INTERIM
Strategy
NoteFoRNePAL
July 2009
TO
June 2011
the
world
bank
group
INTERIM Strategy Note FoR NePAL | 2
INTERIM
Strategy
NoteFoRNePAL
July 2009
TO
June 2011
the
world
bank
group
Pallav Panta
INTERIM Strategy Note FoR NePAL | 4
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.
INTERIM Strategy Note FoR NePAL | 5
the
world
bank
group
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
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
NoteFoRNePAL
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 Equivalents
Currency Unit = Nepali Rupee (NRs.)
US$1 = NRs. 79.78 (as of May 5, 2009)
Fiscal Year
Nepal: 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 IFC
WB 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
Kiran Gautam, World Bank
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.
INTERIM Strategy Note FoR NePAL | 8
ABBREVIATIONS
AND ACRONYMS
AAA Analytical and Advisory Activities LGCDP Local Government and Community Development Project
ADB Asian Development Bank M&E Monitoring & Evaluation
AGEI Adolescent Girls’ Employment Initiative MDG(s) Millennium Development Goal(s)
AIDS Acquired Immunodeficiency Syndrome MOF Ministry of Finance
BOD Board of Directors NC Nepali Congress
CA Constituent Assembly NDF Nepal Development Forum
CAE Country Assistance Evaluation NDSP National Development Strategy Paper
CAS Country Assistance Strategy NLSS Nepal Living Standards Survey
CDD Community Driven Development NLTA Non-Lending Technical Assistance
CEA Country Environmental Analysis NPC National Planning Commission
CMU Country Management Unit OECD Organization for Economic Cooperation & Development
CPA Comprehensive Peace Agreement PAF Poverty Alleviation Fund
CPAR Country Procurement Assessment Report PEFA Public Expenditure & Financial Accountability
DFID Department for International Development PEM Public Expenditure Management
DPC Development Policy Credits PER Public Expenditure Review
e-GOP e-Government Procurement PFM Public Financial Management
ESMAP Energy Sector Management Assistance Program PIC Public Information Center
FY Fiscal Year PLA People’s Liberation Army
GAAP Governance Accountability Action Plan PPMO Public Procurement Monitoring Office
GAC Governance & Anti-Corruption PPP Public Private Partnership
GDP Gross Domestic Product PRGF Poverty Reduction & Growth Facility
GEF Global Environment Facility PSIA Poverty and Social Impact Analysis
GFDRR Global Facility for Disaster Reduction & Recovery PSM Public Sector Management
GON Government of Nepal RTI Right to Information
GPF Governance Partnership Facility SAWI South Asia Water Initiative
GTEF Global Trade Finance Program SEDF Small Enterprise Development Facility
HIV Human Immunodeficiency Virus SEZ Special Economic Zone
ICA Investment Climate Assessment SIL Specific Investment Loan
ICRP Investment Climate Reform Program SMC(s) School Management Committee(s)
ICT Information Communication Technology SME Small and Medium Enterprises
IDA International Development Association SWAp(s) Sector wide Approach(es)
IEG Independent Evaluation Group TA Technical Assistance
IFC International Finance Corporation UCPN-M Unified Communist Party of Nepal - Maoist
IFMIS Integrated Financial Management Information Systems UK United Kingdom
IMF International Monetary Fund UML Unified Marxist Leninist
IMR Infant Mortality Rate UNDP United Nations Development Programme
ISN Interim Strategy Note USA United States of America
JICA Japan International Cooperation Agency WBG World Bank Group
INTERIM Strategy Note FoR NePAL | 9
TABLE OF CONTENTS
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
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
Kishor Sharma, ECS Media
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.
INTERIM Strategy Note FoR NePAL | 12
INTERIM
Strategy
NoteFoRNePAL
ExECUTIVE
SUMMARY
INTERIM Strategy Note FoR NePAL | 13
ExECUTIVE SUMMARY
i. Nepal is a country at a crossroads, an “open moment”
in its history. Nepal’s decade-long conflict formally ended in
Kiran Gautam, World Bank
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 many strengths, the pace and severity of crisis witnessed
sharply. Prudent fiscal management was pursued and elsewhere in the world — combined with Nepal’s already
the economy grew moderately despite the conflict. Nepal fragile situation — strongly caution against complacency.
has been able to retain much of its basic infrastructure,
functioning bureaucracy and service delivery mechanisms. Draft National Development Strategy and the World
Bank Group’s response
iii. Significant challenges remain. A new government
needs to be formed, and the law and order situation remains iv. Nepal’s development agenda is closely intertwined
difficult, with continued regional, ethnic and political with peace building. The Maoist coalition Government
tensions. By 2007, remittances approached 25 percent of produced a draft of its development strategy for the next
GDP, making Nepal vulnerable to a reversal which could fuel three years. This was built upon the previous government’s
unrest. So far, all indicators are holding up. Nevertheless, Three Year Interim Plan which expires in July 2010. The
the impact of the global crisis may hurt exports, tourist draft strategy contains a strong emphasis on spurring
arrivals and remittances. So, even though Nepal has investment, job creation and growth, while reducing
INTERIM Strategy Note FoR NePAL | 14
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
Nepalis have shown remarkable
in post-conflict situations: to be modest and to keep it
resilience throughout their history. simple. The strategy will improve our project’s sensitivity
Thus, this is a period not only of risk to the root causes of the conflict and social tensions by
but also great opportunity. 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
inequality and exclusion. Consistent with the previous plan, access to the benefits of growth, services and social inclusion
the draft highlights investments in power, roads, education, which concentrates on expanding and honing social programs
health, water supply and local development, and improved to increase opportunities and wellbeing, especially for the poor
social protection. Agriculture, rural finance and rural and excluded.
institutions also play a significant role in the strategy.
Proposed Bank Group Program
v. Given the transitional nature of Nepal’s current
situation, with a new government to be formed, a viii. IDA: Nepal can benefit from an IDA15 allocation of
new constitution being drafted and elections for the SDR488.8 million along with trust funds supporting global
federal state expected in 2011, the Bank Group has and regional initiatives. The ISN covers last two years of
prepared an Interim Strategy Note (ISN) covering FY10 IDA15 (FY10-11) with the overall indicative envelope of
and 11. This joint IDA-IFC strategy aims to leverage Bank SDR332.3 million, with the average annual allocation of
and IFC resources and realize synergies. It builds on the about SDR166 million. IDA’s indicative lending program
INTERIM Strategy Note FoR NePAL | 15
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.
DB Maharjan, PowerComm
INTERIM Strategy Note FoR NePAL | 16
envisages about four to five new operations per year that xi. Aid Management and Donor Harmonization: Thirty
would entail investment operations — some on the basis of eight donors operate in Nepal. Although the IMF’s last
sector-wide approaches. A proposed series of Development program with Nepal ended in 2007, the Government may
Policy Credit (DPCs) to address critical policy constraints consider renewed support. The challenge for donors is to
would only proceed if the triggers for such lending are transition from scattered donor projects and programs outside
met. IDA’s lending program would be complemented with Government to harmonized delivery through Government
non-lending services, adapted to Nepal’s expectations systems and institutions. However, Government needs to
of just-in-time advice and taking a more programmatic strengthen its capacity to manage resources efficiently
approach. Consistent with the recommendation of the with greater focus on results. Joint portfolio reviews occur
recently completed Country Assistance Evaluation, we have with the Government and include action plans to improve
maintained flexibility in the proposed strategy which will performance. Sector-wide approaches are operating in the
allow us to respond quickly to the changing circumstances health and education sectors, and are planned for rural roads,
in the country. This includes possibility of project redesign rural water supply and sanitation, and possibly agriculture.
during supervision when this is required to achieve results.
xii. The Decentralized Kathmandu Office: The Bank Group’s
ix. IFC: IFC expects to expand its exposure in Nepal presence in Nepal has increased substantially since the
by potentially committing US$15-20 million on end of conflict. The IFC re-opened its office, co-located
average annually, depending on the availability of viable with the Bank, in 2008 and there has been an increase in
investments and improvements envisaged in the business international and Nepalese staff based in Kathmandu. One
climate. IFC’s investment program will be accompanied of the lessons of working in post-conflict countries is that
by technical and advisory services in areas including the Bank tended to have insufficient numbers of staff on
infrastructure, financial markets, improving the business the ground. This had been the case in Nepal. Already, the
climate and capacity building. Most of these commitments impacts on the timeliness and diversity of policy engagement
will potentially be in infrastructure (mainly hydropower) have been noted by the Government of Nepal (GON) and other
and the financial sector. In addition, IFC will facilitate trade development partners in a number of cases.
by partnering with Nepalese banks under its Trade Finance
program and support projects that have a positive foreign xiii. Mitigating Risks: The Bank Group faces substantial
exchange impact in sectors such as tourism, airlines and risks working in Nepal, but it is also a time of enormous
agribusiness exports. opportunity. The proposed strategy attempts to take
those risks into account, both in design and modalities of
x. Portfolio Management and Monitoring Results: Weak implementation. Nevertheless, not all of the significant
governance and security risks make implementation political, social and economic risks facing Nepal can be
even more challenging at this juncture. A comprehensive mitigated, and the ISN proposes approaches to the portfolio
risk assessment, including governance and anti-corruption in the event of more acute and/or sustained economic and
(GAC)-related risks, was used to help design the proposed political difficulty. At the same time, Nepalis have shown
strategy and to make portfolio management and business remarkable resilience throughout their history. Thus, this
processes more sensitive to those risks. The strategy includes is a period not only of risk but also great opportunity.
a partial results framework in keeping within the ISN’s While many of the political, economic and social transitions
two-year timeframe that identifies key actions, processes outlined in this ISN will not be completed in a two-year
and intermediate outputs, more than indicators of specific period, the directions which are set and the progress made
outcomes. in the coming years will be critical to these processes.
INTERIM Strategy Note FoR NePAL | 17
Despite the very real challenges,
Nepal’s transitions present
opportunities to move to the goal
of a “New Nepal”.
Kishor Sharma, ECS Media
INTERIM Strategy Note FoR NePAL | 18
INTERIM
Strategy
NoteFoRNePAL
MOTIVATING THE
INTERIM STRATEGY
1. 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.
INTERIM Strategy Note FoR NePAL | 19
MOTIVATING THE INTERIM STRATEGY
The transitions include:
• Moving from conflict to peace. While hostilities have • Transforming social and economic relations. Nepal’s
ceased, Nepal is still seeking to secure a robust peace. Con- traditional social relations marginalized many of its diverse
solidating peace remains the overarching priority for the coun- social groups and a clear mandate exists for greater
try. Ongoing violence, regional tensions, civil disturbance and inclusion of all citizens in the “new Nepal”. The oppor-
considerable political fragility slow the consolidation of the tunity and challenge in light of this mandate is to create
peace and create risks of escalation. At the same time, Nepal a notion of shared citizenship which moves away from
did not have a typical conflict period collapse. The basic traditional patronage politics and results in competing and
administrative systems of the state continued to function dur- multiplying demands. Citizenship defined in terms of both
ing conflict, growth slowed but remained mildly positive, and rights and responsibilities — based on full inclusion of Ne-
progress on key social indicators and access to basic services pal’s diverse social groups in political, economic and social
did occur. Policies to build a robust peace underpin develop- life — can become a solid basis for national unity.
mental policies, and successful implementation of develop-
mental policies will help to build sustainable peace. 2. None of the transitions underway in Nepal are
easy. The fact that the country faces them simultaneously
• Defining the new republican Nepali state and “rules of increases the challenges and associated risks. The situa-
the game” in the post-monarchy era. Traditionally, Nepal tion is made even more difficult in the face of uncertainty
has had feudal political relations, with power concentrated about the potential impacts of the global crisis on Nepal
among certain social groups and geographically in the Kath- and the timeframe over which such impacts are likely to
mandu Valley. The conflict, the popular uprisings of Jana manifest. However, Nepalis have shown remarkable resil-
Andolan II in 2006 and the 2008 election results provided a ience throughout their history. Thus, this is a period not
mandate for changing the political dispensation and power only of risk but also enormous opportunity. While many of
structures that was unimaginable only a short time ago. the transitions will not be completed in a two-year period,
While important steps have been taken — such as agree- the directions which are set and the progress made in the
ment by all parties on a “federal” republic — recent events coming years will be critical to these processes. In this
indicate that defining the new state in the constitution will light, the preparation of the Bank Group’s Interim Strategy
present major challenges for building consensus across party, Note (ISN) is timely.
regional, ethnic and social lines.
INTERIM Strategy Note FoR NePAL | 20
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.
Kiran Gautam, World Bank
INTERIM Strategy Note FoR NePAL | 21
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.
Bikash Karki , Republica
INTERIM Strategy Note FoR NePAL | 22
INTERIM
Strategy
NoteFoRNePAL
COUNTRY
CONTExT
(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 | 23
COUNTRY CONTExT
4. Nepal’s progress since the end of the conflict been considerable unrest, mainly in the Tarai region (Box 1),
in maintaining peace and defining new political though also well beyond that, frequently bringing economic
arrangements has been significant, but is vulnerable activity to a standstill through rolling bandhs (strikes).
to setbacks, as recent events demonstrate. In 2008 Government attempts to resolve this situation have been
the country made progress on several fronts: it voted in a unsuccessful. Finally, the political transition has created
Constituent Assembly (CA), abolished a feudal monarchy, opportunities for groups to mobilize support on the basis
named a President, elected a Prime Minister, formed a of ethnic and caste identity, including Dalits and Janajatis.
coalition government, and set about the task of writing a Though several partners are advising on aspects of the
new constitution. The CA is by far the most diverse and security sector, there appears to be little joint planning or
representative political body ever elected in Nepal. The an agreed approach with the Government.
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 (b) Economic Background
opposition, while the Unified Marxist Leninist (UML) party
finished third and until very recently was part of the UCPN- 6. The economy of Nepal has shown a great deal of
M-led coalition government, which also included Madhesi resilience, with modest growth averaging 3.35 percent
parties. One of the CA’s first acts in May 2008 was to declare per annum realized from FY01/02 to FY07/08. This helped
Nepal a federal democratic republic. The Interim Constitution social indicators to improve impressively.3 Prudent fiscal
gives the CA two years to 2010 (with no more than six management was pursued, notwithstanding strong pressure
months extension) to deliver a new constitution. Political for higher security spending (Table 1). As a result, when
parties have been cooperating to complete this complex peace arrived, growth rebounded to 4.7 percent in FY07/08.
task, which will be followed by another round of elections in This was also aided in part by good weather, the buoyant
2011. However, the resignation of the Prime Minister on May regional setting and higher tourist arrivals, among other
4, 2009, and the attendant uncertainties as efforts are made factors.
to form a new government, adds new dimensions to existing
challenges. 7. During the conflict, the economy became increasingly
dependent on remittances from Nepalese workers
5. While the conflict has ended, the political and abroad, estimated as one-third of the working age male
security situation in the country remains challenging. population, or 3 to 4 million people. By 2007, remittances
Key elements of the peace agreements are not being fully from countries other than India exceeded US$2 billion
addressed, and the political discourse around these issues and, if estimated inflows from India are included, the
remains partisan. Three issues stand out as potential flash- total approached 25 percent of GDP. These inflows kept
points for political discord. These are military integration the economy afloat during difficult times. Remittances
and the reform of the armed forces (with limited progress on contributed to higher consumption and spending on
democratization and integration of the Nepal Army and the education, housing and other real property investment. In
People’s Liberation Army ); the role of and control over party-
1
particular, half the reduction in poverty incidence noted
affiliated youth groups (which have been intensifying their below is directly linked to remittances.
tactics of violence and intimidation); and a surge in divisive
regional-cum-identity politics which also pose challenges to 8. Some projections for FY08/09 put annual growth at
state building and security. In the past two years, there has around 3.5 percent, less than the 4.7 percent achieved in
INTERIM Strategy Note FoR NePAL | 24
FY07-08. Besides the deteriorating economic environment, banner year in terms of revenue collections, which have
growth in FY08/09 has been affected by floods during the jumped 34 percent largely reflecting the GON’s greater
last monsoon season, poor rains this winter, and serious collection efforts. At the same time, capital expenditures
power shortages across the entire country. Given the present have fallen by 17 percent, reflecting the learning curve that
global uncertainties and labor unrest, growth for the next the new GON was undergoing in managing its development
two years or so will likely be less than what the Government program. Because of the cash build-up, the GON suspended
would like to see. On the fiscal side, projections for the
4
its borrowing program for the last six months of the current
fiscal deficit in FY08/09 stand at about 4 percent of GDP, fiscal year. At the same time, Nepal’s balance of payments
in line with past performance. So far, FY08/09 has been a 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,
The Pressing Challenges
Box 1 in the Tarai while underdeveloped, is sizeable relative to some other
countries in South Asia, with about one-third of deposits in
The Tarai, the densely populated southern plains of
Nepal, is where much of the country’s industry has two large public banks. The past three years have seen a
traditionally been located. Twenty two districts rapid expansion of financial institutions and credit fueled by
make up the Tarai, which occupies 17 percent of
Nepal’s land area and is home to nearly 48 percent
loose monetary conditions and aggressive lending by smaller,
of the total population. Because of migration from newer banks. Non-performing, politically motivated lending
the hill regions and the porous border with India, and willful defaulters, along with weak regulation and
the Tarai now has an extremely heterogeneous and
complex population, the majority of which are compliance, underscore the vulnerabilities of the system and
Madhesi (who officially account for 31.2 percent of the need for continued strengthening of the financial sector.
Nepal’s population), but with people of hill origin
making up over one-third of the Tarai population.
Apart from mainstream Madhesi political parties 9. While stable macroeconomic management and modest
and representatives of other ethnic and linguistic growth over the past decade are to Nepal’s credit, this
groupings in the Tarai representing diverse interests
performance underscores the opportunity costs that
(e.g. Tharus), armed groups have proliferated in the
past two years, adding to the sense of lawlessness conflict imposed on the economy. Nepal has fallen behind
and impunity pervading parts of the country. The its neighbors on many fronts. Domestic investment during
declared interest of some of these groups is to take
control of the region, its resources, and associated
the past ten years has been low as compared to the 1990s.
political and economic power. While some of these This is particularly evident for public sector investment,
groups are funded largely through extortion and which was typically about 5-6 percent of GDP in the 2000s,
derive their strength through intimidation, they also
draw on long-standing feelings of exclusion from two percentage points less than in the 1990s. Private sector
decisions made in Kathmandu. Violence has caused investment fell quite sharply as the conflict expanded, but
government administration to shrink back to district
has rebounded somewhat. Private investment increased two
headquarters and civil servants and businessmen to
fear living in or visiting affected areas. There is dan- percentage points of GDP in FY07/08, reaching around 18
ger that tensions between diverse political and social percent of GDP, although there is concern that this might
groups in the Tarai could deteriorate. If that occurs,
have helped fuel a real estate price bubble. The structure of
the damage to Nepal’s main trading routes, invest-
ment and livelihoods could be far worse than during the economy has shifted gradually over the conflict period:
the “People’s War” which was largely concentrated in agriculture now stands at about 33 percent of the economy
Nepal’s hill regions.
(down from 38 percent), industry at about 16 percent (down
from 20 percent), and services have grown to 51 percent.
INTERIM Strategy Note FoR NePAL | 25
COUNTRY CONTExT
Table 1 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 3.9
Per 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 22.0
Government Expenditure Growth 6.5 10.9 11.8 19.9 22.8 13.1 6.9 21.4
Government Budget Balance/ GDP -2.9 -2.8 -3.8 -4.1 -4.0 -7.3 -3.5 -4.1
Balance of Payments
Export Value Growth (in US$) 14.7 11.2 2.2 4.9 6.9 6.5 5.9
Import Value Growth (in US$) 15.8 12.2 17.3 11.9 14.1 5.3 13.0
Current Account Balance /GDP 2.7 2.0 2.2 0.5 1.2 -8.6 0.9
Gross 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 data
Broad Money Growth 12.8 8.3 15.4 14.0 18.0 17.0 10.2 16.0
Domestic 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
This mirrors what has been happening in the labor force, and negative effects are expected on export proceeds, tourist
the urban-rural shares of population: the rural population arrivals and remittances, which could affect the balance of
has dropped to about 80 percent from 84 percent of the payments, local consumption, savings and investment and
total. Nepal continues to rank poorly on measures such as the overall fiscal position. Tighter liquidity, falling collateral
“Doing Business”, and largely missed benefiting from the value and increased defaults could also potentially impact
robust growth of its two neighbors, India and China. the financial sector. Among these risks, a significant drop
in remittances would be the most serious. Not only are
10. The dependence on remittances has made Nepal remittances the country’s single largest source of foreign
increasingly vulnerable to the adverse impact of the exchange — with exports at only 7 percent of GDP — they
current global financial crisis. As Nepal is largely isolated are a major source of income spent on consumer goods
from international financial markets, the direct impact of (often imported), services such as health and education,
the crisis so far has been minimal. Nevertheless, indirect
5
and investment in housing and small businesses. Cutting
INTERIM Strategy Note FoR NePAL | 26
Umesh Basnet, PowerComm
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.
INTERIM Strategy Note FoR NePAL | 27
COUNTRY CONTExT
Box 2 Nepal Development Strategy Paper and Growth Assumptions
The draft National Development Strategy Plan (FY10-12) aims opment activities, revenue collection and aid absorption capacity
to “bring about visible positive changes in the lives of com- are also expected to increase. If most of these assumptions —
mon people through lasting peace and promoting economic particularly regarding policy improvements and stability — are
dynamism with distributive justice”. The overarching goal of met, growth can reach or even exceed 5 percent annually in the
draft NDSP is to promote the complementary process of pro- medium term.
moting development and sustaining peace though inclusive
growth and expanded services to the people. But the Government recognizes that downside risks are signifi-
cant in the coming few years. The growth scenario is at risk
To meet the expectations of its people, the draft NDSP aims given the global downturn that affects Nepal’s major trading
for an ambitious target of 7 percent GDP growth in FY10, partners and destination economies for Nepali migrant workers.
rising to 8.5 percent in FY12. To achieve this outcome, it Internal disturbances could continue in the run-up to the next
assumes that with peace and political stability, higher and election as the new constitution is drafted, and the investment
more efficient expenditures can be made in social sectors climate may not improve if labor militancy and load shedding
and economic infrastructure. It also assumes that the private continue.
investment climate will improve significantly, with changes
in industrial policy and institutional reforms that include A more conservative range of scenarios during the ISN period is
improved law and order and increased flexibility in labor presented below, taking into consideration these risks and the
markets. IPPs would start investing in the power sector as current level of economic activity, the impact of global downturn
impediments to investment are removed. Also assumed is on Nepal’s major trading partners and the limited ability of the
fairly expeditious recovery of India and the rest of the world economy to take advantage of India’s growth. The lower ends of
from the global recession and good weather conditions that the ranges are realistic projections for the coming years and are
support agriculture. With expansion of economic and devel- 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 8.1
GDP 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 5
As percent of GDP
Fiscal
Revenues 9.0 11.2 12.8 15.0 15.2 15.5 15.5 14.5 16.7
Grants 1.7 2.1 2.8 3.0 3.0 3.0 3.4 4.0 5.1
Total 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 10.6
Deficit before grants 7.4 3.9 4.8 3.3 3.9 4.9 6.0 8 8.9
Deficit after grants 5.7 1.8 2.0 0.3 0.9 1.9 2.6 4 3.8
Financing 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 | 28
off this lifeline could have a serious impact on growth and
the ability of vulnerable groups to make ends meet. The Table 2 Selected Social Indicators for mid-
1990s and 2000s, Various Years
discontent of the unemployed, combined with returning
Indicator Mid-1990s Latest available
workers facing poor employment prospects in Nepal, might Headcount poverty rate 42% (1995-96) 31% (2003-04)
spill over to an already delicate social situation. The risk of Gini coefficient 34.2 (1995-96) 41.4 (2003-4)
further deterioration of law and order would only exacerbate Net primary school enrollment 67.5% (1995) 89.1% (2007)
the weak investment climate, worsening the overall Gender parity ratio in primary education0.66 (1995) 0.96 (2007)
situation. 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)
11. Still, Nepal has a number of strengths as it manages
Source: Nepal Poverty Assessment, 2006; DHS; and GON data.
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,
ECS Media
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 nature of Nepal’s exports and its tourism
the Government and donors should develop contingency
sector, combined with available data on
plans. Box 2 discusses the country’s macroeconomic outlook
remittances to this point, suggest that the
and challenges.
impacts on Nepal are likely to be gradual.
INTERIM Strategy Note FoR NePAL | 29
COUNTRY CONTExT
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.
Kishor Sharma, ECS Media
INTERIM Strategy Note FoR NePAL | 30
Community Service Delivery of School
Box 3 Education - a Unique Nepalese Tradition
Until 1939, only two government schools delivered was the formation of school management committees
modern education in Nepal. The establishment of (SMCs) comprised of parents, thereby making SMCs
the first community school in 1940 marked the accountable to parents. SMCs have wide ranging pow-
beginning of community initiatives in education. ers that include hiring teachers, mobilizing resources,
Every school established in Nepal from 1940 to 1971 power to approve budgets and all expenditure deci-
was a community school. In 1971, the government sions. In 2002, the government announced a program
replaced community-based boards of directors with of voluntary transfer of schools to communities with an
government-appointed committees. The most glaring assurance that it would continue to provide financial
negative consequences of government management and technical assistance. To date, communities man-
of schools were teacher absenteeism and a serious age over 20 percent of schools with the support of the
funding gap. Responding to extreme public dis- donor community, including IDA, under an ongoing
satisfaction with school quality, the Parliament in SWAp. Community management has benefits which
2001 amended the Education Act, paving the way include increased levels of resource mobilization, com-
for the transfer of public schools back to community munity monitoring, community participation in school
management. The cornerstone of the amendment activities and greater commitment of teachers.
(c) Poverty and Social Development mid-1990s and mid-2000s, the poverty rate and gap fell
sharply,10 and MDG indicators such as primary enrollment,
12. Nepal is one of the poorest countries in the world, educational gender parity, under-5 mortality, infant mortality
with GDP per capita of US$470, and with adverse, though (IMR) and immunization coverage improved markedly.
improving, social indicators.8 In 2007/08, it ranked However, some of these successes create new challenges,
142nd in the world on the Human Development Index, such as meeting the “bulge” of children entering secondary
with life expectancy of 63 years and adult literacy at 63 education, and some old problems (in particular, high
percent for 2008.9 In addition to its poverty, the armed malnutrition rates among children) remain. Inequality has
conflict which ran from 1996 to 2006 imposed a heavy toll risen to the highest level in South Asia and presents a major
in terms of human lives. Nepal also presents a range of challenge to contain and, if possible, reverse.
diversities which contribute to a rich cultural fabric but
create challenges for state building. These include diverse 14. A distinctive feature of basic service delivery in
topography of mountains, hills and plains, with some of Nepal is the importance of community involvement. To
the most remote and inaccessible areas in the world. The some extent this was always present in the absence of the
country has huge ethnic and linguistic diversity and wide state in remote regions. Community involvement in service
discrepancies in social and economic standing depending on delivery is increasingly evident in recent years in education,
geographic location, ethnicity, caste and gender. health care, rural water and sanitation, micro-hydro and
community forestry. While in some areas the spread of
13. While Nepal remains a very poor country, progress community management was accelerated by the challenges for
on a number of social indicators has been impressive, Government during the conflict, in sectors such as education
especially in light of the conflict (Table 2). Between the it built on a long tradition of community involvement (Box 3).
INTERIM Strategy Note FoR NePAL | 31
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.
Amar Rai, ECS Media
INTERIM Strategy Note FoR NePAL | 32
INTERIM
Strategy
NoteFoRNePAL
GOVERNMENT OF
NEPAL’S EMERGING
DEVELOPMENT STRATEGY
INTERIM Strategy Note FoR NePAL | 33
GOVERNMENT OF NEPAL’S EMERGING
DEVELOPMENT STRATEGY
15. Nepal’s development agenda is closely intertwined Nepal, which assures both efficiency and distributive justice
with its peace building agenda. The CPA broadly defines to its citizens. To this end, the objective of the draft NDSP
key success criteria for achieving peace and development is “...to bring visible positive changes in the lives of com-
in Nepal, among others, as: (i) ending discrimination of mon people through lasting peace, and promoting economic
all kinds; (ii) state restructuring and enhancing the state’s dynamism with distributive justice”. The NDSP draft notes
accountability to citizens, people’s empowerment, provision that it builds on the Three-Year Interim Plan, the Interim
of fundamental rights and access to basic services; and (iii) Constitution of Nepal and the Millennium Development Goals
better governance, including economic and social rights, (MDGs). In pursuing the vision and objectives, the draft
transparency and anti-corruption. The theme of change is NDSP outlines the following priorities which reflect a high
one that the voters of Nepal have clearly endorsed, but what degree of convergence with those in the Three Year Plan:
this entails — and the constraints to be overcome — re-
• Pursuing employment-oriented and broad-based high
main uncertain. The high hopes of the population create economic growth.
challenges for policymakers in terms of expectations on the
• Improved governance and service delivery systems.
scope, depth and timetable for change.
• Investment in infrastructural development (physical,
social and economic).
16. The Maoist coalition Government prepared a draft
• Social development.
development strategy built on the foundations of the
• Inclusive development and targeted programs.
Three Year Interim Plan prepared by the previous seven
• Sustainable peace building.
party coalition Government. The vision is to build a
• Harnessing international cooperation and regional
peaceful, prosperous and just new Nepal. The Government economic prosperity for national development (including
initiated preparation of this three-year National Develop- trade integration and foreign direct investment).
ment Strategy Paper (NDSP) in November 2008. The idea
was to build on the existing Three-Year Interim Plan (which 18. In addition to these strategic priorities, the draft
ends in FY09/10), extending it to FY11/12. A draft strategy NDSP identifies a number of more specific “major thrust
was shared with the donor community in April 2009 for areas” which received wider support during NDSP consul-
comments. 11
The National Planning Commission Vice Chair- tations. These include:
man drove the NDSP process, with technical teams focusing • Agricultural transformation, with a focus on commercial-
on the macro framework, economic policies, social sectors, ization of agriculture and food and nutritional security.
infrastructure and governance. The NDSP will be further • Specific infrastructure focus on hydropower, irrigation,
reviewed and refined after the new government is formed. A roads and airports, tourism, information and commu-
Nepal Development Forum is expected to be held sometime nications technology, institutional infrastructure and
thereafter. reforms in trade and investment policies.
• Empowerment of the population in governance and
17. The draft NDSP outlines GON’s approach to peace judicial reforms, and service delivery by governmental,
and development in the country. It elaborates on the non-governmental and private sector actors.
peace building agenda and the mutually reinforcing linkages • Emphasis on basic social services, notably basic and
between peace and development. The overarching vision secondary education, health services, and water and
of the draft NDSP is a peaceful, prosperous and integrated sanitation.
INTERIM Strategy Note FoR NePAL | 34
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 Shrestha
• Emphasis on social security and inclusion, especially for of social harmony and equitable development, with an eye
vulnerable groups such as disabled people, women, the towards promoting socio-economic conditions conducive
elderly and marginalized social groups, as well as com- to avoiding future conflict. The measures specific to the
mitment to including such groups in the public sector peace process include: delivering on the commitments under
and developmental programs. the peace process, in particular the CPA; supporting peace
building institutions (including local ones), strategies and
19. As is appropriate given Nepal’s recent history, processes; relief, rehabilitation, reconciliation and reintegra-
peace building receives special attention in the current tion of conflict-affected persons; security sector reforms;
version of the NDSP. The draft NDSP notes that its peace cantonment management; and transitional justice. The
and development strategies are “intertwined in a holistic broader “conflict prevention” priorities include: promoting
and comprehensive framework of peace and development employment through public works; inclusive and democratic
so as to ensure synergies between the opposite faces of state restructuring; having a “pro-peace” constitution; and
the same coin”. The priorities under the peace building addressing socio-economic disparities in both spatial terms
pillar of the draft NDSP therefore reflect a mix of policies and across social groups. The political developments of May
and directions which are directly related to deepening the 2009 highlight the importance of the peace agenda but also
peace process, and others which reflect broader objectives the ongoing challenges and complexities that it involves.
INTERIM Strategy Note FoR NePAL | 35
Rabindra Prajapati, ECS Media
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”.
INTERIM Strategy Note FoR NePAL | 36
INTERIM
Strategy
NoteFoRNePAL
THE BANK GROUP
INTERIM STRATEGY
INTERIM Strategy Note FoR NePAL | 37
THE BANK GROUP INTERIM STRATEGY
(a) Proposed Approach of the Strategy falter and/or the impact of the global crisis manifest itself
in a sharp downturn. The second lesson is the need to
20. In light of the transitions currently underway be sensitive to the root causes of the conflict and social
in Nepal, we propose to present an Interim Strategy tensions. Some actors may value peace and stability over
covering FY10 and FY11.12 The ongoing peace process is efficiency and equity, while others may take advantage of
still fragile, with many milestones yet to be met and risks of the transition to press for their own interests. This may
further setbacks; the political transition will not be complete make structural reforms more difficult. The third lesson is to
until approval of a new constitution in 2010/11 and fresh remain flexible and open to changes in the lending program
elections in 2011; the new Government to be formed after as well as restructuring projects in response to evolving
elections will need time to translate its vision for the new circumstances. Analytical work must also be designed to
Nepal into specific policies and programs that the World be timely and responsive to rapidly evolving needs. While
Bank Group could support. The current global economic the above lessons are crucial, in many policy areas the Bank
crisis adds further uncertainty. An Interim Strategy will Group can continue to share global experiences, help lay the
thus help the Bank Group and the Government exercise the foundations for state building, and continue to help improve
flexibility needed to deal with these uncertainties and lay basic service delivery for Nepal’s poor.
the basis for a full Country Assistance Strategy (CAS). As a
contingency in light of the electoral cycle, we are including 22. Nepal has been selected as a Bank Group-wide pilot
in this ISN a tentative outline of a FY12 program. This has country for a fully integrated and enhanced joint strategy
the added advantage of synchronizing with the three-year which leverages Bank and IFC resources and realizes
planning horizon used by Government and the rest of the synergies. Building upon the co-location of the IFC and
donor community. This ISN follows the first Interim Strategy Bank offices, the past year has seen greater collaboration
for FY07-09 and the last CAS for FY04-06.13 The proposed and interaction between the Bank and IFC in Nepal,
ISN reflects considerable continuity with both the last CAS particularly in financial markets, infrastructure and business
and ISN, emphasizing the areas of strength but suggesting enabling environment. In preparing this joint strategy,
more flexibility to respond to opportunities and challenges IFC and Bank staff held sector-specific consultations and
(see Box 4 and Appendix IV on the findings of Independent jointly participated in drafting and reviews. In addition,
Evaluation Group’s Country Assistance Evaluation). private sector consultations led by IFC in Kathmandu were
coordinated with the Bank team and IFC advised on the joint
21. We are also taking on board the lessons of working donor consultation agenda. Such interactions, supported
in countries in post-conflict situations. The first lesson by the IDA-IFC Secretariat, are to continue during ISN
is to be modest in terms of outcomes. While Nepalis have implementation.
demonstrated strong resilience, the current transition
is demanding on all actors in society. These demands (b) Principles Underlying the Strategy
would only increase if Nepal were to confront at the same
time a significant economic downturn. We will focus on 23. In light of the above challenges the Bank Group’s
fundamentals and step-by-step change, as Nepal’s capacities strategy should:
will be stretched and could be diverted from long-term • Be driven by and aligned with country priorities. In
development to immediate needs should the peace progress addition to grounding its thematic and operational
INTERIM Strategy Note FoR NePAL | 38
Observations from the Previous
Box 4 CAS/ISN Implementation
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
inject more realism into future country strategy and
effectiveness by bringing resources to grassroots
program design, retaining flexibility to adjust to
levels, but with increased emphasis on growth and
changing country circumstances and consulting widely
inclusion.
with national stakeholders and development partners
throughout program design and implementation.
While recognizing that Nepal’s considerable political In terms of sectors and instruments, the CAE
turmoil and changes had a major impact on CAS recommends: making agriculture and rural development
implementation during the period under review, the centerpiece of the assistance program; establishing
one of the CAE’s conclusions is that little progress a mechanism to track the impact of the PAF on poverty
was made against CAS stated objectives in two of and social inclusion (and adjusting its design as needed
the four main strategic themes — achieving broad to optimize the benefits to the poor and socially
based growth and good governance. This was partly excluded); and continuing support for public finance
because specific objectives under these two pillars management and other institutional reforms through
are considered by IEG to have been unrealistic and policy-based lending, if feasible, or through sectoral
overly ambitious given country circumstances. on SWAps which have proven successful in health and
the other hand, IEG’s evaluation concludes that some education.
progress was made in social inclusion, especially with
regard to mainstreaming inclusion in sector projects
Regarding IFC’s operations in Nepal, the IEG notes that
and, to a lesser extent, achieving greater diversity
as the political and security situation deteriorated in
in the civil service. IDA’s program was most relevant
1999, IFC withdrew its local field presence and had very
and successful in social development, particularly
limited activities from 1999-2006. IFC’s inability to
in improving and expanding health services,
develop successful investment projects through much
significantly increasing access to basic education,
of the decade can be largely attributed to the difficult
and increasing access to safe drinking water in rural
investment environment. Since 2006, IFC’s gradual
areas. In addition, even in those pillars showing
re-engagement in Nepal has resulted in two GTFP
less progress in meeting objectives, there were some
investments, an investment in a domestic airline, a
notable achievements despite the very difficult
pipeline of investment projects in the financial sector,
country circumstances.
and a constructive dialogue with the government on
business enabling environment issues. This approach
Based on these experiences and in light of the of cautious re-engagement has the potential for
challenges ahead, IEG believes that IDA should replication in other post-conflict countries.
INTERIM Strategy Note FoR NePAL | 39
THE BANK GROUP INTERIM STRATEGY
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.
Hari Maharjan, ECS Media
INTERIM Strategy Note FoR NePAL | 40
priorities in the Three Year Interim Plan and draft overly ambitious program. Activities will concentrate on
NDSP, the strategy has followed a participatory process areas where the Bank Group has demonstrated strengths
to ensure that the alignment with country priorities and a cautious “one step at a time” approach in areas of
reflects a representative spectrum of views in Nepali expanded or new engagement. In addition, the program
society. Joint consultations with ADB and DFID in needs to have a “do no harm” approach which places
three regions of the country and Kathmandu gathered emphasis on the sensitivity to conflict.
the inputs of a wide range of civil society actors into
the strategy development process. An ongoing client • Be flexible to respond to the fluid situation and Nepal’s
perception survey will also contribute to framing evolving needs. This is especially so in light of the global
how we implement the strategy. An overarching downturn and Nepal’s complex political situation and
element of the strategy is to be fully supportive of the points to the need for “just-in-time” responses. Careful
consolidation of peace in Nepal, which is the sine qua monitoring of the impact of the crisis on the country
non of stability and development. should conditions worsen will be critical. The short-run
responsiveness of the program to the uncertain impacts
• Be harmonized and coordinated with the support of the crisis is unusually important and underlines the
provided by other development partners using common need for careful attention to governance, enhanced
management arrangements where feasible. For the ISN, portfolio monitoring and risk mitigation strategies.
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 (c) The Overarching Goal and
sectors to provide the basis for discussions on how to Proposed Pillars of the Interim Strategy
increase complementarity and selectivity across donor
programs. To provide an improved framework for aid 24. Reflecting the above challenges and principles
effectiveness, the Ministry of Finance has prepared a draft of engagement, three thematic pillars have emerged
new foreign aid policy inspired by the Paris Principles that support the overarching goal of pursuing the
and commitments made in Accra and Doha. An action complementary processes of consolidating peace and
plan on aid effectiveness has also been developed and its promoting development. Consultations revealed a strong
implementation will be monitored during the ISN period. consensus on the three themes and the relevance of the donor
community in helping Nepal address them. There is also a
• Build on the Bank’s and IFC’s areas of comparative demand for strategies and approaches that would function
advantage and capture synergies. Because of the strong regardless of the risks that the country faces in the next
presence of other development partners and because of few years. This recognizes that progress on Nepal’s main
our own capacity constraints, the Bank and IFC have to be transitions is hard to predict, even more so in light of the
selective in Nepal, based on our strengths and areas where recent political developments and the current global financial
we have the human and financial resources to deliver. crisis. Nepal’s main transitions could proceed steadily (albeit
at different speeds), they could stall, or there may even be
• Retain a degree of modesty, consistent with the country deterioration with external developments exacerbating local
and global environment and timeframe of the ISN. Given conditions. The proposed ISN program aims to be durable and
the multiple uncertainties, the ISN should not propose an robust to these eventualities. The broad stance of the Bank
INTERIM Strategy Note FoR NePAL | 41
THE BANK GROUP INTERIM STRATEGY
Group’s approach, the proposed pillars and options - with underpinning of development and poverty reduction.
peace and readiness to respond with emergency support as IDA’s direct contribution to the peace process has been
cross-cutting themes - are outlined below. the financing for compensation to conflict-affected groups
through a transparent process under the on-going Emergency
25. In designing the ISN program, we have focused on Peace Support project. The Bank would also support South-
strengthening the implementation and performance of South knowledge exchanges on peace building efforts with
the current portfolio. The overall emphasis is on “keeping it countries such as South Africa and Rwanda. As well, sector
simple”. Firstly, this means having a solid core of the program operations such as education, health, rural roads, irrigation
which either involves completing existing operations or and water supply, could address some of the immediate
building on past areas of effective engagement. This should needs for reconstruction of damaged public facilities. Based
enhance the robustness of the program to the uncertainties on our engagement to date, comparative advantage and
in the present environment. Secondly, it means continuing the current programs and plans of other partners, it is
the emphasis on community-based operations, while opening proposed that IDA continue to be selective in engaging on
cautiously in other areas. With new or expanded areas of other aspects of direct peace building support.15 Equally,
engagement, the strategy is to start small and expand based IFC’s contribution toward peace building would be via the
on a track record of performance. Thirdly, it means minimizing second order effects of its focus on investment, improving
the number of projects which may place high demands on the business climate and job creation, and could come in the
project implementation capacity and fiduciary systems. future through linkages and community programs associated
with its advisory and investment activities. Neither IDA nor
26. We have also structured the ISN to be prepared for the IFC envisage direct support for security sector reform.
contingency of a significant decline in economic growth
arising from the current global crisis. It this were to happen, 28. In order to ensure that the ISN contributes to peace
it would likely be triggered by a significant decline in foreign building in Nepal, there will be a structured effort to
exchange earnings, especially from remittances, Nepal’s area make the portfolio more conflict sensitive, taking into
of greatest vulnerability. This would fuel falling consumption, consideration the underlying causes as well as consequences
revenues and liquidity, weakening both the state’s capacity of conflict. IDA is committed to trying to ensure that
to respond to the crisis and the financial sector’s ability to all new interventions “do no harm” and, where possible,
counteract the negative impacts. The slowdown in economic enhance peace building, job creation, and social inclusion.
activity would have the dual effect of increasing poverty and This would be done through social risk analysis that would
aggravating social tensions. Hence, in preparing the ISN, we identify: (i) at the strategy level, inconsistencies between
were conscious of the need to preempt if we can and respond in the choice of instrument and program and the macro- and
case an emergency response is needed, identifying those areas micro-level context analysis; (ii) at project design level,
which are amenable to quick turn-around and quick impact. issues relating to selection of beneficiaries and locations
and to the real or perceived interests of other (indirect)
Overarching Goal: Building a Peaceful, Prosperous and stakeholders; and (iii) at project implementation level,
Just New Nepal concerns relating to implementation arrangements and their
consequences on voice and participation, the selection and
27. Cutting across the ISN pillars is the unifying goal competence of contracted partners, and the transparency of
of helping Nepal to consolidate peace, the essential decision-making.
INTERIM Strategy Note FoR NePAL | 42
29. A specific screening tool — or “peace filter” — practices that promote inclusion. Since employment
has been prepared and will be piloted in the coming generation is seen as a critical factor in maintaining social
months for projects under preparation. It draws on best stability, the peace filter would also track employment
practices of social mobilization and the extensive work by effects in relevant projects. The approach of the proposed
the international community over the last 10-15 years, peace filter is presented in Box 5 and is being piloted on a
including efforts by the Bank, on conflict. The peace filter sample of projects under preparation. Based on these pilots,
will help project teams to focus on a range of issues during the filter will be refined.
the preparation and implementation processes, including:
national and local level political dynamics; the security The Strategy’s Three Pillars
situation in given areas of operation; transparency and
accountability in decision-making and resource use; and 30. Supporting the overarching goal of promoting peace
inclusion, voice and benefit capture. In operationalizing and development, the proposed strategy is organized
this tool, linkages will be made with other risk assessment around the three interlocking themes that emerged
tools regarding governance, anti-corruption and fiduciary during consultations within the Bank Group and with
risk assessment frameworks, as well as social mobilization the Government, donor partners and civil society. These
Proposed ‘Peace Filter’ for Bank
Box 5 Group Operations in Nepal
The ISN proposes a peace filter tool for task teams The first part of the filter, drawing on poverty and
to use in the selection, design and implementation social impact analysis (PSIA) tools, identifies and
of operations. The intention is to proactively seek qualifies direct and indirect project benefits. The
opportunities to promote social harmony, build social second part helps task teams to better understand
capital and sustain and create jobs, as well as identify the national and local level environment in which
and mitigate potential sources of conflict. The filter projects will operate, and prompts them to seek
identifies key conflict and political economy issues for information from internal and external sources. The
task teams to consider early in project design, appraisal final filter would provide guidance on where such
and supervision. The aim is to respond to those issues information can be found in Nepal. The last set of
which: (i) are likely to affect project outcomes in the questions focuses on the analysis of important direct
areas where benefits are being delivered; and (ii) may and secondary benefits by the different beneficiaries,
arise due to the project’s operating environment. In decision makers and other stakeholders in order to
applying the filter, task teams will first disaggregate better identify the social dynamics around given
the different direct and ancillary benefits that will flow aspects of the project as well as discuss any potential
from the project and may be contested by different mechanisms to strengthen the positives.
stakeholders. Against the backdrop of the project’s
national and local context, the task teams will then The Nepal Country Management Unit is committed
identify who controls those benefits, the criteria on to supporting this conflict-sensitive approach to
which they are allocated and how such information operations in the country. During the ISN period,
is circulated in the public domain. Teams would then a team with skills and knowledge in social and
integrate this information as appropriate into the risk peace related areas of analysis should be available
identification worksheet developed during project to support task teams to apply this filter, and,
preparation and appraisal. Mitigation actions to prevent more importantly, assist in appropriate follow-up of
harm and maximize positive impacts can then be operations during implementation.
prioritized and targeted accordingly.
INTERIM Strategy Note FoR NePAL | 43
THE BANK GROUP INTERIM STRATEGY
are also consistent with priorities of the Three Year 32. In this light, the first pillar focuses on three
Interim Plan. The first pillar addresses the cluster of areas of engagement: (i) strengthening core public
challenges facing the state in adapting and constructing sector management systems which are robust to eventual
the systems, institutions and capacities needed for the decisions on the shape of the State; (ii) making selective
new Nepal. The second focuses on overcoming constraints contributions on defining the institutional framework for
and bottlenecks faced by the productive sector, especially the new state, with a particular focus on decentralized
in terms of productivity, connectivity and sustainability. administration; and (iii) helping to articulate and
The third concentrates on expanding and honing programs implement new “rules of the game”, including transparency,
and activities that can increase opportunities and well- accountability, and anti-corruption among key players,
being, especially for the poor and excluded. These three including the private sector, and strengthening institutions
pillars reinforce each other, with a more capable and for regulation and governance. IDA will concentrate on
accountable state essential for building confidence and public institutions, while IFC will focus on corporate
policy predictability that then channels into an improved governance in the private sector. IFC’s initial efforts
business climate, which in turn generates employment and in raising corporate governance awareness in Nepal will
demands for greater provision of public goods and services focus on the banking sector and on large founder-owned
by the state. Social inclusion runs across all of these themes firms. Improved corporate governance in the private
as one of the foundations for the new Nepal. Within each of sector, followed by IFC investments, could be a powerful
these pillars, the strategy identifies specific areas where the demonstration to market leaders.
Bank Group can make a difference.
33. In consultations with the GON, development partners
Pillar 1: Promoting Capable State Structures and and the country team, there is clear endorsement for
Systems and Fostering Accountable Institutions IDA remaining closely engaged on core public sector
management systems. This has been an area of strength
31. The ISN period will be a crucial time for the country in IDA’s engagement to date and would include areas
as it moves towards sustaining peace and defining the such as public financial management (PFM) reform and
structure of a new federal state. Key political leaders institutional strengthening, public procurement capacity
recognize that lasting peace depends on being able to strengthening, core governance functions, and enhanced
deliver tangible results, and that hinges on the effectiveness monitoring and evaluation (M&E) systems. This support for
of the state in delivering on its promises. In this period, strengthening country systems would have added benefits
the country will seek to refine — and in some cases redefine in terms of facilitating donor harmonization and enhancing
— public sector management systems and the institutional aid effectiveness (see para. 77). Consolidating and building
framework and modalities for the interaction of the state on past achievements in governance and public sector
and its citizens. The Bank Group proposes to support management is seen by all players as a sine qua non for an
these processes through several channels, but with a clear effective state and implementation of public policies. It is
recognition of the need to focus on areas of comparative therefore proposed to continue support through a mixture of
advantage within an agenda that is very wide, contingent on analytical and advisory activities (AAA) and policy dialogue.
political consensus and where many development partners The PFM agenda would also be a core element of the proposed
are active.
INTERIM Strategy Note FoR NePAL | 44
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.
Umesh Basnet, ECS Media
INTERIM Strategy Note FoR NePAL | 45
THE BANK GROUP INTERIM STRATEGY
Development Policy Credits (DPCs) if triggers for budgetary partners to improve procurement performance, including
support lending are met (see para. 68). strengthening the capacity of the Public Procurement
Monitoring Office (PPMO) to implement the new procurement
34. In the field of PFM/financial accountability, law (developed with past IDA support), implementing
numerous challenges need to be addressed. This proposed e-government procurement (e-GOP) systems, helping to
program builds on the PFM review carried out in 2005 and establish procurement performance monitoring indicators as
the Public Expenditure and Financial Accountability (PEFA) agreed in the PEFA action plan, and supporting movement
Action Plan which benchmarks Nepal’s performance in the towards full alignment of the procurement law with
areas of fiscal discipline, strategic allocation of resources, international standards. To this end, a joint Government-
efficiency, transparency and accountable management of donor review team has developed recommendations to
public finances. That benchmarking showed that Nepal enforce a more effective procurement system in terms of
was particularly lagging in managing payment arrears, both policy and implementation, and IDA is committed
tax collections and the effectiveness of both internal and to implement the recommendations. IDA’s procurement
external audits. A recent assessment of public sector engagement is being supported through an Institutional
accounting and auditing further revealed the need to Development Fund (IDF) grant, and could be further
accelerate movement towards internationally accepted supported through PEFA Action Plan Implementation
accounting and auditing standards. IDA will continue AAA and inclusion in a DPC program. Finally, one of the
to work closely with the Government and development growing concerns is that public procurement processes are
partners to consolidate achievements and prioritize actions being undermined at times by acts of intimidation to deter
year by year. This includes sustaining technical support competition. This could affect donor willingness to provide
on basic budgeting and treasury functions; outreach resources through Government systems.
and consensus building on the need for these reforms
among public and civil society stakeholders; leveraging 36. In addition to supporting core public sector
information technologies such as Integrated Financial management, the ISN proposes to engage selectively on
Management Information Systems (IFMIS); strengthening the framework for effective decentralized administration
the audit function of the Auditor General; and moving from and service delivery. The work of the Constituent
rules-based to principles-based accounting in line with Assembly in drafting a new constitution is expected to
international standards. The ISN will also support a sound lead to dramatic changes to the state as it decentralizes.
institutional development plan and strengthen performance Ensuring the viability of new levels of government is
monitoring. This will be supported through ongoing PEFA a key element, as is making sure that the hierarchy of
Action Plan Implementation AAA and could be included in functions and responsibilities between the new layers of
the proposed DPCs. administration enhances service delivery, especially for
the poor. This is particularly important in a country which
35. In the area of public procurement, legal reforms has a long tradition of community management and where
have been enacted but institutional capacity needs to the capacities of local bodies — where they exist — were
be further strengthened. Continuing reforms in public weakened during the conflict. The CA has requested that
procurement is a challenging task, as it requires concerted IDA contribute to the consultative process by providing
efforts at all levels. In order to address these challenges, advice and analytical work on fiscal federalism, building
IDA will work closely with the Government and development on the above work on public financial management and
INTERIM Strategy Note FoR NePAL | 46
global knowledge. This would center on fiscal transfers, score cards and social audits); and (iii) strengthening M&E
equalization (horizontal and vertical), expenditure and systems both at national level and sub-national levels,
revenue assignment, and the economic viability of federal including participatory approaches. The umbrella tool for
states. The Bank team proposes to produce a series of this engagement would be the recently-approved GPF for
notes and workshops under a Fiscal Federalism AAA funded implementation of governance and anti-corruption (GAC)
by the Governance Partnership Facility (GPF) (see para. initiatives, with specific outputs in the identified areas such
37). Complementary to the Bank’s support for community- as a Social Accountability Mainstreaming Review and Right
driven development (CDD), we would engage in a dialogue to Information Implementation Non-Lending TA. Enhanced
on the role of local governing bodies, which is being project supervision and use of tools such as technical audits
coordinated by the GON through the Local Governance and would complement this effort.
Community Development Program (LGCDP). A proposed
Local Governance Study under the GPF or other trust fund 38. The interface of the state and the private sector is
would help to further define options for what could be an a further important area of activity. In terms of the new
appropriate engagement for IDA. rules of the game, IDA and IFC would exploit their respective
comparative advantage. IFC would focus on corporate
37. The broader governance and anti-corruption governance and improvement in investment climate via
agenda is also part of this focus on building the new support for the Business Advisory Forum which will facilitate
state. Rethinking the role of the state and its attendant public-private dialogue, while IDA would support regulatory
core institutions under the new constitution creates a reform in banking and telecommunications, for example,
window of opportunity to strengthen Nepal’s governance and the role of the Central Bank in banking supervision.
framework. Nepal presently rates relatively poorly Possible reform of the Bankruptcy Law is another area for
on governance measures, with corruption one of the IFC. IDA would also help the new Government develop a
growing concerns. Anchoring this part of the proposed framework for public-private partnerships (PPPs), and IFC
strategy would be efforts to enhance transparency and would provide support for PPP projects through transaction
accountability, strengthen citizens’ voice and engagement, advisory services and investment, once a functional PPP
promote performance-results based results management policy framework is in place. Some of these themes could be
and establish new “rules of the game”. The specific areas part of a possible series of DPCs.
in which IDA proposes to engage are: (i) advice and
assistance to promote and operationalize the potentially Pillar 2: Laying the Foundation for Sustainable and
powerful new Right to Information (RTI) Law. This would Inclusive Economic Growth
include the “demand” side of promoting use of the RTI to
access information and the “supply” side of the capacity 39. As in any country, the key driver for sustainable
of public agencies to be responsive to RTI requests; (ii) poverty reduction in Nepal is growth. In the case of
support to strengthen social accountability mechanisms in Nepal, this dimension has heightened importance because
service delivery, including non-lending TA on demand side of the sensitivity of sustaining peace to the generation of
approaches in Bank operations and country systems, and tangible benefits for the population and risks of the global
technical advice, capacity building, and grant funding for crisis. As a result, the Bank will continue to monitor macro-
mainstreaming social accountability tools (e.g. citizens developments and to assess the economy’s vulnerabilities
INTERIM Strategy Note FoR NePAL | 47
THE BANK GROUP INTERIM STRATEGY
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.
Rabindra Prajapati, ECS Media
INTERIM Strategy Note FoR NePAL | 48
particularly with respect to remittances and the financial sector constraints. IFC’s support for the Business Advisory
sector, and will engage with the new Government to examine Forum will be an important mechanism to build that linkage.
mitigation measures and contingency planning. Over Towards this end, the Bank Group will focus on the following
the longer term, with an improved global situation and areas:
lasting peace, higher growth performance is feasible. This
will require renewed consumer and business confidence 41. Agriculture and Irrigation: Inclusive growth will
and reductions in the costs of doing business. Actions are require raising agriculture productivity and expanding
needed on several fronts. The first is maintaining macro- off-farm employment. A centerpiece of the country’s
economic stability and increasing fiscal space for growth current strategy going forward is to transform the agriculture
and, second, improving the investment climate for private sector from subsistence based to commercial production as
sector-led growth through implementation of reforms that well as to reduce on-farm underemployment and increase
remove structural and regulatory constraints, enhance more productive off-farm employment. The current thinking
accountability, and increase policy predictability. However, is to encourage high value commodities and programs to
it should be stressed that a critical prerequisite for increased focus on market orientation and trade promotion. IDA did
private investment is an improvement in the law and order not have an active lending program in Nepal during the
situation in the country. On the fiscal front, on-going last ISN period, but is now re-engaging with the proposed
non-lending TA is focused on preparation of a Medium-Term Agriculture Commercialization and Trade Project. At the same
Expenditure Framework and the centrality of the budget time, there are opportunities in a variety of commodities
as an instrument of policy. This will be enhanced by a with potential for niche market exports (e.g., tea, ginger,
Public Expenditure Review (PER), with a focus on critical cardamom, specialty coffees, honey, non-timber products,
sectors, including health, education and roads (including horticulture, and off-season vegetables) which could be
maintenance). explored by IFC. While direct investment opportunities in
Nepalese agribusiness companies are limited due to size,
40. Cognizant of the ISN’s two year coverage, IDA and IFC will look to support agribusiness growth through two
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
DB Maharjan, ECS Media
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
INTERIM Strategy Note FoR NePAL | 49
THE BANK GROUP INTERIM STRATEGY
distinct investment strategies. As a means to increase for current levels of low economic development. This
the financing flows, it will consider wholesale financing has happened across the board — in power, roads,
relationships with local commercial banks to increase other transport and telecommunications. Improving and
lending. In addition, IFC will invest in funds focused on expanding access is important to reducing the cost of doing
agribusiness. It has recently invested in two funds, India business, enhancing productivity, and improving access to
Agri Fund which supports agribusiness and investments markets and information. Investment in infrastructure is
in the South Asia region, and IFC SME Ventures, a global one of the areas in which the synergies between IFC and
initiative which can provide direct financing as well as IDA are particularly strong. IFC would need to have a solid
advisory assistance to small agribusiness players in Nepal policy framework in place before it could support PPPs,
for which IFC direct financing may not be available. IFC’s and thus IFC’s operations would be determined based on
agribusiness advisory services can complement the work progress in establishing a PPP policy which would benefit
done by IDA and other donors via investment climate and from non-lending TA and advice from IDA. Synergies are
business enabling environment work. IFC will also explore also evident in planning for the long term. IDA could help
support to IDA’s agriculture commercialization project with finance feasibility studies and project preparation and
technical assistance and investments through the IFC SME studies to develop financially viable infrastructure projects,
Venture Fund. For IDA, this entails possible investment and IFC, where feasible, could provide long-term limited
in programs that improve access to agricultural inputs — recourse financing to credible private sector sponsors and/
including expansion of irrigation coverage, extension and or transaction advisory services to government to expand
knowledge, and access to market towns. The two past the private sector’s role in infrastructure. Key sectors
coalition governments have asked for support to address where such support may be targeted include power, roads,
the wide gap in uptake of improved technologies by renewable energy, information technology, airports and
farmers required to raise productivity, and this is expected airlines.
to remain a priority. IDA will provide analytical support
within a broader policy engagement as part of a non- 43. The negative impact of years of under-investment
lending Revitalizing Agriculture TA. These interventions is perhaps most highly visible in the power sector with
and associated policy dialogue with the GON and donors load shedding of up to 16 hours per day in the winter of
could lead to a programmatic and coordinated support to 2008/2009. Twin actions are anticipated. First, on the
the sector, possibly through a sector wide approach, down supply side, in order to support the GON’s policy to jumpstart
the road. To date, IDA’s focus in irrigation has been mostly investment in power, IDA will continue to strengthen the
on rehabilitation of farmer-managed irrigation schemes achievements of the on-going power sector portfolio through
in the hills and the Tarai. The ISN proposes to continue investments in transmission, generation rehabilitation and
the existing irrigation operation and also help to develop distribution strengthening. In the short term, emergency
medium irrigation systems through a proposed Small and additional financing is proposed for the Power Development
Medium Sized Irrigation Project. However, this is contingent Project. The longer-term agenda, in which both IDA and
upon improved performance of the ongoing small-scale IFC will play a role, includes new medium-sized hydro-power
irrigation project. generation and associated transmission capacity to connect
Nepal to its neighbors for export of power. IDA would
42. Infrastructure and Connectivity: Years of under- likely keep its support to mid-size or smaller investments
investment in infrastructure are partly responsible under the proposed Mid-Sized Power Generation Project if
INTERIM Strategy Note FoR NePAL | 50
appropriate projects can be developed. IDA also initiated 45. Constraints to connectivity and movement of people,
an ESMAP-funded AAA on Removing Barriers in Hydropower. goods and services have been identified as root causes of
Given the extreme shortage of power in Nepal, IFC’s foremost conflict and low growth. Given its mountainous geography
strategic priority is to support hydropower development, and land-linked position, transportation and communications
mainly hydropower generation across a range of project are vital sectors for Nepal. At present, Nepal has some of
sizes. IFC’s support for large hydro-projects, likely to the highest costs of trade reflecting both poor connectivity
come up for financing only at the end of the ISN period, and the lack of functioning trade agreements with its
will be dependent on progress in establishing cross-border neighbors. Removing barriers (e.g. restrictions on trucks,
transmission lines to export power from Nepal to India customs procedures) and improving infrastructure would do
and other neighboring countries. In the near term, IFC much to increase trade and investment. Exports currently
will consider financing expansions of existing hydropower only account for 7 percent of GDP and Nepal has a low
projects, which may be the fastest available response to the density of road system (less than 100 km of road per
power crisis. It is also studying early-stage opportunities 1000 square km of land area, as against almost 1600 km
where IFC could partner with the private sector and finance in Bangladesh). The roads sector, one of the consistent
project preparation and studies to develop viable projects. priorities of public policy over time, is an area in which IDA
The downside risk will come from the private sector’s lack of and IFC can collaborate. This might be the case of strategic
confidence in National Electricity Authority’s (NEA) capacity roads, for example, depending on the evolution of PPPs. The
to deliver on PPAs and a possibly difficult political situation road sector presents challenges: while there is much to do
that deters private investment. in this sector, there are substantial risks. These are being
addressed through close attention to sector governance,
44. On the demand side, IDA is providing ESMAP-funded including an on-going Road Construction Sector Analysis
TA to the NEA to identify and assess opportunities to Note which will inform planned risk mitigation measures
improve efficiency and quality of service, reduce peak to ensure the quality of the current and future roads
capacity deficits, and reduce costs of power supply through portfolio. This should also provide a base for expanding
implementation of demand side management measures. IDA investment in strategic roads under the proposed
Just-in-time advisory support is also being provided to help Roads Sector Development Additional Financing, which
design and launch the NEA 2009 Compact Florescent Lights would facilitate road links to district headquarters and
(CFL) Distribution Program which will ultimately target serve as trunk routes for planned districts roads expansion
installation of 450,000 of these lights for evening peak load to link rural markets to production centers. This, plus an
reduction. In turn, IFC is likely to pursue opportunities with assessment done through the peace filter mechanism, should
the private sector on energy efficiency, including an advisory also provide a basis for undertaking the proposed Rural
project with local banks on Sustainable Energy Finance, and Access Improvement and Decentralization Project Additional
a possible Risk Sharing Facility with local banks to boost Financing.
energy-efficiency lending. The objective of the proposed
Advisory Services project is to improve the financial 46. Assistance for emerging towns requires further dialogue
performance of Nepalese industry by reducing energy costs to elaborate what this would entail beyond marketing and
and, at the same time, reduce emissions of greenhouse transportation links. This will be done under the Emerging
gases. Towns Programmatic AAA, which will inform a possible
INTERIM Strategy Note FoR NePAL | 51
THE BANK GROUP INTERIM STRATEGY
Emerging Towns Project. In other areas of connectivity, to expand banking into underserved rural areas; and (iv)
IFC has recently financed a domestic airline which helps enhancing regional integration (trade finance facilities for
improve regional connectivity within Nepal, and could local banks). IFC’s potential investment in an infrastructure
expand its participation in the air transport sector through related financing institution would not probably materialize
advisory support to the GON on building airports outside as strategic foreign investors refrain from investing during
of Kathmandu and in supporting private airlines going into the continuing global downturn. On the advisory side,
India. IDA would not likely engage in this area. In the IFC’s Small Enterprise Development Facility (SEDF) will
area of telecommunications, we do not anticipate expanding complement investment projects where feasible and continue
direct IDA support beyond the closing Telecommunications to work with partner banks on credit review strategies for
Project which helped strengthen government regulatory SME lending. Finally, within the framework of building
capacity, spectrum management and rural telephony. regulatory reform mechanisms, SEDF is working to build
However, an ongoing trust-funded Information Infrastructure capacity of stakeholders to address micro-regulatory and
for Growth AAA would continue policy engagement, which modernization issues.
might be built on under possible DPCs.
48. Private sector-led employment. Peace is not
47. Expanding Access to Finance. Access to financial sustainable nor can the economy reach its potential if jobs
services remains limited for most people and small are not created within domestic borders. Private sector
businesses in Nepal, even though the banking system and development is critical for generating off-farm employment.
credit have expanded rapidly in recent years. Under the While recent figures are not available, as of 2003-04, Nepal
ISN, IFC will take the lead to enhance access to finance was characterized by moderate (low) unemployment rates in
and increase financial inclusion, with IDA concentrating urban (rural) areas, but by worryingly high underemployment
its efforts on the continuation of central bank reform and in rural areas (of around 20 percent) and among women in
related regulatory issues of banking supervision under the urban areas. Some 500,000 youth enter the labor force each
ongoing Financial Sector TA project. IFC’s program will year with low education completion rates, on the one hand,
explore potential investment and advisory services for the and few places open for them to continue their education
following: (i) institution building (supporting strong, well at a higher level, on the other. While migration has been
managed SME-oriented commercial banks, infrastructure an outlet for some 3-4 million Nepalis and a major source of
related institutions, microfinance sector); (ii) developing income, that door could close as the effects of the current
financial infrastructure (supporting modernization of a global economic crisis cause the receiving countries to
credit information bureau, a secured transaction registry, shed labor. These conditions only heighten the importance
and — depending on demand from the new Government of harnessing the energies of the private sector to create
— helping to develop payment and clearing systems, a well-paying jobs in the country. IFC’s contribution to
rating agency, and a central depository and automated private sector growth comes through three channels: (i)
clearing in capital markets). IFC’s immediate impact direct investments across agriculture, manufacturing and
would come from working with the credit bureau and the services; (ii) working with the Bank to highlight constraints
secured transaction registry that will be lodged within the to private sector investment (both domestic and external);
same unit, i.e., the Credit Information Bureau; (iii) using and (iii) improving the investment climate. Based on the
technology and a Small and Medium Enterprise Survey joint IDA-IFC Investment Climate Assessment (ICA), IFC will
INTERIM Strategy Note FoR NePAL | 52
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.
Kiran Gautam, World Bank
INTERIM Strategy Note FoR NePAL | 53
THE BANK GROUP INTERIM STRATEGY
work with the Bank to engage the GON in advancing reforms and its institutional capacity and information systems for
to streamline regulations for business entry, operation and water management are weak. At this stage, we anticipate
exit, rationalizing inspections and certification regimes, continuing to work in irrigation, micro-hydro and rural water
accreditation for export markets, and simplifying the tax supply. Nepal will also benefit from the recently initiated
regime. IFC’s Investment Climate Reform Project (ICRP) regional work on interconnectedness of water resources.
which has started work with the Ministry of Industry on the Under the South Asia Water Initiative (SAWI), Nepal will
Special Economic Zone (SEZ) regime is planning to engage receive support to strengthen its national capacity for
the GON on regulatory reform under the Business Advisory water management, deepen understanding of Nepal’s role
Forum in 2009. The implementation of some reforms in in regional water dynamics, and explore opportunities for
the near term, such as enactment of a reformed Special water infrastructure investments in a trans-boundary basin
Economic Zone Law, could have a significant impact on context. An important product is the hydro-economic
attracting FDI and generating employment. In turn, IDA modeling of the Ganges River, which will be done for the first
will concentrate on the macro-framework, understanding the time. This can help to lay the basis for further support down
sources of growth and the dynamics and options through the line, together with the Water Resources and Climate
an ongoing Migration and Remittances Programmatic Change AAA already initiated. Given the short timeframe
AAA. It will also engage in a Jobs and Skills Development of the ISN, and the uncertainties of the transition and the
Programmatic AAA and continue work on education. Beyond potential impacts of the global crisis, during the ISN period
that, the Adolescent Girls’ Employment (AGE) Initiative will activities will be launched to identify and establish the
support a program to enhance school-to-work transition for pre-conditions for a large-scale water infrastructure project.
young women. The pilot is expected to provide an entry The activities will include technical assistance to help the
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
Rabindra Prajapati, ECS Media
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,
INTERIM Strategy Note FoR NePAL | 54
Government update their river basin master plans so that and prevailing economic conditions are the determining factors
potential projects can be considered within a broader basin on when and how this sector could take off. The GON aims
context, and to improve the framework for resettlement and to double tourism arrivals in the next two to three years,
benefit-sharing. particularly focusing on religious and regional markets, and to
see tourism revenues shared more equitably, with an emphasis
50. In addition, enhanced focus is needed on the on sustainability and eco-tourism. But the present global
environment and climate change. Climate change is downturn could dampen demand especially from non-regional
likely to intensify the extreme hydrological variability and visitors. Moreover, tourism in Nepal suffers from the absence
monsoons which deliver about 80 percent of the annual of a strategy, poor infrastructure and logistics, and a need
country’s rainfall in just three months. Devastating floods to strengthen spillovers to the rural poor. At this stage, the
routinely affect large, very poor populations (as seen in the main contribution by IDA and IFC would be by addressing
Koshi floods of 2008), with extreme low-flows felt across some of the overall constraints to private sector development,
the Ganges basin into Bangladesh. Nepal has been selected in collaboration with DFID, which has been asked by the
as one of the countries for the Pilot Program for Climate Government to take the lead. For IDA, one of the specific links
Resilience (PPCR) under the Climate Investment Fund (CIF). to tourism is the proposed work on environmental sustainability
PPCR funding will help to address strategically some of the and conservation. The Bank will support the GON’s application
above-mentioned climate-related issues. In addition, IDA for a GEF grant to strengthen protected area management,
will pursue dialogue on issues of environment and climate particularly for tiger habitats in a landscape approach. IFC
change, including building on the findings of the Country will also provide TA to support a program to implement locally
Environment Analysis (CEA) in areas such as the current operated tourism portals for Nepal which will increase the share
dialogue on environment monitoring. The CEA follow-up of booking revenue to local hotels. The program expects to
is expected to focus on strategic environment and social include 50 Nepali hotels once it is operational.
assessment of the hydropower sector and on solid waste
management in smaller towns. In addition, IDA would focus Pillar 3: Enhancing equitable access to services and
on avoided deforestation which would be financed under the social inclusion
Forestry Carbon Partnership Facility. Helping the country deal
with disasters — such as floods, but also earthquakes — is 52. Growth alone is insufficient if Nepal is to realize
part of the Bank’s continuing non-lending TA for disaster and its goal of building a society which offers opportunities
emergency management. IDA, in collaboration with the Global and inclusion for all its citizens. Moreover, given the
Fund for Disaster Risk Reduction (GFDRR), will also explore the vulnerabilities of the Nepalese economy to the global
possibility of project support to reduce disaster risks. economic downturn and the continuing risks of set-backs
in the peace process, it is doubly important for there to be
51. Tourism sector: Among Nepal’s sources of growth and strong social services and livelihood opportunities, especially
employment, tourism is both a historically important sector for the poor. Supporting equitable access to basic social
and one the country is aiming to expand. Tourism accounts services and livelihood opportunities and efforts to promote
for about 8 percent of foreign exchange earnings and 2008 was social inclusion and sustainable social protection programs
one of the best years in recent times in terms of the number are thus key elements of the strategy. The promotion of
of arrivals. The potential is there for expansion but, like many basic service access and inclusion is also closely linked to
private sector-led endeavors, the overall investment climate the country’s peace-building agenda, with improved services
INTERIM Strategy Note FoR NePAL | 55
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 | 56
Hari Maharjan, ECS Media
INTERIM Strategy Note FoR NePAL | 57
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
Rabindra Prajapati, ECS Media
INTERIM Strategy Note FoR NePAL | 58
providing the tangible benefits of peace, particularly for communities in service delivery. The role of communities
the rural poor, and to the needed response to an economic has proven to be remarkably robust throughout the
downturn should that happen. Past outcomes and the conflict. One of the important issues in the decentralization
GON’s priority on inclusive development and human capital discussions in the Constituent Assembly is how to sustain
suggest a strong continued role for the Bank in this area. the benefits of community involvement as formal local
Coordinated efforts with DFID on addressing social inclusion administrative structures are created and/or assume new
and increased efforts through trust funds to address social roles. It is felt that the Bank has useful experience to offer
accountability in our projects is part of this approach. in terms of sustaining the strengths of community service
delivery and “bottom up” accountability. In the ISN period,
53. This pillar proposes to strengthen core diagnostics engagement through community-based operations and
and continue programs in sectors where we are already dialogue is likely to be an important vehicle for contributing
engaged (education, health, rural water, micro-hydro to the debates on the appropriate roles of communities and
and poverty alleviation through community driven the state. In this light, the community focus of the current
development efforts). In addition, analytical work on social and proposed portfolio is not only about service delivery but
protection will be pursued. In terms of empowerment of also about the emerging governance structure of the country
communities and vulnerable groups, we propose to continue and the compact between the state and its citizens. There
the ongoing Poverty Alleviation Fund Project (PAF II) which is, thus, a close linkage between the agenda under Pillar
promotes grassroots livelihood and community infrastructure, Three and the broader governance and state-building support
as well as engagement by local level institutions and bottom- under Pillar One.
up accountability. The PAF is now sharing information so
that its projects are incorporated into district development 55. Poverty diagnostics and monitoring: While progress
plans and many of the sub-projects are co-financed by local on poverty to 2003-04 was impressive, it is vital to obtain
governments. Early results from the impact evaluation indicate an up-to-date insight on living standards, particularly in
that PAF is having a positive income effect on households and light of the global crisis. The next round of the household
communities. Increased engagement with local governments survey is overdue and the ISN proposes to support a new
and building their capacity for service delivery would be Nepal Living Standards Survey (NLSS), and to follow with an
important elements of the ongoing involvement through this updated Poverty Assessment. This is however contingent on
program. These activities would need to be coordinated with receiving donor co-financing to fund the survey. In addition
and complementary to the local governance and community to new data, this will continue the capacity enhancement of
development program. IFC is also exploring further support the National Bureau of Statistics which was initiated with
for livelihood activities among the poor through helping the previous survey. Further progress on poverty monitoring
commercial and microfinance banks develop their SME/rural systems that capture dimensions of exclusion and gender
lending strategies. The final element of the basic services biases could be supported as part of the potential DPC
theme is deepening of the rural water program and continued series, and the team will also remain aware of needs for
involvement in the micro-hydro sector and alternative energy more rapid updates as the global crisis evolves.
sources, as discussed below.
56. Education: Despite the conflict, Nepal has undertaken
54. A common element across several of the areas significant reforms in the education sector which have
of engagement in this pillar is a strong role for yielded some impressive results in areas such as primary
INTERIM Strategy Note FoR NePAL | 59
THE BANK GROUP INTERIM STRATEGY
enrollment and gender parity (see Table 2). These reforms 40 percent). Different dimensions of women’s health,
include: (a) the transfer of public schools to community access to reproductive and family planning services, and
management; (b) government financing for unaided maternal services, along with HIV/AIDS, malaria and non-
community schools; (c) introduction of per capita financing communicable diseases, are also lagging. Specific targeted
of schools; (d) opening of textbook printing and distribution interventions continue to be needed to address rapid disease
to the private sector; (e) decentralizing higher education, outbreaks. An example is IDA’s support under the on-going
along with introducing formula-based funding and cost Avian Flu Project which is addressing both animal and
sharing; and (f) government financing for community human health components.
campuses. A number of these reforms have been supported
by a range of donors, including IDA, under the Second 58. In collaboration with a broad range of partners, the
Higher Education Project and Education for All (EFA) SWAp. Ministry of Health has recently initiated the preparation
Assuming these reforms are maintained, the proposed School of its next sector strategy. Emphasizing inclusion and
Sector Reform SWAp operation would extend reforms to equity, the government is expected to put renewed efforts
cover the whole school sector and universal education to into decentralization, human resource management,
grade 8, with a focus on quality, accreditation and means- interaction of the public, private and community sectors in
based financial assistance to students. The team also health service delivery and governance. While maintaining
proposes that education be included in the proposed Public a strong focus on maternal and child health, it seeks
Expenditure Review as well as trust fund-financed analytical to address the health challenges noted above. The ISN
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
Rabindra Prajapati, ECS Media
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
INTERIM Strategy Note FoR NePAL | 60
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.
DB Maharjan, ECS Media
INTERIM Strategy Note FoR NePAL | 61
THE BANK GROUP INTERIM STRATEGY
proposes to continue to support these efforts through a new 60. Rural Water Supply and Sanitation: Expanding
Health Sector SWAp and to engage in elements of the health safe water and sanitation in rural areas will be crucial to
agenda such as HIV/AIDS. Analytical work in the areas of improving the living standards of the poor. The Government
non-communicable diseases and health sector governance is estimates water supply coverage at about 77 percent and
also proposed to underpin this dialogue. sanitation coverage at 46 percent. Its goal is to raise those
levels over the coming years. However, 10 percent of
59. Social Protection: Nepal does not have a robust existing schemes reportedly need rehabilitation and more
safety net for the vast majority, beyond traditional informal than half need major repairs. The traditional approach to
structures. The social protection system in Nepal is service delivery, particularly in rural areas, was top-down
characterized by fragmented interventions across different and contractor-led. Community involvement was minimal
ministries and between the public and donor sectors. At and users had no ownership over the system, paying little
the same time, enhanced emphasis has been placed on if anything towards operation and maintenance. Therefore,
transfer programs to promote equity and protect the most under the ongoing Rural Water and Sanitation project, an
vulnerable. Such programs are likely to be even more inclusive community driven approach has been adopted, to
important as the impacts of the global crisis are felt in encourage more robust service delivery with an emphasis
Nepal. National counterparts have identified the following on accountability. Results show that community ownership
potential areas that could benefit from technical and is yielding more sustainable water supply and sanitation
diagnostic advisory services: the overall vision and strategy services, as they are operated and maintained by the
for the social protection system, support for implementation communities who play the lead role in their planning,
of the planned public pension reform, consolidation and design and implementation. In collaboration with DFID,
improvement of targeting systems (in social protection and UN, JICA, Finland and the ADB, we propose to support the
beyond), improving delivery of flagship safety net programs Government’s efforts to develop a framework for a rural
such as social allowances and public works, reforms of social water and sanitation SWAp during this ISN period.
care services, and building M&E systems and the evidence
base in the sector. IDA is responding to these needs 61. Micro-Hydro and other Energy Sources: Off-grid
through a Programmatic Social Protection AAA (building on rural modern energy and electrification programs have
earlier analytical work on pensions) and through the safety been making a slow but steady contribution to economic
net component of the Emergency Food Crisis Project. The and human development in rural Nepal. Considering the
team also proposes that social protection be a core element challenging operating environment of Nepal, this is a
of the policy framework for any budgetary support operations significant achievement. Demand for electricity in rural
during the ISN period and would be integrated within the Nepal will continue to be very high for years to come, and
AAA work on skills and employment. If well-designed, as part of the Bank’s wider energy sector engagement,
well-targeted and sustainable safety net programs are it is proposed to sustain the support to micro-hydro
identified, it might be possible to incorporate them within village electrification schemes through the ongoing power
an emergency response operation, in case such support operation and the PAF, with a strong role for the community
is required to address the negative impact of the global in the planning, implementation and operation of these
economic downturn. schemes. To complement these micro-hydro schemes, IDA
INTERIM Strategy Note FoR NePAL | 62
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.
Hari Maharjan, ECS Media
INTERIM Strategy Note FoR NePAL | 63
THE BANK GROUP INTERIM STRATEGY
will request support from the Global Partnership on Output the last few years; however, as the situation evolved,
Based Aid for the ongoing biogas program, which replaces IFC re-opened an office in Kathmandu in January 2008,
traditional sources of energy used by the rural populations with the objective of scaling up both investment and
with modern biogas plants delivering clean energy to meet advisory operations. An Infrastructure Advisory Team was
cooking and lighting needs. Finally, to learn more about also set up in New Delhi in 2007 to scale up provision of
how electrification affects rural families, we are carrying out infrastructure advisory services in the region, including
an ESMAP-financed AAA study on Social Impacts of Rural Nepal. Going forward, IFC expects to expand its exposure
Energy. in Nepal by potentially committing US$15-20 million on
average annually during the ISN, depending on political
(d) Proposed WBG Program and stability, the availability of viable investments and
Instruments improvements envisaged to the business climate. IFC’s
investment program will be accompanied by complementary
62. (a) IDA: In the near term, the Bank Group and technical assistance and advisory services in a range of areas
ADB are expected to be Nepal’s largest donors. Nepal’s including infrastructure, financial markets, improving the
IDA15 allocation for FY09-FY11 is SDR488.8 million (about business climate and capacity building. Most commitments
US$782 million) against the IDA14 allocation of SDR324 potentially will be in infrastructure (mainly hydropower) and
million. The ISN covers last two years of IDA15 (FY10-11) the financial sector. In addition, IFC will facilitate trade
with the overall indicative envelope of SDR332.3 million, by partnering with Nepalese banks under its Global Trade
with the average annual allocation of about SDR166 million. Finance Program (GTFP) and support projects that have a
FY10-11 allocations are indicative only and actual annual positive foreign exchange impact in sectors such as tourism,
allocations will depend on: (i) total IDA resources available, airlines and agri-business exports.
(ii) the country’s performance rating; (iii) the performance
and assistance terms of other IDA borrowers; (iv) the terms 64. (c) Potential impact of the global economic crisis:
of IDA’s assistance to Nepal (grants or credits); and (v) the The previous sections outline how the Bank Group would
number of IDA-eligible countries. 16
Nepal’s performance has proceed if the global economic crisis does not have
recently been upgraded from “red” to “yellow” on account of acute impacts on Nepal. Four to five new operations per
its improved debt sustainability position. This has allowed year for IDA would be prepared, with one or two potential
for an increase in total resources for Nepal but also altered investments per year expected for IFC. The program would
the terms under IDA15 to 55 percent credit and 45 percent be paced, taking into account the demands of the current
grant (as against 100 percent IDA grant in FY08), but this transition on all actors, the step-by-step approach on the
can change if the debt sustainability position changes. governance front, the investment climate and the fragilities
of the peace process. For IDA, that would entail mainly
63. (b) IFC: IFC’s committed exposure in Nepal is the extension of existing programs in health, education,
US$37.5 million as of February 2009 in six projects power and rural roads, often with the CDD focus that has
and US$7.2 million for the account of participants. proven robust under conflict (Annex B3). There would be
Infrastructure, mainly power generation and one airline an increased emphasis on agriculture and new areas, such
investment, accounts for 84 percent of the portfolio. as emerging towns, would proceed on a programmatic
Because of the conflict, IFC was not active in Nepal over basis. The proposed series of DPCs that would address
INTERIM Strategy Note FoR NePAL | 64
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
Rabindra Prajapati, ECS Media
INTERIM Strategy Note FoR NePAL | 65
THE BANK GROUP INTERIM STRATEGY
critical policy constraints would only proceed if the triggers support through senior loans and trade facilitation support
for such lending are met. However, given that this is a via the GTFP. IFC would also explore utilization of its global
transition period in which a new government has still to be crisis response initiatives such as the Bank Recapitalization
formed, we need to adopt a flexible approach to respond to Fund.
opportunities and retreat when constraints inhibit effective
engagement. 67. (d) Range of Instruments: The proposed strategy
will be supported by a range of instruments for
65. If, instead, the impacts of the global economic engagement under both scenarios. Both IFC and IDA will
crisis on Nepal are more acute and/or sustained, an employ a combination of financing and technical, analytical
alternative approach would reconfigure the IDA program and advisory services. For IDA, lending will continue to
to emphasize quick, targeted actions that could help be predominantly in the form of Sector Investment Loans
the poor and vulnerable and preserve or create jobs to (SILs). Some of this investment lending would be based on
cushion the effects of the crisis. Such an emergency sector-wide approaches (SWAps) in sectors where donors and
response would front load the program. It would retain the the Government agree on the policy and results framework
emphasis on health and education which are vital and would and how to work together collaboratively. In some cases,
accelerate already planned programs and/or expand ongoing there may be pooled resources, combined with IDA fiduciary
programs to alleviate poverty and stimulate job creation. oversight. In other sectors, development partners may
This would be the case of support for labor intensive agree on common management arrangements that rely on
programs such as rural roads and the PAF project. Another enhanced fiduciary support such as use of procurement
jobs-related program could be modeled after the Emergency agents. In line with the Bank’s commitment to increase
Food Support operation which has been working successfully. harmonization and improve aid effectiveness, we would like
Under this scenario, the IDA would consider emergency to see SWAps play an increased role in the Nepal program.
budget support, with a focus on the areas that have already Moving forward, we expect to work with the Government
been identified as potential reform candidates as part of and donors to define SWAp frameworks in rural water and
DPCs (see para. 68). The acute economic crisis scenario sanitation and for rural roads and trail bridges, in addition
would have to be considered in light of other risks, including to the existing ones for health and education. To ensure
that of a deteriorating political situation (see para. 85). that our engagement in program-based approaches is well
informed by analysis of sectoral risks, we propose to carry
66. Under such a crisis scenario, IFC would also out sector risk assessments with GPF funding for the health
reconfigure its approach. If the situation deteriorates, IFC sector, and possibly education, as well as for all future
would focus more on advisory services. If Nepal’s corporate sectors in which SWAps are to be adopted. IDA will closely
sector were unable to raise both domestic and international monitor performance of SWAps under the ISN, including
financing, IFC could step up its program of assistance, first difficulties with procurement or reversal of reforms which
by focusing on the provision of liquidity and long-term could endanger use of the pooling mechanism.
financing to its few existing strong and well-managed clients
on an “as-needed” basis. Second, IFC’s SME Venture Fund, 68. Based on GON’s request for budgetary support,
designed for quick disbursement, could increase its share a series of programmatic Development Policy Credits
for Nepal to mitigate the reduced flow of credit and advice (DPCs) may form part of the IDA program. Reform triggers
to SMEs. Finally, IFC could also provide short term liquidity for budgetary support include a stable macro/medium-term
INTERIM Strategy Note FoR NePAL | 66
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.
Hari Maharjan, ECS Media
INTERIM Strategy Note FoR NePAL | 67
THE BANK GROUP INTERIM STRATEGY
fiscal framework and a clear development strategy. Any DPCs and depth of the analysis for particular audiences. We have
would be single tranche operations, supporting completed moved towards this approach in FY09 and will continue it
policy actions. So far, we have identified the following as during the ISN period. As the new Government articulates its
possible areas for reforms to be addressed within a DPC development vision, we expect substantial opportunities for
series: (i) deepening implementation of the PSM agenda non-lending technical assistance.
with a focus on budget reforms, auditing and accounting
systems, accountability and other dimensions of PFM; (ii) 70. The indicative non-lending program for IDA
adopting and implementing a social protection strategy, presented in Annex B4 emphasizes areas which underpin
including areas relating to pension reform, targeting the wider program and/or provide diagnostics building
mechanisms and M&E; (iii) continuing the strengthening blocks for the next programming cycle. The listed program
of banking sector regulations and compliance, secured is the “core” AAA program of tasks which are either ongoing
transactions, collateral registries, etc.; (iv) enhancing or core mandates and needs of the wider program that would
private sector development and improving the investment be financed by the Bank’s administrative budget. The NLSS
climate, including telecommunications regulation, spectrum requires substantial trust fund resources to complete. In
management, ICT, hydro-power licensing procedures, addition, the team will mobilize trust funds for areas such
other aspects of PPPs, etc.; and (v) improving overall as analysis of education reforms, the health sector, disaster
fiscal and macro-management, with particular emphasis risk management (under the GFDRR), the PPCR (the first
on effectiveness of public spending on areas such as road ‘adaptation pilot’ of the Climate Investment Funds), and
maintenance and the social sectors, as informed by the PER. other areas. A number of additional AAA tasks are either
These potential initiatives will require prior policy dialogue, ongoing or proposed, but are funded entirely from trust
advice and AAA. funds and hence do not appear in this core list of AAA.
69. Continuing our analytical engagement is an essential 71. The IFC program in Nepal will seek to design and
part of the proposed program, but during the ISN implement coordinated programs (rather than projects)
consultations, national counterparts raised concerns about particularly in environmentally friendly “green” infrastructure,
the timeliness and utility of past non-lending assistance. financial sector, agribusiness, climate change and business
They expressed limited appetite for “big” Bank reports. At enabling environment (Annex B4). This is aligned with the
the same time, the client and other partners clearly value the three strategic pillars of IFC’s regional South Asia Strategy
rigor and scope of the Bank’s analytical work. The consensus which include: (a) improving economic inclusion through
is to undertake more programmatic AAA which incorporates increasing private sector investment in labor-intensive
a “just-in-time” response to client needs. This entails: (i) and export-oriented industries, bridging the infrastructure
initially scoping out the task and defining a range of issues gap, improving access to finance for the underserved and
that the GON and we agree are important; (ii) carrying out accelerating rural growth; (b) addressing climate change
the analytical work in such a way that intermediate products, through renewable energy investments and projects which
including workshops, are produced as the work proceeds; focus on clean energy; and (c) supporting regional integration
(iii) interacting with the client on a regular basis during the through intra-regional trade facilitation and investment.
course of the work; and (iv) packaging the intermediate and
final products into focused, accessible presentations and 72. Like IDA, IFC will support the pillars of the proposed
workshops for policy makers, while preserving the full extent strategy through a mix of investment and advisory
INTERIM Strategy Note FoR NePAL | 68
services. IFC’s investment services currently include US indicators under the IDA Results Measurement System.18
dollar loans, trade finance lines, and minority equity stake We will continue to monitor Nepal’s relative standing
in companies. IFC will continue to provide long-term and in global surveys such as “Doing Business” and WBI’s
counter-cyclical financing for companies that are unable to Governance Indicators. Project by project, we will endeavor
access financing on appropriate terms. IFC’s additionality to enhance tracking and reporting with increased attention
in Nepal comes through providing longer tenor than that to inclusion and job creation, to the extent that underlying
available in the market, patient equity capital, global data permits, as part of the application of the peace filter
and regional expertise and experience, and TA to enhance to new operations. The goal is to build the evidence base
areas such as corporate governance and management of and capacity for M&E more systematically for both Bank
environmental and social risks. IFC will continue to respond operations and country-wide indicators.
to client needs through initiatives such as IFC SME Ventures,
Infraventures, and transaction advice, as well as to crisis 75. (f) Portfolio Management: IDA’s Nepal portfolio
situations through the Bank Recapitalization Fund. Local has faced challenges, but efforts are ongoing to enhance
currency debt financing is essential for companies and portfolio quality. As of May 2009, the Nepal portfolio
sectors that generate local currency revenues. However, as consists of 16 active IDA operations and seven recipient-
of now IFC does not have a local currency product, which executed trust funds with net commitments of US$803.3
could pose a constraint in providing financing for large scale million and US$29.9 million, respectively. The undisbursed
infrastructure hydro-projects with revenues in local currency. IDA balance totals US$468.7 million, while US$21.2
million remains to be disbursed from the trust funds. In
73. (e) Monitoring Performance and Results: Although terms of portfolio quality, four projects are considered at
a formal results framework is not necessarily part of an risk, reflecting overall country conditions and weak FM
ISN, we have prepared a partial framework that reflects
17
and procurement performance. These four projects have a
Nepal’s circumstances. This framework anticipates modest combined commitment of US$198.6 million, representing
results, as the country is undergoing a major transformation 25 percent of total net IDA commitments. Over the past
of its constitution, political structures and governmental year, the Government and the Bank have initiated efforts to
institutions. With only a two-year timeframe, the results rectify project performance, including project restructurings.
matrix (Annex B9) focuses on key actions, processes and At present, only one project — the Irrigation and Water
intermediate outputs. Only in areas with mature programs, Resource Management Project — is rated unsatisfactory
such as education, health, rural water supply and sanitation, with respect to implementation and none is rated as
and rural roads, are we able to include outcome indicators. unsatisfactory on development objectives. Nevertheless,
Reflecting the substantial risks facing the Nepal program, more than half the portfolio is rated as moderately
we have taken those risks into account in the results matrix, satisfactory on implementation progress, highlighting the
providing an assessment of the likelihood of the milestones need for intensive follow up and support. Moreover, the
and outcomes being realized. uncertainties of the transition, combined with generally
low institutional capacity, weak systems of governance and
74. We will also track progress by the country in meeting accountability, Nepal’s geography, and its diverse socio-
its challenges. This includes the monitoring of Nepal’s cultural setting, all make implementation challenging.
progress towards meeting the MDGs, as well as tracking Physical security remains a concern in certain areas.
INTERIM Strategy Note FoR NePAL | 69
THE BANK GROUP INTERIM STRATEGY
Continued monitoring of the portfolio via the peace filter is commitments to gain greater clarity on planned donor
intended to keep a watch on such concerns. support by sector over the next three years (Appendix II).
To deepen this process, MOF launched a comprehensive
76. Building on the pilot exercise carried out for mapping exercise at the project level which is expected to
the India program, Nepal has recently undertaken a be completed shortly. This will be used to identify gaps,
comprehensive assessment of risks, including those duplications, and opportunities for consolidation, with the
relating to GAC (see Appendix III for details). This goal of improving aid effectiveness.
assessment revealed that the portfolio faces substantial risks
even though risks have been reduced by the judicious choice 78. The challenge for donors is to support the
of project instrument and design in the on-going portfolio. government to manage the transition from scattered
Two-thirds of active projects are CDD, are implemented with donor projects and programs outside government, to
community involvement, and/or already incorporate demand harmonized delivery through government. In 2009, the
side accountability mechanisms. On the other hand, four Ministry of Finance began to meet with donors periodically
projects are considered as high risk from a GAC perspective. to share information and promote coordination. In addition,
Of these four, the Telecommunications Sector Reform the donors meet frequently to exchange information and to
Project is to close soon; the risks of the Emergency Peace agree on joint approaches. The Utstein group, composed
Support Project were exhaustively analyzed and mitigation of bilateral donors, meets regularly and the World Bank
measures put in place as part of project design when it was and ADB participate as observers. At the operational level,
approved one year ago; and the Financial Sector TA Project coordination efforts are being consolidated and expanded,
is now closely supervised from the field. This leaves the and some progress has been made towards targets set out in
last high risk project, the Rural Access Improvement and the Paris Declaration and on Fragile States principles. In late
Decentralization Project (rural roads). A review of risks 2008, the World Bank, DFID, ADB, and JICA conducted the
and mitigation measures is presently underway. 19
Support fourth joint portfolio review with the GON and agreed on an
from the GPF will be used to reinforce mitigation measures action plan to improve performance. Harmonization efforts
in several on-going projects, with additional support for are most advanced in sectors which have operationalized
strengthening demand side social accountability mechanisms SWAps (such as the health and education sectors). Efforts
anticipated from other trust funds. are underway to replicate these examples in other areas,
with potential SWAps for rural roads, rural water supply and
77. (g) Aid Management and Donor Harmonization: sanitation, and possibly in agriculture.
Thirty eight donors are active in Nepal. In addition to
the Asian Development Bank, a number of development 79. IDA’s Nepal country team is closely coordinating
partners plan to support substantial programs in Nepal, with with the IMF team. The Fund approved a three-year Poverty
the largest being DFID, the European Commission, Japan, Reduction and Growth Facility (PRGF) arrangement in
Norway, the United States, Germany, and Denmark. India November 2003, amounting to SDR49.9 million (70 percent
provides substantial aid, including in-kind, and China is also of quota), and its last review was completed in November
an important development partner. Reliable and comparable 2007. The Government broadly met the arrangement’s
data on external assistance have been difficult to compile, quantitative criteria under a difficult conflict situation, but
as much aid is provided off-budget. In early 2009, the implementation of structural reforms has been slow. The
Ministry of Finance updated information on existing donor Government may consider a successor PRGF arrangement with
INTERIM Strategy Note FoR NePAL | 70
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.
the Fund, and a mission is expected to discuss preparation on the use of radio, which is the medium of choice for most
of the FY09/10 budget. Nepalis. In addition, a client survey will be completed in
late FY09 to inform implementation of the ISN. Respondents
80. (h) Communications and outreach: As part of include representative samples from government, project
implementing the ISN, the Bank will expand its outreach beneficiaries, civil society, private sector and media. Focus
to civil society groups and strengthen its public groups are being organized to discuss how best to use the
information services beyond Kathmandu. In addition to findings of the survey.
the Bank’s Public Information Center (PIC) in Kathmandu,
we hope to establish two satellite PICs in partnership with 82. (i) The Decentralized Kathmandu Office: The Bank
universities in Pokhara and Biratnagar. The PIC program Group’s presence in Nepal has been substantially
will be retooled to strengthen dialogue and outreach. PIC increased since the end of conflict. The IFC re-opened
products will be redesigned to meet the needs of non- its office, co-located with the Bank, in 2008 which
English language speakers. The PIC in Kathmandu is the has facilitated the interaction and collaboration of the
local affiliate of the Global Development Learning Network two teams. Moreover, there has been an increase in
and its activities will be tailored to contribute to the internationally recruited staff based in Kathmandu which is
knowledge agenda of the Bank and development partners. becoming a de-facto operational base for staff working on
neighboring countries that have restrictions on staff travel
81. Communications will be integrated into Bank and presence due to security concerns. One of the lessons
projects, analytical work and knowledge management. of working in post-conflict countries is that the Bank tended
The External Affairs unit will work proactively with project to have insufficient numbers of staff on the ground. This had
teams to design communications components and to been the case in Nepal: there was no international staff,
strengthen capacity towards ensuring compliance with other than the Country Director, since early 2004. During
Nepal’s Right to Information Law. Emphasis will be placed 2008, eight joined and all Country Sector Coordinators are
INTERIM Strategy Note FoR NePAL | 71
field-based. The impacts on the timeliness and diversity of 84. The proposed Nepal program has been designed
policy engagement have been noted by the GON and other to take those risks into account and to enhance risk
development partners in a number of cases. The delivery management through a number of dimensions:
of two emergency operations and preparation of a third • Selectivity in the program is informed by a comprehen-
in the past 12 months are also testament to the positive sive risk assessment of the portfolio and interventions
impacts on responsiveness of an enhanced field presence. in different sectors.
That expansion is expected to continue with the placement • The program is designed to “keep it simple” and to build
of two more international staff by end-FY09. We further on existing strengths, especially in areas in which past
anticipate expanding numbers of Nepali staff, who will programs have been resilient and robust to conflict.
strengthen our capacity to perform our fiduciary functions, • The risk of lack of ownership when the government
enhance our capacity to deal with governance issues (with changes is minimized, first, because the new govern-
GPF support) and add the expertise needed to apply the ment will likely include some coalition members from
peace filter across the portfolio. This will take highly honed the previous government, and second, almost all the
skills and knowledge of the political economy and effective proposed investment operations will be scaling up pro-
ways to work in conflict sensitive situations. SWAps also grams that were started and implemented by previous
need field presence and moving away from the “mission- governments.
based” supervision to day-to-day dialogue. IFC also plans to • Community management purposefully underpins most
increase its staff presence in Nepal. operations. CDD approaches, with communities taking
decisions and managing programs, have built-in checks
83. (j) Mitigating Risks: The Bank Group faces and balances and accountability mechanisms that rein-
substantial risks working in Nepal (see Appendix III on force effective implementation.
governance and risk assessment). The key challenge for the • We will try to “do no harm”. The addition of a peace
new Government is to rebuild the legitimacy of the state, filter to the project cycle for new IDA operations is
consolidate the peace process and maintain law and order, expected to heighten awareness and sensitivity to the
and deliver tangible benefits to those traditionally excluded risks associated with conflict situations that are often
and to society at large. It is undertaking several difficult closely linked to poor governance. Design options can
transitions at the same time — political, economic and social then be addressed early in the cycle and monitored
— none of which is easy, as demonstrated by recent political throughout project life.
developments. At the same time, Nepal has embarked on • The program tries to avoid making commitments that
the long road to reducing the risks of weak governance would place high demands on “supply” side account-
and systemic corruption by strengthening the country’s ability and fiduciary systems while expanding support
overarching governance framework and institutional capacity. for mainstreaming “demand” side mechanisms such as
Long-lasting peace also hinges on progress in these areas. score cards and social audits that can be reflected in
The fact that the country faces them simultaneously increases Governance and Accountability Action Plans.
the associated risks, a situation made even more challenging • Support for policy reforms, addressing areas such as regula-
in the face of the global crisis and the uncertainty about its tory reform in finance and telecom, could be on the basis
potential impacts on Nepal and the timeframe over which of single tranche operations and backed by solid AAA.
such impacts are likely to manifest. • We will continue to strengthen our own capacity to
INTERIM Strategy Note FoR NePAL | 72
deal with these risks with a strong focus on enhanced extent of the conflict and without creating “aid orphans”.
fiduciary and supervision functions, as well as building This assumes that the basic functions of government can
in-house capacity to deal with governance and conflict. continue and that adequate macro-management prevails
and is similar to the stance followed during the conflict
85. Not all of the risks facing Nepal can be mitigated period. It would mean that IDA would likely continue to
and significant political, social and economic risks emphasize CDD approaches and basic social services while
remain. We need to prepare and to the extent possible providing support for strengthening state systems. Finally,
take preemptive action. The impact of an economic crisis with respect to a third scenario in which the country faces
on new Bank Group investments was discussed previously deterioration along multiple fronts, the Bank Group would
(para. 65 and 66). Such a crisis would require both IDA combine elements of the two above responses, although a
and IFC to undertake contingency planning, now underway, situation of a sustained economic and political crisis might
close consultations with other donors, and monitoring of inhibit a workable response. No matter how much effort
the situation particularly with respect to remittances and goes into project readiness, due to an often unpredictable
the banking sector. Should there be a prolonged period of and volatile implementation environment, ongoing
political stalemate, a deterioration in the political situation supervision will be required which adopts a proactive and
or a renewal of conflict that inhibits the Bank Group’s flexible approach to achieving results. It should be assumed
operations, IDA would: (i) adjust individual operations as that project design may need to be modified and provisions
needed to reflect the impact of conflict via the peace filter; made for future adjustments through project restructuring
and/or (ii) scale back operations selectively and gradually, during the implementation phase.
depending on other donor responses and the pace and
INTERIM Strategy Note FoR NePAL | 73
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.
Kishor Sharma, ECS Media
INTERIM Strategy Note FoR NePAL | 74
INTERIM
Strategy
NoteFoRNePAL
ISN PROCESS
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 | 75
END NOTES
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.
INTERIM Strategy Note FoR NePAL | 76
Appendices
the
world
bank
group
Appendix I
Debt Sustainability Analysis1
I. LOW INCOME COUNTRY-DEBT 2. Baseline projections of public and publicly guaranteed
SUSTAINABILITY ANALYSIS (LIC-DSA)2 (PPG) debt are based on the following key assumptions:
A. Size and Composition of Public and Publicly
Guarantee (PPG) Debt • Real sector: Real GDP growth is projected to rise
1. Nepal’s total public debt stock is estimated at 47 gradually from 3.8 percent FY07/08 and stabilize at 5.5
percent of GDP at end 2007 (in nominal terms), of which percent after FY10/11, in line with growth rates observed
roughly 33 percent is external debt. Public external debt is in the early 1990s—a period of relative stability—and
estimated at US$3.2 billion, of which about US$3 billion was supported by structural reforms and sound macroeconomic
owed to multilateral institutions, mostly IDA and the ADB. policies. In the longer term, Nepal’s vast untapped
Bilateral debt stock is estimated at about US$270 million, hydropower potential is expected to contribute significantly
with Japan as the largest creditor accounting for more than to growth. Inflation is assumed to decline from around 6.5
half of the bilateral debt. After remaining fairly constant percent FY07/08 to an average of about 5 percent in the
at around 50 percent of GDP since 1995, the external debt medium term in line with projected inflation developments
stock dropped by about 17 percentage points of GDP during in India and as supply bottlenecks are gradually alleviated.
2004-2007, as a result of relatively low external loan The exchange rate is projected to depreciate against the
disbursements and the appreciation of the Nepalese rupee. dollar, in line with projected movements in the Indian rupee
The domestic debt stock accounts for around 14 percent of to which the Nepalese rupee is pegged.
GDP and constitutes an increasing share of total public debt.
• Fiscal sector: The revenue-to-GDP ratio is projected to rise
B. Assumptions from 13.5 percent in FY07/08 to 14.3 percent by FY14-28,
Figure I.1: Composition of External Debt, 2000/01- 2006/07
(In millions of U.S. dollars)
owing to gradual improvements in revenue mobilization. The
3500
expenditure-to-GDP ratio rises from 19.5 percent in FY07/08
3000 and assumed to be maintained at this level thereafter3 .
2500 Official grants are assumed to average 3 percent of GDP
2000
FY07/08–FY12/13 as donors are expected to support the
1500
peace process; from FY13/14 onwards official grants are
1000
projected to decline as a share of GDP.
500
0
2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07
Multilateral Bilateral
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 classified 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 fiscal 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 flows.
INTERIM Strategy Note FoR NePAL | 78
• External sector: Exports of goods and services are Other indicators remain below the policy-based indicative
projected to average of about 8 percent over the period, thresholds throughout the projection period.4
supported by tourism and growth in partner countries.
Imports of goods and services (in dollar terms) are expected 4. In the baseline scenario, debt burden ratios are
to grow by an average of 11 percent in the medium term, projected to fall between 2007/08 and 2027/28 (Table
fuelled by remittances and in line with economic activity. I.1). The NPV of external public debt-to-GDP (20 percent
Import growth during FY13/14-FY27/28 is assumed to to 12 percent), NPV of external public debt-to-exports (148
average 6.6 percent. The current account balance is percent to 87 percent); external public debt service-to-
projected to deteriorate from a surplus of 0.9 percent of GDP exports ratio (9 percent to 6 percent).5
in FY07/08 to a moderate deficit of 1.6 percent of GDP in
FY27/28 driven by the development needs, with remittances
declining gradually as a share of GDP. New financing is Table I.1 : Indicative External Debt Burden Indicators
assumed to rise from about US$200 million FY07/08 to Indicative Nepal: Nepal: projected
US$450 million FY12/13; from FY13/14 onwards official Thresholds 2006/07 average 2007/08
disbursements are expected to gradually decline as a share -2027/28
of GDP. The grant element of new borrowing is assumed NPV of debt, in percent of
to gradually decline during the projection period, with an Exports 150 148 116
average of 46 percent. GDP 40 22 15
Revenue 250 163 114
C. Baseline Debt Service, in percent of
PPG External Debt Exports 20 11 7
3. A key feature of the LIC−DSA framework is that it Revenues 30 12 6
compares debt burden indicators to indicative policy-
based thresholds. The thresholds are based on the empirical Total Public Debt
finding that low-income countries with stronger policies and
institutions tend to have a higher debt carrying capacity. 5. Domestic debt accounts for about 30 percent of total
Nepal is classified as a medium performer based on its three public debt at end-2007. Under the baseline scenario
year average CPIA score during 2004-06. At end-2007, which does not take into account the possible negative
Nepal’s NPV of public debt-to-exports ratio is estimated at impacts of the current global economic crisis on Nepal,
148 percent (the relevant policy based indicative threshold the NPV of public debt-to-GDP ratio declines from 35
is 150 percent). The ratio is projected to fall to 129 percent at end FY07/08 to 26 percent by FY27/28 (Table
percent by FY12/13 percent and 87 percent by FY27/28. 4 and Figure I.3). Over the same period, the NPV of
4
The baseline projections expect the current account, which has been historically a surplus in Nepal, to unwind gradually into a deficit, as spending and higher
growth result in more imports of goods and services and the surge in remittances stabilizes. The average current account deficit 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 reflects debt service on existing debt and debt service on projected disbursements.
public debt to-revenue ratio falls from 216 percent to debt-to-exports to break the thresholds. These results are
157 percent, and the public debt service-to revenue ratio partly driven by Nepal’s volatile export performance in the
decreases from 17 percent to 12 percent. past decade. Shocks to other debt indicators, such as the
NPV of debt-to-GDP and debt service-to-revenue, result in
D. Sensitivity Analysis trajectories below threshold values.
6. Stress tests and alternative scenarios suggest that
Nepal’s debt profile is vulnerability to shocks. E. Staff Assessment
7. Based on the LIC-DSA, staffs conclude that Nepal’s
• Total public debt: A shock modeled using real GDP growth external debt dynamics are subject to a moderate risk of
at historical average minus one standard deviations FY09-10 distress but vulnerable to shocks. The negative impact
results in the NPV of debt-to-GDP ratio increasing from 35 of current global economic conditions and/or renewal
percent in FY08 to 41 percent in FY28; the NPV of Debt- conflict on Nepal’s economy could in fact resemble such
to-Revenues-and-Grants ratio increases from 215 to 250 a shock scenario. Since the last DSA in 2007, the initial
percent; and the debt service to revenue ratio increases from net present value of debt improved due to the appreciation
17 to 23 percent. This scenario illustrates the importance of the Nepalese rupee and lower than projected loan
of the peace dividend to generate stronger real GDP growth disbursements in the interim. In contrast to the previous
and the impact of deteriorating global economic conditions. DSA, the baseline scenario does not indicate a protracted
Alternative scenarios reveal vulnerabilities from maintaining breach of debt thresholds. In view of this, Nepal’s external
the FY08 fiscal stance (primary balance) which could result debt dynamics are assessed to be subject to a moderate
in the NPV of debt-to-GDP ratio increasing from 35 FY08 to risk of debt distress. This said, bound tests reflecting
44 percent FY28. shocks to export growth and non-debt creating flows could
result in protracted breach of the debt thresholds. The
• External debt: Bound tests indicate that the NPV of sensitivity analyses underscore the need to implement sound
debt-to-export ratio is sensitive to shocks. Following a macroeconomic policies and reforms, including through
combined, half-standard deviation shock to export growth, raising the real GDP growth rate and achieving higher
GDP deflator, and net non-debt creating flows, the NPV of export growth. Stronger and more stable growth in exports
debt-to-exports ratio increases significantly, peaking at near contributing to higher GDP growth, combined with foreign
300 percent FY10, and stays above the threshold for most financing at favorable terms—preferably through grants—
of the projection period. Other bound tests (e.g. shocks to would help Nepal make progress toward achieving its MDG
exports and non-debt creating flows) also cause the NPV of targets while containing risks to debt sustainability.
6
The Nepalese rupee has in fact depreciated by more than 20 percent since November 2008.
INTERIM Strategy Note FoR NePAL | 80
Figure I.2: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2008-2028
(In percentage)
350
NPV of debt -to-exports ratio
Most extreme shock
NPV of debt-to-GDP Ratio 300
45
Threshold 250
40
Most extreme shock Threshold
35 200
30 Baseline 150
25 Baseline
Historical scenario
100
20 Historical scenario
15 50
10 0
2007 2012 2017 2022 2027
5
0
2007 2012 2017 2022 2027
Debt-service-to-exports ratio
25
Baseline
20
Most extreme shock
15
10 Threshold
Historical scenario
5
0
2007 2012 2017 2022 2027
Source: Staff projections and simulations.
Figure I.3: Indicators of Public Debt Under Alternative Scenarios, 2008-2028
(In percentage) 1/
30 NPV of debt-to-GDP Ratio
Debt Service-to-Revenue Ratio 2/ 50
25 45
40
20
35
30
15
25
Baseline Baseline
10 20
No Reform
No Reform 15 Most extreme stress test
5 10
Most extreme stress test
5
0
2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 0
2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028
300
NPV of Debt-to- Revenue Ratio 2/
250
200
150
100
Baseline
50 No Reform
Most extreme stress test
0
2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028
Source: Staff projections and simulations.
1/ Most extreme stress test is test that yields highest ratio in 2018.
2/ Revenue including grants.
INTERIM Strategy Note FoR NePAL | 81
Table 1.Nepal: External Debt Sustainability Framework, Baseline Scenario, 2008-2028 1/
(In Percentage of GDP, unless otherwise indicated)
Actual Historical Standard Projections
Average 6/ Deviation 6/
2006 2007 2008 2009 2010 2011 2012 2013 2008-13 2018 2028 2014-28
Average Average
INTERIM Strategy Note FoR NePAL
External debt (nominal) 1/ 37.9 35.5 29.1 28.7 27.8 27.0 26.6 26.5 24.6 20.7
|
o/w public and publicly guaranteed (PPG) 35.3 33.0 26.9 26.4 25.4 24.6 24.2 24.1 22.1 18.0
82
Change in external debt -7.1 -.25 -6.3 -0.4 -1.0 -0.8 -0.4 -0.1 -0.6 -0.3
Identified net debt-creating flows -9.9 -5.4 -1.9 -2.5 -2.0 -1.8 -1.1 -0.7 -0.4 0.3
Non-interest current account deficit -2.5 -0.9 -3.4 1.4 -0.9 -1.3 -0.7 -0.5 0.2 0.8 1.1 2.2 1.6
Deficit in balance of goods and services 18.1 18.4 18.7 20.6 20.7 20.6 21.0 21.1 20.1 17.9
Exports 13.6 13.2 12.1 12.3 12.1 12.1 12.2 12.1 12.1 13.3
Imports 31.7 31.6 30.8 32.8 32.7 32.7 33.3 33.3 32.2 31.2
Net current transfers (negative = inflow) -19.5 -17.9 -15.7 3.1 -18.4 -20.7 -20.2 -19.8 -19.6 -19.2 -18.1 -15.2 -17.0
o/w official -1.6 -2.0 -1.9 -3.3 -3.2 -3.1 -3.0 -3.0 -1.9 -0.9
Other current account flows (negative = net inflow) -1.1 -1.3 -1.2 -1.2 -1.2 -1.2 -1.2 -1.2 -0.9 -0.6
Net FDI (negative = inflow) 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
Endogenous debt dynamics 2/ -7.4 -4.5 -0.9 -1.0 -1.1 -1.2 -1.1 -1.1 -1.0 -0.9
Contribution from nominal interest rate 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.3 0.2
Contribution from real GDP growth -1.0 -0.8 -1.1 -1.3 -1.3 -1.4 -1.4 -1.4 -1.3 -1.1
Contribution from price and exchange rate changes -6.7 -4.0 … … … … … … … …
Residual (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 exceptional financing -0.3 -0.3 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.1 0.0
NPV of external debt 4/ … 22.1 19.4 19.3 18.8 18.3 18.1 18.0 16.9 14.3
In percent of exports … 167.3 160.4 157.6 155.6 151.8 148.4 148.5 139.9 107.6
NPV of PPG external debt … 19.6 17.1 17.0 16.4 16.0 15.7 15.6 14.5 11.6
In percent of exports … 148.5 141.7 138.5 136.1 132.1 128.8 128.7 119.6 87.4
In percent of government revenues … 163.0 127.1 129.9 120.1 113.3 107.8 103.3 99.9 78.6
Debt service-to-exports ratio (in percent) 13.8 10.8 10.4 10.1 10.0 9.6 9.3 8.9 8.2 6.5
PPG debt service-to-exports ratio (in percent) 13.8 10.8 9.2 9.1 9.0 8.6 8.3 7.9 7.2 5.5
PPG debt service-to-revenue ratio (in percent) 17.2 11.9 8.2 8.5 8.0 7.4 6.9 6.4 6.0 5.0
Total gross financing need (billions of U.S. dollars) 0.2 0.3 0.3 0.2 0.3 0.4 0.5 0.7 1.0 2.2
Non-interest current account deficit that stabilizes debt ratio 4.6 1.6 5.4 -0.9 0.3 0.3 0.6 0.9 1.7 2.5
Key macroeconomic assumptions
Real GDP growth (in percent) 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 deflator in US dollar terms (change in percent) 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
Effective interest rate (percent) 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
Growth of exports of G&S (US dollar terms, in percent) 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
Growth of imports of G&S (US dollar terms, in percent) 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
Grant element of new public sector borrowing (in percent) … … … … 47.0 46.8 46.7 46.6 46.5 46.4 46.7 45.9 45.0 45.7
Memorandum items:
Nominal GDP (billions of US dollars) 8.9 10.2 12.1 12.8 13.9 15.1 16.3 17.6 25.1 48.3
Source: Staff simulations.
1/ Includes both public and private sector external debt.2/ Derived as [r - g - (1+g)]/(1+g+P+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and P = growth rate of GDP deflator in U.S. dollar terms.
3/ Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.
4/ Assumes that NPV of private sector debt is equivalent to its face value.
5/ Current-year interest payments divided by previous period debt stock.
6/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.
7/ Defined as grants, concessional loans, and debt relief.
8/ Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the NPV of new debt).
Table 2. Nepal: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed
External Debt, 2008-28(In percent)
NPV of debt-to-GDP ratio
Projections
2008 2009 2010 2011 2012 2013 2018 2028
Baseline 17 17 16 16 16 16 14 12
A. Alternative Scenarios
A1. Key variables at their historical averages in 2009-28 1/ 17 16 14 13 11 9 0 0
A2. New public sector loans on less favorable terms in 2009-28 2/ 17 18 17 18 18 18 19 19
B. Bound Tests
B1. Real GDP growth at historical average minus
one standard deviation in 2009-10 17 17 17 17 17 17 15 12
B2. Export value growth at historical average minus
one standard deviation in 2009-10 3/ 17 18 20 19 19 19 17 13
B3. US dollar GDP deflator at historical average minus
one standard deviation in 2009-10 17 18 18 18 18 17 16 13
B4. Net non-debt creating flows at historical average minus
one standard deviation in 2009-10 4/ 17 22 25 24 24 24 21 14
B5. Combination of B1-B4 using one-half standard deviation shocks 17 22 29 28 27 27 23 16
B6. One-time 30 percent nominal depreciation
relative to the baseline in 2009 5/ 17 24 23 23 22 22 21 17
NPV of debt-to-exports ratio
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 0
A2. 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 87
B2. Export value growth at historical average minus
one standard deviation in 2009-10 3/ 142 184 251 243 236 235 213 144
B3. US dollar GDP deflator at historical average minus
one standard deviation in 2009-10 142 138 136 132 129 129 120 87
B4. Net non-debt creating flows at historical average minus
one standard deviation in 2009-10 4/ 142 176 209 202 196 194 171 106
B5. Combination of B1-B4 using one-half standard deviation shocks 142 204 291 281 272 269 236 145
B6. One-time 30 percent nominal depreciation
relative to the baseline in 2009 5/ 142 138 136 132 129 129 120 87
INTERIM Strategy Note FoR NePAL | 83
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 0
A2. 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 83
B2. Export value growth at historical average minus
one standard deviation in 2009-10 3/ 127 140 146 138 130 124 117 86
B3. US dollar GDP deflator at historical average minus
one standard deviation in 2009-10 127 136 134 126 120 115 111 88
B4. Net non-debt creating flows at historical average minus
one standard deviation in 2009-10 4/ 127 166 185 173 164 155 143 96
B5. Combination of B1-B4 using one-half standard deviation shocks 127 170 210 197 186 176 161 106
B6. 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 | 84
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 32.5
o/w foreign-currency 35.3 33.0 26.9 26.4 25.4 24.6 24.0 23.6 21.7 17.7
denominated
Change in public sector debt -2.8 -10.0 -2.1 -0.3 -1.3 -1.3 -1.5 -1.5 -0.7 0.1
Identified debt-creating flows -6.7 -8.5 -0.2 -0.6 -1.7 -1.9 -2.1 -2.3 -0.2 0.6
Primary 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 1.5
Revenue and grants 13.1 14.3 16.1 16.4 16.8 17.2 17.6 18.8 16.8 16.4
of which: grants 2.1 2.3 2.7 3.3 3.1 3.1 3.1 3.1 2.6 1.9
Primary (noninterest) 13.8 14.8 18.8 17.8 17.8 17.9 18.0 18.1 18.2 18.3
expenditure
Automatic debt dynamics -7.4 -9.0 -2.9 -2.0 -2.7 -2.6 -2.6 -2.5 -1.6 -1.3
Contribution from interest -4.0 -2.3 -1.7 -2.0 -2.1 -2.2 -2.1 -2.0 -1.5 -1.3
rate/growth differential
of 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 rate
of 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 growth
Contribution from real -3.4 -6.7 -1.2 0.0 -0.6 -0.5 -0.5 -0.5 … …
exchange rate depreciation
Other identified debt- 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
creating flows
Privatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Recognition 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 | 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
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 26.4
o/w foreign-currency 22.6 19.6 17.1 17.0 16.4 16.0 15.7 15.6 14.5 11.6
denominated
o/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
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
Key macroeconomic and fiscal
assumptions
Real 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 5.5
Average 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 | 87
Table 4.Nepal: Sensitivity Analysis for Key Indicators of Public Debt 2008-2028
Projections
2008 2009 2010 2011 2012 2013 2018 2028
NPV of Debt-to-GDP Ratio
Baseline 35 35 34 33 32 31 26 26
A. Alternative Scenarios
35 35 35 35 36 36 35 34
A1. Real GDP growth and primary balance are at historical averages 35 36 36 37 38 38 39 44
A2. Primary balance is unchanged from 2008 35 35 34 33 33 38 30 38
A3. 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 2009-2010
B2. Primary balance is at historical average minus 35 36 37 36 35 33 28 28
one standard deviations in 2009-2010
B3. Combination of B1-B2 using one half standard deviation shocks 35 36 37 36 34 33 27 25
B4. One-time 30 percent real depreciation in 2009 35 42 41 39 37 36 30 28
B5. 10 percent of GDP increase in other debt-creating flows in 2009 35 44 43 41 40 38 33 31
NPV of Debt-to-Revenue Ratio 2/
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 214 213 207 204 202 200 201 197
A2. Primary balance is unchanged from 2008 215 218 216 214 214 214 232 266
A3. 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 2009-2010
B2. Primary balance is at historical average minus 215 220 220 208 197 185 169 168
one standard deviations in 2009-2010
B3. Combination of B1-B2 using one half standard deviation shocks 215 219 219 206 194 182 161 154
B4. One-time 30 percent real depreciation in 2009 215 258 242 227 213 199 176 170
B5. 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 | 88
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 16
A2. Primary balance is unchanged from 2008 17 16 18 19 19 20 20 26
A3. 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 2009-2010
B2. Primary balance is at historical average minus 17 16 19 20 16 15 13 14
one standard deviations in 2009-2010
B3. Combination of B1-B2 using one half standard deviation shocks 17 17 18 19 16 14 13 12
B4. One-time 30 percent real depreciation in 2009 17 17 17 16 15 14 13 14
B5. 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 | 89
Ongoing and Indicative Aid $ 20 mn
Commitments July 2009-July 2012
Project Financing - On-going + Indicative Pipeline
INTERIM Strategy Note FoR NePAL
1 - Natural Resources / Agriculture
|
Agriculture UN, JICA USAID, DFID Swiss ADB, WB
90
Land Administration/Land Reform DFID, ADB
Irrigation Swiss Saudi Fund India ADB, WB
Forestry WB Swiss Finland, DFID
Water Resource Management Norway WB (TA) Finland India
Environment / Climate Change ADB, UN Norway, WB, DFID, Finland
USAID, Swiss
Other (soil conservation) India
2 - Infrastructure
Strategic Roads / Highways ADB, WB,
Appendix II
India, JICA
Rural Infrastructure / Rural Roads Swiss DFID, WB,
ADB, India
Suspension Trails / Bridges WB, DFID ADB, Swiss
Air Transportation ADB
Railway India
Donor mapping at Sector Level
Rehabilitation and Reconstruction ADB, JICA
Power generation Norway Germany ADB, WB, India
Transmission Lines JICA ADB, WB, India
Alternative Energy (renewable, biogas, ADB UN, India Norway EC, Germany WB, Denmark
micro-hydro, rural electrification)
Housing and Urban Development Germany ADB
Communication / IT ADB
Other (brick kilns) Swiss
3 - Social Services
Education UN, JICA* EC *, USAID Finland, ADB, WB, Denmark,
Japan/ JICA DFID, EC, India,
Japan, Norway
Health & Population JICA* Swiss, ADB, UN Germany DFID, WB, USAID,
JICA India, GFATM
Water Supply and Sanitation DFID, UN, India JICA Finland ADB, WB
52
Social Safety Net / Food Security / Relief Swiss, Germany, Japan WB
ADB, DFID
Other (Disaster Mgt) USAID, JICA* Swiss WB ADB
Other (research) Norway
* through International NGOs or non-state actors
Ongoing and Indicative Aid $ 20 mn
Commitments July 2009-July 2012
4 - Economic Services
Industry
Trade USAID EC ADB, India
Tourism DFID Opec Fund ADB
Micro-finance Germany, ADB
USAID, UN
Employment/Skills Development JICA* WB(DFID) USAID, Swiss DFID ADB
Private Sector Norway Germany WB (IFC) DFID
Other (livelihood) CIDA Swiss ADB, WB
5 - Governance / Peace building
Administrative Reform, inc. macro-management, M&E WB, Germany,
USAID, JICA
Financial Sector Reform DFID ADB WB
Judiciary / Rule of Law / Security / Constituent Assembly Norway, Japan, CIDA, USAID, Denmark,
CIDA, WB, DFID ADB, Swiss DFID
Public Financial Management/anti-corruption Norway, ADB WB(DFID)
Local Governance (inc. emerging towns), local development Denmark* CIDA, Norway, Germany, ADB, WB,
UN, JICA USAID, Swiss Denmark DFID
5 - Governance / Peace building (cont.)
Peace Building / Conflict Mitigation / Human Rights Finland, ADB, Norway, Germany,
UN, JICA EC*, CIDA,
USAID, Swiss
Denmark DFID, WB, EC
Other (eg, inclusion, gender, UN1325, Norway DFID, Norway, USAID, ADB
human rights, indigenous people’s rights) Swiss, UN, JICA
INTERIM Strategy Note FoR NePAL
|
91
Appendix III
Governance and Risks Assessment Nepal Portfolio
Introduction Nepal, it added the risks of conflict based on the 2004
1. As part of the preparation of the ISN for Nepal, the edition of Post-Conflict Performance Indicators. Following
country team undertook in January 2009 a comprehensive the approach used by the Africa Region, the framework
review of the risks of its portfolio and the implications of converts these numeric ratings to the H, S, M or L scale.
those risks for future lending. The methodology used was
1
In the case of Nepal, the country risk rating is substantial.
based on the pilot done for the India program in June-July > It adds a set of questions to identify systemic risks at
2008. The framework developed for India, and modified for the sector level. At this point, there is no generalized
Nepal, had been initially constructed in order to address guidance on or measurement of sector level risks so that
the systemic weaknesses in the management of risks that
teams do this based on their respective country and
had been identified in the Detailed Implementation Review
sector knowledge and operational experiences.
(DIR) of five health sector operations in India. Nepal
> It does the same thing for project specific risks. In
was the second country in the Region to carry out this
addition, it folds into those risks the IRS ratings on
comprehensive risk assessment.
financial management, procurement and safeguards. The
The Framework work sheet indicates the residual risk, after mitigation
2. The framework below was developed with the assistance measures.
of external consultants funded with central GAC funds > The standard sets of questions for both sector and
allocated to the South Asia Region. The key features are:
2 project specific risks cover the broad range of concerns
> It establishes a hierarchy of risks, with overall project about getting results on the ground and governance,
risks a function of country, sector and project specific including fraud and corruption. On this last point, the
risks, with country risks overshadowing sector risks and questions do so by not rating the incidence of fraud and
sector risks overshadowing project specific risks. corruption per se (which is hard for anyone to know
> The approach builds on the Bank-wide Risk with precision) but by assessing some of the underlying
Identification Worksheet, standard for all new operations factors. These factors have been derived from available
since 2007, and uses that system’s four point scale— best practices, economic principles and theory, auditing
high, substantial, moderate and low. and accounting, and risk management practices.
> It takes the CPIA ratings on governance and corruption > Once sector risks and project specific risks are rated,
as the starting point for country risks. In the case of the framework provides a risk “look-up” table that: (i)
1
The 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.
2
The team that developed the framework, including the specific set of questions to assess sector and project specific 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 | 92
combines country, sector and project specific risks into > Project design and supervision risks: There are a set of
an overall project risk rating; and (ii) ensures that all assertions that address the ease by which supervision and
teams follow the same methodology thereby reducing physical monitoring can be undertaken. These assertions
discretion and incentive that individual teams may have probe, for example, whether the project is dispersed across
to down grade risks. a wide geographic area (high risks) or concentrated in a
> The risks can further be broken down, according to the single location (low risks); or whether the project involves
particular risk posed in the questions, and analyzed multiple implementing agencies (high risk) or a single
separately. entity (low risks). Other examples are whether or not the
implementing agency s is new/no experience with the Bank
The Questions Asked (high risks) or existing with prior experience (low risks).
3. The questions of both the sector and project specific
risks are framed as assertions, in the manner of the Mitigation of Portfolio Risks
COSO (Committee of Sponsoring Organizations) Risk and 4. The conclusion of the risk assessment was that the Nepal
Opportunity Workshops and other surveys.3 Each assertion program entails substantial risks. The team rated 13 sector
provides the two extremes: what would prevail if the risks and sub-sectors and fifteen active projects. The level of
were low and what would prevail if risks were high. The overall risks is driven in large part by the country risks
team can rate the risk of each assertion high, substantial, which are rated as substantial, reflecting CPIA ratings on
moderate or low. Here are some examples: systemic corruption and governance. This is consistent with
> Sector-wide risks. There are a set of assertions that the ranking of Nepal in the WBI’s Governance Indicators.
deal with the quality of sector-wide regulations and Sector risks are also substantial reflecting the vulnerabilities
institutions. One assertion probes the extent to which in regulation in key sectors such as telecommunications
there is a functioning regulatory set-up with the and banking; in social protection due to the lack of robust
appropriate separation of powers between the policy- targeting and M&E systems; and in rural roads because of
making institution and the regulatory-compliance the weaknesses in local administrations, combined with poor
quality standards and the nature of procurement.
institutions. Other probes the extent to which quality
standards exist, whether they provide the relevant
5. Mitigation measures built into project design helps to lower
benchmark, and whether they are adhered to. The
project specific risks. That brings down those risks overall to
risks would be highest is there was no regulation,
moderate. The main risk mitigation mechanism adopted in
no separation of powers, and no quality standards in
the Nepal portfolio has been the incorporation of community
the sector. Conversely risks would be the lowest if
management in the original project design. Aspects of
the response were the reverse with intermediate risks community management and community driven development
(substantial or moderate) in between. are features of ten of the fifteen ongoing operations. While
There 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.
3
INTERIM Strategy Note FoR NePAL | 93
not perfect, and still subject to capture by elites, community > Specific trust funds, notably the GPF, are being
management is seen to enhance oversight and accountability and mobilized to: (i) advance the overall GAC agenda; (ii)
to offset risks of procurement and quality. Further, this mode of undertake governance and institutional assessments of
project implementation offsets the risks of adequate supervision sectors, particularly those in which IDA has or plans to
and physical inspection for operations in widely dispersed and adopt sector wide approaches; (iii) develop GAAPs for
hard to reach geographic areas. Going forward, community
new IDA operations; and (iv) strengthen demand side
management will be a continuing feature of new operations
accountability mechanisms in new operations and one-
to the extent possible. In the case of the four operations
third of the ongoing IDA portfolio.
rated as high risk, mitigation measures are being taken. All
> Additional expertise on governance and on peace and
four operations are closely supervised. In one case—the
conflict will be brought into the country team with GPF
Telecommunications Sector project—it is soon to close.
support.
6. More broadly, in light of the substantial risks in the portfolio, > Business processes are being reengineered to integrate
the Nepal program is taking the following additional steps: the risk assessment, GAAP preparation, and Peace Filter
> Resources allocated to supervision and to fiduciary into critical points in the business cycle.
functions will be increased in FY10 by about 10 percent.
INTERIM Strategy Note FoR NePAL | 94
Appendix IV
IEG Country Assistance Evaluation Summary
of Conclusions and Recommendations
Introduction was most relevant and successful, particularly in terms
1. IEG is presently preparing a Country Assistance Evaluation of improving and expanding health services, significantly
(CAE) to be discussed with the Committee for Development increasing access to basic education, and increasing access
Effectiveness in May 2009. The CAE examines whether: (a) to safe drinking water in rural areas. In addition, even in
the objectives of Bank assistance were relevant; (b) the those pillars showing less progress in meeting objectives,
Bank’s assistance program was effectively designed and there were some notable achievements despite the very
consistent with its objectives; and (c) the Bank’s program difficult country circumstances.
achieved its objectives and had a substantial impact on
the country’s development during this period. Examining 3. The areas of minimal or no progress included key parts
these questions allows the CAE to draw lessons and of the governance agenda - where the Bank’s strategy
recommendations for future Bank assistance. The CAE covers was considered to be highly relevant but strategy
three CAS documents: (i) the CAS Progress Report discussed implementation was constrained by the country’s political
at the Board in December 2002; (ii) the CAS presented context – and sub-areas of the broad-based growth agenda
in November 2003; and (iii) the Interim Strategy Note such as private sector development and agriculture and rural
presented in February 2007. The goals of the Bank assistance development. In the specific area of public expenditure
program over FY03–08 remained broadly aligned with the management, the Bank’s AAA was considered to have
2003 PRSP and unchanged: the focus was on improving achieved some significant steps, such as passage of a new
governance and development effectiveness by bringing Procurement Act, but the impact in terms of the quality and
resources to grassroots levels but with increased emphasis efficiency of PFM has been minimal so far.
on growth and inclusion.
4. Education is one of the areas where the Bank’s program
was especially relevant and contributed to strong progress
Main Conclusions towards CAS objectives. Among the positive results, the
2. While recognizing that Nepal’s considerable political enrollment of girls and marginalized groups improved
turmoil and changes had a major impact on CAS substantially through the Education for All program which is
implementation during the period under review, one of being implemented under a Sector-Wide Approach (SWAp).
the CAE’s conclusions is that little progress was made Measurable quality improvements were limited, however, and
against CAS stated objectives in two of the four main textbook distribution continues to be late. The community
strategic themes —achieving broad based growth and good school management model, which is currently being
governance. Specific objectives under these two pillars mainstreamed, has shown some good results but IEG believes
are considered by IEG to have often been unrealistic and that a number of improvements are required to make it fully
overly ambitious given country circumstances characterized effective, such as putting in place a sound M&E system and
by political instability, conflict and insecurity, and similar ensuring that there are adequate mechanisms for funding
issues. On the other hand, IEG’s draft evaluation concludes schools in poorer areas. The financial condition of higher
that some progress was made in the area of social inclusion, education institutions improved modestly, but fell well short
especially with regard to mainstreaming inclusion in sector of being sustainable. The sole new IDA project, Higher
projects and, to a lesser extent, diversity of the civil service. Education Project II (approved in 2007), is innovative and
Social development was the area where the Bank’s program flexible in its design and IEG considers the project outcome
INTERIM Strategy Note FoR NePAL | 95
objectives to be highly relevant. Under the project, to the IDA-financed First Rural Water and Sanitation project,
substantial progress has been made in terms of improving which used community-based approaches to facilitate
access for under-privileged students, but project start-up provision of demand-driven rural water and sanitation
was slowed due to political and security issues, the project services, infrastructure and hygiene education. However
executing agency still lacks administrative capacity, and a IEG considers that the second project has thus far failed
major teachers’ union has blocked implementation of the to achieve its development objectives related to sector
plan to allow autonomy for the country’s largest university. institutional reforms.
5. Health and Water and Sanitation are two sectors that 6. Some progress was made with regard to social inclusion,
showed substantial progress during the period under review. one of the main pillars of the past strategies. Through its
Through a successful SWAp which became effective in 2004, lending, IDA helped improve access to basic services for the
basic health care services improved, with an emphasis on socially excluded (in terms of gender, caste or ethnicity).
poor and underserved populations, despite challenging IDA and DFID jointly produced a seminal piece of analytical
operational conditions on the ground. To the credit of the work on social inclusion that has contributed to the overall
SWAp, approximately 70 percent of public funding now goes understanding of these issues in Nepal and influenced
to support low-cost, cost-effective interventions of Essential the 2003 PRSP.1 The largest Bank-supported program, the
Health Care Services (EHCS). The significant increase in Poverty Alleviation Fund (PAF), was deemed as effective in
supply and accessibility to these services in districts with channeling funding to the socially excluded and supporting
low health indicators is interpreted as being at least partly livelihood improvements, but weaker in terms of improving
responsible for improved health outcomes over time. The access to services and institutional development.
expansion of public health facilities at the sub-national
and community levels (sub-health posts, health posts, 7. Regarding IFC’s operations in Nepal, IEG report mentions
and primary health care centers) contributed to increased that as the political and security situation deteriorated in
access for the poor and underserved populations. Nepal’s 1999, IFC withdrew its local field presence and had very
health indicators demonstrate significantly improved limited activities in Nepal between 1999-2006. To a large
outcomes; for example, the infant mortality rate (IMR) extent, IFC’s inability to develop successful investment
declined from 79 deaths per 1,000 live births in 1996 to projects through much of the decade can be attributed to
64 in 2001 and 48 in 2006 while the maternal mortality the increasingly difficult investment environment. Since
declined from 539 per 100,000 live births in 1996 to 281 2006, IFC’s gradual re-engagement in Nepal has resulted in
in 2006. A major persisting shortcoming is the lack of two GTFP investments; an investment in a domestic airline,
progress in addressing malnutrition, as Nepal’s level of child a pipeline of investment projects in the financial sector, and
malnutrition remains among the highest in the world. The a constructive dialogue with the government on business
quality and access to sustainable rural drinking water and enabling environment issues. This approach of cautious
sanitation services improved over the period, in part thanks re-engagement has the potential for replication in other
difficult investment climate countries.
1
See “Unequal Citizens: Gender, Caste, and Ethnic Exclusion in Nepal.” Published by the World Bank and DFID.
2
IEG’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 | 96
Recommendations Moving Ahead IDA strategy. It also suggests stepping up efforts to increase
8. Given the challenges facing Nepal, IEG believes the poor and marginalized people’s access to basic services, with
Bank could be more realistic and pragmatic, and consult a focus on supporting the expanded use of delivery schemes
widely and continually with national stakeholders. The new that have been shown to have worked in Nepal. With regard
ISN should take into account the current circumstances to the PAF, the primary recommendation is to establish a
with a flexible program that can be adjusted closely to mechanism to track the extent to which its activities are
the Government’s capacity and a changing political and effectively addressing poverty and the various dimensions of
institutional context. social exclusion. An additional highlighted recommendation is
to continue support to public expenditures and public finance
9. In terms of sectors and instruments, the coming CAE will management. The SWAp model that has been successful in
recommend more decisive support for agriculture and rural health and education could be applied to other sectors, such
development, i.e. placing this sector at the heart of any new as water and sanitation or roads.
INTERIM Strategy Note FoR NePAL | 97
Appendix V
Summary of CAS Consultations
(ADB, DFID, World Bank)
Background Consultation Process
1. During the months of October and November 2008, the Asian 2. The consultations were undertaken in three different regions
Development Bank (ADB), the UK Department for International of Nepal (Central region – Pokhara; Eastern region – Biratnagar;
Development (DFID) and the World Bank Group (IDA and IFC) and Western region – Nepalganj), as well as in Kathmandu. All
undertook joint consultations in order to gain insights from consultations included a range of stakeholders. The participants
as wide an audience as possible on what role they should play attending in Pokhara, Biratnagar, and Nepalganj included
in supporting the people of Nepal. These consultations were representatives from community organizations, political leaders,
jointly undertaken as all three agencies were in the process of civil society, program personnel and others. The group in
developing their new country assistance plans. 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.
Summary of Findings
3. During both the consultations in the regions and Kathmandu, participants expressed similar priorities. A summary of these
is provided in the following table:
Consultations in regions Consultations in Kathmandu
• Peace and security • Peace process
o Rehabilitation of displaced and conflict-affected people, reconstruction of damaged infrastructure o reconstruction, rehabilitation and reintegration
o Support for making the new constitution and state restructuring o Constitution making and state restructuring
o Integration of armies • Jobs and employment creation (focus on youth)
o Special package programs for excluded communities/ regions o Market and skill oriented training and education
• Job creation/employment /livelihoods o Promotion of self-employment, trepreneurship,
o Self-employment and entrepreneurship promotion MSME promotion
o MSME (micro, small and medium enterprise) and micro-finance promotion • Infrastructure development
o Commercialization of agriculture and NRM o Roads, hydropower, communications
o Tourism promotion • Social sector - Health, education, drinking water
• Infrastructure development (roads, hydropower, irrigation, communications) o Equipped and functional health facilities
o Schools o Awareness of health programs
o Rural and agricultural roads, suspension bridges o Facilitating equal access to health and education
o Micro and small hydro power development/rural electrification • Creating an enabling environment for private
o Health posts/facilities sector
o Communication Centres/facilities o Legal and policy reform and their
o River training/irrigation for Madhesi districts implementation with joint
• Good governance monitoring and follow-up by both GOs and the
o Awareness programs on awareness creation at all levels private sector
o Transparent program design, implementation and monitoring and supervision • Building human capital
(with people's participation) o Awareness, education and training
o Social/public audits o Building and strengthening local institutions
o Reward and punishment system in GOs and NGOs (NGOs, cooperatives, CBOs)
• Social sector – inclusive access and effective service delivery (health – special focus • Good governance (for all stakeholders)
on reproductive health/safe motherhood for women, education – focus on skill- o Transparency, accountability
based job-/market-oriented education and training etc.) o Functioning monitoring and supervision
o Equal and equitable access to quality health services (priority to women's health (with involvement of
– safe motherhood, reproductive health etc.) stakeholders)
o Employment/market oriented education and training for all (scholarships for • Greater involvement and participation of youth
poor and excluded groups)
o Clean drinking water for rural areas
• Special programs for single women, VAW, disadvantaged groups
• Others: agriculture, NRM, support for M&E systems/mechanisms, involvement of community (especially
poor and excluded in decision making), capacity building and empowerment, private sector promotion.
INTERIM Strategy Note FoR NePAL | 98
4. The recommendations of the participants for the three 5. Some suggestions on how this should be done were:
donor agencies were to provide financial and technical > Support GON and people's priorities
support for: > Implementation pluralism (through both GOs and NGOs)
> Growth and employment > More transparency in donor programmes
> Greater emphasis on commercialization in support for > Ensure involvement and participation of poor & excluded
agriculture, NRM, other IG and livelihoods programmes and youth; ensuring increased access to quality basic
> Capacity building of Government services (health, education, water and sanitation, etc.)
> Facilitate trust building among political parties > Inclusive policy formulation
> Immediate relief; and reconstruction, rehabilitation and > Greater emphasis on developing appropriate and
reintegration participatory M&E mechanism
> Support for the peace process > Special programs for mid- and far-West, and for youth
> Support for constitution making, state restructuring > Priority to local experts for technical assistance
including fiscal federalism > More effective donor coordination, and coordination
> Good governance with GON
> Budgetary support for government programs; basket
funding based on priorities
> Real partnership with civil society.
INTERIM Strategy Note FoR NePAL | 99
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.
INTERIM Strategy Note FoR NePAL | 100
Annexes
the
world
bank
group
INTERIM Strategy Note FoR NePAL | 101
Annex A1
Key Economic and Program Indicators -- Change from Last ISN
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 11.3
Program
Lending (US$ millions) 0 145 210 105 380
Gross disbursements (US$ millions) 67 80 110 75 81
/a.GDP at market price
/b.GDP at factor cost. Source: Central Bureau of Statistics - 2008
INTERIM Strategy Note FoR NePAL | 102
Nepal at a glance
POVERTY and SOCIAL South Low-
Nepal Asia income
Development diamond*
2007
Population, mid-year (millions) 28.1 1,520 1,296
GNI per capita (Atlas method, US$) 340 880 578
GNI (Atlas method, US$ billions) 9.7 1,339 749 Life expectancy
Average annual growth, 2001-07
Population (%) 2.0 1.6 2.2 GNI Gross
Labor force (%) 2.8 2.1 2.7 per primary
Most recent estimate (latest year available, 2001-07) capita enrollment
Poverty (% of population below national poverty line) 31 .. ..
Urban population (% of total population) 17 29 32
Life expectancy at birth (years) 63 64 57
Infant mortality (per 1,000 live births) 46 62 85 Access to improved water
Child malnutrition (% of children under 5) 39 41 29
Access to an improved water source (% of population) 89 87 68
Literacy (% of population age 15+) 49 58 61
Nepal Low-income group
Gross primary enrollment (% of school-age population) 126 108 94
Male 129 111 100
Female 123 104 89
KEY ECONOMIC RATIOS and LONG-TERM TRENDS
1987 1997 2006 2007 Economic ratios*
GDP (US$ billions)3.0 4.9 8.9 10.2
Gross capital formation/GDP21.2 25.3 26.0 25.3 Trade
Exports of goods and services/GDP 11.8 26.3 13.6 12.5
Gross domestic savings/GDP12.1 14.0 7.9 9.4
Gross national savings/GDPa 16.3 22.5 28.2 27.9
Current account balance/GDP -4.7 -0.8 2.2 0.6 Domestic Capital
Interest payments/GDP 0.5 0.5 0.3 .. savings
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 .. Indebtedness
1987-97 1997-07 2006 2007 2007-11
(average annual growth)
GDP 5.2 3.6 2.8 2.5 4.5 Nepal Low-income group
GDP per capita 2.6 1.4 0.8 0.8 3.1
Exports of goods and services .. .. .. .. ..
INTERIM Strategy Note FoR NePAL | 103
STRUCTURE of the ECONOMY
1987 1997 2006 2007
(% of GDP)
Agriculture 50.7 41.4 35.1 33.8
Industry 15.8 22.9 17.4 17.2
Manufacturing 6.2 9.5 7.9 7.7 Growth of capital and GDP (%)
Services 33.4 35.7 47.5 48.9 6
Household final consumption expenditure 78.8 77.1 83.3 81.9
General gov’t final consumption expenditure 9.1 8.9 8.8 8.7 4
Imports of goods and services 20.9 37.7 31.7 28.5
2
1987-97 1997-07 2006 2007
(average annual growth) 0
Agriculture 2.9 3.4 1.8 1.0
02 03 04 05 06 07
Industry 8.1 3.5 4.5 3.9 GCF GDP
Manufacturing 10.6 1.9 2.0 2.2
Services 6.3 3.7 3.8 2.8
Household final consumption expenditure .. .. .. ..
General gov’t final 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.
INTERIM Strategy Note FoR NePAL | 104
PRICES and GOVERNMENT FINANCE
1987 1997 2006 2007 Inflation (%)
15
Domestic prices
(% change) 10
Consumer prices 13.4 8.1 8.0 6.4
Implicit GDP deflator 12.7 7.3 6.7 8.6 5
Government finance 0
(% of GDP, includes current grants) 02 03 04 05 06 07
Current revenue 9.4 10.8 13.1 14.3
GDP deflator CPI
Current budget balance -0.7 1.0 1.8 3.4
Overall surplus/deficit -8.7 -3.9 -1.6 -1.4
TRADE
1987 1997 2006 2007 Export and import levels (US$ mill.)
3,000
(US$ millions)
Total exports (fob) 138 1,160 833 939 2,000
Food and live animals .. 51 99 ..
Animal and vegetable oils .. 35 59 .. 1,000
Manufactures .. 318 606 645
Total imports (cif) 503 1,750 2,372 2,653 0
Food 62 123 184 206 01 02 03 04 05 06 07
Fuel and energy 43 217 504 691 Exports Imports
Capital goods 128 242 293 328
Export price index (2000=100) .. .. .. ..
Import price index (2000=100) .. .. .. ..
Terms of trade (2000=100) .. .. .. ..
BALANCE of PAYMENTS
1987 1997 2006 2007 Current account
balance to GDP (%)
(US$ millions)
Exports of goods and services 348 1,506 1,216 1,347
5
Imports of goods and services 604 1,962 2,832 3,225 4
Resource balance -256 -456 -1,616 -1,878 3
2
Net income -6 8 68 106
1
Net current transfers 124 410 1,744 1,830
0
01 02 03 04 05 06 07
Current account balance -138 -38 197 58
Financing items (net) 156 131 159 118
Changes in net reserves -18 -94 -355 -176
Memo:
Reserves including gold (US$ millions) 185 657 1,797 2,008
Conversion rate (DEC, local/US$) 21.6 57.0 72.3 70.5
INTERIM Strategy Note FoR NePAL | 105
EXTERNAL DEBT and RESOURCE FLOWS
1987 1997 2006 2007 Composition of 2006 debt (US$ mill.)
(US$ millions) 362
Total debt outstanding and disbursed 986 2,414 3,409 .. 5
81
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
1468
Composition of net resource flows 43
Official grants 131 140 312 .. 1450
Official creditors 130 197 58 ..
Private creditors 37 -11 0 .. A-IBRD E- Bilaral
Foreign direct investment (net inflows) 1 23 -7 .. B-IDA D-Other F- Private
Portfolio equity (net inflows) 0 0 0 .. C-IMF multilateral G- Short
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
Note: This table was produced from the Development Economics LDB database.
INTERIM Strategy Note FoR NePAL | 106
Annex B2
Selected Indicators* of Bank Portfolio
Performance and Management
As of 5/5/09
Indicator 2006 2007 2008 2009
Portfolio Assessment
Number of Projects Under Implementation a 12 13 16 16
Average Implementation Period (years) b 2.8 2.9 3.0 3.6
Percent of Problem Projects by Number a, c 25.0 23.1 6.3 6.3
Percent of Problem Projects by Amount a, c 34.5 25.6 6.6 8.0
Percent of Projects at Risk by Number a, d 25.0 30.8 25.0 25.0
Percent of Projects at Risk by Amount a, d 34.5 29.5 19.8 24.7
Disbursement Ratio (%) e 20.6 28.6 25.7 17.8
Portfolio Management
CPPR during the year (yes/no) Yes Yes Yes Yes
Supervision Resources (total US$'000) 1,312 1,582 1,816 1,630
Average Supervision (US$/project) 109.3 121.7 113.5 101.9
Memorandum Item Since FY 80 Last Five FYs
Proj Eval by OED by Number 69 2
Proj 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.
INTERIM Strategy Note FoR NePAL | 107
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.
INTERIM Strategy Note FoR NePAL | 108
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
INTERIM Strategy Note FoR NePAL | 109
Annex B4
Indicative Non-lending Activities (IDA)
As of 4/22/09
Task1 Completion FY
For Completion in FY09
Technology in Microfinance 2009
Agriculture Insurance Feasibility Study 2009
Financial Sector SWAT Assessment 2009
Governance Note 2009
Evaluation of Community Managed Schools 2009
Construction Sector Analysis 2009
Underway
Hydropower – Removing Barriers (ESMAP) 2010
Social Impacts of Rural Energy (ESMAP) 2010
Energy Efficiency Study (ESMAP) 2010
Investment Climate Assessment 2010
Information Infrastructure for Growth(AusAid) 2010
Water Resources and Climate Change 2010
Fiscal Federalism (GPF) 2010
Planned (preliminary) – Core AAA only2
Right To Information Implementation (GPF) 2010
Local Government Study (GPF/other) 2010
Social Accountability Analysis(GPF) 2011
Nepal Living Standards Survey 2010
Poverty Assessment 2011
Public Expenditure Review 2011
PEFA Action Plan Implementation 2011
Programmatic Activities
Migration and Remittances 2009-2011
Jobs and Skills Development 2009-2011
Revitalizing Agriculture 2009-2011
Support to Urban Development 2009-2011
Social Protection TA (incl. DFID TF) 2009-2011
1
Includes activities funded from Bank Budget and Bank-Executed Trust Funds.
2
Other sector-specific 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.
INTERIM Strategy Note FoR NePAL | 110
Indicative Non-lending Activities (IFC)
As of 4/22/09
Task Completion FY Task Completion FY
Financial Sector Activities > SME strategy completed
Credit Information Bureau (underway) 2010 > Next steps to be discussed once SME
> MOU signed on Nov. 2007 survey competed
> Legal framework reviewed > Renewal of MOU of SEDF II
> Business Plan prepared
> RFP for hardware / software under WB project Bank of Kathmandu (underway) 2010
> Procurement review > Diagnostic
> Drafting of Directives for Central Bank > MOU signed in May 2007
> Approval of bidding documents by WB > Strengthening of credit operations (by October 2009)
> Draft CIB Act > Micro-finance services
> Public Awareness > Next steps discussed upon completion of
> Training of CIB staff strengthening of credit
> Exposure and best practices visits of
regulators and stakeholders Operations
> Renewal of MOU for SEDF II
Secured Transactions Registry (underway) 2012
> Feasibility Study by FIAS Nepal Industrial and Commercial Bank (underway) 2010
> Appointment of Registrar by the GoN > Diagnostic
> Cambodia exposure visit > MOU signed in February 2007
> Amend Secured Transaction Registry Action/ > SME department restructuring
Notify Regulations > Renewal of MOU for SEDF II
> Physical office establishment
> Service provider agreement with private operator Business Enabling Environment/ICRP (underway) 2014
> Awareness campaign > Economic Zone Regime Review
> Regulatory Reform
MSME Survey (underway) 2009 > Business Advisory Forum
> RFP in September 2008 > Corporate Governance workshops
> Survey to be finalized by 2009
Agriculture
Micro-Finance (underway) 2010 > Support for IDA’s PACT projects (tentative ) 2011
> Preliminary scoping
> Explore investments with complementary Hydro-Power Sector 2009
advisory work > Study to identify prospects (underway)
> Identify advisory leads in
coordination with investments Energy Efficiency
> Support for investments in banks for on-lending to energy 2010
Convergence (proposed) 2010 efficient projects (underway)
> Scoping public-private sector interest
(underway) Infrastructure/Transport Sector
> Await Central Bank endorsement > Joint work with Bank on PPPs
Partner Finance Institutions > Transaction advisory services for PPP (tentative) 2011
Himalayan Bank Ltd. (underway) 2010
> Diagnostic Tourism Sector
> MOU signed in March 2007 > World hotel Link-web portal for automated
hotel bookings (underway) 2010
INTERIM Strategy Note FoR NePAL | 111
Annex B5
Poverty and Social Development Indicators
Latest single year Same region/income group
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 2.2
Urban population (% of population) 7.4 10.9 16.8 29.2 31.7
Total fertility rate (births per woman) 5.4 4.6 3.1 2.8 4.3
POVERTY
(% of population)
National headcount index .. .. 30.9 .. ..
Urban headcount index .. .. 9.6 .. ..
Rural headcount index .. .. 34.6 .. ..
INCOME
GNI per capita (US$) 160 200 340 880 578
Consumer price index (2000=100) 25 72 140 140 150
Food 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 69
Access to an improved water source
(% of population)
Total .. 78 89 87 68
Urban .. 96 94 94 84
Rural .. 76 88 84 60
Immunization rate
(% of children ages 12-23 months)
Measles 34 56 85 65 76
DPT 32 54 89 64 77
Child malnutrition (% under 5 years) .. .. 39 41 29
Life expectancy at birth
(years)
Total 51 58 63 64 57
Male 52 58 63 63 56
Female 51 58 64 66 58
Mortality
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) .. .. 830 500 780
Births attended by skilled health staff (%) .. 7 19 41 41
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.
INTERIM Strategy Note FoR NePAL | 112
Annex B6
Key Economic Indicators
Actual Estimated Budget
Indicator 04/05. 05/06. 06/07. 07/08. 08/09.
National Accounts (as %of GDP) /a
Gross 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 51.4
Total Consumption 92.0 94.5 94.2 31.7
Gross 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 18.6
Exports (GNFS) 15.2 14.0 13.6 12.5
Imports (GNFS) 30.7 32.5 32.7 33.7
Gross domestic savings 12.0 9.3 10.2 11.9
Gross national savings 29.6 30.1 29.7 33.2
Memorandum items
Gross domestic products (US$ million at current prices) /a 7974 8715 9888 12254
GNI per capita (US$) 329 352 394 476
GDP per capita (US$) 328 350 390 470
Real GDP annual growth rates (%, calculated at 2001 prices) /b 3.1 3.7 3.2 4.7
Real 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 -37.7
Official transfers 503.4 458.7 468.9 337.3
Memorandum items
Resource balance (% of GDP) /b 0.3 0.8 1.0 0.4
Annual 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) /c
Total revenues 11.7 10.8 11.9 12.8 15.0
Total 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 9.6
Overall deficit before grants -3.2 -3.7 -4.0 -4.8 -8.3
Overall deficit after grants -0.8 -1.6 -1.8 -2.0 -3.3
Domestic financing (net) 0.2 1.4 1.5 1.8 2.4
Foreign financing (net) 1.6 1.3 1.4 1.4 2.0
Monetary indicators
M2/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. INTERIM Strategy Note FoR NePAL | 113
Annex B7
Key Exposure Indicators
Actual Estimated
Indicator 04/05. 05/06. 06/07. 07/08.
Total debt outstanding and
disbursed (TDO) (US$m)a 3,330 3,385 3,623 3,529
Net disbursements (US$m)a 9 55 238 -95
Total debt service (TDS) (US$m)a 98 168 146 152
Debt abd debt service indicators (%)
TDO/XGSb 3 3 3 2
TDO/GDP 45 38 35 29
TDS/XGS 8 14 11 10
Concessional/TDO 87 89 90 90
IBRD exposure indicators (%)
IBRD DS/public DS 0 0 0 0
Preferred creditor DS/public DS (%)c
IBRD DS/XGS 0 0 0 0
IBRD TDO (US$m)d 0 0 0 0
Share of IBRD portfolio (%) 0 0 0 0
IDA TDO (US$m)d 1,396 1,468 1,524 1,509
a. Includes public and publicly guranteed debt, private non-guranteed, use of IMF credits and net short-term capital.
b. "XGS" denotes exports of goods and services, including workers' remittances.
c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank
for International Settlements.
d. Includes present value of gurantees.
e.Includes equity and quasi-equity types of both loan and equity instruments.
INTERIM Strategy Note FoR NePAL | 114
Annex B8
Status of Bank Group Operations and Grants
as of 5/5/09
Closed Projects 75
IBRD/IDA *
Total Disbursed (Active) 337.13
of which has been repaid 0.00
Total Disbursed (Closed) 1,501.99
of which has been repaid 310.68
Total Disbursed (Active + Closed) 1,839.13
of which has been repaid 310.68
Total Undisbursed (Active) 469.55
Total Undisbursed (Closed) 6.36
Total Undisbursed (Active + Closed) 475.91
Active Projects Last ISR
Supervision Rating Original Amount in US$ Millions
Development Implementation Fiscal IBRD IDA IDA TF
Project ID Project Name Objectives Progress Year Loan Credit Grant Grant Cancel. Total.
P100342 Avian Flu S MS 2007 18.2 18.2
P074633 Education for All Project S S 2005 50.0 60.0 110.0
P084219 Fin Sector Restructuring (Phase II) MS MS 2004 68.5 7.0 21.3 54.2
P099296 Irrig & Water Res Mgmt Proj S MU 2008 14.3 50.0 64.3
P093294 NP Economic Reform TA S MS 2005 3.0 3.0
P071291 NP Financial Sector Technical Assistance MS MS 2003 16.0 6.5 9.5
P113002 NP Social Safety Net - Food Crisis Response S MS 2009 2.7 14.0 5.0 21.7
P050671 NP: Telecommunications Sector Reform S S 2002 22.6 6.8 15.8
P040613 Nepal Health Sector Program Project S MS 2005 10.0 90.0 100.0
P105860 PAF II S S 2008 100.0 100.0
P043311 Power Development Project S S 2003 50.6 25.0 0.8 74.8
P110762 Peace Support Project S S 2008 50.0 50.0
P095977 Road Sector Development Project S S 2008 42.6 42.6
P083923 Rural Access Improve. & Decentralization S MS 2005 32.0 32.0
P071285 Rural Water Supply & Sanitation Project S MS 2004 25.3 27.0 52.3
P090967 Second Higher Education Project MS MS 2007 60.0 60.0
P071291 NP Financial Sector Project (FSTA) DFID 2003 9.6 9.6
P090038 NP Biogas Support program (Carbon Finance) 2006 7.0 7.0
P103979 NP Biogas Support program (GPOBA/DFID) 2008 5.0 5.0
P104445 IDF Reforms to Strengthen Creditor Rights 2008 0.4 0.4
aP110760 IDF Strengthening Public Procurement Office 2009 0.5 0.5
P090967 Targeted Secondary School Stipend (Japan) 2009 1.9 1.9
Overall 0.0 260.0 578.8 29.4 35.4 832.8
Result
INTERIM Strategy Note FoR NePAL | 115
Annex B8
Statement of IFC's Held and Disbursed Portfolio
as of 04/30/2009
(In USD Millions)
Committed Disbursed Outstanding
**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 6.2
2009 Buddha Air, Nepal 10.0 0 0.0 0.0 0.0 10.0 0 0 0.0 0.0
1994 Himal Power 9.6 0 0.9 0.0 0.0 9.6 0 0.9 0.0 0.0
1998 Jomsom Resort 4.0 0 0.0 0.0 0.0 4.0 0 0 0.0 0.0
2007 Bank of Kathmandu GTFP 2.1 0.0 2.1 0.0
2007 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
INTERIM Strategy Note FoR NePAL | 116
Annex B9
ISN Results Framework, FY10-FY11
Country Development Issues and Obstacles Strategy Milestones and Likelihood of Bank Group Program
Agenda Outcomes for end FY111 Realization2
Overarching Goal: Building a Peaceful, Prosperous and Just New Nepal
The goal is to bring > Societal > Application of the Medium: since the > Ongoing dialogue on
about visible, positive overall role of the
fragmentation Peace Filter for the draft National
changes in the lives of Bank Group and
the common people, and long standing new operations to its influence on Development Strategy
through lasting discrimination understand project the peace process > Efforts at better donor
peace and economic is selective, the
based on caste, dynamics better and coordination
dynamism with equity. specific milestones
This entails: (i) ethnicity, either “do no harm” have a good chance > Application of the Peace
implementing the Peace language, gender or enhance the peace of being realized, Filter to all new IDA
Agreement, security notwithstanding
reform, and cantonment
and/or religion building process via the challenges
operations
> Pervasive poverty,
management, among job sustainability facing the peace > Exchange of south-south
income inequality,
other things; (ii) and/or creation, and process and the post-conflict experiences
and inequitable
presenting a vision economy overall.
access to services, enabling inclusive (non-lending TA)
of the New Nepal and However, it may be
jobs, and resources
reflecting that vision access to services difficult to monitor > Implementation of IDA’s
> Lack of trust in
in public policies implementation
political and state and opportunities ongoing Emergency Peace
and spending; and and to measure
institutions > Payments made Support Project
(iii) grounding the robust results by
> Resort to violence,
New Nepal in the under the Emergency end of the ISN > Reconstruction of damaged
intimidation and
new Constitution
aggression to deal Peace Support public facilities (schools,
under preparation.
with grievances Project using sound clinics, roads, etc,)
Accelerating economic
> Law and order does
development, addressing fiduciary mechanisms under sector specific IDA
not prevail
poverty and exclusion,
and improving service
to compensate those operations (see below)
delivery are essential affected by the past > Second order effects of
elements of that conflict IFC’s investments and
agenda. This overarching
goal is reflected in each dialogue on improving
of the following pillars the investment climate
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.
INTERIM Strategy Note FoR NePAL | 117
ISN Results Framework, FY10-FY11
Country Development Issues and Obstacles Strategy Milestones and Likelihood of Bank Group Program
Agenda Outcomes for end FY111 Realization2
Pillar One: Promoting Capable State Structures and Systems, and Fostering Accountable Institutions
1.1 Strengthening > Despite some progress in > Implementation of OECD/ Medium: many of > Implementation of IDF grant for
Core Public Sector financial management and DAC indicators for public these reforms are Strengthening Institutional Capacity
Institutions and procurement, implementation of procurement monitoring on the critical path of PPMO
Systems (i.e. public core PEFA Actions remains and > Issuance of standard but their successful > PEFA Action Plan implementation
financial management, continued weak capacity prevails bidding documents implementation (non-lending TA and AAA)
procurement, > Permissiveness, lack (works and goods) for depends > Close coordination with DFID and ADB
accountability of enforcement, poor NCP by PPMO on political to advance reform agenda in public
institutions), step accountability and > Production of financial commitment and financial management and public
by step, building on performance measurement in statements for the resources to procurement
the advances to date public institutions FY11 according to make them happen > Analytical work and advice on: (i)
and reinforcing the > Low salaries and mixed internationally accepted within the ISN international experiences, models, and
necessary underlying incentives in the civil accounting principles timeframe options for strengthening the CIAA, the
sound public sector service which foster “petty” (IPSAS-based) for public Public Accounts Committee, and the
management principles corruption sector Public Service Commission; (ii) pay and
> Completed piloting of a incentives reform; and (iii) management
single treasury account of public enterprise reforms (GPF)
in two districts > Inclusion in possible Development
Policy Credit
1.2 Within the broader > No local elections since 1999 > On demand, just-in-time advice
goal of transforming the > The civil service regime is and analysis to the CA on global
state, putting in place a unclear; many posts are vacant experiences and different models of
new federal government > Various political and fiscal federalism (GPF)
administrative and administrative entities exist, > Synthesis of the experiences of local
fiscal structure which, with unclear jurisdictions governments to help inform the Bank
among other things, > Some structures, especially at and others (GPF/AAA)
devolves responsibilities the lowest level, are too small > Dialogue with the GON and donors on
to decentralized local to be viable the role of local governments through
governments that > Regional aspirations for the Local Government and Community
are responsive and autonomy complicate finding Development Program (LGCDP)
accountable to local solutions to the fiscal dimensions (non-lending TA) and analysis of
populations > Continuing violence inhibits governance, infrastructure and service
normal operations priorities of selected emerging towns
> New Constitution may (programmatic AAA)
reorganize current government
boundaries and structures
1.3 Changing the > Nepal ranks relatively poorly > Endorsement by High: the > Completion of Joint Bank-IFC
rules of the game to on perceptions of corruption Cabinet of a set of milestones are ongoing Investment Climate
foster a climate of and the WBI’s Governance the Regulations to modest and build Assessment (AAA)
good governance and Indicators implement the Right to on areas in which > IFC’s advice and technical support
accountability both > Nepal ranked 122nd out of Information (RTI) Act, the Bank Group has for improving the Investment Climate
within the public and 188 in the Doing Business 2007 already engaged (ICRP). In particular, engagement
private sectors 2009 survey
INTERIM Strategy Note FoR NePAL | 118
ISN Results Framework, FY10-FY11
Country Development Issues and Obstacles Strategy Milestones and Likelihood of Bank Group Program
Agenda Outcomes for end FY111 Realization2
Pillar One: Promoting Capable State Structures and Systems, and Fostering Accountable Institutions
> Inclusion of Governance and/or where we with the GON on the SEZ regime
and Accountability anticipate high > IFC’s support for the Business Advisory
Action Plans (GAAPs) in convergence with Forum
all new IDA operations the GON’s policies > Awareness workshops on corporate
plus five of ongoing and programs governance, one each with banks and
projects business membership organizations
> Introduction of Social > Non-lending TA for RTI (GPF)
Accountability (demand- > Social Accountability and Risk Analysis
side) in new operations of at least one sector and Governance
and five ongoing projects and Institutional Review of the Health
> Social Audits will Sector (GPF)
increase from 68 percent > Support to task teams for GAAP design
to 80 percent non- and implementation (GPF and other TFs)
private, grade 1 to 8 > Capacity building for civil society
schools and Bank staff on introduction of
> Preparation of Framework social accountability (demand side)
to govern Private mechanisms in IDA’s program (GPF and
Participation in Public other TFs)
Services (PPP) for GON > ID’s proposal to PPIAF to prepare a PPP
consideration framework
> Inclusion of some elements in possible
Development Policy Credit
Pillar Two: Laying the Foundation for Sustainable Economic Growth
2.1 Maintaining macro- > While Nepal has performed well • Medium-term expenditure Medium: while > Monitoring of the macro-situation, with
economic stability and under the circumstances, it has framework agreed for the milestones close watch on economic vulnerabilities
increasing fiscal space lost opportunities and now faces FY11 are modest, they and engagement with GON on contingency
for growth, along with growing expectations in the midst • Improved SEZ Law dependent on planning in case of sharp economic
implementation of of an adverse global situation submitted to the continued dialogue downturn (AAA and non-lending TA)
reforms that improve the > Nepal continues to rank poorly Constituent Assembly and openness to > Support to prepare a Medium-term
investment climate for on “Doing Business” • Public-Private Policy reforms and may expenditure Framework (non-lending TA)
private sector-led growth, > Job creation is weak Dialogue Initiated be overtaken by > Continued implementation of IDA’s
employment creation > Among other things, labor laws through IFC’s ICRP events Economic Reform TA project and
and reducing the cost of are inflexible Non-lending TA to improve selected
doing business > Strikes and other disruptions government functions
to production are a concern > 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)
2.2 Alleviating > Because of the conflict, > Rehabilitation of 8,000 Medium: > IFC lending of some $15-20 million per
bottlenecks and investment—both public and hectares of small-scale milestones are year in 1 to 2 projects
private—has been low irrigation vulnerable to > Improved sector knowledge about
INTERIM Strategy Note FoR NePAL | 119
ISN Results Framework, FY10-FY11
Country Development Issues and Obstacles Strategy Milestones and Likelihood of Bank Group Program
Agenda Outcomes for end FY111 Realization2
Pillar Two: Laying the Foundation for Sustainable Economic Growth
constraints in key sectors > Productivity in the > Increased availability overall economic Revitalizing Agriculture (programmatic
such as power, along agriculture sector is poor of power generation conditions, social AAA)
with the promotion of > The power sector is in dire capacity by 100 MW and political > IDA’s support for Agriculture
investments, productivity straits with rotating blackouts > At least one bank offers stability and Commercialization and Trade Project
improvements, job up to 16 hours per day energy efficiency credits maintenance of and ongoing and possible new
creation and expansion > New Hydro-power are licensed to private sector peace, as well as Irrigation and Water Resource Mgmt
of credit but do not proceed > 450 km of strategic confidence of the Projects
> Constraints to connectivity and roads updated to all private sector. > IFC’s investment in agri-business
movement of people and goods weather standard Intimidation of through two ongoing funds (India
are among the root causes of equivalent to an increase bidders, poor Agri Fund and IFC SME Ventures)
conflict and low growth of 6 percent of the rural contracting > Joint Bank-IFC workshop on PPPs
> Nepal has very low density population within 20 processes, and > IFC’s infrastructure advisory (one
of its road system and poor minutes (2 km) walking disruption of work feasibility study)
access to communities to all > Funding in budget sites and supply > AAA on removing the barriers to
weather roads sufficient for 500 km of chains could have expanding hydro-power (ESMAP); TA
> This results in Nepal having road maintenance per adverse effects on to NEA on demand-side management
high costs of trade year (FY10/11) realizing planned (ESMAP); TA for CFL distribution
> Few Nepalese have access to > 615 km of rural roads investments. (ESMAP); and IDA’s support for the
credit upgraded to all season Deterioration in Power Development Project (ongoing
> The banking sector has in 20 districts the fiscal situation and additional financing).
regulatory and structural > Agreement on the and/or the > IFC’s exploration of possible
weaknesses; significant framework for sector wide financial sector investments in green-field and
non-performing loans, approach in rural roads is other risk that expansion of existing IFC hydropower
inadequate provisions and > Credit Bureau equipped could affect the projects and opportunities to
undercapitalization with the necessary realization of some collaborate with the Bank to set up
> 500,000 youths enter the hardware and software to of the milestones cross-border transmission lines
labor force each year with carry out its functions (IFC) in this pillar > IFC’s advisory services with banks on
low skills and job prospects > SME lending strategy lending for energy efficiency
approved by three > IDA’s support under the ongoing Road
commercial banks (IFC) Sector Development Project, Rural
> Completion of training of Access Improvement project (ongoing
1000 girls in vocational and additional financing); and new
skills and life skills 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)
INTERIM Strategy Note FoR NePAL | 120
ISN Results Framework, FY10-FY11
Country Development Issues and Obstacles Strategy Milestones and Likelihood of Bank Group Program
Agenda Outcomes for end FY111 Realization2
Pillar Two: Laying the Foundation for Sustainable Economic Growth
> 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 Three: Enhancing Equitable Access to Services and Social Inclusion
3.1 Strengthening > Although Nepal has been able to > NLSS completed Medium: the > Non-lending TA and AAA for the survey
core diagnostics and track and monitor a number of completion of (contingent on donor co-financing)
monitoring in order to social indicators, the next wave the survey could > Poverty Assessment (AAA)
have an –up-to-date scheduled living standard survey be hampered by
insight into living that should have taken place in security conditions
standards, especially in 2008 has slipped for the surveyors
light of the global crisis > This is critical for the preparation and therefore may
and emphasis on social of the next Poverty Reduction not be completed
inclusion Strategy as the last PRSP expired on time or only
in 2007 partially completed
> Generally there is a need
to strengthen sector level
M&E system, include social
accountability and enhance
analysis of social exclusion
INTERIM Strategy Note FoR NePAL | 121
ISN Results Framework, FY10-FY11
Country Development Issues and Obstacles Strategy Milestones and Likelihood of Bank Group Program
Agenda Outcomes for end FY111 Realization2
Pillar Three: Enhancing Equitable Access to Services and Social Inclusion
3.2 Reinforcing and > Economic hardships remain a > Number of community Medium: while > Completion of the Evaluation of
extending Nepal’s barrier for many children to attend managed schools there is some risk Community Managed Schools (AAA)
ongoing efforts to reform schools, particularly among Dalits increased from 8,000 to that renewed, wide > Continued implementation of IDA’s
its education system, and Janajatis 12,000 spread conflict, Education for All and Second Higher
with a view to increase > Participation is inequitable, > Net enrollment increases intimidation and/ Education projects
access to all levels particularly in higher education, from 92 percent to 94 or severe economic > Expansion of IDA’s support via new School
of education, with a with 88 percent of students percent (grades 1-5) and conditions might Sector Reform Program SWAp
particular emphasis on coming from the highest income from 82 percent to 86 affect achieving > Continued implementation of the Pro-
attaining universal access quintile percent (grades 1-8) as these outcomes, Poor Targeted Secondary School Stipend
to primary education > Access to technical education and verified through EMIS the experience program (JSDF)
followed by basic vocational training is limited, and > Establishing an during the past > Study of Jobs and Skills (programmatic
education of very poor quality. accreditation system for conflict period AAA)
> Other systemic issues include inter higher education. indicates that the
alia timely availability of text > 4000 students from programs are quite
books, teacher absenteeism, low 1st and 2nd quintile to robust. There is a
completion rates, slow progress in benefit from financial risk of past reforms
hiring female and disadvantaged aid to attend higher being challenged
teachers, slow progress in secondary and higher
measuring learning achievements education
3.3 Addressing the > Despite many advances, some > 35 percent of pregnant Medium: while
many remaining health indicators remain women receive at least there is some risk > Health Sector SWAp
challenges in the health stubborn—namely under five four antenatal visits (29 that renewed, > Continued implementation of the ongoing
sector, building on malnutrition which stands at percent in 2006) wide spread Avian Flu project
the improvements to about 40 percent > Share of deliveries by conflict and/or > Non-lending TA and policy dialogue on
some health outcomes > Nepal is also off track in meeting trained health workers severe economic new Health Sector Strategy (AAA)
(notably the rate of the MDG concerning maternal increased from 32 percent conditions might > Continued implementation of Governance
skilled birth attendance, health and addressing HIV/AIDS in 2009 to 42 percent affect achieving and Accountability Action Plan (GPF)
infant mortality and > Data are lacking on malaria and > Share of women with these outcomes,
vaccinations), and more could be done to assess knowledge of at least one the experience
with renewed emphasis access by income quintile method of HIV infection during the past
on inclusion and in women from 56 percent conflict period
equity—including in 2006 to 72 percent indicates that
decentralization, human > Share of under-five the programs
resources, interaction of malnourished children are quite robust.
the public-private-and from 49 percent in 2006 Nevertheless, fraud
community sectors in the to 35 percent and corruption
delivery of health services > Contraceptive Prevalence remains an issue
and governance. There rate for modern methods and bidding
would be heightened increased from 44 percent and contracting
emphasis on maternal in 2006 to 48 percent processes may
and child health and > 6000 surgeries for uterine be vulnerable to
new vigor in addressing pro-lapse per year intimidation and
nutrition, HIV/AIDS > Share of children under 12 collusion
and non-communicable months immunized with
diseases DPT3 from 79 percent in
2008 to 90 percent
INTERIM Strategy Note FoR NePAL | 122
ISN Results Framework, FY10-FY11
Country Development Issues and Obstacles Strategy Milestones and Likelihood of Bank Group Program
Agenda Outcomes for end FY111 Realization2
Pillar Three: Enhancing Equitable Access to Services and Social Inclusion
3.4 Developing Nepal’s > Nepal’s current social safety > Cabinet endorsement Medium: the > Analysis of Nepal’s current system provision
vision of a coherent net is fragmented and spread of a Social Protection complexity of of diagnostic inputs to prepare an overall
and robust social safety across a number of ministries Strategy, including this task and its vision (programmatic AAA and DFID TF)
net that goes beyond > The efficiency and framework or set political economy > Continued implementation of IDA’s ongoing
its traditional informal effectiveness of targeting of principles and ramifications may Poverty Alleviation Fund II project and
structures. This vision mechanisms are unclear information base make reaching a Emergency Food Support project with
would include pensions, > The M&E system and evidence on targeting social political consensus additional financing
targeted programs and base are lacking programs for poor and on reforms difficult > Some elements included in possible
delivery of flagship vulnerable groups Development Policy Credit
safety net support such
as social allowances
and public works
3.5 Expanding other > While increasing, the access > 20,000 more rural High: while there > Continued implementation of IDA’s Rural
basic services in the rural of rural communities to households benefiting from is some risk that Water Supply and Sanitation project
areas, notably water electricity and to improved modern electricity through renewed, wide > Continued implementation of the
supply, sanitation and water and sanitation systems sustainable community spread conflict and/ micro-hydro components of IDA’s Power
off-grid electrification, remains low based micro-hydro schemes or severe economic Development Project along with additional
using community based > Moreover, the traditional > 69,000 more rural conditions might financing
mechanisms for delivery approach of contractor-led households benefiting affect achieving > Analysis of the Social Impacts of Rural
and operation construction and top-down from community managed these outcomes, the Energy (ESMAP)
operation has not been rural water systems experience during > Implementation of the Nepal Biogas Support
effective and 65,000 more from the past conflict Program (Carbon Fund) and Biogas IV
sanitation systems period indicates Program (DFID)
> 21,000 more rural families that the programs
using biogas are quite robust
INTERIM Strategy Note FoR NePAL | 123
INTERIM Strategy Note FoR NePAL | 124
INTERIM Strategy Note FoR NePAL | 125
The World Bank
Nepal Office
P.O. Box 798
Yak and Yeti Hotel Complex
Durbar Marg
Kathmandu, Nepal
Tel.: 4226792, 4226793
Fax: 4225112
Websites www.worldbank.org.np,
www.bishwabank.org.np
Public Information Center
1st Floor, West Wing
Lal Durbar Convention Center
Yak and Yeti Hotel Complex,
Durbar Marg, Kathmandu, NEPAL
Tel: (+9771) 4268195, 4249731,
4238545, Fax: (+9771) 4238546
Email: nepalpic@worldbank.org
the
world
bank
group