37). Complementary to the Bank’s support for community-
driven development (CDD), we would engage in a dialogue
on the role of local governing bodies, which is being
coordinated by the GON through the Local Governance and
Community Development Program (LGCDP). A proposed
Local Governance Study under the GPF or other trust fund
would help to further define options for what could be an
appropriate engagement for IDA.
37. The broader governance and anti-corruption
agenda is also part of this focus on building the new
state. Rethinking the role of the state and its attendant
core institutions under the new constitution creates a
window of opportunity to strengthen Nepal’s governance
framework. Nepal presently rates relatively poorly
on governance measures, with corruption one of the
growing concerns. Anchoring this part of the proposed
strategy would be efforts to enhance transparency and
accountability, strengthen citizens’ voice and engagement,
promote performance-results based results management
and establish new “rules of the game”. The specific areas
in which IDA proposes to engage are: (i) advice and
assistance to promote and operationalize the potentially
powerful new Right to Information (RTI) Law. This would
include the “demand” side of promoting use of the RTI to
access information and the “supply” side of the capacity
of public agencies to be responsive to RTI requests; (ii)
support to strengthen social accountability mechanisms in
service delivery, including non-lending TA on demand side
approaches in Bank operations and country systems, and
technical advice, capacity building, and grant funding for
mainstreaming social accountability tools (e.g. citizens
score cards and social audits); and (iii) strengthening M&E
systems both at national level and sub-national levels,
including participatory approaches. The umbrella tool for
this engagement would be the recently-approved GPF for
implementation of governance and anti-corruption (GAC)
initiatives, with specific outputs in the identified areas such
as a Social Accountability Mainstreaming Review and Right
to Information Implementation Non-Lending TA. Enhanced
project supervision and use of tools such as technical audits
would complement this effort.
38. The interface of the state and the private sector is
a further important area of activity. In terms of the new
rules of the game, IDA and IFC would exploit their respective
comparative advantage. IFC would focus on corporate
governance and improvement in investment climate via
support for the Business Advisory Forum which will facilitate
public-private dialogue, while IDA would support regulatory
reform in banking and telecommunications, for example,
and the role of the Central Bank in banking supervision.
Possible reform of the Bankruptcy Law is another area for
IFC. IDA would also help the new Government develop a
framework for public-private partnerships (PPPs), and IFC
would provide support for PPP projects through transaction
advisory services and investment, once a functional PPP
policy framework is in place. Some of these themes could be
part of a possible series of DPCs.
Pillar 2: Laying the Foundation for Sustainable and Inclusive Economic Growth
39. As in any country, the key driver for sustainable
poverty reduction in Nepal is growth. In the case of
Nepal, this dimension has heightened importance because
of the sensitivity of sustaining peace to the generation of
tangible benefits for the population and risks of the global
crisis. As a result, the Bank will continue to monitor macro-
developments and to assess the economy’s vulnerabilities
INTERIM Strategy Note FoR NePAL | 48
A centerpiece of the country’s current strategy going forward is to transform the agriculture sector from subsistence based to commercial production as well as to reduce on-farm underemployment and increase more productive off-farm employment. The current thinking is to encourage high value commodities and programs to focus on market orientation and trade promotion.
THE BANK GROUP INTERIM STRATEGYRa
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INTERIM Strategy Note FoR NePAL | 49
particularly with respect to remittances and the financial
sector, and will engage with the new Government to examine
mitigation measures and contingency planning. Over
the longer term, with an improved global situation and
lasting peace, higher growth performance is feasible. This
will require renewed consumer and business confidence
and reductions in the costs of doing business. Actions are
needed on several fronts. The first is maintaining macro-
economic stability and increasing fiscal space for growth
and, second, improving the investment climate for private
sector-led growth through implementation of reforms that
remove structural and regulatory constraints, enhance
accountability, and increase policy predictability. However,
it should be stressed that a critical prerequisite for increased
private investment is an improvement in the law and order
situation in the country. On the fiscal front, on-going
non-lending TA is focused on preparation of a Medium-Term
Expenditure Framework and the centrality of the budget
as an instrument of policy. This will be enhanced by a
Public Expenditure Review (PER), with a focus on critical
sectors, including health, education and roads (including
maintenance).
40. Cognizant of the ISN’s two year coverage, IDA and
IFC will adopt a two-pronged approach under this pillar.
This entails helping to lay the foundations for achieving
higher growth and employment in the medium to long
term, and focusing immediate attention on enhancing
productivity. Nepal has considerable untapped potential for
long-term growth: its hydro-power and water resources are
vast and it is well positioned between two giant markets
— China and India. Numerous niche markets in agriculture
are still to be exploited. Tourism — with Nepal’s obvious
natural attractions — can also play an important role. But
new investments alone will not be enough. Our approach
will involve ensuring linkages between the ISN support
under Pillar One on the broad governance and state building
initiatives to activities under this pillar geared at alleviating
sector constraints. IFC’s support for the Business Advisory
Forum will be an important mechanism to build that linkage.
Towards this end, the Bank Group will focus on the following
areas:
41. Agriculture and Irrigation: Inclusive growth will
require raising agriculture productivity and expanding
off-farm employment. A centerpiece of the country’s
current strategy going forward is to transform the agriculture
sector from subsistence based to commercial production as
well as to reduce on-farm underemployment and increase
more productive off-farm employment. The current thinking
is to encourage high value commodities and programs to
focus on market orientation and trade promotion. IDA did
not have an active lending program in Nepal during the
last ISN period, but is now re-engaging with the proposed
Agriculture Commercialization and Trade Project. At the same
time, there are opportunities in a variety of commodities
with potential for niche market exports (e.g., tea, ginger,
cardamom, specialty coffees, honey, non-timber products,
horticulture, and off-season vegetables) which could be
explored by IFC. While direct investment opportunities in
Nepalese agribusiness companies are limited due to size,
IFC will look to support agribusiness growth through two
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distinct investment strategies. As a means to increase
the financing flows, it will consider wholesale financing
relationships with local commercial banks to increase
lending. In addition, IFC will invest in funds focused on
agribusiness. It has recently invested in two funds, India
Agri Fund which supports agribusiness and investments
in the South Asia region, and IFC SME Ventures, a global
initiative which can provide direct financing as well as
advisory assistance to small agribusiness players in Nepal
for which IFC direct financing may not be available. IFC’s
agribusiness advisory services can complement the work
done by IDA and other donors via investment climate and
business enabling environment work. IFC will also explore
support to IDA’s agriculture commercialization project with
technical assistance and investments through the IFC SME
Venture Fund. For IDA, this entails possible investment
in programs that improve access to agricultural inputs —
including expansion of irrigation coverage, extension and
knowledge, and access to market towns. The two past
coalition governments have asked for support to address
the wide gap in uptake of improved technologies by
farmers required to raise productivity, and this is expected
to remain a priority. IDA will provide analytical support
within a broader policy engagement as part of a non-
lending Revitalizing Agriculture TA. These interventions
and associated policy dialogue with the GON and donors
could lead to a programmatic and coordinated support to
the sector, possibly through a sector wide approach, down
the road. To date, IDA’s focus in irrigation has been mostly
on rehabilitation of farmer-managed irrigation schemes
in the hills and the Tarai. The ISN proposes to continue
the existing irrigation operation and also help to develop
medium irrigation systems through a proposed Small and
Medium Sized Irrigation Project. However, this is contingent
upon improved performance of the ongoing small-scale
irrigation project.
42. Infrastructure and Connectivity: Years of under-
investment in infrastructure are partly responsible
for current levels of low economic development. This
has happened across the board — in power, roads,
other transport and telecommunications. Improving and
expanding access is important to reducing the cost of doing
business, enhancing productivity, and improving access to
markets and information. Investment in infrastructure is
one of the areas in which the synergies between IFC and
IDA are particularly strong. IFC would need to have a solid
policy framework in place before it could support PPPs,
and thus IFC’s operations would be determined based on
progress in establishing a PPP policy which would benefit
from non-lending TA and advice from IDA. Synergies are
also evident in planning for the long term. IDA could help
finance feasibility studies and project preparation and
studies to develop financially viable infrastructure projects,
and IFC, where feasible, could provide long-term limited
recourse financing to credible private sector sponsors and/
or transaction advisory services to government to expand
the private sector’s role in infrastructure. Key sectors
where such support may be targeted include power, roads,
renewable energy, information technology, airports and
airlines.
43. The negative impact of years of under-investment
is perhaps most highly visible in the power sector with
load shedding of up to 16 hours per day in the winter of
2008/2009. Twin actions are anticipated. First, on the
supply side, in order to support the GON’s policy to jumpstart
investment in power, IDA will continue to strengthen the
achievements of the on-going power sector portfolio through
investments in transmission, generation rehabilitation and
distribution strengthening. In the short term, emergency
additional financing is proposed for the Power Development
Project. The longer-term agenda, in which both IDA and
IFC will play a role, includes new medium-sized hydro-power
generation and associated transmission capacity to connect
Nepal to its neighbors for export of power. IDA would
likely keep its support to mid-size or smaller investments
under the proposed Mid-Sized Power Generation Project if
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INTERIM Strategy Note FoR NePAL | 51
appropriate projects can be developed. IDA also initiated
an ESMAP-funded AAA on Removing Barriers in Hydropower.
Given the extreme shortage of power in Nepal, IFC’s foremost
strategic priority is to support hydropower development,
mainly hydropower generation across a range of project
sizes. IFC’s support for large hydro-projects, likely to
come up for financing only at the end of the ISN period,
will be dependent on progress in establishing cross-border
transmission lines to export power from Nepal to India
and other neighboring countries. In the near term, IFC
will consider financing expansions of existing hydropower
projects, which may be the fastest available response to the
power crisis. It is also studying early-stage opportunities
where IFC could partner with the private sector and finance
project preparation and studies to develop viable projects.
The downside risk will come from the private sector’s lack of
confidence in National Electricity Authority’s (NEA) capacity
to deliver on PPAs and a possibly difficult political situation
that deters private investment.
44. On the demand side, IDA is providing ESMAP-funded
TA to the NEA to identify and assess opportunities to
improve efficiency and quality of service, reduce peak
capacity deficits, and reduce costs of power supply through
implementation of demand side management measures.
Just-in-time advisory support is also being provided to help
design and launch the NEA 2009 Compact Florescent Lights
(CFL) Distribution Program which will ultimately target
installation of 450,000 of these lights for evening peak load
reduction. In turn, IFC is likely to pursue opportunities with
the private sector on energy efficiency, including an advisory
project with local banks on Sustainable Energy Finance, and
a possible Risk Sharing Facility with local banks to boost
energy-efficiency lending. The objective of the proposed
Advisory Services project is to improve the financial
performance of Nepalese industry by reducing energy costs
and, at the same time, reduce emissions of greenhouse
gases.
45. Constraints to connectivity and movement of people,
goods and services have been identified as root causes of
conflict and low growth. Given its mountainous geography
and land-linked position, transportation and communications
are vital sectors for Nepal. At present, Nepal has some of
the highest costs of trade reflecting both poor connectivity
and the lack of functioning trade agreements with its
neighbors. Removing barriers (e.g. restrictions on trucks,
customs procedures) and improving infrastructure would do
much to increase trade and investment. Exports currently
only account for 7 percent of GDP and Nepal has a low
density of road system (less than 100 km of road per
1000 square km of land area, as against almost 1600 km
in Bangladesh). The roads sector, one of the consistent
priorities of public policy over time, is an area in which IDA
and IFC can collaborate. This might be the case of strategic
roads, for example, depending on the evolution of PPPs. The
road sector presents challenges: while there is much to do
in this sector, there are substantial risks. These are being
addressed through close attention to sector governance,
including an on-going Road Construction Sector Analysis
Note which will inform planned risk mitigation measures
to ensure the quality of the current and future roads
portfolio. This should also provide a base for expanding
IDA investment in strategic roads under the proposed
Roads Sector Development Additional Financing, which
would facilitate road links to district headquarters and
serve as trunk routes for planned districts roads expansion
to link rural markets to production centers. This, plus an
assessment done through the peace filter mechanism, should
also provide a basis for undertaking the proposed Rural
Access Improvement and Decentralization Project Additional
Financing.
46. Assistance for emerging towns requires further dialogue
to elaborate what this would entail beyond marketing and
transportation links. This will be done under the Emerging
Towns Programmatic AAA, which will inform a possible
INTERIM Strategy Note FoR NePAL | 52
Emerging Towns Project. In other areas of connectivity,
IFC has recently financed a domestic airline which helps
improve regional connectivity within Nepal, and could
expand its participation in the air transport sector through
advisory support to the GON on building airports outside
of Kathmandu and in supporting private airlines going into
India. IDA would not likely engage in this area. In the
area of telecommunications, we do not anticipate expanding
direct IDA support beyond the closing Telecommunications
Project which helped strengthen government regulatory
capacity, spectrum management and rural telephony.
However, an ongoing trust-funded Information Infrastructure
for Growth AAA would continue policy engagement, which
might be built on under possible DPCs.
47. Expanding Access to Finance. Access to financial
services remains limited for most people and small
businesses in Nepal, even though the banking system and
credit have expanded rapidly in recent years. Under the
ISN, IFC will take the lead to enhance access to finance
and increase financial inclusion, with IDA concentrating
its efforts on the continuation of central bank reform and
related regulatory issues of banking supervision under the
ongoing Financial Sector TA project. IFC’s program will
explore potential investment and advisory services for the
following: (i) institution building (supporting strong, well
managed SME-oriented commercial banks, infrastructure
related institutions, microfinance sector); (ii) developing
financial infrastructure (supporting modernization of a
credit information bureau, a secured transaction registry,
and — depending on demand from the new Government
— helping to develop payment and clearing systems, a
rating agency, and a central depository and automated
clearing in capital markets). IFC’s immediate impact
would come from working with the credit bureau and the
secured transaction registry that will be lodged within the
same unit, i.e., the Credit Information Bureau; (iii) using
technology and a Small and Medium Enterprise Survey
to expand banking into underserved rural areas; and (iv)
enhancing regional integration (trade finance facilities for
local banks). IFC’s potential investment in an infrastructure
related financing institution would not probably materialize
as strategic foreign investors refrain from investing during
the continuing global downturn. On the advisory side,
IFC’s Small Enterprise Development Facility (SEDF) will
complement investment projects where feasible and continue
to work with partner banks on credit review strategies for
SME lending. Finally, within the framework of building
regulatory reform mechanisms, SEDF is working to build
capacity of stakeholders to address micro-regulatory and
modernization issues.
48. Private sector-led employment. Peace is not
sustainable nor can the economy reach its potential if jobs
are not created within domestic borders. Private sector
development is critical for generating off-farm employment.
While recent figures are not available, as of 2003-04, Nepal
was characterized by moderate (low) unemployment rates in
urban (rural) areas, but by worryingly high underemployment
in rural areas (of around 20 percent) and among women in
urban areas. Some 500,000 youth enter the labor force each
year with low education completion rates, on the one hand,
and few places open for them to continue their education
at a higher level, on the other. While migration has been
an outlet for some 3-4 million Nepalis and a major source of
income, that door could close as the effects of the current
global economic crisis cause the receiving countries to
shed labor. These conditions only heighten the importance
of harnessing the energies of the private sector to create
well-paying jobs in the country. IFC’s contribution to
private sector growth comes through three channels: (i)
direct investments across agriculture, manufacturing and
services; (ii) working with the Bank to highlight constraints
to private sector investment (both domestic and external);
and (iii) improving the investment climate. Based on the
joint IDA-IFC Investment Climate Assessment (ICA), IFC will
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Constraints to connectivity and movement of people, goods and services have been identified as root causes of conflict and low growth. Given its mountainous geography and land-linked position, transportation and communications are vital sectors for Nepal. At present, Nepal has some of the highest costs of trade reflecting both poor connectivity and the lack of functioning trade agreements with its neighbors.
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work with the Bank to engage the GON in advancing reforms
to streamline regulations for business entry, operation and
exit, rationalizing inspections and certification regimes,
accreditation for export markets, and simplifying the tax
regime. IFC’s Investment Climate Reform Project (ICRP)
which has started work with the Ministry of Industry on the
Special Economic Zone (SEZ) regime is planning to engage
the GON on regulatory reform under the Business Advisory
Forum in 2009. The implementation of some reforms in
the near term, such as enactment of a reformed Special
Economic Zone Law, could have a significant impact on
attracting FDI and generating employment. In turn, IDA
will concentrate on the macro-framework, understanding the
sources of growth and the dynamics and options through
an ongoing Migration and Remittances Programmatic
AAA. It will also engage in a Jobs and Skills Development
Programmatic AAA and continue work on education. Beyond
that, the Adolescent Girls’ Employment (AGE) Initiative will
support a program to enhance school-to-work transition for
young women. The pilot is expected to provide an entry
point for more sustained engagement on youth employment
in coming years.
49. Water resource management, environment and
climate change. Nepal is the “water tower” of the Ganges
River Basin and yet its water resources remain largely
untapped, and its population highly vulnerable to water
hazards. The development and management of water
resources will not only support growth nationally, but will
also provide capacity to adapt to climate change in the
Ganges basin where impacts will likely manifest in increased
floods, droughts and glacier lake outbursts. With more
than 6,000 rivers, Nepal has immense water resource wealth
and a central role to play in regional water management.
The country’s terrain has the potential for world class,
multipurpose reservoirs and hydropower sites that could
generate 40,000-80,000 MW of power (now only 600MW
developed), as well as mitigate floods and provide irrigation.
But the country has negligible water storage infrastructure,
and its institutional capacity and information systems for
water management are weak. At this stage, we anticipate
continuing to work in irrigation, micro-hydro and rural water
supply. Nepal will also benefit from the recently initiated
regional work on interconnectedness of water resources.
Under the South Asia Water Initiative (SAWI), Nepal will
receive support to strengthen its national capacity for
water management, deepen understanding of Nepal’s role
in regional water dynamics, and explore opportunities for
water infrastructure investments in a trans-boundary basin
context. An important product is the hydro-economic
modeling of the Ganges River, which will be done for the first
time. This can help to lay the basis for further support down
the line, together with the Water Resources and Climate
Change AAA already initiated. Given the short timeframe
of the ISN, and the uncertainties of the transition and the
potential impacts of the global crisis, during the ISN period
activities will be launched to identify and establish the
pre-conditions for a large-scale water infrastructure project.
The activities will include technical assistance to help the
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Government update their river basin master plans so that
potential projects can be considered within a broader basin
context, and to improve the framework for resettlement and
benefit-sharing.
50. In addition, enhanced focus is needed on the
environment and climate change. Climate change is
likely to intensify the extreme hydrological variability and
monsoons which deliver about 80 percent of the annual
country’s rainfall in just three months. Devastating floods
routinely affect large, very poor populations (as seen in the
Koshi floods of 2008), with extreme low-flows felt across
the Ganges basin into Bangladesh. Nepal has been selected
as one of the countries for the Pilot Program for Climate
Resilience (PPCR) under the Climate Investment Fund (CIF).
PPCR funding will help to address strategically some of the
above-mentioned climate-related issues. In addition, IDA
will pursue dialogue on issues of environment and climate
change, including building on the findings of the Country
Environment Analysis (CEA) in areas such as the current
dialogue on environment monitoring. The CEA follow-up
is expected to focus on strategic environment and social
assessment of the hydropower sector and on solid waste
management in smaller towns. In addition, IDA would focus
on avoided deforestation which would be financed under the
Forestry Carbon Partnership Facility. Helping the country deal
with disasters — such as floods, but also earthquakes — is
part of the Bank’s continuing non-lending TA for disaster and
emergency management. IDA, in collaboration with the Global
Fund for Disaster Risk Reduction (GFDRR), will also explore the
possibility of project support to reduce disaster risks.
51. Tourism sector: Among Nepal’s sources of growth and
employment, tourism is both a historically important sector
and one the country is aiming to expand. Tourism accounts
for about 8 percent of foreign exchange earnings and 2008 was
one of the best years in recent times in terms of the number
of arrivals. The potential is there for expansion but, like many
private sector-led endeavors, the overall investment climate
and prevailing economic conditions are the determining factors
on when and how this sector could take off. The GON aims
to double tourism arrivals in the next two to three years,
particularly focusing on religious and regional markets, and to
see tourism revenues shared more equitably, with an emphasis
on sustainability and eco-tourism. But the present global
downturn could dampen demand especially from non-regional
visitors. Moreover, tourism in Nepal suffers from the absence
of a strategy, poor infrastructure and logistics, and a need
to strengthen spillovers to the rural poor. At this stage, the
main contribution by IDA and IFC would be by addressing
some of the overall constraints to private sector development,
in collaboration with DFID, which has been asked by the
Government to take the lead. For IDA, one of the specific links
to tourism is the proposed work on environmental sustainability
and conservation. The Bank will support the GON’s application
for a GEF grant to strengthen protected area management,
particularly for tiger habitats in a landscape approach. IFC
will also provide TA to support a program to implement locally
operated tourism portals for Nepal which will increase the share
of booking revenue to local hotels. The program expects to
include 50 Nepali hotels once it is operational.
Pillar 3: Enhancing equitable access to services and social inclusion
52. Growth alone is insufficient if Nepal is to realize
its goal of building a society which offers opportunities
and inclusion for all its citizens. Moreover, given the
vulnerabilities of the Nepalese economy to the global
economic downturn and the continuing risks of set-backs
in the peace process, it is doubly important for there to be
strong social services and livelihood opportunities, especially
for the poor. Supporting equitable access to basic social
services and livelihood opportunities and efforts to promote
social inclusion and sustainable social protection programs
are thus key elements of the strategy. The promotion of
basic service access and inclusion is also closely linked to
the country’s peace-building agenda, with improved services
INTERIM Strategy Note FoR NePAL | 56
Climate change is likely to intensify the extreme hydrological variability and monsoons which deliver about 80 percent of the annual country’s rainfall in just three months. Devastating floods routinely affect large, very poor populations with extreme low-flows felt across the Ganges basin into Bangladesh.
INTERIM Strategy Note FoR NePAL | 57
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Despite the conflict, Nepal has undertaken significant reforms in the education sector which have yielded some impressive results in areas such as primary enrollment and gender parity
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providing the tangible benefits of peace, particularly for
the rural poor, and to the needed response to an economic
downturn should that happen. Past outcomes and the
GON’s priority on inclusive development and human capital
suggest a strong continued role for the Bank in this area.
Coordinated efforts with DFID on addressing social inclusion
and increased efforts through trust funds to address social
accountability in our projects is part of this approach.
53. This pillar proposes to strengthen core diagnostics
and continue programs in sectors where we are already
engaged (education, health, rural water, micro-hydro
and poverty alleviation through community driven
development efforts). In addition, analytical work on social
protection will be pursued. In terms of empowerment of
communities and vulnerable groups, we propose to continue
the ongoing Poverty Alleviation Fund Project (PAF II) which
promotes grassroots livelihood and community infrastructure,
as well as engagement by local level institutions and bottom-
up accountability. The PAF is now sharing information so
that its projects are incorporated into district development
plans and many of the sub-projects are co-financed by local
governments. Early results from the impact evaluation indicate
that PAF is having a positive income effect on households and
communities. Increased engagement with local governments
and building their capacity for service delivery would be
important elements of the ongoing involvement through this
program. These activities would need to be coordinated with
and complementary to the local governance and community
development program. IFC is also exploring further support
for livelihood activities among the poor through helping
commercial and microfinance banks develop their SME/rural
lending strategies. The final element of the basic services
theme is deepening of the rural water program and continued
involvement in the micro-hydro sector and alternative energy
sources, as discussed below.
54. A common element across several of the areas
of engagement in this pillar is a strong role for
communities in service delivery. The role of communities
has proven to be remarkably robust throughout the
conflict. One of the important issues in the decentralization
discussions in the Constituent Assembly is how to sustain
the benefits of community involvement as formal local
administrative structures are created and/or assume new
roles. It is felt that the Bank has useful experience to offer
in terms of sustaining the strengths of community service
delivery and “bottom up” accountability. In the ISN period,
engagement through community-based operations and
dialogue is likely to be an important vehicle for contributing
to the debates on the appropriate roles of communities and
the state. In this light, the community focus of the current
and proposed portfolio is not only about service delivery but
also about the emerging governance structure of the country
and the compact between the state and its citizens. There
is, thus, a close linkage between the agenda under Pillar
Three and the broader governance and state-building support
under Pillar One.
55. Poverty diagnostics and monitoring: While progress
on poverty to 2003-04 was impressive, it is vital to obtain
an up-to-date insight on living standards, particularly in
light of the global crisis. The next round of the household
survey is overdue and the ISN proposes to support a new
Nepal Living Standards Survey (NLSS), and to follow with an
updated Poverty Assessment. This is however contingent on
receiving donor co-financing to fund the survey. In addition
to new data, this will continue the capacity enhancement of
the National Bureau of Statistics which was initiated with
the previous survey. Further progress on poverty monitoring
systems that capture dimensions of exclusion and gender
biases could be supported as part of the potential DPC
series, and the team will also remain aware of needs for
more rapid updates as the global crisis evolves.
56. Education: Despite the conflict, Nepal has undertaken
significant reforms in the education sector which have
yielded some impressive results in areas such as primary
INTERIM Strategy Note FoR NePAL | 60
enrollment and gender parity (see Table 2). These reforms
include: (a) the transfer of public schools to community
management; (b) government financing for unaided
community schools; (c) introduction of per capita financing
of schools; (d) opening of textbook printing and distribution
to the private sector; (e) decentralizing higher education,
along with introducing formula-based funding and cost
sharing; and (f) government financing for community
campuses. A number of these reforms have been supported
by a range of donors, including IDA, under the Second
Higher Education Project and Education for All (EFA) SWAp.
Assuming these reforms are maintained, the proposed School
Sector Reform SWAp operation would extend reforms to
cover the whole school sector and universal education to
grade 8, with a focus on quality, accreditation and means-
based financial assistance to students. The team also
proposes that education be included in the proposed Public
Expenditure Review as well as trust fund-financed analytical
work on governance and institutional risks, among other
topics.
57. Health: Significant progress on health outputs has
been achieved and some key outcomes have improved
markedly over time. The 2004 Nepal Health Strategy
aimed to increase access to and use of essential health
services, in particular for the underserved. The ongoing
Health Sector Program SWAp helped consolidate donor-
supported efforts behind the strategy, and increase public
expenditure levels and effectiveness through an emphasis
on basic health services. It also initiated decentralization
or deconcentration of management authority and
promoted PPPs. Although use of essential health care
services expanded across the board, the emphasis on the
inclusion agenda was more limited until recently, when the
constitutional right to health care was translated into a
policy of free essential health care. At the same time, much
remains to be done, with some health outcomes stubbornly
adverse (e.g. under 5 malnutrition stands at around
THE BANK GROUP INTERIM STRATEGY
40 percent). Different dimensions of women’s health,
access to reproductive and family planning services, and
maternal services, along with HIV/AIDS, malaria and non-
communicable diseases, are also lagging. Specific targeted
interventions continue to be needed to address rapid disease
outbreaks. An example is IDA’s support under the on-going
Avian Flu Project which is addressing both animal and
human health components.
58. In collaboration with a broad range of partners, the
Ministry of Health has recently initiated the preparation
of its next sector strategy. Emphasizing inclusion and
equity, the government is expected to put renewed efforts
into decentralization, human resource management,
interaction of the public, private and community sectors in
health service delivery and governance. While maintaining
a strong focus on maternal and child health, it seeks
to address the health challenges noted above. The ISN
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Significant progress on health outputs has been achieved and some key outcomes have improved markedly over time. Although use of essential health care services expanded across the board, the emphasis on the inclusion agenda was more limited until recently.
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proposes to continue to support these efforts through a new
Health Sector SWAp and to engage in elements of the health
agenda such as HIV/AIDS. Analytical work in the areas of
non-communicable diseases and health sector governance is
also proposed to underpin this dialogue.
59. Social Protection: Nepal does not have a robust
safety net for the vast majority, beyond traditional informal
structures. The social protection system in Nepal is
characterized by fragmented interventions across different
ministries and between the public and donor sectors. At
the same time, enhanced emphasis has been placed on
transfer programs to promote equity and protect the most
vulnerable. Such programs are likely to be even more
important as the impacts of the global crisis are felt in
Nepal. National counterparts have identified the following
potential areas that could benefit from technical and
diagnostic advisory services: the overall vision and strategy
for the social protection system, support for implementation
of the planned public pension reform, consolidation and
improvement of targeting systems (in social protection and
beyond), improving delivery of flagship safety net programs
such as social allowances and public works, reforms of social
care services, and building M&E systems and the evidence
base in the sector. IDA is responding to these needs
through a Programmatic Social Protection AAA (building on
earlier analytical work on pensions) and through the safety
net component of the Emergency Food Crisis Project. The
team also proposes that social protection be a core element
of the policy framework for any budgetary support operations
during the ISN period and would be integrated within the
AAA work on skills and employment. If well-designed,
well-targeted and sustainable safety net programs are
identified, it might be possible to incorporate them within
an emergency response operation, in case such support
is required to address the negative impact of the global
economic downturn.
60. Rural Water Supply and Sanitation: Expanding
safe water and sanitation in rural areas will be crucial to
improving the living standards of the poor. The Government
estimates water supply coverage at about 77 percent and
sanitation coverage at 46 percent. Its goal is to raise those
levels over the coming years. However, 10 percent of
existing schemes reportedly need rehabilitation and more
than half need major repairs. The traditional approach to
service delivery, particularly in rural areas, was top-down
and contractor-led. Community involvement was minimal
and users had no ownership over the system, paying little
if anything towards operation and maintenance. Therefore,
under the ongoing Rural Water and Sanitation project, an
inclusive community driven approach has been adopted, to
encourage more robust service delivery with an emphasis
on accountability. Results show that community ownership
is yielding more sustainable water supply and sanitation
services, as they are operated and maintained by the
communities who play the lead role in their planning,
design and implementation. In collaboration with DFID,
UN, JICA, Finland and the ADB, we propose to support the
Government’s efforts to develop a framework for a rural
water and sanitation SWAp during this ISN period.
61. Micro-Hydro and other Energy Sources: Off-grid
rural modern energy and electrification programs have
been making a slow but steady contribution to economic
and human development in rural Nepal. Considering the
challenging operating environment of Nepal, this is a
significant achievement. Demand for electricity in rural
Nepal will continue to be very high for years to come, and
as part of the Bank’s wider energy sector engagement,
it is proposed to sustain the support to micro-hydro
village electrification schemes through the ongoing power
operation and the PAF, with a strong role for the community
in the planning, implementation and operation of these
schemes. To complement these micro-hydro schemes, IDA
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INTERIM Strategy Note FoR NePAL | 63
Expanding safe water and sanitation in rural areas will be crucial to improving the living standards of the poor. Results show that community ownership is yielding more sustainable water supply and sanitation services, as they are operated and maintained by the communities who play the lead role in their planning, design and implementation.
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will request support from the Global Partnership on Output
Based Aid for the ongoing biogas program, which replaces
traditional sources of energy used by the rural populations
with modern biogas plants delivering clean energy to meet
cooking and lighting needs. Finally, to learn more about
how electrification affects rural families, we are carrying out
an ESMAP-financed AAA study on Social Impacts of Rural
Energy.
(d) Proposed WBG Program and Instruments
62. (a) IDA: In the near term, the Bank Group and
ADB are expected to be Nepal’s largest donors. Nepal’s
IDA15 allocation for FY09-FY11 is SDR488.8 million (about
US$782 million) against the IDA14 allocation of SDR324
million. The ISN covers last two years of IDA15 (FY10-11)
with the overall indicative envelope of SDR332.3 million,
with the average annual allocation of about SDR166 million.
FY10-11 allocations are indicative only and actual annual
allocations will depend on: (i) total IDA resources available,
(ii) the country’s performance rating; (iii) the performance
and assistance terms of other IDA borrowers; (iv) the terms
of IDA’s assistance to Nepal (grants or credits); and (v) the
number of IDA-eligible countries.16 Nepal’s performance has
recently been upgraded from “red” to “yellow” on account of
its improved debt sustainability position. This has allowed
for an increase in total resources for Nepal but also altered
the terms under IDA15 to 55 percent credit and 45 percent
grant (as against 100 percent IDA grant in FY08), but this
can change if the debt sustainability position changes.
63. (b) IFC: IFC’s committed exposure in Nepal is
US$37.5 million as of February 2009 in six projects
and US$7.2 million for the account of participants.
Infrastructure, mainly power generation and one airline
investment, accounts for 84 percent of the portfolio.
Because of the conflict, IFC was not active in Nepal over
the last few years; however, as the situation evolved,
IFC re-opened an office in Kathmandu in January 2008,
with the objective of scaling up both investment and
advisory operations. An Infrastructure Advisory Team was
also set up in New Delhi in 2007 to scale up provision of
infrastructure advisory services in the region, including
Nepal. Going forward, IFC expects to expand its exposure
in Nepal by potentially committing US$15-20 million on
average annually during the ISN, depending on political
stability, the availability of viable investments and
improvements envisaged to the business climate. IFC’s
investment program will be accompanied by complementary
technical assistance and advisory services in a range of areas
including infrastructure, financial markets, improving the
business climate and capacity building. Most commitments
potentially will be in infrastructure (mainly hydropower) and
the financial sector. In addition, IFC will facilitate trade
by partnering with Nepalese banks under its Global Trade
Finance Program (GTFP) and support projects that have a
positive foreign exchange impact in sectors such as tourism,
airlines and agri-business exports.
64. (c) Potential impact of the global economic crisis:
The previous sections outline how the Bank Group would
proceed if the global economic crisis does not have
acute impacts on Nepal. Four to five new operations per
year for IDA would be prepared, with one or two potential
investments per year expected for IFC. The program would
be paced, taking into account the demands of the current
transition on all actors, the step-by-step approach on the
governance front, the investment climate and the fragilities
of the peace process. For IDA, that would entail mainly
the extension of existing programs in health, education,
power and rural roads, often with the CDD focus that has
proven robust under conflict (Annex B3). There would be
an increased emphasis on agriculture and new areas, such
as emerging towns, would proceed on a programmatic
basis. The proposed series of DPCs that would address
THE BANK GROUP INTERIM STRATEGY
INTERIM Strategy Note FoR NePAL | 65
Years of under-investment in infrastructure are partly responsible for current levels of low economic development. This has happened across the board — in power, roads, other transport and telecommunications. Improving and expanding access is important to reducing the cost of doing business, enhancing productivity, and improving access to markets and information
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critical policy constraints would only proceed if the triggers
for such lending are met. However, given that this is a
transition period in which a new government has still to be
formed, we need to adopt a flexible approach to respond to
opportunities and retreat when constraints inhibit effective
engagement.
65. If, instead, the impacts of the global economic
crisis on Nepal are more acute and/or sustained, an
alternative approach would reconfigure the IDA program
to emphasize quick, targeted actions that could help
the poor and vulnerable and preserve or create jobs to
cushion the effects of the crisis. Such an emergency
response would front load the program. It would retain the
emphasis on health and education which are vital and would
accelerate already planned programs and/or expand ongoing
programs to alleviate poverty and stimulate job creation.
This would be the case of support for labor intensive
programs such as rural roads and the PAF project. Another
jobs-related program could be modeled after the Emergency
Food Support operation which has been working successfully.
Under this scenario, the IDA would consider emergency
budget support, with a focus on the areas that have already
been identified as potential reform candidates as part of
DPCs (see para. 68). The acute economic crisis scenario
would have to be considered in light of other risks, including
that of a deteriorating political situation (see para. 85).
66. Under such a crisis scenario, IFC would also
reconfigure its approach. If the situation deteriorates, IFC
would focus more on advisory services. If Nepal’s corporate
sector were unable to raise both domestic and international
financing, IFC could step up its program of assistance, first
by focusing on the provision of liquidity and long-term
financing to its few existing strong and well-managed clients
on an “as-needed” basis. Second, IFC’s SME Venture Fund,
designed for quick disbursement, could increase its share
for Nepal to mitigate the reduced flow of credit and advice
to SMEs. Finally, IFC could also provide short term liquidity
support through senior loans and trade facilitation support
via the GTFP. IFC would also explore utilization of its global
crisis response initiatives such as the Bank Recapitalization
Fund.
67. (d) Range of Instruments: The proposed strategy
will be supported by a range of instruments for
engagement under both scenarios. Both IFC and IDA will
employ a combination of financing and technical, analytical
and advisory services. For IDA, lending will continue to
be predominantly in the form of Sector Investment Loans
(SILs). Some of this investment lending would be based on
sector-wide approaches (SWAps) in sectors where donors and
the Government agree on the policy and results framework
and how to work together collaboratively. In some cases,
there may be pooled resources, combined with IDA fiduciary
oversight. In other sectors, development partners may
agree on common management arrangements that rely on
enhanced fiduciary support such as use of procurement
agents. In line with the Bank’s commitment to increase
harmonization and improve aid effectiveness, we would like
to see SWAps play an increased role in the Nepal program.
Moving forward, we expect to work with the Government
and donors to define SWAp frameworks in rural water and
sanitation and for rural roads and trail bridges, in addition
to the existing ones for health and education. To ensure
that our engagement in program-based approaches is well
informed by analysis of sectoral risks, we propose to carry
out sector risk assessments with GPF funding for the health
sector, and possibly education, as well as for all future
sectors in which SWAps are to be adopted. IDA will closely
monitor performance of SWAps under the ISN, including
difficulties with procurement or reversal of reforms which
could endanger use of the pooling mechanism.
68. Based on GON’s request for budgetary support,
a series of programmatic Development Policy Credits
(DPCs) may form part of the IDA program. Reform triggers
for budgetary support include a stable macro/medium-term
THE BANK GROUP INTERIM STRATEGY
INTERIM Strategy Note FoR NePAL | 67
Despite the conflict, Nepal retains much of the basic infrastructure, functioning bureaucracy and local service delivery mechanisms to meet many of the economic challenges for inclusive growth. These are assets on which it can build.
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fiscal framework and a clear development strategy. Any DPCs
would be single tranche operations, supporting completed
policy actions. So far, we have identified the following as
possible areas for reforms to be addressed within a DPC
series: (i) deepening implementation of the PSM agenda
with a focus on budget reforms, auditing and accounting
systems, accountability and other dimensions of PFM; (ii)
adopting and implementing a social protection strategy,
including areas relating to pension reform, targeting
mechanisms and M&E; (iii) continuing the strengthening
of banking sector regulations and compliance, secured
transactions, collateral registries, etc.; (iv) enhancing
private sector development and improving the investment
climate, including telecommunications regulation, spectrum
management, ICT, hydro-power licensing procedures,
other aspects of PPPs, etc.; and (v) improving overall
fiscal and macro-management, with particular emphasis
on effectiveness of public spending on areas such as road
maintenance and the social sectors, as informed by the PER.
These potential initiatives will require prior policy dialogue,
advice and AAA.
69. Continuing our analytical engagement is an essential
part of the proposed program, but during the ISN
consultations, national counterparts raised concerns about
the timeliness and utility of past non-lending assistance.
They expressed limited appetite for “big” Bank reports. At
the same time, the client and other partners clearly value the
rigor and scope of the Bank’s analytical work. The consensus
is to undertake more programmatic AAA which incorporates
a “just-in-time” response to client needs. This entails: (i)
initially scoping out the task and defining a range of issues
that the GON and we agree are important; (ii) carrying out
the analytical work in such a way that intermediate products,
including workshops, are produced as the work proceeds;
(iii) interacting with the client on a regular basis during the
course of the work; and (iv) packaging the intermediate and
final products into focused, accessible presentations and
workshops for policy makers, while preserving the full extent
and depth of the analysis for particular audiences. We have
moved towards this approach in FY09 and will continue it
during the ISN period. As the new Government articulates its
development vision, we expect substantial opportunities for
non-lending technical assistance.
70. The indicative non-lending program for IDA
presented in Annex B4 emphasizes areas which underpin
the wider program and/or provide diagnostics building
blocks for the next programming cycle. The listed program
is the “core” AAA program of tasks which are either ongoing
or core mandates and needs of the wider program that would
be financed by the Bank’s administrative budget. The NLSS
requires substantial trust fund resources to complete. In
addition, the team will mobilize trust funds for areas such
as analysis of education reforms, the health sector, disaster
risk management (under the GFDRR), the PPCR (the first
‘adaptation pilot’ of the Climate Investment Funds), and
other areas. A number of additional AAA tasks are either
ongoing or proposed, but are funded entirely from trust
funds and hence do not appear in this core list of AAA.
71. The IFC program in Nepal will seek to design and
implement coordinated programs (rather than projects)
particularly in environmentally friendly “green” infrastructure,
financial sector, agribusiness, climate change and business
enabling environment (Annex B4). This is aligned with the
three strategic pillars of IFC’s regional South Asia Strategy
which include: (a) improving economic inclusion through
increasing private sector investment in labor-intensive
and export-oriented industries, bridging the infrastructure
gap, improving access to finance for the underserved and
accelerating rural growth; (b) addressing climate change
through renewable energy investments and projects which
focus on clean energy; and (c) supporting regional integration
through intra-regional trade facilitation and investment.
72. Like IDA, IFC will support the pillars of the proposed
strategy through a mix of investment and advisory
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INTERIM Strategy Note FoR NePAL | 69
services. IFC’s investment services currently include US
dollar loans, trade finance lines, and minority equity stake
in companies. IFC will continue to provide long-term and
counter-cyclical financing for companies that are unable to
access financing on appropriate terms. IFC’s additionality
in Nepal comes through providing longer tenor than that
available in the market, patient equity capital, global
and regional expertise and experience, and TA to enhance
areas such as corporate governance and management of
environmental and social risks. IFC will continue to respond
to client needs through initiatives such as IFC SME Ventures,
Infraventures, and transaction advice, as well as to crisis
situations through the Bank Recapitalization Fund. Local
currency debt financing is essential for companies and
sectors that generate local currency revenues. However, as
of now IFC does not have a local currency product, which
could pose a constraint in providing financing for large scale
infrastructure hydro-projects with revenues in local currency.
73. (e) Monitoring Performance and Results: Although
a formal results framework is not necessarily part of an
ISN,17 we have prepared a partial framework that reflects
Nepal’s circumstances. This framework anticipates modest
results, as the country is undergoing a major transformation
of its constitution, political structures and governmental
institutions. With only a two-year timeframe, the results
matrix (Annex B9) focuses on key actions, processes and
intermediate outputs. Only in areas with mature programs,
such as education, health, rural water supply and sanitation,
and rural roads, are we able to include outcome indicators.
Reflecting the substantial risks facing the Nepal program,
we have taken those risks into account in the results matrix,
providing an assessment of the likelihood of the milestones
and outcomes being realized.
74. We will also track progress by the country in meeting
its challenges. This includes the monitoring of Nepal’s
progress towards meeting the MDGs, as well as tracking
indicators under the IDA Results Measurement System.18
We will continue to monitor Nepal’s relative standing
in global surveys such as “Doing Business” and WBI’s
Governance Indicators. Project by project, we will endeavor
to enhance tracking and reporting with increased attention
to inclusion and job creation, to the extent that underlying
data permits, as part of the application of the peace filter
to new operations. The goal is to build the evidence base
and capacity for M&E more systematically for both Bank
operations and country-wide indicators.
75. (f) Portfolio Management: IDA’s Nepal portfolio
has faced challenges, but efforts are ongoing to enhance
portfolio quality. As of May 2009, the Nepal portfolio
consists of 16 active IDA operations and seven recipient-
executed trust funds with net commitments of US$803.3
million and US$29.9 million, respectively. The undisbursed
IDA balance totals US$468.7 million, while US$21.2
million remains to be disbursed from the trust funds. In
terms of portfolio quality, four projects are considered at
risk, reflecting overall country conditions and weak FM
and procurement performance. These four projects have a
combined commitment of US$198.6 million, representing
25 percent of total net IDA commitments. Over the past
year, the Government and the Bank have initiated efforts to
rectify project performance, including project restructurings.
At present, only one project — the Irrigation and Water
Resource Management Project — is rated unsatisfactory
with respect to implementation and none is rated as
unsatisfactory on development objectives. Nevertheless,
more than half the portfolio is rated as moderately
satisfactory on implementation progress, highlighting the
need for intensive follow up and support. Moreover, the
uncertainties of the transition, combined with generally
low institutional capacity, weak systems of governance and
accountability, Nepal’s geography, and its diverse socio-
cultural setting, all make implementation challenging.
Physical security remains a concern in certain areas.
INTERIM Strategy Note FoR NePAL | 70
Continued monitoring of the portfolio via the peace filter is
intended to keep a watch on such concerns.
76. Building on the pilot exercise carried out for
the India program, Nepal has recently undertaken a
comprehensive assessment of risks, including those
relating to GAC (see Appendix III for details). This
assessment revealed that the portfolio faces substantial risks
even though risks have been reduced by the judicious choice
of project instrument and design in the on-going portfolio.
Two-thirds of active projects are CDD, are implemented with
community involvement, and/or already incorporate demand
side accountability mechanisms. On the other hand, four
projects are considered as high risk from a GAC perspective.
Of these four, the Telecommunications Sector Reform
Project is to close soon; the risks of the Emergency Peace
Support Project were exhaustively analyzed and mitigation
measures put in place as part of project design when it was
approved one year ago; and the Financial Sector TA Project
is now closely supervised from the field. This leaves the
last high risk project, the Rural Access Improvement and
Decentralization Project (rural roads). A review of risks
and mitigation measures is presently underway.19 Support
from the GPF will be used to reinforce mitigation measures
in several on-going projects, with additional support for
strengthening demand side social accountability mechanisms
anticipated from other trust funds.
77. (g) Aid Management and Donor Harmonization:
Thirty eight donors are active in Nepal. In addition to
the Asian Development Bank, a number of development
partners plan to support substantial programs in Nepal, with
the largest being DFID, the European Commission, Japan,
Norway, the United States, Germany, and Denmark. India
provides substantial aid, including in-kind, and China is also
an important development partner. Reliable and comparable
data on external assistance have been difficult to compile,
as much aid is provided off-budget. In early 2009, the
Ministry of Finance updated information on existing donor
commitments to gain greater clarity on planned donor
support by sector over the next three years (Appendix II).
To deepen this process, MOF launched a comprehensive
mapping exercise at the project level which is expected to
be completed shortly. This will be used to identify gaps,
duplications, and opportunities for consolidation, with the
goal of improving aid effectiveness.
78. The challenge for donors is to support the
government to manage the transition from scattered
donor projects and programs outside government, to
harmonized delivery through government. In 2009, the
Ministry of Finance began to meet with donors periodically
to share information and promote coordination. In addition,
the donors meet frequently to exchange information and to
agree on joint approaches. The Utstein group, composed
of bilateral donors, meets regularly and the World Bank
and ADB participate as observers. At the operational level,
coordination efforts are being consolidated and expanded,
and some progress has been made towards targets set out in
the Paris Declaration and on Fragile States principles. In late
2008, the World Bank, DFID, ADB, and JICA conducted the
fourth joint portfolio review with the GON and agreed on an
action plan to improve performance. Harmonization efforts
are most advanced in sectors which have operationalized
SWAps (such as the health and education sectors). Efforts
are underway to replicate these examples in other areas,
with potential SWAps for rural roads, rural water supply and
sanitation, and possibly in agriculture.
79. IDA’s Nepal country team is closely coordinating
with the IMF team. The Fund approved a three-year Poverty
Reduction and Growth Facility (PRGF) arrangement in
November 2003, amounting to SDR49.9 million (70 percent
of quota), and its last review was completed in November
2007. The Government broadly met the arrangement’s
quantitative criteria under a difficult conflict situation, but
implementation of structural reforms has been slow. The
Government may consider a successor PRGF arrangement with
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INTERIM Strategy Note FoR NePAL | 71
the Fund, and a mission is expected to discuss preparation
of the FY09/10 budget.
80. (h) Communications and outreach: As part of
implementing the ISN, the Bank will expand its outreach
to civil society groups and strengthen its public
information services beyond Kathmandu. In addition to
the Bank’s Public Information Center (PIC) in Kathmandu,
we hope to establish two satellite PICs in partnership with
universities in Pokhara and Biratnagar. The PIC program
will be retooled to strengthen dialogue and outreach. PIC
products will be redesigned to meet the needs of non-
English language speakers. The PIC in Kathmandu is the
local affiliate of the Global Development Learning Network
and its activities will be tailored to contribute to the
knowledge agenda of the Bank and development partners.
81. Communications will be integrated into Bank
projects, analytical work and knowledge management.
The External Affairs unit will work proactively with project
teams to design communications components and to
strengthen capacity towards ensuring compliance with
Nepal’s Right to Information Law. Emphasis will be placed
on the use of radio, which is the medium of choice for most
Nepalis. In addition, a client survey will be completed in
late FY09 to inform implementation of the ISN. Respondents
include representative samples from government, project
beneficiaries, civil society, private sector and media. Focus
groups are being organized to discuss how best to use the
findings of the survey.
82. (i) The Decentralized Kathmandu Office: The Bank
Group’s presence in Nepal has been substantially
increased since the end of conflict. The IFC re-opened
its office, co-located with the Bank, in 2008 which
has facilitated the interaction and collaboration of the
two teams. Moreover, there has been an increase in
internationally recruited staff based in Kathmandu which is
becoming a de-facto operational base for staff working on
neighboring countries that have restrictions on staff travel
and presence due to security concerns. One of the lessons
of working in post-conflict countries is that the Bank tended
to have insufficient numbers of staff on the ground. This had
been the case in Nepal: there was no international staff,
other than the Country Director, since early 2004. During
2008, eight joined and all Country Sector Coordinators are
The World Bank Public Information Center in Kathmandu is the local affiliate of the Global Development Learning Network and its activities will be tailored to contribute to the knowledge agenda of the Bank and development partners.
INTERIM Strategy Note FoR NePAL | 72
field-based. The impacts on the timeliness and diversity of
policy engagement have been noted by the GON and other
development partners in a number of cases. The delivery
of two emergency operations and preparation of a third
in the past 12 months are also testament to the positive
impacts on responsiveness of an enhanced field presence.
That expansion is expected to continue with the placement
of two more international staff by end-FY09. We further
anticipate expanding numbers of Nepali staff, who will
strengthen our capacity to perform our fiduciary functions,
enhance our capacity to deal with governance issues (with
GPF support) and add the expertise needed to apply the
peace filter across the portfolio. This will take highly honed
skills and knowledge of the political economy and effective
ways to work in conflict sensitive situations. SWAps also
need field presence and moving away from the “mission-
based” supervision to day-to-day dialogue. IFC also plans to
increase its staff presence in Nepal.
83. (j) Mitigating Risks: The Bank Group faces
substantial risks working in Nepal (see Appendix III on
governance and risk assessment). The key challenge for the
new Government is to rebuild the legitimacy of the state,
consolidate the peace process and maintain law and order,
and deliver tangible benefits to those traditionally excluded
and to society at large. It is undertaking several difficult
transitions at the same time — political, economic and social
— none of which is easy, as demonstrated by recent political
developments. At the same time, Nepal has embarked on
the long road to reducing the risks of weak governance
and systemic corruption by strengthening the country’s
overarching governance framework and institutional capacity.
Long-lasting peace also hinges on progress in these areas.
The fact that the country faces them simultaneously increases
the associated risks, a situation made even more challenging
in the face of the global crisis and the uncertainty about its
potential impacts on Nepal and the timeframe over which
such impacts are likely to manifest.
84. The proposed Nepal program has been designed
to take those risks into account and to enhance risk
management through a number of dimensions:
• Selectivity in the program is informed by a comprehen-
sive risk assessment of the portfolio and interventions
in different sectors.
• The program is designed to “keep it simple” and to build
on existing strengths, especially in areas in which past
programs have been resilient and robust to conflict.
• The risk of lack of ownership when the government
changes is minimized, first, because the new govern-
ment will likely include some coalition members from
the previous government, and second, almost all the
proposed investment operations will be scaling up pro-
grams that were started and implemented by previous
governments.
• Community management purposefully underpins most
operations. CDD approaches, with communities taking
decisions and managing programs, have built-in checks
and balances and accountability mechanisms that rein-
force effective implementation.
• We will try to “do no harm”. The addition of a peace
filter to the project cycle for new IDA operations is
expected to heighten awareness and sensitivity to the
risks associated with conflict situations that are often
closely linked to poor governance. Design options can
then be addressed early in the cycle and monitored
throughout project life.
• The program tries to avoid making commitments that
would place high demands on “supply” side account-
ability and fiduciary systems while expanding support
for mainstreaming “demand” side mechanisms such as
score cards and social audits that can be reflected in
Governance and Accountability Action Plans.
• Support for policy reforms, addressing areas such as regula-
tory reform in finance and telecom, could be on the basis
of single tranche operations and backed by solid AAA.
• We will continue to strengthen our own capacity to
INTERIM Strategy Note FoR NePAL | 73
deal with these risks with a strong focus on enhanced
fiduciary and supervision functions, as well as building
in-house capacity to deal with governance and conflict.
85. Not all of the risks facing Nepal can be mitigated
and significant political, social and economic risks
remain. We need to prepare and to the extent possible
take preemptive action. The impact of an economic crisis
on new Bank Group investments was discussed previously
(para. 65 and 66). Such a crisis would require both IDA
and IFC to undertake contingency planning, now underway,
close consultations with other donors, and monitoring of
the situation particularly with respect to remittances and
the banking sector. Should there be a prolonged period of
political stalemate, a deterioration in the political situation
or a renewal of conflict that inhibits the Bank Group’s
operations, IDA would: (i) adjust individual operations as
needed to reflect the impact of conflict via the peace filter;
and/or (ii) scale back operations selectively and gradually,
depending on other donor responses and the pace and
extent of the conflict and without creating “aid orphans”.
This assumes that the basic functions of government can
continue and that adequate macro-management prevails
and is similar to the stance followed during the conflict
period. It would mean that IDA would likely continue to
emphasize CDD approaches and basic social services while
providing support for strengthening state systems. Finally,
with respect to a third scenario in which the country faces
deterioration along multiple fronts, the Bank Group would
combine elements of the two above responses, although a
situation of a sustained economic and political crisis might
inhibit a workable response. No matter how much effort
goes into project readiness, due to an often unpredictable
and volatile implementation environment, ongoing
supervision will be required which adopts a proactive and
flexible approach to achieving results. It should be assumed
that project design may need to be modified and provisions
made for future adjustments through project restructuring
during the implementation phase.
INTERIM Strategy Note FoR NePAL | 74
Peace is not sustainable nor can the economy reach its potential if jobs are not created within domestic borders. Private sector development is critical for generating off-farm employment. Some 500,000 youth enter the labor force each year with low education completion rates, on the one hand, and few places open for them to continue their education at a higher level, on the other.
Kish
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INTERIM Strategy Note FoR NePAL | 75
ISN PROCESS
INTERIMStrategy
NoteFoRNePAL
86. The ISN formulation process has involved consultations in Nepal
and in Washington. Joint Bank Group strategy consultations with
DFID and ADB and a strategy brainstorming with the three donors’ staff,
Secretary of Finance, National Planning Commission Vice Chairman and
government planning and sector specialists were undertaken in Kathmandu
in November 2008. The objective of these consultations was to gather
views from a variety of stakeholders on where and how the three donors
can be most effective in supporting Nepal’s development. This included
civil society actors, representatives of the major political parties, senior
civil servants and youth groups. Consultations were also undertaken in
selected districts of Nepal during October-November 2008. A summary of
the in-country consultations is provided in Appendix V. Prior to the up-
stream review of the ISN in February 2009, further consultations were held
with GON and development partners on the proposed principles and areas
of engagement, with positive responses. Another fuller review sponsored
by the Ministry of Finance with all the major development partners was
conducted in March 2009. The Ministry has been extensively consulted at
each stage of the process and the lending and analytical program reflects
their assessment of the World Bank Group’s comparative advantage and
where we should engage.
INTERIM Strategy Note FoR NePAL | 76
1 Originally called the Communist Party of Nepal-Maoist, it was renamed the Unified Communist Party of Nepal-Maoist (UCPN-M) following its merger with a smaller group.
2 This issue was the catalyst in the Prime Minister’s resignation, with open disagreement between the President, several political parties (including coalition partners) and the Nepal Army on one hand and the Prime Minister and UCPN-M on the other.
3 Resilience Amidst Conflict – Assessment of Poverty in Nepal (1996-2004), 2006.
4 The Government is working on a medium-term framework starting FY09/10. An IMF mission had been expected in the near future to assist in the budget process and to help frame a set of consistent medium-term projections. The Bank team is in contact with the Fund to assess the timing of next steps.
5 According to the Bank’s policy note, “The Global Economic Crisis: Assessing Vulnerability with a Poverty Lens”, of February 2009, Nepal’s exposure to the crisis is considered medium, with the country having some fiscal space to react to the crisis, along with a medium institutional capacity to do so.
6 Most of Nepal’s exports, 70 percent, are commodities sold to India. With respect to tourism, about 60 percent of tourist arrivals are from Asia, with India accounting for the single largest share (20 percent) (2007 figures).
7 Recent data on remittances show a significant increase, likely partially due to exchange rate depreciation. Net migration of Ne-palis is still positive, with local labor agencies expecting most foreign labor contracts to be honored. This could change, however, when contracts expire and are not renewed.
8 The GDP per capita figure is the GON figure. The World Bank estimates GNI per capita (Atlas method) as US$340 per capita in 2007.
9 Literacy based on UNESCO EFA data for population 15 years and over.
10 Updated poverty statistics will not be available before 2011.
11 Consultation Draft of Nepal Development Strategy Paper, National Planning Commission, April 2009.
12 This is consistent with OP 2.10 and OP 2.30, along with BP 2.30 and the Guidelines to Staff for CAS Products dated March 2006.
13 The first ISN, dated January 22, 2007, Report no. 38119-NEP, covered 18 months to August 2008.
14 The CAE covers three CAS documents: (i) the CAS Progress Report discussed at the Board in December 2002; (ii) the CAS pre-sented in November 2003; and (iii) the Interim Strategy Note presented in February 2007.
15 A range of donors are involved in direct support to the peace process, including several UN agencies, the EU, DFID, India, the Norwegian, Swiss and German governments, INGOS and others. Two mechanisms coordinate programming and monitoring of this support: the Nepal Peace Trust Fund (chaired by GON), and the UN Peace Trust Fund. Specific donor/bilateral support is described in Appendix II.
16 IDA allocations are made in SDRs, and the US$ equivalent is dependent upon the prevailing exchange rate.
17 The ISN covering FY07-08 did not incorporate any results features.
18 In some cases, these indicators would have to be adapted to Nepal’s circumstances. For example, the indicator on rural access would be framed as the percentage of the rural population within four hours’ walk from all weather roads in the case of the hills, or two hours’ walk in case of the plains.
19 A review is presently being carried out, along with the preparation of a GAC Plan, to put in place additional mitigation measures.
This will be done prior to appraisal of the request for additional financing.
END NOTES
Appendices
theworld bankgroup
INTERIM Strategy Note FoR NePAL | 78
I. LOW INCOME COUNTRY-DEBT SUSTAINABILITY ANALYSIS (LIC-DSA)2 A. Size and Composition of Public and Publicly
Guarantee (PPG) Debt1. Nepal’s total public debt stock is estimated at 47
percent of GDP at end 2007 (in nominal terms), of which
roughly 33 percent is external debt. Public external debt is
estimated at US$3.2 billion, of which about US$3 billion was
owed to multilateral institutions, mostly IDA and the ADB.
Bilateral debt stock is estimated at about US$270 million,
with Japan as the largest creditor accounting for more than
half of the bilateral debt. After remaining fairly constant
at around 50 percent of GDP since 1995, the external debt
stock dropped by about 17 percentage points of GDP during
2004-2007, as a result of relatively low external loan
disbursements and the appreciation of the Nepalese rupee.
The domestic debt stock accounts for around 14 percent of
GDP and constitutes an increasing share of total public debt.
B. Assumptions
Debt Sustainability Analysis1
2. Baseline projections of public and publicly guaranteed
(PPG) debt are based on the following key assumptions:
• Real sector: Real GDP growth is projected to rise
gradually from 3.8 percent FY07/08 and stabilize at 5.5
percent after FY10/11, in line with growth rates observed
in the early 1990s—a period of relative stability—and
supported by structural reforms and sound macroeconomic
policies. In the longer term, Nepal’s vast untapped
hydropower potential is expected to contribute signifi cantly
to growth. Infl ation is assumed to decline from around 6.5
percent FY07/08 to an average of about 5 percent in the
medium term in line with projected infl ation developments
in India and as supply bottlenecks are gradually alleviated.
The exchange rate is projected to depreciate against the
dollar, in line with projected movements in the Indian rupee
to which the Nepalese rupee is pegged.
• Fiscal sector: The revenue-to-GDP ratio is projected to rise
from 13.5 percent in FY07/08 to 14.3 percent by FY14-28,
owing to gradual improvements in revenue mobilization. The
expenditure-to-GDP ratio rises from 19.5 percent in FY07/08
and assumed to be maintained at this level thereafter3 .
Offi cial grants are assumed to average 3 percent of GDP
FY07/08–FY12/13 as donors are expected to support the
peace process; from FY13/14 onwards offi cial grants are
projected to decline as a share of GDP.
1 Public debt dynamics are assessed using the Low-Income Country Debt Sustainability Analysis (LIC-DSA) framework, which was jointly prepared by the IMF and the World Bank. The baseline macroeconomic scenario is broadly the same as in the previous DSA. The initial net present value of debt has improved compared to the previous DSA due to the appreciation of the Nepalese rupee and lower than projected loan disbursements in the interim. In view of the improved debt indicators, Nepal’s external debt dynamics are assessed to be subject to a moderate risk of debt distress. This is a change from the previous DSA, which classifi ed Nepal as at high risk of debt distress. Report – May 2, 2008. This analysis, however, does not take into account the rapidly changing global economic conditions and the effect that they will have on Nepal’s exchange rate and economic growth prospects.2 The LIC-DSA produces different results from calculations under the enhanced HIPC Initiative because of different methodologies.3 The projected increase in the fi scal spending in 2007/08 is driven mainly by pre-election and election spending; higher costs associated with clearing Nepal Oil Corporation’s arrears, and increased donor fl ows.
Appendix I
Figure I.1: Composition of External Debt, 2000/01- 2006/07(In millions of U.S. dollars)
0
500
1000
1500
2000
2500
3000
3500
2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Multilateral Bilateral
• External sector: Exports of goods and services are
projected to average of about 8 percent over the period,
supported by tourism and growth in partner countries.
Imports of goods and services (in dollar terms) are expected
to grow by an average of 11 percent in the medium term,
fuelled by remittances and in line with economic activity.
Import growth during FY13/14-FY27/28 is assumed to
average 6.6 percent. The current account balance is
projected to deteriorate from a surplus of 0.9 percent of GDP
in FY07/08 to a moderate defi cit of 1.6 percent of GDP in
FY27/28 driven by the development needs, with remittances
declining gradually as a share of GDP. New fi nancing is
assumed to rise from about US$200 million FY07/08 to
US$450 million FY12/13; from FY13/14 onwards offi cial
disbursements are expected to gradually decline as a share
of GDP. The grant element of new borrowing is assumed
to gradually decline during the projection period, with an
average of 46 percent.
C. BaselinePPG External Debt
3. A key feature of the LIC−DSA framework is that it
compares debt burden indicators to indicative policy-
based thresholds. The thresholds are based on the empirical
fi nding that low-income countries with stronger policies and
institutions tend to have a higher debt carrying capacity.
Nepal is classifi ed as a medium performer based on its three
year average CPIA score during 2004-06. At end-2007,
Nepal’s NPV of public debt-to-exports ratio is estimated at
148 percent (the relevant policy based indicative threshold
is 150 percent). The ratio is projected to fall to 129
percent by FY12/13 percent and 87 percent by FY27/28.
4 The baseline projections expect the current account, which has been historically a surplus in Nepal, to unwind gradually into a defi cit, as spending and higher growth result in more imports of goods and services and the surge in remittances stabilizes. The average current account defi cit over the projection period 2008-28 is a little over 1 percent of GDP relative to the historical average of a surplus current account of 3.4 percent. The results of the historical scenario, where the current account surplus of 3.4 percent of GDP continues into the projection period, suggests negative borrowing and thereby steady declines in debt. In view of this, debt is constrained to zero in 2018.5 Given the high concessionality of external debt, the debt service-to-exports ratio is low, and at levels similar or lower than to most HIPCs after full HIPC debt relief. The ratio refl ects debt service on existing debt and debt service on projected disbursements.
Other indicators remain below the policy-based indicative
thresholds throughout the projection period.4
4. In the baseline scenario, debt burden ratios are
projected to fall between 2007/08 and 2027/28 (Table
I.1). The NPV of external public debt-to-GDP (20 percent
to 12 percent), NPV of external public debt-to-exports (148
percent to 87 percent); external public debt service-to-
exports ratio (9 percent to 6 percent).5
Total Public Debt
5. Domestic debt accounts for about 30 percent of total
public debt at end-2007. Under the baseline scenario
which does not take into account the possible negative
impacts of the current global economic crisis on Nepal,
the NPV of public debt-to-GDP ratio declines from 35
percent at end FY07/08 to 26 percent by FY27/28 (Table
4 and Figure I.3). Over the same period, the NPV of
Indicative Nepal: Nepal: projected Thresholds 2006/07 average 2007/08 -2027/28
NPV of debt, in percent ofExports 150 148 116GDP 40 22 15Revenue 250 163 114
Debt Service, in percent ofExports 20 11 7Revenues 30 12 6
Table I.1 : Indicative External Debt Burden Indicators
INTERIM Strategy Note FoR NePAL | 80
public debt to-revenue ratio falls from 216 percent to
157 percent, and the public debt service-to revenue ratio
decreases from 17 percent to 12 percent.
D. Sensitivity Analysis6. Stress tests and alternative scenarios suggest that
Nepal’s debt profi le is vulnerability to shocks.
• Total public debt: A shock modeled using real GDP growth
at historical average minus one standard deviations FY09-10
results in the NPV of debt-to-GDP ratio increasing from 35
percent in FY08 to 41 percent in FY28; the NPV of Debt-
to-Revenues-and-Grants ratio increases from 215 to 250
percent; and the debt service to revenue ratio increases from
17 to 23 percent. This scenario illustrates the importance
of the peace dividend to generate stronger real GDP growth
and the impact of deteriorating global economic conditions.
Alternative scenarios reveal vulnerabilities from maintaining
the FY08 fi scal stance (primary balance) which could result
in the NPV of debt-to-GDP ratio increasing from 35 FY08 to
44 percent FY28.
• External debt: Bound tests indicate that the NPV of
debt-to-export ratio is sensitive to shocks. Following a
combined, half-standard deviation shock to export growth,
GDP defl ator, and net non-debt creating fl ows, the NPV of
debt-to-exports ratio increases signifi cantly, peaking at near
300 percent FY10, and stays above the threshold for most
of the projection period. Other bound tests (e.g. shocks to
exports and non-debt creating fl ows) also cause the NPV of
debt-to-exports to break the thresholds. These results are
partly driven by Nepal’s volatile export performance in the
past decade. Shocks to other debt indicators, such as the
NPV of debt-to-GDP and debt service-to-revenue, result in
trajectories below threshold values.
E. Staff Assessment7. Based on the LIC-DSA, staffs conclude that Nepal’s
external debt dynamics are subject to a moderate risk of
distress but vulnerable to shocks. The negative impact
of current global economic conditions and/or renewal
confl ict on Nepal’s economy could in fact resemble such
a shock scenario. Since the last DSA in 2007, the initial
net present value of debt improved due to the appreciation
of the Nepalese rupee and lower than projected loan
disbursements in the interim. In contrast to the previous
DSA, the baseline scenario does not indicate a protracted
breach of debt thresholds. In view of this, Nepal’s external
debt dynamics are assessed to be subject to a moderate
risk of debt distress. This said, bound tests refl ecting
shocks to export growth and non-debt creating fl ows could
result in protracted breach of the debt thresholds. The
sensitivity analyses underscore the need to implement sound
macroeconomic policies and reforms, including through
raising the real GDP growth rate and achieving higher
export growth. Stronger and more stable growth in exports
contributing to higher GDP growth, combined with foreign
fi nancing at favorable terms—preferably through grants—
would help Nepal make progress toward achieving its MDG
targets while containing risks to debt sustainability.
6The Nepalese rupee has in fact depreciated by more than 20 percent since November 2008.
INTERIM Strategy Note FoR NePAL | 81
Figure I.2: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2008-2028
(In percentage)
Figure I.3: Indicators of Public Debt Under Alternative Scenarios, 2008-2028
(In percentage) 1/
NPV of Debt-to- Revenue Ratio 2/
0
50
100
150
200
250
300
2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028
BaselineNo ReformMost extreme stress test
NPV of debt-to-GDP Ratio
0
5
10
15
20
25
30
35
40
45
50
2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028
BaselineNo ReformMost extreme stress test
Debt Service-to-Revenue Ratio 2/
0
5
10
15
20
25
30
2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028
Baseline
No Reform
Most extreme stress test
Source: Staff projections and simulations.1/ Most extreme stress test is test that yields highest ratio in 2018.2/ Revenue including grants.
Source: Staff projections and simulations.
NPV of debt -to-exports ratio
0
50
100
150
200
250
300
350
2007 2012 2017 2022 2027
Baseline
Threshold
Historical scenario
Most extreme shockNPV of debt-to-GDP Ratio
0
5
10
15
20
25
30
35
40
45
2007 2012 2017 2022 2027
Baseline
Threshold
Historical scenario
Most extreme shock
0
5
10
15
20
25
2007 2012 2017 2022 2027
Baseline
Threshold
Historical scenario
Most extreme shock
Debt-service-to-exports ratio
INTERIM Strategy Note FoR NePAL | 82
Tabl
e 1.
Nep
al: E
xter
nal D
ebt
Sust
aina
bilit
y Fr
amew
ork,
Bas
elin
e Sc
enar
io, 2
008-
2028
1/
(In
Perc
enta
ge o
f GD
P, u
nles
s ot
herw
ise
indi
cate
d)
A
ctua
l H
isto
rica
l St
anda
rd
P
roje
ctio
ns
Av
erag
e 6/
De
viat
ion
6/
20
06
2007
20
08
2009
20
10
2011
20
12
2013
20
08-1
3 20
18
2028
20
14-2
8
Av
erag
e
Av
erag
e
Exte
rnal
deb
t (n
omin
al)
1/
37.9
35
.5
29.1
28
.7
27.8
27
.0
26.6
26
.5
24
.6
20.7
o/
w p
ublic
and
pub
licly
gua
rant
eed
(PPG
) 35
.3
33.0
26
.9
26.4
25
.4
24.6
24
.2
24.1
22.1
18
.0
Chan
ge in
ext
erna
l deb
t -7
.1
-.25
-6
.3
-0.4
-1
.0
-0.8
-0
.4
-0.1
-0.6
-0
.3
Iden
tifie
d ne
t de
bt-c
reat
ing
flow
s -9
.9
-5.4
-1
.9
-2.5
-2
.0
-1.8
-1
.1
-0.7
-0.4
0.
3
Non
-int
eres
t cu
rren
t ac
coun
t de
ficit
-2
.5
-0.9
-3
.4
1.4
-0.9
-1
.3
-0.7
-0
.5
0.2
0.8
1.
1 2.
2 1.
6De
ficit
in b
alan
ce o
f go
ods
and
serv
ices
18
.1
18.4
18
.7
20.6
20
.7
20.6
21
.0
21.1
20.1
17
.9
Expo
rts
13.6
13
.2
12.1
12
.3
12.1
12
.1
12.2
12
.1
12
.1
13.3
Impo
rts
31.7
31
.6
30.8
32
.8
32.7
32
.7
33.3
33
.3
32
.2
31.2
Net
curr
ent
tran
sfer
s (n
egat
ive
= in
flow
) -1
9.5
-17.
9 -1
5.7
3.1
-18.
4 -2
0.7
-20.
2 -1
9.8
-19.
6 -1
9.2
-1
8.1
-15.
2 -1
7.0
o/w
offi
cial
-1
.6
-2.0
-1
.9
-3.3
-3
.2
-3.1
-3
.0
-3.0
-1.9
-0
.9
Othe
r cu
rren
t ac
coun
t flo
ws
(neg
ativ
e =
net
inflo
w)
-1.1
-1
.3
-1.2
-1
.2
-1.2
-1
.2
-1.2
-1
.2
-0
.9
-0.6
Net
FDI
(ne
gati
ve =
infl
ow)
0.1
-0.1
0.
0 0.
1 -0
.1
-0.2
-0
.2
-0.2
-0
.3
-0.3
-0.5
-0
.9
-0.6
Endo
geno
us d
ebt
dyna
mic
s 2/
-7
.4
-4.5
-0
.9
-1.0
-1
.1
-1.2
-1
.1
-1.1
-1.0
-0
.9
Cont
ribu
tion
fro
m n
omin
al in
tere
st r
ate
0.3
0.3
0.3
0.2
0.2
0.2
0.2
0.2
0.
3 0.
2
Cont
ribu
tion
fro
m r
eal G
DP g
row
th
-1.0
-0
.8
-1.1
-1
.3
-1.3
-1
.4
-1.4
-1
.4
-1
.3
-1.1
Cont
ribu
tion
fro
m p
rice
and
exch
ange
rat
e ch
ange
s -6
.7
-4.0
…
…
…
…
…
…
…
…
Resi
dual
(3-
4) 3
/ 2.
8 2.
9
-4
.4
2.1
1.0
1.1
0.8
0.5
-0
.2
-0.6
o/
w e
xcep
tion
al fi
nanc
ing
-0.3
-0
.3
-0.2
-0
.2
-0.2
-0
.2
-0.2
-0
.2
-0
.1
0.0
NPV
of e
xter
nal d
ebt
4/
…
22.1
19
.4
19.3
18
.8
18.3
18
.1
18.0
16.9
14
.3
In p
erce
nt o
f ex
port
s …
16
7.3
160.
4 15
7.6
155.
6 15
1.8
148.
4 14
8.5
13
9.9
107.
6
NPV
of
PPG
exte
rnal
deb
t …
19
.6
17.1
17
.0
16.4
16
.0
15.7
15
.6
14
.5
11.6
In
per
cent
of
expo
rts
… 1
48.5
141
.7
138.
5 13
6.1
132.
1 12
8.8
128.
7
119.
6 87
.4
In p
erce
nt o
f go
vern
men
t re
venu
es
… 1
63.0
127
.1
129.
9 12
0.1
113.
3 10
7.8
103.
3
99.9
78
.6
Debt
ser
vice
-to-
expo
rts
rati
o (i
n pe
rcen
t)
13.8
10
.8
10.4
10
.1
10.0
9.
6 9.
3 8.
9
8.2
6.5
PPG
debt
ser
vice
-to-
expo
rts
rati
o (i
n pe
rcen
t)
13.8
10
.8
9.2
9.1
9.0
8.6
8.3
7.9
7.
2 5.
5 PP
G de
bt s
ervi
ce-t
o-re
venu
e ra
tio
(in
perc
ent)
17
.2
11.9
8.
2 8.
5 8.
0 7.
4 6.
9 6.
4
6.0
5.0
Tota
l gro
ss fi
nanc
ing
need
(bi
llion
s of
U.S
. do
llars
) 0.
2 0.
3
0.
3 0.
2 0.
3 0.
4 0.
5 0.
7
1.0
2.2
Non-
inte
rest
cur
rent
acc
ount
defi
cit th
at s
tabi
lizes
deb
t ra
tio
4.6
1.6
5.4
-0.9
0.
3 0.
3 0.
6 0.
9
1.7
2.5
Key
mac
roec
onom
ic a
ssum
ptio
ns
Re
al G
DP g
row
th (
in p
erce
nt)
2.8
2.5
3.6
1.7
3.8
4.5
5.0
5.5
5.5
5.5
5.0
5.5
5.5
5.5
GDP
defla
tor
in U
S do
llar
term
s (c
hang
e in
per
cent
) 17
.5
11.7
4.
0 7.
2 14
.2
1.2
3.5
3.0
2.1
2.1
4.3
1.6
1.1
1.4
Effe
ctiv
e in
tere
st r
ate
(per
cent
) 5/
0.
9 0.
9 0.
9 0.
1 0.
8 0.
9 0.
9 0.
9 0.
9 1.
0 0.
9 1.
1 1.
1 1.
1
Grow
th o
f ex
port
s of
G&
S (U
S do
llar
term
s, in
per
cent
) 2.
0 10
.8
-0.6
12
.4
8.9
7.2
6.9
8.9
8.8
7.1
8.0
7.6
8.0
7.6
Grow
th o
f im
port
s of
G&
S (U
S do
llar
term
s, in
per
cent
) 17
.5
13.9
5.
9 14
.4
15.8
12
.7
8.4
8.5
9.6
7.1
10.4
6.
3 6.
5 6.
5
Gran
t el
emen
t of
new
pub
lic s
ecto
r bo
rrow
ing
(in
perc
ent)
…
…
…
…
47
.0
46.8
46
.7
46.6
46
.5
46.4
46
.7
45.9
45
.0
45.7
Mem
oran
dum
item
s:
Nom
inal
GDP
(bi
llion
s of
US
dolla
rs)
8.9
10.2
12
.1
12.8
13
.9
15.1
16
.3
17.6
25.1
48
.3
Sour
ce:
Staf
f si
mul
atio
ns.
1/ I
nclu
des
both
pub
lic a
nd p
riva
te s
ecto
r ex
tern
al d
ebt.
2/ D
eriv
ed a
s [r
- g
- (1
+g)]
/(1+
g+P+
gρ)
tim
es p
revi
ous
perio
d de
bt r
atio
, w
ith
r =
nom
inal
inte
rest
rat
e; g
= r
eal G
DP g
row
th r
ate,
and
P =
gro
wth
rat
e of
GDP
defl
ator
in U
.S.
dolla
r te
rms.
3/
Inc
lude
s ex
cept
iona
l fina
ncin
g (i
.e.,
cha
nges
in a
rrea
rs a
nd d
ebt
relie
f);
chan
ges
in g
ross
for
eign
ass
ets;
and
val
uati
on a
djus
tmen
ts.
For
proj
ecti
ons
also
incl
udes
con
trib
utio
n fr
om p
rice
and
exch
ange
rat
e ch
ange
s.4/
Ass
umes
tha
t NP
V of
pri
vate
sec
tor
debt
is e
quiv
alen
t to
its
face
val
ue.
5/ C
urre
nt-y
ear
inte
rest
pay
men
ts d
ivid
ed b
y pr
evio
us p
erio
d de
bt s
tock
. 6/
His
toric
al a
vera
ges
and
stan
dard
dev
iati
ons
are
gene
rally
der
ived
ove
r th
e pa
st 1
0 ye
ars,
sub
ject
to
data
ava
ilabi
lity.
7/
Defi
ned
as g
rant
s, c
once
ssio
nal l
oans
, an
d de
bt r
elie
f.8/
Gra
nt-e
quiv
alen
t fin
anci
ng in
clud
es g
rant
s pr
ovid
ed d
irect
ly t
o th
e go
vern
men
t an
d th
roug
h ne
w b
orro
win
g (d
iffe
renc
e be
twee
n th
e fa
ce v
alue
and
the
NPV
of
new
deb
t).
INTERIM Strategy Note FoR NePAL | 83
Table 2. Nepal: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2008-28(In percent)
Projections 2008 2009 2010 2011 2012 2013 2018 2028
Baseline 17 17 16 16 16 16 14 12A. Alternative ScenariosA1. Key variables at their historical averages in 2009-28 1/ 17 16 14 13 11 9 0 0A2. New public sector loans on less favorable terms in 2009-28 2/ 17 18 17 18 18 18 19 19B. Bound TestsB1. Real GDP growth at historical average minus one standard deviation in 2009-10 17 17 17 17 17 17 15 12B2. Export value growth at historical average minus one standard deviation in 2009-10 3/ 17 18 20 19 19 19 17 13B3. US dollar GDP deflator at historical average minus one standard deviation in 2009-10 17 18 18 18 18 17 16 13B4. Net non-debt creating flows at historical average minus one standard deviation in 2009-10 4/ 17 22 25 24 24 24 21 14B5. Combination of B1-B4 using one-half standard deviation shocks 17 22 29 28 27 27 23 16B6. One-time 30 percent nominal depreciation relative to the baseline in 2009 5/ 17 24 23 23 22 22 21 17
Projections 2008 2009 2010 2011 2012 2013 2018 2028
Baseline 142 138 136 132 129 129 120 87 A. Alternative Scenarios A1. Key variables at their historical averages in 2009-28 1/ 142 129 117 104 87 72 0 0A2. New public sector loans on less favorable terms in 2009-28 2/ 142 143 145 145 146 151 159 143 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2009-10 142 138 136 132 129 129 120 87B2. Export value growth at historical average minus one standard deviation in 2009-10 3/ 142 184 251 243 236 235 213 144B3. US dollar GDP deflator at historical average minus one standard deviation in 2009-10 142 138 136 132 129 129 120 87B4. Net non-debt creating flows at historical average minus one standard deviation in 2009-10 4/ 142 176 209 202 196 194 171 106B5. Combination of B1-B4 using one-half standard deviation shocks 142 204 291 281 272 269 236 145B6. One-time 30 percent nominal depreciation relative to the baseline in 2009 5/ 142 138 136 132 129 129 120 87
NPV of debt-to-exports ratio
NPV of debt-to-GDP ratio
INTERIM Strategy Note FoR NePAL | 84
NPV of debt-to-revenue ratio
Projections 2008 2009 2010 2011 2012 2013 2018 2028
Baseline 127 130 120 113 108 103 100 79 A. Alternative Scenarios A1. Key variables at their historical averages in 2009-28 1/ 127 121 103 89 73 58 0 0A2. New public sector loans on less favorable terms in 2009-28 2/ 127 134 128 125 122 121 133 129 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2009-10 127 133 127 120 114 109 106 83B2. Export value growth at historical average minus one standard deviation in 2009-10 3/ 127 140 146 138 130 124 117 86B3. US dollar GDP deflator at historical average minus one standard deviation in 2009-10 127 136 134 126 120 115 111 88B4. Net non-debt creating flows at historical average minus one standard deviation in 2009-10 4/ 127 166 185 173 164 155 143 96B5. Combination of B1-B4 using one-half standard deviation shocks 127 170 210 197 186 176 161 106B6. One-time 30 percent nominal depreciation relative to the baseline in 2009 5/ 127 185 171 161 153 147 142 112
Source: Staff projections and simulations.1/ Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.
Owing to the debt dynamics based on the historical period, the NPV of debt turns negative and is therefore set to zero. 2/ Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.3/ Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after
the shock (implicitly assuming an offsetting adjustment in import levels). 4/ Includes official and private transfers and FDI.5/ Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.6/ Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.
INTERIM Strategy Note FoR NePAL | 85
Table 3. Nepal: Public Sector Debt Sustainability Framework, Baseline Scenario, 2005-2028(In percent of GDP, unless otherwise indicated)
Actual Historical Standard Projections Average 5/ Deviation 5/ 2008-13 2014-28 2006 2007 2008 2009 2010 2011 2012 2013 Average 2018 2028 Average
Public sector debt 1/ 56.7 46.7 44.6 44.3 43.0 41.7 40.3 38.8 33.6 32.5o/w foreign-currency 35.3 33.0 26.9 26.4 25.4 24.6 24.0 23.6 21.7 17.7 denominatedChange in public sector debt -2.8 -10.0 -2.1 -0.3 -1.3 -1.3 -1.5 -1.5 -0.7 0.1Identified debt-creating flows -6.7 -8.5 -0.2 -0.6 -1.7 -1.9 -2.1 -2.3 -0.2 0.6Primary deficit 0.7 0.5 1.5 1.5 2.6 1.4 1.0 0.7 0.5 0.1 1.1 1.4 1.9 1.5Revenue and grants 13.1 14.3 16.1 16.4 16.8 17.2 17.6 18.8 16.8 16.4of which: grants 2.1 2.3 2.7 3.3 3.1 3.1 3.1 3.1 2.6 1.9Primary (noninterest) 13.8 14.8 18.8 17.8 17.8 17.9 18.0 18.1 18.2 18.3 expenditureAutomatic debt dynamics -7.4 -9.0 -2.9 -2.0 -2.7 -2.6 -2.6 -2.5 -1.6 -1.3Contribution from interest -4.0 -2.3 -1.7 -2.0 -2.1 -2.2 -2.1 -2.0 -1.5 -1.3 rate/growth differentialof which: contribution -2.4 -0.9 0.0 0.0 0.0 0.1 0.1 0.1 0.3 0.4 from average real interest rateof which: contribution -1.6 -1.4 -1.7 -1.9 -2.1 -2.2 -2.2 -2.1 -1.8 -1.7 from real GDP growthContribution from real -3.4 -6.7 -1.2 0.0 -0.6 -0.5 -0.5 -0.5 … … exchange rate depreciationOther identified debt- 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 creating flowsPrivatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Recognition of implicit or 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 contingent liabilities
INTERIM Strategy Note FoR NePAL | 86
Actual Historical Standard Projections Average 5/ Deviation 5/ 2008-13 2014-28 2006 2007 2008 2009 2010 2011 2012 2013 Average 2018 2028 Average
Debt relief (HIPC and other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other (specify, e.g. bank 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 recapitalization)Residual, including asset changes 3.9 -1.5 -1.9 0.3 0.4 0.6 0.6 0.8 NPV of public sector debt 43.9 33.3 34.9 34.9 34.1 33.1 32.0 30.8 26.3 26.4o/w foreign-currency 22.6 19.6 17.1 17.0 16.4 16.0 15.7 15.6 14.5 11.6 denominatedo/w external 22.6 19.6 17.1 17.0 16.4 16.0 15.7 15.6 14.5 11.6 NPV of contingent liabilities … … … … … … … … … … (not included in public sector debt)Gross financing need 2/ 3.9 3.7 5.4 4.1 3.7 3.3 2.9 2.5 3.5 3.9 NPV of public sector 335.0 233.3 216.2 213.3 202.8 192.1 182.1 171.3 156.6 161.0 debt-to-revenue and grants ratio (in percent)NPV of public sector debt- 398.8 277.5 258.7 266.9 249.0 234.6 221.4 207.3 185.3 182.2 to-revenue ratio (in percent)o/w external 3/ 204.7 163.0 127.1 129.9 120.1 113.3 108.8 105.3 101.9 80.1 Debt service-to-revenue and 24.1 22.3 17.5 16.5 16.0 15.3 14.1 13.3 12.3 12.2 grants ratio (in percent) 4/Debt service-to-revenue 28.7 26.5 20.9 20.6 19.7 18.6 17.1 16.1 14.6 13.9 ratio (in percent) 4/Primary deficit that stabilizes 3.5 10.5 4.7 1.7 2.3 2.0 1.9 1.6 2.0 1.8 the debt-to-GDP ratio
Table 3. Nepal: Public Sector Debt Sustainability Framework, Baseline Scenario, 2005-2028(In percent of GDP, unless otherwise indicated)
INTERIM Strategy Note FoR NePAL | 87
Actual Historical Standard Projections Average 5/ Deviation 5/ 2008-13 2014-28 2006 2007 2008 2009 2010 2011 2012 2013 Average 2018 2028 Average
Key macroeconomic and fiscal assumptionsReal GDP growth (in percent) 2.8 2.5 3.3 1.9 3.8 4.5 5.0 5.5 5.5 5.5 5.0 5.5 5.5 5.5Average nominal interest rate 1.0 1.1 1.0 0.1 1.1 1.3 1.2 1.2 1.2 1.2 1.2 1.0 0.9 1.0 on forex debt (in percent)Average real interest rate on -11.5 -4.6 -0.7 4.6 0.0 -0.6 -0.2 0.2 0.2 0.2 0.0 2.8 3.0 2.6 domestic currency debt (in percent)Real exchange rate -8.2 -19.5 -2.6 9.7 -3.7 … … .. … … … … … … depreciation (in percent, + indicates depreciation)Inflation rate (GDP 17.9 8.6 6.4 4.5 6.5 6.0 5.5 5.0 5.0 5.0 5.5 3.5 3.0 3.3 deflator, in percent)Growth of real primary -7.0 8.4 3.3 8.5 33.2 -1.0 5.3 6.2 5.9 5.9 9.3 5.7 5.5 5.6 spending (deflated by GDP deflator, in percent)
Sources: Country authorities; and Fund staff estimates and projections.1/ Public and publicly guaranteed debt.2/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period. 3/ Revenues excluding grants.4/ Debt service is defined as the sum of interest and amortization of medium and long-term debt.5/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.
INTERIM Strategy Note FoR NePAL | 88
Table 4.Nepal: Sensitivity Analysis for Key Indicators of Public Debt 2008-2028
NPV of Debt-to-Revenue Ratio 2/
Projections 2008 2009 2010 2011 2012 2013 2018 2028
NPV of Debt-to-GDP RatioBaseline 35 35 34 33 32 31 26 26
A. Alternative Scenarios 35 35 35 35 36 36 35 34A1. Real GDP growth and primary balance are at historical averages 35 36 36 37 38 38 39 44A2. Primary balance is unchanged from 2008 35 35 34 33 33 38 30 38A3. Permanently lower GDP growth 1/
B. Bound Tests
B1. Real GDP growth is at historical average minus 35 36 37 37 37 36 35 41 one standard deviations in 2009-2010B2. Primary balance is at historical average minus 35 36 37 36 35 33 28 28 one standard deviations in 2009-2010B3. Combination of B1-B2 using one half standard deviation shocks 35 36 37 36 34 33 27 25B4. One-time 30 percent real depreciation in 2009 35 42 41 39 37 36 30 28B5. 10 percent of GDP increase in other debt-creating flows in 2009 35 44 43 41 40 38 33 31
Projections 2008 2009 2010 2011 2012 2013 2018 2028
Baseline
A. Alternative Scenarios 216 213 203 192 182 171 157 161 A1. Real GDP growth and primary balance are at historical averages 214 213 207 204 202 200 201 197A2. Primary balance is unchanged from 2008 215 218 216 214 214 214 232 266A3. Permanently lower GDP growth 1/ 215 212 203 193 185 176 175 230
B. Bound Tests
B1. Real GDP growth is at historical average minus 215 219 218 212 206 198 205 250 one standard deviations in 2009-2010B2. Primary balance is at historical average minus 215 220 220 208 197 185 169 168 one standard deviations in 2009-2010B3. Combination of B1-B2 using one half standard deviation shocks 215 219 219 206 194 182 161 154B4. One-time 30 percent real depreciation in 2009 215 258 242 227 213 199 176 170B5. 10 percent of GDP increase in other debt-creating flows in 2009 215 268 253 239 226 213 195 189
INTERIM Strategy Note FoR NePAL | 89
Debt Service-to-Revenue Ratio 2/
Projections 2008 2009 2010 2011 2012 2013 2018 2028
Baseline 17 16 16 15 14 13 12 12
A. Alternative Scenarios
A1. Real GDP growth and primary balance are at historical averages 17 17 17 17 17 17 16 16A2. Primary balance is unchanged from 2008 17 16 18 19 19 20 20 26A3. Permanently lower GDP growth 1/ 17 17 16 16 15 14 15 20
B. Bound Tests
B1. Real GDP growth is at historical average minus 17 17 18 18 17 17 17 23 one standard deviations in 2009-2010B2. Primary balance is at historical average minus 17 16 19 20 16 15 13 14 one standard deviations in 2009-2010B3. Combination of B1-B2 using one half standard deviation shocks 17 17 18 19 16 14 13 12B4. One-time 30 percent real depreciation in 2009 17 17 17 16 15 14 13 14B5. 10 percent of GDP increase in other debt-creating flows in 2009 17 16 35 23 18 16 15 17
Sources: Country authorities; and Fund staff estimates and projections.1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).2/ Revenues are defined inclusive of grants
INTERIM Strategy Note FoR NePAL | 90
Ongo
ing
and
Indi
cati
ve A
id
< $1
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n $5
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0 m
n $1
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Donor mapping at Sector Level
Appendix II
INTERIM Strategy Note FoR NePAL | 91
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INTERIM Strategy Note FoR NePAL | 92
Introduction1. As part of the preparation of the ISN for Nepal, the
country team undertook in January 2009 a comprehensive
review of the risks of its portfolio and the implications of
those risks for future lending.1 The methodology used was
based on the pilot done for the India program in June-July
2008. The framework developed for India, and modifi ed for
Nepal, had been initially constructed in order to address
the systemic weaknesses in the management of risks that
had been identifi ed in the Detailed Implementation Review
(DIR) of fi ve health sector operations in India. Nepal
was the second country in the Region to carry out this
comprehensive risk assessment.
The Framework2. The framework below was developed with the assistance
of external consultants funded with central GAC funds
allocated to the South Asia Region.2 The key features are:
> It establishes a hierarchy of risks, with overall project
risks a function of country, sector and project specifi c
risks, with country risks overshadowing sector risks and
sector risks overshadowing project specifi c risks.
> The approach builds on the Bank-wide Risk
Identifi cation Worksheet, standard for all new operations
since 2007, and uses that system’s four point scale—
high, substantial, moderate and low.
> It takes the CPIA ratings on governance and corruption
as the starting point for country risks. In the case of
Appendix III
Governance and Risks Assessment Nepal Portfolio
Nepal, it added the risks of confl ict based on the 2004
edition of Post-Confl ict Performance Indicators. Following
the approach used by the Africa Region, the framework
converts these numeric ratings to the H, S, M or L scale.
In the case of Nepal, the country risk rating is substantial.
> It adds a set of questions to identify systemic risks at
the sector level. At this point, there is no generalized
guidance on or measurement of sector level risks so that
teams do this based on their respective country and
sector knowledge and operational experiences.
> It does the same thing for project specifi c risks. In
addition, it folds into those risks the IRS ratings on
fi nancial management, procurement and safeguards. The
work sheet indicates the residual risk, after mitigation
measures.
> The standard sets of questions for both sector and
project specifi c risks cover the broad range of concerns
about getting results on the ground and governance,
including fraud and corruption. On this last point, the
questions do so by not rating the incidence of fraud and
corruption per se (which is hard for anyone to know
with precision) but by assessing some of the underlying
factors. These factors have been derived from available
best practices, economic principles and theory, auditing
and accounting, and risk management practices.
> Once sector risks and project specifi c risks are rated,
the framework provides a risk “look-up” table that: (i)
1The risk assessment covers the following broad areas: political economy, governance, corruption, regulation, accountability, institutional capacity, policy coherence, quality and standards, project design, and implementation systems including procurement, FM and M&E. It does not, however, address technical or other risks such as climate, acts-of-god, etc., that also could affect project outcomes. For the framework to be completely comprehensive these risks would have to be added. 2The team that developed the framework, including the specifi c set of questions to assess sector and project specifi c risks, comprised both external consultants and Bank staff, specialized in public sector management, public administration, governance, and operations. Preparation involved a review of PADs, GAAPs, and ISRs, along with interviews with Bank staff, and a review of sector studies, best practices on anti-corruption, corruption mapping, and experiences in the Bank and elsewhere.
INTERIM Strategy Note FoR NePAL | 93
combines country, sector and project specifi c risks into
an overall project risk rating; and (ii) ensures that all
teams follow the same methodology thereby reducing
discretion and incentive that individual teams may have
to down grade risks.
> The risks can further be broken down, according to the
particular risk posed in the questions, and analyzed
separately.
The Questions Asked3. The questions of both the sector and project specifi c
risks are framed as assertions, in the manner of the
COSO (Committee of Sponsoring Organizations) Risk and
Opportunity Workshops and other surveys.3 Each assertion
provides the two extremes: what would prevail if the risks
were low and what would prevail if risks were high. The
team can rate the risk of each assertion high, substantial,
moderate or low. Here are some examples:
> Sector-wide risks. There are a set of assertions that
deal with the quality of sector-wide regulations and
institutions. One assertion probes the extent to which
there is a functioning regulatory set-up with the
appropriate separation of powers between the policy-
making institution and the regulatory-compliance
institutions. Other probes the extent to which quality
standards exist, whether they provide the relevant
benchmark, and whether they are adhered to. The
risks would be highest is there was no regulation,
no separation of powers, and no quality standards in
the sector. Conversely risks would be the lowest if
the response were the reverse with intermediate risks
(substantial or moderate) in between.
> Project design and supervision risks: There are a set of
assertions that address the ease by which supervision and
physical monitoring can be undertaken. These assertions
probe, for example, whether the project is dispersed across
a wide geographic area (high risks) or concentrated in a
single location (low risks); or whether the project involves
multiple implementing agencies (high risk) or a single
entity (low risks). Other examples are whether or not the
implementing agency s is new/no experience with the Bank
(high risks) or existing with prior experience (low risks).
Mitigation of Portfolio Risks4. The conclusion of the risk assessment was that the Nepal
program entails substantial risks. The team rated 13 sector
and sub-sectors and fi fteen active projects. The level of
overall risks is driven in large part by the country risks
which are rated as substantial, refl ecting CPIA ratings on
systemic corruption and governance. This is consistent with
the ranking of Nepal in the WBI’s Governance Indicators.
Sector risks are also substantial refl ecting the vulnerabilities
in regulation in key sectors such as telecommunications
and banking; in social protection due to the lack of robust
targeting and M&E systems; and in rural roads because of
the weaknesses in local administrations, combined with poor
quality standards and the nature of procurement.
5. Mitigation measures built into project design helps to lower
project specifi c risks. That brings down those risks overall to
moderate. The main risk mitigation mechanism adopted in
the Nepal portfolio has been the incorporation of community
management in the original project design. Aspects of
community management and community driven development
are features of ten of the fi fteen ongoing operations. While
3There is potential to use COSO-like techniques to have anonymous voting of the risks by participants and then a structured discussion on the ratings and the variations.
INTERIM Strategy Note FoR NePAL | 94
not perfect, and still subject to capture by elites, community
management is seen to enhance oversight and accountability and
to offset risks of procurement and quality. Further, this mode of
project implementation offsets the risks of adequate supervision
and physical inspection for operations in widely dispersed and
hard to reach geographic areas. Going forward, community
management will be a continuing feature of new operations
to the extent possible. In the case of the four operations
rated as high risk, mitigation measures are being taken. All
four operations are closely supervised. In one case—the
Telecommunications Sector project—it is soon to close.
6. More broadly, in light of the substantial risks in the portfolio,
the Nepal program is taking the following additional steps:
> Resources allocated to supervision and to fiduciary
functions will be increased in FY10 by about 10 percent.
> Specific trust funds, notably the GPF, are being
mobilized to: (i) advance the overall GAC agenda; (ii)
undertake governance and institutional assessments of
sectors, particularly those in which IDA has or plans to
adopt sector wide approaches; (iii) develop GAAPs for
new IDA operations; and (iv) strengthen demand side
accountability mechanisms in new operations and one-
third of the ongoing IDA portfolio.
> Additional expertise on governance and on peace and
conflict will be brought into the country team with GPF
support.
> Business processes are being reengineered to integrate
the risk assessment, GAAP preparation, and Peace Filter
into critical points in the business cycle.
INTERIM Strategy Note FoR NePAL | 95
Introduction1. IEG is presently preparing a Country Assistance Evaluation
(CAE) to be discussed with the Committee for Development
Effectiveness in May 2009. The CAE examines whether: (a)
the objectives of Bank assistance were relevant; (b) the
Bank’s assistance program was effectively designed and
consistent with its objectives; and (c) the Bank’s program
achieved its objectives and had a substantial impact on
the country’s development during this period. Examining
these questions allows the CAE to draw lessons and
recommendations for future Bank assistance. The CAE covers
three CAS documents: (i) the CAS Progress Report discussed
at the Board in December 2002; (ii) the CAS presented
in November 2003; and (iii) the Interim Strategy Note
presented in February 2007. The goals of the Bank assistance
program over FY03–08 remained broadly aligned with the
2003 PRSP and unchanged: the focus was on improving
governance and development effectiveness by bringing
resources to grassroots levels but with increased emphasis
on growth and inclusion.
Main Conclusions2. While recognizing that Nepal’s considerable political
turmoil and changes had a major impact on CAS
implementation during the period under review, one of
the CAE’s conclusions is that little progress was made
against CAS stated objectives in two of the four main
strategic themes —achieving broad based growth and good
governance. Specific objectives under these two pillars
are considered by IEG to have often been unrealistic and
overly ambitious given country circumstances characterized
by political instability, conflict and insecurity, and similar
issues. On the other hand, IEG’s draft evaluation concludes
that some progress was made in the area of social inclusion,
especially with regard to mainstreaming inclusion in sector
projects and, to a lesser extent, diversity of the civil service.
Social development was the area where the Bank’s program
Appendix IV
was most relevant and successful, particularly in terms
of improving and expanding health services, significantly
increasing access to basic education, and increasing access
to safe drinking water in rural areas. In addition, even in
those pillars showing less progress in meeting objectives,
there were some notable achievements despite the very
difficult country circumstances.
3. The areas of minimal or no progress included key parts
of the governance agenda - where the Bank’s strategy
was considered to be highly relevant but strategy
implementation was constrained by the country’s political
context – and sub-areas of the broad-based growth agenda
such as private sector development and agriculture and rural
development. In the specific area of public expenditure
management, the Bank’s AAA was considered to have
achieved some significant steps, such as passage of a new
Procurement Act, but the impact in terms of the quality and
efficiency of PFM has been minimal so far.
4. Education is one of the areas where the Bank’s program
was especially relevant and contributed to strong progress
towards CAS objectives. Among the positive results, the
enrollment of girls and marginalized groups improved
substantially through the Education for All program which is
being implemented under a Sector-Wide Approach (SWAp).
Measurable quality improvements were limited, however, and
textbook distribution continues to be late. The community
school management model, which is currently being
mainstreamed, has shown some good results but IEG believes
that a number of improvements are required to make it fully
effective, such as putting in place a sound M&E system and
ensuring that there are adequate mechanisms for funding
schools in poorer areas. The financial condition of higher
education institutions improved modestly, but fell well short
of being sustainable. The sole new IDA project, Higher
Education Project II (approved in 2007), is innovative and
flexible in its design and IEG considers the project outcome
IEG Country Assistance Evaluation Summary of Conclusions and Recommendations
INTERIM Strategy Note FoR NePAL | 96
objectives to be highly relevant. Under the project,
substantial progress has been made in terms of improving
access for under-privileged students, but project start-up
was slowed due to political and security issues, the project
executing agency still lacks administrative capacity, and a
major teachers’ union has blocked implementation of the
plan to allow autonomy for the country’s largest university.
5. Health and Water and Sanitation are two sectors that
showed substantial progress during the period under review.
Through a successful SWAp which became effective in 2004,
basic health care services improved, with an emphasis on
poor and underserved populations, despite challenging
operational conditions on the ground. To the credit of the
SWAp, approximately 70 percent of public funding now goes
to support low-cost, cost-effective interventions of Essential
Health Care Services (EHCS). The signifi cant increase in
supply and accessibility to these services in districts with
low health indicators is interpreted as being at least partly
responsible for improved health outcomes over time. The
expansion of public health facilities at the sub-national
and community levels (sub-health posts, health posts,
and primary health care centers) contributed to increased
access for the poor and underserved populations. Nepal’s
health indicators demonstrate signifi cantly improved
outcomes; for example, the infant mortality rate (IMR)
declined from 79 deaths per 1,000 live births in 1996 to
64 in 2001 and 48 in 2006 while the maternal mortality
declined from 539 per 100,000 live births in 1996 to 281
in 2006. A major persisting shortcoming is the lack of
progress in addressing malnutrition, as Nepal’s level of child
malnutrition remains among the highest in the world. The
quality and access to sustainable rural drinking water and
sanitation services improved over the period, in part thanks
to the IDA-fi nanced First Rural Water and Sanitation project,
which used community-based approaches to facilitate
provision of demand-driven rural water and sanitation
services, infrastructure and hygiene education. However
IEG considers that the second project has thus far failed
to achieve its development objectives related to sector
institutional reforms.
6. Some progress was made with regard to social inclusion,
one of the main pillars of the past strategies. Through its
lending, IDA helped improve access to basic services for the
socially excluded (in terms of gender, caste or ethnicity).
IDA and DFID jointly produced a seminal piece of analytical
work on social inclusion that has contributed to the overall
understanding of these issues in Nepal and infl uenced
the 2003 PRSP.1 The largest Bank-supported program, the
Poverty Alleviation Fund (PAF), was deemed as effective in
channeling funding to the socially excluded and supporting
livelihood improvements, but weaker in terms of improving
access to services and institutional development.
7. Regarding IFC’s operations in Nepal, IEG report mentions
that as the political and security situation deteriorated in
1999, IFC withdrew its local fi eld presence and had very
limited activities in Nepal between 1999-2006. To a large
extent, IFC’s inability to develop successful investment
projects through much of the decade can be attributed to
the increasingly diffi cult investment environment. Since
2006, IFC’s gradual re-engagement in Nepal has resulted in
two GTFP investments; an investment in a domestic airline,
a pipeline of investment projects in the fi nancial sector, and
a constructive dialogue with the government on business
enabling environment issues. This approach of cautious
re-engagement has the potential for replication in other
diffi cult investment climate countries.
1See “Unequal Citizens: Gender, Caste, and Ethnic Exclusion in Nepal.” Published by the World Bank and DFID.2IEG’s draft report concludes that there is little evidence that the PAF has been an effective instrument for poverty reduction and social inclusion. However, an impact evaluation of the PAF was recently completed and it is currently being reviewed by the Bank team. It will be considered by IEG as time allows.
INTERIM Strategy Note FoR NePAL | 97
Recommendations Moving Ahead8. Given the challenges facing Nepal, IEG believes the
Bank could be more realistic and pragmatic, and consult
widely and continually with national stakeholders. The new
ISN should take into account the current circumstances
with a flexible program that can be adjusted closely to
the Government’s capacity and a changing political and
institutional context.
9. In terms of sectors and instruments, the coming CAE will
recommend more decisive support for agriculture and rural
development, i.e. placing this sector at the heart of any new
IDA strategy. It also suggests stepping up efforts to increase
poor and marginalized people’s access to basic services, with
a focus on supporting the expanded use of delivery schemes
that have been shown to have worked in Nepal. With regard
to the PAF, the primary recommendation is to establish a
mechanism to track the extent to which its activities are
effectively addressing poverty and the various dimensions of
social exclusion. An additional highlighted recommendation is
to continue support to public expenditures and public finance
management. The SWAp model that has been successful in
health and education could be applied to other sectors, such
as water and sanitation or roads.
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Appendix V
Background1. During the months of October and November 2008, the Asian
Development Bank (ADB), the UK Department for International
Development (DFID) and the World Bank Group (IDA and IFC)
undertook joint consultations in order to gain insights from
as wide an audience as possible on what role they should play
in supporting the people of Nepal. These consultations were
jointly undertaken as all three agencies were in the process of
developing their new country assistance plans.
Summary of CAS Consultations (ADB, DFID, World Bank)
Consultation Process2. The consultations were undertaken in three different regions
of Nepal (Central region – Pokhara; Eastern region – Biratnagar;
and Western region – Nepalganj), as well as in Kathmandu. All
consultations included a range of stakeholders. The participants
attending in Pokhara, Biratnagar, and Nepalganj included
representatives from community organizations, political leaders,
civil society, program personnel and others. The group in
Kathmandu included the private sector, government, civil society,
academia, INGOs, NGOs, politicians, staff of ADB, DFID and WB,
sectoral staff of government, youth, and donor agencies.
• Peaceandsecurityo Rehabilitation of displaced and conflict-affected people, reconstruction of damaged infrastructureo Support for making the new constitution and state restructuringo Integration of armieso Special package programs for excluded communities/ regions• Jobcreation/employment/livelihoodso Self-employment and entrepreneurship promotiono MSME (micro, small and medium enterprise) and micro-finance promotiono Commercialization of agriculture and NRMo Tourism promotion• Infrastructuredevelopment(roads,hydropower,irrigation,communications)o Schoolso Rural and agricultural roads, suspension bridgeso Micro and small hydro power development/rural electrificationo Health posts/facilitieso Communication Centres/facilitieso River training/irrigation for Madhesi districts• Goodgovernanceo Awareness programs on awareness creation at all levelso Transparent program design, implementation and monitoring and supervision (with people's participation)o Social/public auditso Reward and punishment system in GOs and NGOs• Socialsector–inclusiveaccessandeffectiveservicedelivery(health–specialfocus on reproductive health/safe motherhood for women, education – focus on skill- based job-/market-oriented education and training etc.)o Equal and equitable access to quality health services (priority to women's health – safe motherhood, reproductive health etc.)o Employment/market oriented education and training for all (scholarships for poor and excluded groups)o Clean drinking water for rural areas• Specialprogramsforsinglewomen,VAW,disadvantagedgroups• Others:agriculture,NRM,supportforM&Esystems/mechanisms,involvementofcommunity(especiallypoor and excluded in decision making), capacity building and empowerment, private sector promotion.
• Peaceprocesso reconstruction, rehabilitation and reintegrationo Constitution making and state restructuring• Jobsandemploymentcreation(focusonyouth)o Market and skill oriented training and education o Promotion of self-employment, trepreneurship, MSME promotion• Infrastructuredevelopmento Roads, hydropower, communications• Socialsector-Health,education,drinkingwatero Equipped and functional health facilitieso Awareness of health programso Facilitating equal access to health and education• Creatinganenablingenvironmentforprivate sectoro Legal and policy reform and their implementation with joint monitoring and follow-up by both GOs and the private sector• Buildinghumancapitalo Awareness, education and trainingo Building and strengthening local institutions (NGOs, cooperatives, CBOs)• Goodgovernance(forallstakeholders)o Transparency, accountabilityo Functioning monitoring and supervision (with involvement of stakeholders)• Greaterinvolvementandparticipationofyouth
Consultations in regions Consultations in Kathmandu
Summary of Findings3. During both the consultations in the regions and Kathmandu, participants expressed similar priorities. A summary of these
is provided in the following table:
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4. The recommendations of the participants for the three
donor agencies were to provide financial and technical
support for:
> Growth and employment
> Greater emphasis on commercialization in support for
agriculture, NRM, other IG and livelihoods programmes
> Capacity building of Government
> Facilitate trust building among political parties
> Immediate relief; and reconstruction, rehabilitation and
reintegration
> Support for the peace process
> Support for constitution making, state restructuring
including fiscal federalism
> Good governance
5. Some suggestions on how this should be done were:
> Support GON and people's priorities
> Implementation pluralism (through both GOs and NGOs)
> More transparency in donor programmes
> Ensure involvement and participation of poor & excluded
and youth; ensuring increased access to quality basic
services (health, education, water and sanitation, etc.)
> Inclusive policy formulation
> Greater emphasis on developing appropriate and
participatory M&E mechanism
> Special programs for mid- and far-West, and for youth
> Priority to local experts for technical assistance
> More effective donor coordination, and coordination
with GON
> Budgetary support for government programs; basket
funding based on priorities
> Real partnership with civil society.
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Appendix VI
Country Financing Parameters
Item Parameter Remarks/Explanation
Cost sharing. Limit on the proportion of individual Up to 100% Financing of Bank-supported projects is fully integrated into the project costs that the Bank may finance budget, and the Government has full ownership and leadership of the NPPR exercise at the portfolio level. GoN has been increasing its efforts to improve overall expenditure management through a PEFA action plan, and is also progressively moving towards program- based approaches (SWAps) in a number of sectors.
Recurrent cost financing. Any limits that would apply No country- Bank financing of projects is fully integrated into the budget and to the overall amount of recurrent expenditures that level limit thus subject to Nepal’s fiscal management regime anchored in the the Bank may finance Medium Term Expenditure Framework (MTEF), for which the Bank continues to provide technical assistance. The level of recurrent cost financing would be reviewed on a case by case basis to ensure consistency with a prudent fiscal stance. Financing of civil servant salaries may be considered on a selective basis (for example through support for SWAps).
Local cost financing. Are the requirements for Bank Yes The two requirements are met. At the project level, the Bank financing of local expenditures met, namely that: (i) expects to finance local costs as required by the financing requirements for the country’s development development objectives. program would exceed the public sector’s own resources (e.g., from taxation and other revenues) and expected domestic borrowing; and (ii) the financing of foreign expenditures alone would not enable the Bank to assist in the financing of individual projects
Taxes and duties. Are there any taxes and duties None The Bank may finance the costs of taxes and duties as long as they that the Bank would not finance? are reasonable and non-discriminatory. As of May 2009, no taxes are identified as unreasonable or discriminatory vis-à-vis Bank- financed projects.
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Annexes
theworld bankgroup
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Key Economic and Program Indicators -- Change from Last ISN
Annex A1
Forecast in Last ISN Actual Economy FY06 FY07 FY08 FY07 FY08
Growth rates (%) Real GDP /a 1.9 3.7 4.5 3.2 4.7 Merchandise exports (in current US$) 4.0 8.5 12.8 2.3 -1.9 Merchandise imports (in current US$) 18.3 16.1 10.8 11.2 12.9
Inflation (GDP deflator %) 7.2 6.5 6.0 7.4 7.7
National accounts (% of GDP) Current account balance 2.4 3.9 2.9 0.5 -0.3 Gross fixed investment /b 18.5 18.8 19.8 21.3 21.8
Public finance (% of GDP) /a Fiscal balance (including grants) -1.7 -3.0 -3.2 -1.8 -2.0 Foreign financing 0.3 1.7 1.5 1.4 1.4
International reserves(as months of goods imports) 8.9 8.4 7.9 12.4 11.3ProgramLending (US$ millions) 0 145 210 105 380Gross disbursements (US$ millions) 67 80 110 75 81
/a.GDP at market price /b.GDP at factor cost. Source: Central Bureau of Statistics - 2008
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KEY ECONOMIC RATIOS and LONG-TERM TRENDS
Nepal at a glance
Nepal Low-income group
Development diamond*
Life expectancy
Access to improved water
GNIpercapita
Grossprimary
enrollment
POVERTY and SOCIAL South Low- Nepal Asia income
2007Population, mid-year (millions) 28.1 1,520 1,296GNI per capita (Atlas method, US$) 340 880 578GNI (Atlas method, US$ billions) 9.7 1,339 749Average annual growth, 2001-07
Population (%) 2.0 1.6 2.2Labor force (%) 2.8 2.1 2.7Most recent estimate (latest year available, 2001-07)
Poverty (% of population below national poverty line) 31 .. ..Urban population (% of total population) 17 29 32Life expectancy at birth (years) 63 64 57Infant mortality (per 1,000 live births) 46 62 85Child malnutrition (% of children under 5) 39 41 29Access to an improved water source (% of population) 89 87 68Literacy (% of population age 15+) 49 58 61Gross primary enrollment (% of school-age population) 126 108 94 Male 129 111 100 Female 123 104 89
Economic ratios*
Trade
Indebtedness
Domesticsavings
Capital
Nepal Low-income group
1987 1997 2006 2007
GDP (US$ billions)3.0 4.9 8.9 10.2Gross capital formation/GDP21.2 25.3 26.0 25.3Exports of goods and services/GDP 11.8 26.3 13.6 12.5Gross domestic savings/GDP12.1 14.0 7.9 9.4Gross national savings/GDPa 16.3 22.5 28.2 27.9Current account balance/GDP -4.7 -0.8 2.2 0.6Interest payments/GDP 0.5 0.5 0.3 ..Total debt/GDP 33.3 49.1 38.1 ..Total debt service/exports 10.1 5.2 5.1 ..Present value of debt/GDP .. .. 24.8 ..Present value of debt/exports .. .. 81.4 .. 1987-97 1997-07 2006 2007 2007-11(average annual growth)GDP 5.2 3.6 2.8 2.5 4.5GDP per capita 2.6 1.4 0.8 0.8 3.1Exports of goods and services .. .. .. .. ..
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0
2
4
6
02 03 04 05 06 07GCF GDP
Growth of capital and GDP (%)
STRUCTURE of the ECONOMY
1987 1997 2006 2007
(% of GDP) Agriculture 50.7 41.4 35.1 33.8Industry 15.8 22.9 17.4 17.2 Manufacturing 6.2 9.5 7.9 7.7Services 33.4 35.7 47.5 48.9Household fi nal consumption expenditure 78.8 77.1 83.3 81.9General gov’t fi nal consumption expenditure 9.1 8.9 8.8 8.7Imports of goods and services 20.9 37.7 31.7 28.5 1987-97 1997-07 2006 2007(average annual growth) Agriculture 2.9 3.4 1.8 1.0Industry 8.1 3.5 4.5 3.9 Manufacturing 10.6 1.9 2.0 2.2Services 6.3 3.7 3.8 2.8Household fi nal consumption expenditure .. .. .. ..General gov’t fi nal consumption expenditure .. .. .. ..Gross capital formation .. .. .. ..Imports of goods and services .. .. .. ..
Note: 2007 data are preliminary estimates.* The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.
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PRICES and GOVERNMENT FINANCE 1987 1997 2006 2007
Domestic prices(% change)Consumer prices 13.4 8.1 8.0 6.4Implicit GDP deflator 12.7 7.3 6.7 8.6
Government finance(% of GDP, includes current grants)Current revenue 9.4 10.8 13.1 14.3Current budget balance -0.7 1.0 1.8 3.4Overall surplus/deficit -8.7 -3.9 -1.6 -1.4
0
5
10
15
02 03 04 05 06 07
GDP deflator CPI
Inflation (%)
1987 1997 2006 2007
(US$ millions)Total exports (fob) 138 1,160 833 939 Food and live animals .. 51 99 .. Animal and vegetable oils .. 35 59 .. Manufactures .. 318 606 645Total imports (cif) 503 1,750 2,372 2,653 Food 62 123 184 206 Fuel and energy 43 217 504 691 Capital goods 128 242 293 328 Export price index (2000=100) .. .. .. ..Import price index (2000=100) .. .. .. ..Terms of trade (2000=100) .. .. .. ..
TRADE
0
1,000
2,000
3,000
01 02 03 04 05 06 07Exports Imports
Export and import levels (US$ mill.)
1987 1997 2006 2007
(US$ millions) Exports of goods and services 348 1,506 1,216 1,347Imports of goods and services 604 1,962 2,832 3,225Resource balance -256 -456 -1,616 -1,878
Net income -6 8 68 106Net current transfers 124 410 1,744 1,830 Current account balance -138 -38 197 58 Financing items (net) 156 131 159 118Changes in net reserves -18 -94 -355 -176
Memo: Reserves including gold (US$ millions) 185 657 1,797 2,008Conversion rate (DEC, local/US$) 21.6 57.0 72.3 70.5
BALANCE of PAYMENTS
012345
01 02 03 04 05 06 07
Current accountbalance to GDP (%)
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1987 1997 2006 2007
(US$ millions)Total debt outstanding and disbursed 986 2,414 3,409 .. IBRD 0 0 0 0 IDA 392 1,047 1,468 1,524
Total debt service 35 92 140 .. IBRD 0 0 0 0 IDA 5 17 42 46
Composition of net resource flows Official grants 131 140 312 .. Official creditors 130 197 58 .. Private creditors 37 -11 0 .. Foreign direct investment (net inflows) 1 23 -7 .. Portfolio equity (net inflows) 0 0 0 ..
World Bank program Commitments 94 146 0 0 Disbursements 81 55 43 35 Principal repayments 1 9 31 34 Net flows 79 45 12 0 Interest payments 4 8 11 11 Net transfers 75 38 1 -11
EXTERNAL DEBT and RESOURCE FLOWS
146843
1450
Composition of 2006 debt (US$ mill.)
3625
81
A-IBRDB-IDA D-Other
multilateralC-IMF
E- BilaralF- PrivateG- Short
Note: This table was produced from the Development Economics LDB database.
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Annex B2
Selected Indicators* of Bank Portfolio Performance and Management
As of 5/5/09
Indicator 2006 2007 2008 2009
Portfolio AssessmentNumber of Projects Under Implementation a 12 13 16 16Average Implementation Period (years) b 2.8 2.9 3.0 3.6Percent of Problem Projects by Number a, c 25.0 23.1 6.3 6.3Percent of Problem Projects by Amount a, c 34.5 25.6 6.6 8.0Percent of Projects at Risk by Number a, d 25.0 30.8 25.0 25.0Percent of Projects at Risk by Amount a, d 34.5 29.5 19.8 24.7Disbursement Ratio (%) e 20.6 28.6 25.7 17.8Portfolio ManagementCPPR during the year (yes/no) Yes Yes Yes YesSupervision Resources (total US$'000) 1,312 1,582 1,816 1,630Average Supervision (US$/project) 109.3 121.7 113.5 101.9
Memorandum Item Since FY 80 Last Five FYs
Proj Eval by OED by Number 69 2Proj Eval by OED by Amt (US$ millions) 1,454.6 65.6% of OED Projects Rated U or HU by Number 33.8 0.0% of OED Projects Rated U or HU by Amt 20.0 0.0
a. As shown in the Annual Report on Portfolio Performance (except for current FY).b. Average age of projects in the Bank's country portfolio.c. Percent of projects rated U or HU on development objectives (DO) and/or implementation
progress (IP).d. As defined under the Portfolio Improvement Program.e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at
the beginning of the year: Investment projects only.* All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio,
which includes all active projects as well as projects which exited during the fiscal year.
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Annex B3
IDA Indicative Program Summary1
As of 4/21/09
Fiscal Year Project Name
2009 Emergency Food Support Project2
Power Development Project AF Project for Agriculture Commercialization and Trade
Total FY09 = US$131 million
2010 Rural Access Improvement and Decentralization Project AF School Sector Reform SWApHealth Sector SWAp Social Safety Net AF Development Policy Credit*
Total FY10 = US$350 – US$400 million
2011 Mid-sized Power Generation Small and Medium Irrigation Emerging Towns Roads Sector Development AF Development Policy Credit*
Total FY11 = US$250 – US$340 million
20123 Rural Roads SWAp Rural Water Supply and Sanitation SWAp Agriculture SWAp Poverty Alleviation Fund (subject to evaluation completion, could be moved forward) Development Policy Credit*
* Certain triggers must be met before DPCs could be processed.
1 The IDA envelope for the ISN period (FY10-11) is indicative. Actual allocations in these years will depend on (i) total IDA resources available, (ii) the country’s performance rating; (iii) the performance and assistance terms of other IDA borrowers; (iv) the terms of IDA’s assistance to Nepal (grants or credits), and (v) the number of IDA-eligible countries. US$ equivalent is dependent on prevailing exchange rate.2 Actual – delivered in September 2008.3 Although FY12 is outside the ISN period, an indicative pipeline is listed since there is high probability that we will get into a ‘strategy gap’ period after ISN expiration and before a new CAS is prepared.
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IFC and MIGA Program Summary,
FY06-09 (as of March 12, 2009)
2006 2007 2008 2009
IFC Approvals (US$ millions) 0.0 4.0 0.0 10.0
Sector (%)Financial Markets (GTFP) 0% 100% 0% 0%Infrastructure 0% 0% 0% 100% Total 0% 100% 0% 100%
Investment Instrument (%) Loans 0% 0% 0% 100% Equity 0% 0% 0% 0% Quasi-Equity 0% 0% 0% 0% Other (GTFP) 0% 100% 0% 0% Total 0% 100% 0% 100%
MIGA Guarantees (US$ millions) 30 30 30 30
GTFP - Global Trade Finance Program
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Annex B4
Indicative Non-lending Activities (IDA)
As of 4/22/09
Task1 Completion FY
For Completion in FY09Technology in Microfi nance 2009Agriculture Insurance Feasibility Study 2009Financial Sector SWAT Assessment 2009Governance Note 2009Evaluation of Community Managed Schools 2009Construction Sector Analysis 2009
UnderwayHydropower – Removing Barriers (ESMAP) 2010Social Impacts of Rural Energy (ESMAP) 2010Energy Effi ciency Study (ESMAP) 2010Investment Climate Assessment 2010Information Infrastructure for Growth(AusAid) 2010Water Resources and Climate Change 2010Fiscal Federalism (GPF) 2010
Planned (preliminary) – Core AAA only2 Right To Information Implementation (GPF) 2010Local Government Study (GPF/other) 2010Social Accountability Analysis(GPF) 2011Nepal Living Standards Survey 2010Poverty Assessment 2011Public Expenditure Review 2011PEFA Action Plan Implementation 2011
Programmatic Activities Migration and Remittances 2009-2011Jobs and Skills Development 2009-2011Revitalizing Agriculture 2009-2011Support to Urban Development 2009-2011Social Protection TA (incl. DFID TF) 2009-2011
1 Includes activities funded from Bank Budget and Bank-Executed Trust Funds.2 Other sector-specifi c AAA tasks will be undertaken based on further discussions with GON and country team and taking into consideration the overall budget constraints and available trust fund resources during the FYs.
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Indicative Non-lending Activities (IFC)
As of 4/22/09
Task Completion FY
Financial Sector ActivitiesCredit Information Bureau (underway) 2010> MOU signed on Nov. 2007> Legal framework reviewed> Business Plan prepared> RFP for hardware / software under WB project> Procurement review > Drafting of Directives for Central Bank > Approval of bidding documents by WB > Draft CIB Act> Public Awareness> Training of CIB staff> Exposure and best practices visits of
regulators and stakeholders
Secured Transactions Registry (underway) 2012> Feasibility Study by FIAS> Appointment of Registrar by the GoN> Cambodia exposure visit> Amend Secured Transaction Registry Action/
Notify Regulations> Physical office establishment> Service provider agreement with private operator> Awareness campaign
MSME Survey (underway) 2009> RFP in September 2008> Survey to be finalized by 2009
Micro-Finance (underway) 2010> Preliminary scoping> Explore investments with complementary
advisory work> Identify advisory leads in
coordination with investments
Convergence (proposed) 2010> Scoping public-private sector interest
(underway)> Await Central Bank endorsementPartner Finance Institutions
Himalayan Bank Ltd. (underway) 2010> Diagnostic> MOU signed in March 2007
> SME strategy completed> Next steps to be discussed once SME
survey competed> Renewal of MOU of SEDF II
Bank of Kathmandu (underway) 2010> Diagnostic> MOU signed in May 2007> Strengthening of credit operations (by October 2009)> Micro-finance services> Next steps discussed upon completion of
strengthening of credit
Operations> Renewal of MOU for SEDF II
Nepal Industrial and Commercial Bank (underway) 2010> Diagnostic> MOU signed in February 2007> SME department restructuring> Renewal of MOU for SEDF II
Business Enabling Environment/ICRP (underway) 2014> Economic Zone Regime Review> Regulatory Reform> Business Advisory Forum> Corporate Governance workshops
Agriculture> Support for IDA’s PACT projects (tentative ) 2011
Hydro-Power Sector 2009> Study to identify prospects (underway)
Energy Efficiency> Support for investments in banks for on-lending to energy 2010efficient projects (underway)
Infrastructure/Transport Sector > Joint work with Bank on PPPs> Transaction advisory services for PPP (tentative) 2011
Tourism Sector> World hotel Link-web portal for automated
hotel bookings (underway) 2010
Task Completion FY
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Poverty and Social Development Indicators
Annex B5
1980-85 1990-95 2001-07 South Asia Low-income
POPULATION Total population, mid-year (millions) 17.0 21.7 28.1 1,520.4 1,295.7 Growth rate (% annual average for period) 2.3 2.5 2.0 1.6 2.2Urban population (% of population) 7.4 10.9 16.8 29.2 31.7Total fertility rate (births per woman) 5.4 4.6 3.1 2.8 4.3POVERTY (% of population) National headcount index .. .. 30.9 .. .. Urban headcount index .. .. 9.6 .. .. Rural headcount index .. .. 34.6 .. ..INCOME GNI per capita (US$) 160 200 340 880 578Consumer price index (2000=100) 25 72 140 140 150Food price index (2000=100) 24 71 104 .. ..INCOME/CONSUMPTION DISTRIBUTION Gini index .. .. 47.2 .. ..Lowest quintile (% of income or consumption) .. .. 6.0 .. ..Highest quintile (% of income or consumption) .. .. 54.6 .. ..SOCIAL INDICATORS Public expenditure Health (% of GDP) .. .. 1.6 0.9 1.5 Education (% of GDP) .. 2.0 3.4 2.7 ..Net primary school enrollment rate (% of age group) Total .. 63 79 85 73 Male .. 83 84 88 76 Female .. 42 74 83 69Access to an improved water source (% of population) Total .. 78 89 87 68 Urban .. 96 94 94 84 Rural .. 76 88 84 60Immunization rate (% of children ages 12-23 months) Measles 34 56 85 65 76 DPT 32 54 89 64 77Child malnutrition (% under 5 years) .. .. 39 41 29Life expectancy at birth (years) Total 51 58 63 64 57 Male 52 58 63 63 56 Female 51 58 64 66 58Mortality Infant (per 1,000 live births) 117 84 46 62 85 Under 5 (per 1,000) 171 118 59 83 135 Adult (15-59) Male (per 1,000 population) 376 350 235 251 310 Female (per 1,000 population) 395 376 211 172 272 Maternal (modeled, per 100,000 live births) .. .. 830 500 780Births attended by skilled health staff (%) .. 7 19 41 41
Latest single year Same region/income group
Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age or at any time before the survey. World Development Indicators database, World Bank - 10 September 2008.
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Key Economic Indicators
Annex B6 Actual Estimated BudgetIndicator 04/05. 05/06. 06/07. 07/08. 08/09.
National Accounts (as %of GDP) /aGross Domestic Products /a 100.0 100.0 100.0 100.0 Agriculture 35.2 33.6 32.5 32.6 Industry 17.1 16.7 16.6 16.0 Services 47.7 49.7 50.9 51.4Total Consumption 92.0 94.5 94.2 31.7Gross domestic fixed investments 20.7 21.5 21.3 21.8 Government Investment 3.0 2.8 3.0 3.2 Private Investment 17.7 18.7 18.3 18.6Exports (GNFS) 15.2 14.0 13.6 12.5Imports (GNFS) 30.7 32.5 32.7 33.7Gross domestic savings 12.0 9.3 10.2 11.9Gross national savings 29.6 30.1 29.7 33.2
Memorandum itemsGross domestic products (US$ million at current prices) /a 7974 8715 9888 12254GNI per capita (US$) 329 352 394 476GDP per capita (US$) 328 350 390 470Real GDP annual growth rates (%, calculated at 2001 prices) /b 3.1 3.7 3.2 4.7Real GDP annual per capita growth rates (%, calculated at 2001 prices) /b 1.1 1.8 1.2 2.6
Balance of Payments (US$ millions) Exports, Merchandise FOB 843.9 850.1 892.3 955 Imports, Merchandise FOB 2050.9 2372 2659.3 3291.1 Resource Balance 23 68.5 105.4 47.9 Net Private transfers 922.5 1350.8 1420.7 1275 Current Account Balance 162.5 196.7 49.6 -37.7Official transfers 503.4 458.7 468.9 337.3
Memorandum itemsResource balance (% of GDP) /b 0.3 0.8 1.0 0.4Annual growth rates (in %) Merchandise exports (FOB) (excluding re-exports) 8.6 2.5 2.3 -1.9 Merchandise imports (FOB) 9.8 11.0 11.2 12.9
Public finance (as % of GDP at market prices) /cTotal revenues 11.7 10.8 11.9 12.8 15.0Total expenditure 14.9 14.5 15.9 17.6 23.4 Current expenditure 10.5 10.2 10.6 11.1 13.7 Capital expenditure and net lending 4.4 4.3 5.3 6.4 9.6Overall deficit before grants -3.2 -3.7 -4.0 -4.8 -8.3Overall deficit after grants -0.8 -1.6 -1.8 -2.0 -3.3Domestic financing (net) 0.2 1.4 1.5 1.8 2.4Foreign financing (net) 1.6 1.3 1.4 1.4 2.0
Monetary indicatorsM2/GDPb 51.0 53.1 54.5 54.7 Growth of M2 (%) 8.3 15.6 14.0 13.3 Private sector credit growth/total credit growth (%) 102.6 112.8 111.3 154.8
Price indices Real exchange rate (eop; percentage change- = depreciation) /d -7.5 -8.2 -19.5 -3.7 Consumer price index (% change) (FY00=100) 5.7 7.7 6.2 7.2 GDP deflator (% change) (FY00=100) 6.3 6.6 7.4 7.7/a.GDP at factor cost. Source: Central Bureau of Statistics - 2008/b.GDP at market price/c.Consolidated central government operation, net terms./d.Includes use of IMF resourses.
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Annex B7
Key Exposure Indicators
Actual Estimated
Indicator 04/05. 05/06. 06/07. 07/08.
Total debt outstanding and disbursed (TDO) (US$m)a 3,330 3,385 3,623 3,529Net disbursements (US$m)a 9 55 238 -95Total debt service (TDS) (US$m)a 98 168 146 152 Debt abd debt service indicators (%) TDO/XGSb 3 3 3 2TDO/GDP 45 38 35 29TDS/XGS 8 14 11 10Concessional/TDO 87 89 90 90
IBRD exposure indicators (%)
IBRD DS/public DS 0 0 0 0Preferred creditor DS/public DS (%)c IBRD DS/XGS 0 0 0 0IBRD TDO (US$m)d 0 0 0 0Share of IBRD portfolio (%) 0 0 0 0IDA TDO (US$m)d 1,396 1,468 1,524 1,509
a. Includes public and publicly guranteed debt, private non-guranteed, use of IMF credits and net short-term capital.b. "XGS" denotes exports of goods and services, including workers' remittances.c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank
for International Settlements.d. Includes present value of gurantees.e.Includes equity and quasi-equity types of both loan and equity instruments.
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Annex B8
Status of Bank Group Operations and Grants
as of 5/5/09
Closed Projects 75
IBRD/IDA * Total Disbursed (Active) 337.13 of which has been repaid 0.00Total Disbursed (Closed) 1,501.99 of which has been repaid 310.68Total Disbursed (Active + Closed) 1,839.13 of which has been repaid 310.68
Total Undisbursed (Active) 469.55Total Undisbursed (Closed) 6.36Total Undisbursed (Active + Closed) 475.91
Last ISR
Development Implementation Fiscal IBRD IDA IDA TFProject ID Project Name Objectives Progress Year Loan Credit Grant Grant Cancel. Total.
P100342 Avian Flu S MS 2007 18.2 18.2P074633 Education for All Project S S 2005 50.0 60.0 110.0P084219 Fin Sector Restructuring (Phase II) MS MS 2004 68.5 7.0 21.3 54.2P099296 Irrig & Water Res Mgmt Proj S MU 2008 14.3 50.0 64.3P093294 NP Economic Reform TA S MS 2005 3.0 3.0P071291 NP Financial Sector Technical Assistance MS MS 2003 16.0 6.5 9.5P113002 NP Social Safety Net - Food Crisis Response S MS 2009 2.7 14.0 5.0 21.7P050671 NP: Telecommunications Sector Reform S S 2002 22.6 6.8 15.8P040613 Nepal Health Sector Program Project S MS 2005 10.0 90.0 100.0P105860 PAF II S S 2008 100.0 100.0P043311 Power Development Project S S 2003 50.6 25.0 0.8 74.8P110762 Peace Support Project S S 2008 50.0 50.0P095977 Road Sector Development Project S S 2008 42.6 42.6P083923 Rural Access Improve. & Decentralization S MS 2005 32.0 32.0P071285 Rural Water Supply & Sanitation Project S MS 2004 25.3 27.0 52.3P090967 Second Higher Education Project MS MS 2007 60.0 60.0P071291 NP Financial Sector Project (FSTA) DFID 2003 9.6 9.6P090038 NP Biogas Support program (Carbon Finance) 2006 7.0 7.0P103979 NP Biogas Support program (GPOBA/DFID) 2008 5.0 5.0P104445 IDF Reforms to Strengthen Creditor Rights 2008 0.4 0.4aP110760 IDF Strengthening Public Procurement Office 2009 0.5 0.5P090967 Targeted Secondary School Stipend (Japan) 2009 1.9 1.9Overall 0.0 260.0 578.8 29.4 35.4 832.8 Result
Active ProjectsSupervision Rating Original Amount in US$ Millions
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Statement of IFC's Held and Disbursed Portfolio
as of 04/30/2009 (In USD Millions)
**Quasi **Quasi FY Approval Company Loan Equity Equity *GT/RM Participant Loan Equity Equity *GT/RM Participant
1996/98 Bhote Koshi 6.9 0 0.0 1.0 6.2 6.9 0 0 1.0 6.22009 Buddha Air, Nepal 10.0 0 0.0 0.0 0.0 10.0 0 0 0.0 0.01994 Himal Power 9.6 0 0.9 0.0 0.0 9.6 0 0.9 0.0 0.01998 Jomsom Resort 4.0 0 0.0 0.0 0.0 4.0 0 0 0.0 0.02007 Bank of Kathmandu GTFP 2.1 0.0 2.1 0.02007 NIC Bank GTFP 0.0 0.0 0.0 0.0 Total Portfolio: 30.5 0 0.9 3.1 6.2 30.5 0 0.9 3.1 6.2
Committed Disbursed Outstanding
Annex B8
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Annex B9
Bank Group Program
> Ongoing dialogue on
the draft National
Development Strategy
> Efforts at better donor
coordination
> Application of the Peace
Filter to all new IDA
operations
> Exchange of south-south
post-conflict experiences
(non-lending TA)
> Implementation of IDA’s
ongoing Emergency Peace
Support Project
> Reconstruction of damaged
public facilities (schools,
clinics, roads, etc,)
under sector specific IDA
operations (see below)
> Second order effects of
IFC’s investments and
dialogue on improving
the investment climate
Country Development Agenda
The goal is to bring about visible, positive changes in the lives of the common people, through lasting peace and economic dynamism with equity. This entails: (i) implementing the Peace Agreement, security reform, and cantonment management, among other things; (ii) presenting a vision of the New Nepal and reflecting that vision in public policies and spending; and (iii) grounding the New Nepal in the new Constitution under preparation. Accelerating economic development, addressing poverty and exclusion, and improving service delivery are essential elements of that agenda. This overarching goal is reflected in each of the following pillars
Issues and Obstacles
> Societal
fragmentation
and long standing
discrimination
based on caste,
ethnicity,
language, gender
and/or religion> Pervasive poverty,
income inequality, and inequitable access to services, jobs, and resources
> Lack of trust in political and state institutions
> Resort to violence, intimidation and aggression to deal with grievances
> Law and order does not prevail
Strategy Milestones and Outcomes for end FY111
> Application of the
Peace Filter for
new operations to
understand project
dynamics better and
either “do no harm”
or enhance the peace
building process via
job sustainability
and/or creation, and
enabling inclusive
access to services
and opportunities
> Payments made
under the Emergency
Peace Support
Project using sound
fiduciary mechanisms
to compensate those
affected by the past
conflict
Likelihood of Realization2
Medium: since the overall role of the Bank Group and its influence on the peace process is selective, the specific milestones have a good chance of being realized, notwithstanding the challenges facing the peace process and the economy overall. However, it may be difficult to monitor implementation and to measure robust results by end of the ISN
Overarching Goal: Building a Peaceful, Prosperous and Just New Nepal
1 The ISN’s milestones and outcomes are those areas in which the Bank Group expects to have a major contribution and can influence results. In light of the ISN’s short timeframe, the results matrix focuses on key processes, actions, and intermediate outputs. Anticipated outcomes are provided for select areas that are robust and can demonstrate concrete results. The target date for the milestones is June 2011. In some cases, there may be a lag in availability of statistics. 2 The ISN attempts to establish realistic goals and accomplishments recognizing that the country situation is fluid and there are many uncertainties, including the possible impact of the global economic crisis. The results matrix provides an indication of the likelihood of these milestones being realized. The probability of occurrence of 40 percent or less would be considered low; around 60 percent as medium, and 80 percent or over as high.
ISN Results Framework, FY10-FY11
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Bank Group Program
> Implementation of IDF grant for Strengthening Institutional Capacity of PPMO
> PEFA Action Plan implementation (non-lending TA and AAA)
> Close coordination with DFID and ADB to advance reform agenda in public financial management and public procurement
> Analytical work and advice on: (i) international experiences, models, and options for strengthening the CIAA, the Public Accounts Committee, and the Public Service Commission; (ii) pay and incentives reform; and (iii) management of public enterprise reforms (GPF)
> Inclusion in possible Development Policy Credit
> On demand, just-in-time advice and analysis to the CA on global experiences and different models of fiscal federalism (GPF)
> Synthesis of the experiences of local governments to help inform the Bank and others (GPF/AAA)
> Dialogue with the GON and donors on the role of local governments through the Local Government and Community Development Program (LGCDP) (non-lending TA) and analysis of governance, infrastructure and service priorities of selected emerging towns (programmatic AAA)
> Completion of Joint Bank-IFC ongoing Investment Climate Assessment (AAA)
> IFC’s advice and technical support for improving the Investment Climate (ICRP). In particular, engagement
Country Development Agenda
1.1 Strengthening Core Public Sector Institutions and Systems (i.e. public financial management, procurement, accountability institutions), step by step, building on the advances to date and reinforcing the necessary underlying sound public sector management principles
1.2 Within the broader goal of transforming the state, putting in place a new federal government administrative and fiscal structure which, among other things, devolves responsibilities to decentralized local governments that are responsive and accountable to local populations
1.3 Changing the rules of the game to foster a climate of good governance and accountability both within the public and private sectors
Issues and Obstacles
> Despite some progress in financial management and procurement, implementation of core PEFA Actions remains and continued weak capacity prevails
> Permissiveness, lack of enforcement, poor accountability and performance measurement in public institutions
> Low salaries and mixed incentives in the civil service which foster “petty” corruption
> No local elections since 1999> The civil service regime is
unclear; many posts are vacant> Various political and
administrative entities exist, with unclear jurisdictions
> Some structures, especially at the lowest level, are too small to be viable
> Regional aspirations for autonomy complicate finding solutions to the fiscal dimensions
> Continuing violence inhibits normal operations
> New Constitution may reorganize current government boundaries and structures
> Nepal ranks relatively poorly on perceptions of corruption and the WBI’s Governance Indicators
> Nepal ranked 122nd out of 188 in the Doing Business 2009 survey
Strategy Milestones and Outcomes for end FY111
> Implementation of OECD/DAC indicators for public procurement monitoring
> Issuance of standard bidding documents (works and goods) for NCP by PPMO
> Production of financial statements for FY11 according to internationally accepted accounting principles (IPSAS-based) for public sector
> Completed piloting of a single treasury account in two districts
> Endorsement by Cabinet of a set of the Regulations to implement the Right to Information (RTI) Act, 2007
Likelihood of Realization2
Medium: many of these reforms are on the critical path but their successful implementation depends on political commitment and the resources to make them happen within the ISN timeframe
High: the milestones are modest and build on areas in which the Bank Group has already engaged
Pillar One: Promoting Capable State Structures and Systems, and Fostering Accountable Institutions
ISN Results Framework, FY10-FY11
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Bank Group Program
with the GON on the SEZ regime> IFC’s support for the Business Advisory
Forum > Awareness workshops on corporate
governance, one each with banks and business membership organizations
> Non-lending TA for RTI (GPF)> Social Accountability and Risk Analysis
of at least one sector and Governance and Institutional Review of the Health Sector (GPF)
> Support to task teams for GAAP design and implementation (GPF and other TFs)
> Capacity building for civil society and Bank staff on introduction of social accountability (demand side) mechanisms in IDA’s program (GPF and other TFs)
> ID’s proposal to PPIAF to prepare a PPP framework
> Inclusion of some elements in possible Development Policy Credit
> Monitoring of the macro-situation, with close watch on economic vulnerabilities and engagement with GON on contingency planning in case of sharp economic downturn (AAA and non-lending TA)
> Support to prepare a Medium-term expenditure Framework (non-lending TA)
> Continued implementation of IDA’s Economic Reform TA project and Non-lending TA to improve selected government functions
> Public Expenditure Review (AAA)> Completion of joint IDA-Bank
Investment Climate Assessment (AAA)> IFC’s Investment Climate Reform Project
to improve investment climate (Advisory Services)
> Continued monitoring and assessment of Migration and Remittances (programmatic AAA)
> IFC lending of some $15-20 million per year in 1 to 2 projects
> Improved sector knowledge about
Country Development Agenda
2.1 Maintaining macro-economic stability and increasing fiscal space for growth, along with implementation of reforms that improve the investment climate for private sector-led growth, employment creation and reducing the cost of doing business
2.2 Alleviating bottlenecks and
Issues and Obstacles
> While Nepal has performed well under the circumstances, it has lost opportunities and now faces growing expectations in the midst of an adverse global situation
> Nepal continues to rank poorly on “Doing Business”
> Job creation is weak> Among other things, labor laws
are inflexible> Strikes and other disruptions
to production are a concern
> Because of the conflict, investment—both public and private—has been low
Strategy Milestones and Outcomes for end FY111
> Inclusion of Governance and Accountability Action Plans (GAAPs) in all new IDA operations plus five of ongoing projects
> Introduction of Social Accountability (demand-side) in new operations and five ongoing projects
> Social Audits will increase from 68 percent to 80 percent non-private, grade 1 to 8 schools
> Preparation of Framework to govern Private Participation in Public Services (PPP) for GON consideration
•Medium-termexpenditureframework agreed for FY11
•ImprovedSEZLawsubmitted to the Constituent Assembly
•Public-PrivatePolicyDialogue Initiated through IFC’s ICRP
> Rehabilitation of 8,000 hectares of small-scale irrigation
Likelihood of Realization2
and/or where we anticipate high convergence with the GON’s policies and programs
Medium: while the milestones are modest, they dependent on continued dialogue and openness to reforms and may be overtaken by events
Medium: milestones are vulnerable to
Pillar One: Promoting Capable State Structures and Systems, and Fostering Accountable Institutions
Pillar Two: Laying the Foundation for Sustainable Economic Growth
ISN Results Framework, FY10-FY11
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Bank Group Program Country Development Agenda
Issues and Obstacles Strategy Milestones and Outcomes for end FY111
Likelihood of Realization2
> Productivity in the agriculture sector is poor
> The power sector is in dire straits with rotating blackouts up to 16 hours per day
> New Hydro-power are licensed but do not proceed
> Constraints to connectivity and movement of people and goods are among the root causes of conflict and low growth
> Nepal has very low density of its road system and poor access to communities to all weather roads
> This results in Nepal having high costs of trade
> Few Nepalese have access to credit
> The banking sector has regulatory and structural weaknesses; significant non-performing loans, inadequate provisions and undercapitalization
> 500,000 youths enter the labor force each year with low skills and job prospects
> Increased availability of power generation capacity by 100 MW
> At least one bank offers energy efficiency credits to private sector
> 450 km of strategic roads updated to all weather standard equivalent to an increase of 6 percent of the rural population within 20 minutes (2 km) walking
> Funding in budget sufficient for 500 km of road maintenance per year (FY10/11)
> 615 km of rural roads upgraded to all season in 20 districts
> Agreement on the framework for sector wide approach in rural roads
> Credit Bureau equipped with the necessary hardware and software to carry out its functions (IFC)
> SME lending strategy approved by three commercial banks (IFC)
> Completion of training of 1000 girls in vocational skills and life skills
overall economic conditions, social and political stability and maintenance of peace, as well as confidence of the private sector. Intimidation of bidders, poor contracting processes, and disruption of work sites and supply chains could have adverse effects on realizing planned investments. Deterioration in the fiscal situation and/or the financial sector is other risk that could affect the realization of some of the milestones in this pillar
Revitalizing Agriculture (programmatic AAA)
> IDA’s support for Agriculture Commercialization and Trade Project and ongoing and possible new Irrigation and Water Resource Mgmt Projects
> IFC’s investment in agri-business through two ongoing funds (India Agri Fund and IFC SME Ventures)
> Joint Bank-IFC workshop on PPPs> IFC’s infrastructure advisory (one
feasibility study)> AAA on removing the barriers to
expanding hydro-power (ESMAP); TA to NEA on demand-side management (ESMAP); TA for CFL distribution (ESMAP); and IDA’s support for the Power Development Project (ongoing and additional financing).
> IFC’s exploration of possible investments in green-field and expansion of existing IFC hydropower projects and opportunities to collaborate with the Bank to set up cross-border transmission lines
> IFC’s advisory services with banks on lending for energy efficiency
> IDA’s support under the ongoing Road Sector Development Project, Rural Access Improvement project (ongoing and additional financing); and new Strategic Roads project
> Completion of the study of the Construction Industry (AAA)
> Agreement on a framework for SWAps in rural roads (non-lending TA)
> IFC’s completion of its ongoing project with an airline and potential investment to enhance air transport facilities
> IDA’s strategy to address emerging towns, first with AAA, and then possible IDA financial support (programmatic AAA)
constraints in key sectors such as power, along with the promotion of investments, productivity improvements, job creation and expansion of credit
Pillar Two: Laying the Foundation for Sustainable Economic Growth
ISN Results Framework, FY10-FY11
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Bank Group Program Country Development Agenda
Issues and Obstacles Strategy Milestones and Outcomes for end FY111
Likelihood of Realization2
> Completion of IDA’s ongoing Telecommunications Project
> Completion of the study of Information Infrastructure for Growth (AAA/TF)
> IDA’s work under the Financial Sector TA project, the DFID TF for the Financial Sector, and an IDF for legal and judicial reforms to strengthen creditor risks, with possible inclusion under DPCs
> Continuation of IFC’s ongoing advice and technical support for the Credit Bureau; setting up of the Secured Transaction Registry; and developing SME strategies and capacities in three banks (SEDF)
> IFC to promote one investment for MSME support through investments in micro-finance institutions
> IFC to provide $10-15 million to facilitate trade finance with three Nepalese banks
> Analysis of Jobs and Skills (programmatic AAA)
> Implementation of the Adolescent Girls’ Employment Initiative (AGI-Gender Action Plan Partnership)
Pillar Two: Laying the Foundation for Sustainable Economic Growth
Pillar Three: Enhancing Equitable Access to Services and Social Inclusion
> Non-lending TA and AAA for the survey (contingent on donor co-financing)
> Poverty Assessment (AAA)
3.1 Strengthening core diagnostics and monitoring in order to have an –up-to-date insight into living standards, especially in light of the global crisis and emphasis on social inclusion
> Although Nepal has been able to track and monitor a number of social indicators, the next wave scheduled living standard survey that should have taken place in 2008 has slipped
> This is critical for the preparation of the next Poverty Reduction Strategy as the last PRSP expired in 2007
> Generally there is a need to strengthen sector level M&E system, include social accountability and enhance analysis of social exclusion
> NLSS completed Medium: the completion of the survey could be hampered by security conditions for the surveyors and therefore may not be completed on time or only partially completed
ISN Results Framework, FY10-FY11
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> Completion of the Evaluation of Community Managed Schools (AAA)
> Continued implementation of IDA’s Education for All and Second Higher Education projects
> Expansion of IDA’s support via new School Sector Reform Program SWAp
> Continued implementation of the Pro-Poor Targeted Secondary School Stipend program (JSDF)
> Study of Jobs and Skills (programmatic AAA)
> Health Sector SWAp> Continued implementation of the ongoing
Avian Flu project> Non-lending TA and policy dialogue on
new Health Sector Strategy (AAA)> Continued implementation of Governance
and Accountability Action Plan (GPF)
3.2 Reinforcing and extending Nepal’s ongoing efforts to reform its education system, with a view to increase access to all levels of education, with a particular emphasis on attaining universal access to primary education followed by basic education
3.3 Addressing the many remaining challenges in the health sector, building on the improvements to some health outcomes (notably the rate of skilled birth attendance, infant mortality and vaccinations), and with renewed emphasis on inclusion and equity—including decentralization, human resources, interaction of the public-private-and community sectors in the delivery of health services and governance. There would be heightened emphasis on maternal and child health and new vigor in addressing nutrition, HIV/AIDS and non-communicable diseases
> Economic hardships remain a barrier for many children to attend schools, particularly among Dalits and Janajatis
> Participation is inequitable, particularly in higher education, with 88 percent of students coming from the highest income quintile
> Access to technical education and vocational training is limited, and of very poor quality.
> Other systemic issues include inter alia timely availability of text books, teacher absenteeism, low completion rates, slow progress in hiring female and disadvantaged teachers, slow progress in measuring learning achievements
> Despite many advances, some health indicators remain stubborn—namely under five malnutrition which stands at about 40 percent
> Nepal is also off track in meeting the MDG concerning maternal health and addressing HIV/AIDS
> Data are lacking on malaria and more could be done to assess access by income quintile
> Number of community managed schools increased from 8,000 to 12,000
> Net enrollment increases from 92 percent to 94 percent (grades 1-5) and from 82 percent to 86 percent (grades 1-8) as verified through EMIS
> Establishing an accreditation system for higher education.
> 4000 students from 1st and 2nd quintile to benefit from financial aid to attend higher secondary and higher education
> 35 percent of pregnant women receive at least four antenatal visits (29 percent in 2006)
> Share of deliveries by trained health workers increased from 32 percent in 2009 to 42 percent
> Share of women with knowledge of at least one method of HIV infection in women from 56 percent in 2006 to 72 percent
> Share of under-five malnourished children from 49 percent in 2006 to 35 percent
> Contraceptive Prevalence rate for modern methods increased from 44 percent in 2006 to 48 percent
> 6000 surgeries for uterine pro-lapse per year
> Share of children under 12 months immunized with DPT3 from 79 percent in 2008 to 90 percent
Medium: while there is some risk that renewed, wide spread conflict, intimidation and/or severe economic conditions might affect achieving these outcomes, the experience during the past conflict period indicates that the programs are quite robust. There is a risk of past reforms being challenged
Medium: while there is some risk that renewed, wide spread conflict and/or severe economic conditions might affect achieving these outcomes, the experience during the past conflict period indicates that the programs are quite robust. Nevertheless, fraud and corruption remains an issue and bidding and contracting processes may be vulnerable to intimidation and collusion
Bank Group Program Country Development Agenda
Issues and Obstacles Strategy Milestones and Outcomes for end FY111
Likelihood of Realization2
Pillar Three: Enhancing Equitable Access to Services and Social Inclusion
ISN Results Framework, FY10-FY11
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Bank Group Program Country Development Agenda
Issues and Obstacles Strategy Milestones and Outcomes for end FY111
Likelihood of Realization2
3.4 Developing Nepal’s vision of a coherent and robust social safety net that goes beyond its traditional informal structures. This vision would include pensions, targeted programs and delivery of flagship safety net support such as social allowances and public works
3.5 Expanding other basic services in the rural areas, notably water supply, sanitation and off-grid electrification, using community based mechanisms for delivery and operation
> Cabinet endorsement of a Social Protection Strategy, including framework or set of principles and information base on targeting social programs for poor and vulnerable groups
> 20,000 more rural households benefiting from modern electricity through sustainable community based micro-hydro schemes
> 69,000 more rural households benefiting from community managed rural water systems and 65,000 more from sanitation systems
> 21,000 more rural families using biogas
Medium: the complexity of this task and its political economy ramifications may make reaching a political consensus on reforms difficult
High: while there is some risk that renewed, wide spread conflict and/or severe economic conditions might affect achieving these outcomes, the experience during the past conflict period indicates that the programs are quite robust
> Analysis of Nepal’s current system provision of diagnostic inputs to prepare an overall vision (programmatic AAA and DFID TF)
> Continued implementation of IDA’s ongoing Poverty Alleviation Fund II project and Emergency Food Support project with additional financing
> Some elements included in possible Development Policy Credit
> Continued implementation of IDA’s Rural Water Supply and Sanitation project
> Continued implementation of the micro-hydro components of IDA’s Power Development Project along with additional financing
> Analysis of the Social Impacts of Rural Energy (ESMAP)
> Implementation of the Nepal Biogas Support Program (Carbon Fund) and Biogas IV Program (DFID)
> Nepal’s current social safety net is fragmented and spread across a number of ministries
> The efficiency and effectiveness of targeting mechanisms are unclear
> The M&E system and evidence base are lacking
> While increasing, the access of rural communities to electricity and to improved water and sanitation systems remains low
> Moreover, the traditional approach of contractor-led construction and top-down operation has not been effective
Pillar Three: Enhancing Equitable Access to Services and Social Inclusion
ISN Results Framework, FY10-FY11
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The World BankNepal OfficeP.O. Box 798Yak and Yeti Hotel ComplexDurbar MargKathmandu, Nepal Tel.: 4226792, 4226793Fax: 4225112
Websites www.worldbank.org.np, www.bishwabank.org.np
Public Information Center1st Floor, West WingLal Durbar Convention CenterYak and Yeti Hotel Complex, Durbar Marg, Kathmandu, NEPALTel: (+9771) 4268195, 4249731, 4238545, Fax: (+9771) 4238546Email: [email protected]
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