51992 IDA At Work Nepal: Building a Peaceful, Prosperous and Just New Nepal N epal is a country at a crossroads. Nepal's decade-long conflict formally ended in November 2006 and the country is now in transition from conflict to peace and from a monarchy to a republic. This moment in history creates welcome opportunities for a country that remains one of the poorest in South Asia, poorer than many Sub-Saharan African countries, with a GDP per capita of US$470 in 2009. The next few years are critical as Nepal manages its transition while confronting long-standing development challenges at a time of global economic downturn. The International Development Association (IDA), the World Bank's fund for the world's poorest countries, supports Nepal at this delicate juncture. As of July 2009, IDA commitments in Nepal totaled US$872.4 million. IDA also man- ages seven recipient-executed trust funds with net commitments of US$30.81 million. Bank assistance will remain flexible in order to respond to opportunities as they arise. Country Indicators 1997­98 2002­03 Most recent GDP growth (%) 2.9 4.0 4.7 ( 2008) Per capita GDP (US$) 207 261 470 ( 2008) Total expenditure (% of GDP) 16.9 14.8 20.0 (2008) Deficit financing after grants (% of GDP) 5.2 1.4 4.0 (2008) Net domestic borrowing( as % of GDP) 1.5 1.3 1.8 (2008) Official remittances ( as % of GDP) 2.3 11.0 17.4 (2008)* Net primary school enrollment (%) 69.6 82.3 91.9 (2008/09) Under-5 child mortality (per 1,000 live births) 118 91 61 (2006) Population with access to improved water sources (%) 65-70 70-75 75-80 Population (millions) 23.3 26.0 28.1 Sources: Central Statistics Bureau, Nepal Rastra Bank, Bank Staff Estimates, Ministry of Physical Planning and Works, World Bank WDI and GDF Database *This figure excludes all remittances from India and other informal flows. Including these flows, remittances are estimated to easily exceed 20 percent of GDP. Many estimates are above 25 percent. COUNTRY ACHIEVEMENTS shown significant resilience during the recent civil conflict, with annual growth averaging Nepal is a country at an "open 3.1 percent between fiscal years (FY) 2002- moment" in its history. 2007, made possible through stable macro- economic management based on a prudent Nepal's decade-long conflict formally ended fiscal stance--strong spending pressures in November 2006 and the country is now in notwithstanding. This laid the ground for GDP transition from conflict to peace and from a growth to rebound to 4.7 percent in FY2008 monarchy to a republic. In 2008, the country as peace arrived. The rebound was also aided voted in a Constituent Assembly (CA), abol- by good weather, a buoyant regional setting, ished a feudal monarchy, named a President, and higher tourist arrivals. elected a Prime Minister, formed a coalition government, and set about the task of writ- However, FY2009 growth is estimated to be ing a new Constitution by 2010, with a new less than 4 percent. Major adverse factors round of elections planned for 2011. Former include political uncertainties, low agricul- insurgents, Maoists, became the largest party tural growth, slow capital budget implemen- in the CA but fell short of majority. tation, long and frequent power outages, and security problems such as strikes and highway The new Nepal is expected to take on a fed- blockades. The global recession is affecting eral character, with significant devolution of Nepal in a limited way so far. Tourist arrivals decision-making powers from the center to are down slightly and exports are not grow- local levels of the government. The next few ing, but remittances continue to grow, albeit years are critical as Nepal manages transition at a slower rate than earlier. while confronting long-standing development challenges at a time of global economic Political uncertainty, law and order problems, downturn. Already the first coalition govern- uncertainty regarding private property rights, ment of the republic led by Maoists fell and and more generally, a business climate not a new 22-party coalition government, which friendly to investors, are hindering private excludes Maoists, has been established. The investment. Limited job opportunities in the key challenge facing the government will be country are driving many to seek work abroad to rebuild the legitimacy of the state, main- resulting in large inflows of remittances. tain law and order, and deliver benefits to those excluded and to society at large. Remittances have a problematic impact. Enormous economic challenges At above 20 percent of GDP in 2009, officially remain as growth remains low. recorded remittances (excluding informal flows and flows from India) are growing more The World Bank ranks Nepal at 195th out of slowly but are still 30 percent above the last 210 countries in terms of Gross National year's level in dollar term. Higher liquidity Income per capita (Atlas methodology, 2008). on account of remittances combined with The country largely missed benefiting from supply bottlenecks due to security problems the robust growth of its two neighbors, India as well as cartels for some key commodities, and China. Nepal's economy has, however, are keeping prices high--12-month inflation remains 12 percent. 2 Nepal's balance of payments continues to be · The coverage of potable water rose from in surplus, despite a chronic trade deficit, 71 percent in 2002 to 77 percent in 2006. thanks to the high amount of remittances. Households are increasing expenditures Some of these successes, however, create because of these inflows, and poverty new challenges, such as meeting the "bulge" incidence has declined significantly. At the of children entering secondary education. same time, remittances are increasing the Old challenges also remain such as high mal- economy's vulnerability through (i) high nutrition rates among children. In addition, dependence on foreign labor markets and (ii) inequality has risen to the highest level in erosion of both external competitiveness and South Asia mostly because wages of skilled incentives to invest in tradable activities. To workers and professionals rose fast. This take on these challenges, the government seems to be a result of a shift in demand as needs to address law and order problems higher remittances support increased con- and improve the investment climate. (Nepal sumption of modern services--such as finance ranked 111 out of 181 economies in terms of and information technology. While higher ease of doing business in the 2009 Doing Busi- remunerations for people who have gained ness survey.) skills through education and training are desirable (encouraging new generations to Nepal has made considerable seek education), higher inequality presents a progress toward reducing poverty. difficult challenge for policymakers. On the social side, achievements are many. IDA CONTRIBUTIONS Over the last decade Nepal has made con- siderable progress toward reducing poverty, Poverty reduction is the main objective with the headcount poverty rate falling underlying IDA's activities in Nepal. IDA from 42 percent in FY1996 to 31 percent in assists Nepal in its development with IDA FY2004--in large part thanks to remittances. funds and analytical and advisory work. As of While there are wide discrepancies depend- July 7, 2009, the Nepal portfolio consisted of ing on geographic location, ethnicity, caste 16 active IDA projects and seven recipient- and gender, progress on a number of social executed trust funds with net commitments indicators has been impressive: of US$872.4 million and US$30.81 million respectively. · Net primary enrollment in schools has increased from 82 percent in 2002 to 92 IDA's program over the next 2 years (June percent in 2008. Gender parity ratio in 2009­June 2011) as outlined in the Interim primary education improved from 0.66 in Strategy Note (ISN), builds on the areas 1995 to 0.98 in 2008. which have shown to be the most robust · The maternal mortality rate was halved during conflict and which are well suited to from 538 in 1996 to 281 in 2006. The infant Nepalese modalities of implementation. The mortality rate dropped from 79 in 1996 to overarching goal of the ISN is to promote 48 in 2006. Full immunization coverage the complementary processes of peace and rose from 43 percent to 83 percent during development (see box). the same period. 3 IDA support is helping overcome Foundations for a New Nepal constraints to growth. IDA's Interim Strategy rests on three pillars: Financial sector. World Bank-financed proj- (i) promoting capable state structures and ects are helping improve the supervisory systems and fostering accountable institutions functions of the central bank and stem the which addresses the cluster of challenges in losses at the two of the largest public sector adapting and constructing the public systems, banks. institutions and capacities needed for the new Nepal; Infrastructure. IDA has been supporting (ii) laying the foundation for sustainable, inclusive Nepal's Rural Water Supply and Sanitation and equitable economic growth which focuses sector since 1996. The ongoing Rural Water on over-coming constraints in the productive Supply and Sanitation Project (RWSSP) sector in terms of job-creation, productivity, connectivity and sustainability; accords priority to service delivery in remote, rural areas and takes extra pains to ensure (iii) and enhancing equitable access to the social inclusion, particularly with respect to benefits of growth, services and social inclusion which concentrates on expanding indigenous peoples, Dalits and disadvantaged and honing social programs to increase groups. Supported by 589 schemes completed opportunities and wellbeing, especially for the so far, access to clean water in rural areas poor and excluded. has increased from 77 to 85 percent of the population while access to sanitation has The over-arching goal is to help Nepal consolidate risen from 46 to 56 percent between 2007 peace--the essential underpinning of development and poverty reduction--along with social inclusion. and 2009. RWSSP now covers 74 of Nepal's 75 districts. Schemes completed thus far serve over 430,000 people with improved water supply and over 55,000 households with new latrines. Clean water and better hygiene The broader governance and anti-corruption have helped reduce diarrheal disease mor- agenda is part of the focus on building bidity among young children by at least 10 the new state. IDA will support efforts to percent. enhance transparency and accountability and strengthen citizens' voice and engagement. In the roads sector, a project is improving This will include "demand" side approaches rural transport infrastructure and services to building good governance from bottom-up and enhancing people's access to social ser- and "supply" side capacity building of public vices and economic opportunities. A survey of agencies to respond effectively to the emerg- five completed first-year roads (three in hills ing demands. Social accountability tools and and two in Terai), has found that motorized other non-lending technical assistance will and non-motorized trips by beneficiaries have be the core program in this area and will be increased by more than 20 percent; travel largely supported by IDA-managed Gover- times have dropped from an average of 2.6 nance Partnership Facility and other donor hours to 32 minutes--a 79 percent saving in trust funds. time. 4 Another Bank-financed project is increasing 1 to 4 hours to reach the nearest health or access to electricity for the population in sub-health post. In the Hill Region, 3 out of rural areas, while promoting the develop- 10 individuals have to travel 1 to 4 hours to ment of Nepal's hydropower potential in a reach the nearest health or sub-health post. sustainable and environmentally sound man- Continuing with the sector-wide approach, ner, and encouraging private participation to the health sector program intends to expand improve efficiency in the power sector. The access to, and increase the use of, essential steady expansion of community-managed health care services. Currently IDA, DFID, micro-hydro systems has so far resulted in and AusAID are pooling funds to support this coverage of about 40,000 households in 40 goal. of 51 districts that have micro-hydro poten- tial. These systems serve as entry points for Social inclusion. To help Nepal achieve its holistic and sustainable development in rural goals of social inclusion, IDA is working with areas as they generate local employment in the government and other development electricity-based enterprises, help protect partners on strengthening the policy dialogue the environment, and provide quality lighting to reach out to marginalized groups. Specifi- for children to study at night. cally, community-based projects, such as the Rural Water and Sanitation project and the To accelerate human development, Poverty Alleviation Fund have started to focus IDA's assistance to Nepal has on issues of inclusion more vigorously. A Food focused on improving the access Price Crisis Response Program was approved to education and health care. in 2008 to support immediate social safety net measures to ensure food for vulnerable Education. With funding and technical assis- households in food insecure districts as well tance from IDA, Nepal has moved toward as longer-term measures to raise agricultural community management of schools and yields and consequently the production of improved the access to education. More than staples. 8,300 schools have so far chosen a transfer to community management. At this rate, the IDA's strategy is focusing on consolidating goal of achieving community management for the peace process and helping the govern- all public schools by 2015 appears attainable. ment prepare for important post-conflict Net enrollment at the primary level rose from work. IDA-financed Emergency Peace Support 83.5 percent in 2003 to 91.8 percent in 2008. project supports the government in fulfilling Gender parity improved from 83 percent to the commitments made under the Compre- 98 percent during the same period. hensive Peace Agreement, including support to the families of those killed in the conflict. Health. IDA is also providing funding and A specific screening tool--or "peace filter'-- advice to the government on its long-term has been developed to use in the selection, health strategy and program as well as the design and implementation of operations. devolution of sub-health posts to local com- The intention is to proactively seek opportu- munities. A total of 676 health posts and nities to promote social harmony, build social 3,134 sub-health posts have been established capital and sustain and create jobs, as well since 1991. However, in the Mountain Region, as identify and mitigate potential sources of 4 out of 10 individuals still have to travel conflict. 5 PARTNERSHIPS · Life expectancy at birth has increased, but at 63 years, it remains lower than its A large number of donors are active in Nepal neighboring South Asian countries. Infant and program coordination remains chal- mortality rates are still among the highest lenging. The Ministry of Finance meets with in the region. donors periodically to share information and · Due to still high maternal mortality, wom- promote coordination. In addition, donors en's life expectancy is lower than men's. meet frequently to exchange information and · On literacy, gender disparities are com- agree on joint approaches. At the operational mon; only 26 percent of Nepal's women are level, coordination efforts are being consoli- literate compared to 62 percent of men. dated and expanded. Joint portfolio reviews · Population growth has led to fragmented occur with the government and include land holdings and depletion of forest prod- action plans to improve performance. Sector- ucts upon which much of the rural popula- wide approaches are operating in health and tion depends for its livelihood. education sectors where a few donors pool their funds. IDA's Nepal country team also To sustain poverty reduction, Nepal faces coordinates closely with the IMF team. the dual challenges of accelerating domestic growth and sharing this growth more broadly During the preparation of the recent Interim across the population. Policies to achieve Strategy Note, the IDA team undertook con- these ends will help all citizens of Nepal-- sultations with a broad range of stakeholders including groups that have been traditionally in different regions of the country. The par- excluded. But such policies will not be suf- ticipants attending consultations in Pokhara, ficient to rapidly improve the well-being of Biratnagar, and Nepalgunj included represen- disadvantaged groups--the policies need to be tatives from community organizations, politi- accompanied by efforts to build human and cal leaders, civil society, program personnel social capital among the excluded groups. and others. The group in Kathmandu included the private sector, government, civil society, Nepal is facing several transitions including: academia, international and local NGOs, moving from conflict to peace, defining a politicians, youth and donor agencies. As it new republic state and "rules of the game" implements its interim strategy, IDA is plan- in the post-monarchy era, and transforming ning to expand its outreach to civil society the social and economic relations. The fact groups and strengthen its public information that these are being faced simultaneously services beyond Kathmandu. increases the challenges and associated risks. CHALLENGES AHEAD Additional challenges are emerging. The law and order situation remains difficult with Recent improvements notwithstanding, the regional, ethnic, and political tensions. Fre- following issues need the government's and quent unrest and strikes in the Tarai region development partners' attention. are hurting economic activity and livelihoods. High dependence on remittances makes 6 Nepal vulnerable to a reversal of fortunes IDA faces substantial risks working in Nepal which could fuel unrest. The impact of the and its program is designed to take those risks global crisis may hurt exports, tourist arriv- into account. To manage and mitigate the als, and remittances. So far, all indicators are risks, the program is kept selective, simple holding up. and flexible. It builds on existing strengths and successful projects (for example, com- IDA's future role in Nepal. munity management approach) and applies the `do no harm' principle. IDA is also work- IDA will continue to enter into new commit- ing closely with development partners on ments for a number of projects, many built the development of joint approaches to deal on robust community engagement and others with the fluid and complex country situa- strengthening the foundations for future tion. At the same time, IDA's own capacity sustained growth. Strong dialogue, backed to deal with fiduciary and other risks is being by analytical work carried out not just with strengthened. the government, but also with a broad range of stakeholders, will continue, especially on However, given the transitional nature of the the issues of inclusion, state building, and country, not all of the risks can be mitigated, growth. Bank assistance will remain flexible and significant political, social and economic in order to respond to opportunities as they risks remain. If any such risks are realized, arise. IDA program will be adjusted accordingly. August 2009. http://www.worldbank.org/ida 7