Documentof The World Bank FOROFFICIAL USEONLY ReportNo. 34017-NP NEPAL JOINT IDA-IMF STAFFADVISORY NOTE ON THE POVERTYREDUCTION STRATEGYPAPER ANNUAL PROGRESSREPORT November29,2005 PovertyReductionandEconomicManagementSector Unit SouthAsia Region This document has a restricted distribution and may beusedby recipients only inthe performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. INTERNATIONAL MONETARY FUNDAND INTERNATIONAL DEVELOPMENT ASSOCIATION NEPAL Joint StaffAdvisory Note on the PovertyReductionStrategyPaper AnnualProgressReport Preparedbythe Staffs ofthe InternationalMonetary Fund andthe International Development Association Approved by Wanda Tseng andMatthew Fisher(IMF) andPraful C. Pate1(IDA) November 29,2005 I. Introduction.................................................................................................................... 1 11. ProgressinImplementingthe Strategy.......................................................................... 1 A. Macroeconomic Performance.................................................................................. 1 B. FiscalPolicies andDebt Sustainability.................................................................... 2 C. Structural Reforms and Governance........................................................................ 2 D. Social Sector Development andTargetedPrograms............................................... 3 111. MonitoringandEvaluation. .......................................................................................... .4 NEPAL Joint StaffAdvisory Noteon the PovertyReductionStrategy Paper AnnualProgressReport I.INTRODUCTION 1. The Annual Progress Report (APR) of the Poverty Reduction Strategy (PRS) provides evidence of poverty reduction, modest economic performance, and some progress in reform implementation.The PRS was presentedto the Boards o f IDA and the IMF inNovember 2003. Shortly thereafter, His Majesty's Government o f Nepal (HMGN) reviewed the implementation o f the PRS during 2002103 and the donor community provided feedback to HMGN at the Nepal Development Forum in Kathmandu in M a y 2004. This APR covers the fiscal year 2003104, which ended on July 15, 2004, but also provides preliminary information about 2004/05. The APR was finalized by HMGN in June 2005. Noteworthy among the findings o f the APR are a significant reduction in poverty during 1995196- 2003/04, progress in devolution o f school management and basic health facility to local communities, and an improvement inpublic expenditure management. However, reform implementation in other areas has been slower than expected. 2. The APR provides evidence of a significant decline in poverty incidence from42 percent in 1995/96 to 31 percent in 2003/04. The decline in poverty was higher in urban areas (from 22 to 10 percent), while poverty in rural areas also declined appreciably (from 43 percent to 35 percent). Staffs welcome HMGN's efforts to update the diagnostics o f poverty based on the most recent household survey. 3. The APR acknowledges that PRS implementation has been adversely affected by the increased politicaltensions and continued conflict. The conflict intensified during the review period and, together with political uncertainties, negatively affected economic performance and structural implementation. Staffs also note that the pace o f reform implementation has slowed down since mid- 2004, malung the PRS objectives more difficult to achieve and putting a number o f donor-supported programs off-track. In light o f this, staffs recommend that the next APR details steps that need to be taken to achieve the PRSP targets. Staffs also recommend that the APR contains a fuller discussion o f sources o f growth, fiscal issues, notably budget implementation, and the impact o f the conflict on service delivery. 11. PROGRESSINIMPLEMENTINGTHE STRATEGY A. MacroeconomicPerformance 4. The APR candidly documentsweaker than targeted growth due to continued conflict and politicalinstability.It benchmarks performance against the two PRS scenarios during the Tenth Plan period (2002/03-2006/07) - the "normal case" scenario o f annual real GDP growth o f 6% percent and the "lower case" scenario o f 4% percent. Duringthe first three years o f the Tenth Plan, growth i s estimated to have averaged 3 percent, lower than the "lower case" scenario. The report rightly notes that the conflict has affected the nonagricultural sector the most, especially trade, industry, tourism, and construction sectors, where growth i s estimated to have averaged 1.4 percent in 2002/03-2004/05. In the agricultural sector, growth is slightly higher than projected under the lower case scenario but lower than the normal case scenario (3.1 percent compared to the plan period average o f 4.1 percent and 2.8 percent in the normal and lower case scenarios, respectively). Staffs note that other macroeconomic indicators remained stable. Inflation was contained within single digits, anchored by the exchange rate peg to the Indianrupee, and international reserves remained adequate. 5. Looking forward, staffs agree with the APR conclusion that Nepal's growth prospects depend critically on improved security conditions and progress toward peace. If the security environment improves and structural reforms can be implemented, Nepal could rebound at least to growth rates targeted under the "lower" case scenario. This could be achieved through a gradual recovery inthe nonagricultural sector and a step up in development spending. Should the conflict persist, the low growth rates are likely to become entrenched. It i s encouraging that the APR recommends pressing on with PRS reforms, the conflict notwithstanding. In this context, staffs recommend that the next APR provides a fuller discussion o f the forward-loolung elements o f the macroeconomic framework and its relationship with the original PRS framework. B. FiscalPolicies and Debt Sustainability 6. Fiscalpolicies remainedprudent. Inline with the PRS scenario, the revenue-to-GDP ratio rose to 12% percent o f GDP in 2003/04, as tax administration improved. At the same time, expenditures- notably development expenditures inconflict-affectedareas-and aid inflows were lower than targeted in the budget. The APR frankly recognizes this issue and describes changes inmodalities that were put in place to boost spending, including through greater local community involvement indevelopment projects. The APR also acknowledges the rise in security-related expenditures. Overall, these revenue and expenditure trends resulted inlower than plannedoverall and domestically financed deficits. 7. Looking forward, staffs recommendthat the next APR provide a more realistic assessment of fiscal prospects. Staffs note that the 2005/06 budget provides forward-loolung expenditure projections until 2007/08. The overall expenditure targets, especially for development spending in the outer years, appear ambitious inview o f the continued conflict. Current spending targets also appear to be an underestimate on account o f higher civil service wages, security-related expenditures, and prospective contingent liabilities. Prospective aid inflows also appear overestimated. Staffs suggest that the next APR provide a more realistic assessment o f expenditures and aid inflows. Staffs recommend that the forthcoming APRs lay out the implications o f the fiscal projections for the evolution o f public debt and fiscal sustainability, including the implications o f ongoing structural reforms (inthe financial sector and inpublic enterprises) on contingent liabilities. C. Structural Reforms and Governance 8. Progress is reported on implementation of the twenty year Agriculture Perspective Plan (APP). Implementation o f some o f its components has started, such as the new District Agriculture Development Fund (providing agriculture extension services in 20 districts) and the APR also reports on some progress in rural infrastructure (notably irrigation, power, and roads). Many other components, however, are yet to be addressed. Given the considerable number o f poor in rural areas, this remains a critical area to reach PRS objectives. Overall, staffs encourage HMGNto further elaborate its agricultural strategy and articulate the concrete steps and timeline for implementation. 9. The APR justifiably takes pride in its public expenditure management reforms. These reforms have focused much-needed attention on improving the quality o f government spending. Notable among the reforms i s prioritization o f development spending, with full funding for priority activities (including social spending for poverty alleviation) to secure predictability; improvements in budget classification; and implementation o f the "Immediate Action Plan". Staffs welcome these reforms and encourage authorities to continue with initiatives to strengthen public expenditure management, notably the development o f sector strategies ("business plans") to cost the delivery o f key activities. Staffs also welcome efforts to prioritize all budget expenditures in order to make more effective public expenditures and facilitate donor harmonization under the Government's leadership. Inthis regard, staffs believe that early involvement o f the donor community during the preparation o f the APR and budget formulation could help secure external financing for PRS priority areas on a timely basis. 2 10. The APR reports progress infinancial sector reforms, but there are several challenges going forward. Inparticular, two main banks - Nepal Bank Limited and Rastriya Banijya Bank - were turned from making substantial losses to operating profits by external managers. In addition, reforms are addressing weaknesses through improved accounting, auditing standards, and loan recovery, as well as strengthened monitoring and regulatory capacity o f the central bank and the institutional framework. Staffs commend progress made during the period covered by the APR and encourage the authorities to press on with these reforms especially inrecoveries from large willful defaulters to reduce the significant negative net worth o f the banks. 11. The APR outlines progress in public sector reforms and promotion of the private sector. A few loss making state-owned enterprises were privatized or liquidated. To promote private sector participation in infrastructure development, a Roads Board and Road Fund were created. Staffs note that the APR does not cover the issue o f labor market regulations, while a reform o f labor laws was planned for 2004 in the PRS. Staffs look forward to the adoption o f the amendments to the labor law after due consultation with stakeholders. 12. The APR outlines achievements in civil service reform and control of corruption. These include: a sharp reduction in transfers; drafting o f a Governance Act and an amendment to the Civil Service Act; computerization o f the personnel information system. Staffs however note that these achievements will bear fruit only when the legal reforms are effectively adopted and implemented. Data i s tabled on the role o f the Commission for the Investigation o f Abuse o f Authority (CIAA) and the establishment o f the National Vigilance Centre (NVC) i s outlined. Staffs stress the need to assess the impact o f these mechanisms and to report progress on actions that complement them (such as the Procurement Act). 13. With respect to decentralization, a key crosscutting element of the PRS, the APR concludes that progress has been uneven because of the absence of elected authorities. Nevertheless, as indicated above, progress has been significant in terms o f decentralization to communities in the health and education sector. Also District Periodic Plans are now prepared in52 districts and district level public expenditures has increased. The APR also notes that community-owned development initiatives are more resilient than others. D. Social Sector Development and Targeted Programs 14. In education and health, PRS implementation is moving forward. As planned in the PRS, management o f schools and basic health facilities i s being devolved to local communities. Other achievements in education include the introduction o f block grants and funding o f unaided community schools. In2004, the National Water Supply and Sanitation Policy has been updated inline with the PRS, notably to expand the community-based approach inrural areas. This policy i s complemented by Sector- Wide Approaches (SWAPS) in the health and education sectors. The APR outlines progress inoutcomes, including an increase in net enrolment in primary school (from 81 to 84 percent between 2001/02 and 2003/04), in one-year old infant receiving DPT3 (from 80 to 90 percent over the same period), and in households with sanitation facility (from 20 to 39 percent over the same period). The APR, however, notes that the benefits o f the decentralization policies are not observed in all districts. Staffs suggest that the APR could assess progress in these reform areas in light of the benchmarks set in the PRS. For instance, while encouraging, progress in transferring school management to local communities (from no school in 2001 to 1,500 in 2003104) needs to be sustained in order to meet the PRS target o f more than 6,000 schools in2007. 15. The APR reviews progress towards MDGs, noting improvements in literacy, school enrollment, and access to safe drinking water. It notes that bringing women and the disadvantaged populations (Dalits, Janjatis) into the development mainstream i s the key for accelerating progress towards MDGs. It also stresses that progress towards MDGs i s being threatened by the conflict. Finally, 3 the APR also notes progress in access to electricity, piped water, and toilet facilities, as well as improvements in accessibility to schools, health posts and hospitals, agricultural centers and roads. The achievements o f Nepal in poverty reduction and improvements in human development indicators are commendable and the diagnostics o fthe challenges i s candid. 16. The APR documents some progress in implementing targeted programs as evidenced by increased spending. However, staffs note that, for most programs, monitoring mechanisms are not yet in place as envisaged inthe PRS. The APR recognizes that the challenge o f social inclusionrequires looking much beyond these targeted programs and mainstreaming this issue across the budget. Staffs encourage HMGNto continue developing the tools to monitor social inclusion and evaluate the impact of public expenditures and policies. 111. MONITORINGEVALUATION AND 17. Progress has been made in establishing the framework for a sound monitoring and evaluation systembut implementationremainsslower than anticipated.HGMNunveiled the Poverty Monitoring and Analysis system (PMAS) in 2004 and has clarified the institutional home in the National Planning Commission for ensuring its implementation. It has also clarified plans for trachng outcome/MDG indicators (via the NLSS and the Demographic and Household Surveys, DHS) and initiated efforts to improve monitoring o f key intermediate indicators to track progress on outputs from public investment inkey areas - most notably in education and health. Staffs commend HMGN for these very important achievements. Staffs also urge HMGNto step up the implementation o f the monitoring and evaluation fkamework especially in the high priority areas like improving quality o f the education, health monitoring systems, and expenditure trachng in key sectors. This i s particularly important given the urgent needto assess impact o fdevolution and expenditure reformon outputs and outcomes. 18. The APR acknowledges that the original target set by the PRSP/Tenth Plan to reduce povertyincidenceto 30 percentby 2005/06 has infact already beenmet. Staffs commendHMGNfor including a preliminary analysis o f the drivers o f this reduction in poverty incidence (notably remittances). In order to understand prospects to reach the MDG objective o f halving the 1990 rate o f poverty incidence (i.e. lowering the poverty headcount rate to 21 percent by 2015), it would have been helpfulif the APR had included a discussion o f how the developmental impact o f remittances could be exploited to improve the investment and productivity in the local economy and, in particular, what measures are envisaged to accelerate growth in agriculture. It would have also been helpful for the APR to present a more disaggregated poverty profile (i.e., present trends in indicators inBox 2 across different quintiles o f per capita expenditure, across gender as well as ethnic and caste groups), especially since these data are available inrecent or forthcoming reports o f the Central Bureau o f Statistics. 19. Finally, while the achievements outlined in the APR are significant, their impact on outcomes is yet to be documented. A number o f achievements are related to instruments that are expected to deliver results, most notably public expenditure management reforms and devolution to local bodies. But the slow progress in assessing impact on outcomes raises a range o f issues: are these reforms delivering their expected results? I s local ownership and accountability as strong as anticipated? Staffs welcome the serious efforts made at developingHMGN'smonitoring systems and the focus on outcomes. They also urge HMGN to continue developing its monitoring and evaluation capacity to address these issues in order to meaningfully continue the implementation o f the PRS and adjust its strategy where needed. 4 A N A S S E S S M E N T OF T H E Implementationof the (PRSP) Second Progress Report ONTHE ROADTO FREEDOMFROMPOVERTY N A T I O N A L P L A N N I N G C O M M I S S I O N Singh Durbar,Kathmandu, Nepal June2005 A N A S S E S S M E N T OF T H E ONationalPlanningCommission SinghDurbar,Kathmandu,Nepal,June2005 Design and Processed by: Wordscape, Sanepa, 5520755 Contents PREFACE vi ABBREVIATIONS vii SECTIONI:INTRODUCTION Background Organisationofthe report SECTIONI1:KEYNATIONALOBJECTIVESAND STRATEGIES 3 Thenationalsituation 3 Povertyprofile 4 PRSPandthe MillenniumDevelopmentGoals (MDGs) 8 RecentInitiativesonthe MDGs 10 SECTION111:THEPATHTORECOVERY 11 Sustainingmacroeconomicstability 11 Publicdebtmanagement 17 SECTIONIV:PUBLICEXPENDITUREMANAGEMENT 19 MediumTermExpenditureFramework (MTEF) inNepal 19 MTEFandfiscal performance 21 Budgetrealism 21 Inter-sectoralallocation 23 SECTIONV BROADBASEDGROWTHPERFORMANCE 27 Accelerating agriculture growth 27 Irrigation 29 Roadsfor development 30 Powerto the people 31 Pro-poorforestry 32 Non-agriculturalgrowth 33 SECTIONVI:SOCIALSECTORPERFORMANCE 39 Education 39 Health 41 Drinkingwater andsanitation 44 SECTIONVII:PERFORMANCEINSOCIALINCLUSIONAND TARGETEDPROGRAMS 49 Inclusion 49 Whoare excluded 49 Targetedprogramsandsafetynets 50 Monitoringtargetedprograms 53 Beyondtargetedprogramsto inclusivemainstreamprograms 53 Evaluationoftargetedprogramme 54 SECTIONVIII:PERFORMANCEININSTITUTIONAL REFORMSAND GOVERNANCE 55 Civilservice reforms 55 Decentralization 56 Corruptioncontrol 58 SECTIONIX:THECONFLICTANDTHE DEVELOPMENTRESPONSE 59 SECTIONX:TRACKING MECHANISMSANDLEARNING 63 Povertymonitoringandanalysis system 64 Implementationmonitoring 64 Outcomemonitoring 64 Impactassessment 65 Povertymanagement informationsystem (PMIS) 66 Monitoringmechanismfor targetedprogram 67 Districtpovertymonitoringandanalysis system(DPMAS) 67 Resultbasedmanagementandmonitoring 61 SECTIONXI:RESOURCENEEDSANDAID HARMONIZATION 69 Resourceneeds 69 Aid harmonization 70 SECTIONXII:CONCLUSIONS 73 REFERENCES 75 ANNEXES 77 LISTOFTABLES 2.1 Target andperformance onMDGs 9 3.1 Macroeconomicperformance indicators, 1999/00-2004/05 12 3.2 Macroeconomic performance andprojections 14 3.3 Nepaleseworkers indifferentcountries (excludingIndia) 16 4.1 Budgetaryperformance (2001/02 to 2003/04) 22 4.2 Development budget and trends 22 4.3 Allocation by priorityclassificationinthe MTEE2002103 to 2004/05 23 4.4 Composition ofdevelopment expenditure, 1999/00-2004/05 24 4.5 Centralanddistrict level expenditure, 1999/00-2004105 25 6.1 Major accomplishments: Education 40 6.2 Major accomplishments: Health 43 6.3 Major accomplishments: Drinkingwater and sanitation 45 7.1 Budgetallocationfor selected targetedprograms 52 7.2 Development expenditure classifiedby strategicpillars ofPRS (2003104) 53 8.1 CIAAactivitiesandoutcomes, 2000/01to 2003/04 58 11.1 Projectedexpenditure andfinancing for 2005106-2006/07 IO BOXES Box 1 Distinct Featuresof the PRS (TenthPlan) 2 Box 2 Poverty profile: NUS-IandNLSS-I1 5 Box 3 PRSPPillars 7 Box4 MTEFclassifications 20 Box 5 APPSP update 28 Box 6 Kamali'sroadto development 32 Box 7 BankingonNBLandRBBreforms 36 Box 8 Community schools 40 Box 9 Basic healthindicators 43 Box 10 Inclusioninruralwater supply andsanitation 46 Box 11Some feedback onthe FreeTextbook andNational Scholarship programs 53 Box 12 Impact assessmentconductedinSiraha District 65 Box 13 Results-basedManagement 67 Preface The PovertyReductionStrategy/TenthPlanprogressreport inyour handsis testimony ofthe silent development efforts that havebeentaking placeinNepalafter 2002/03. Theoutcomesunderscorethe appropriatenessofthedevelopmentapproachandalso makeastrong casefor redoublingefforts tobringabout meaningfulchanges inthelives ofthe peopleat the grassroots. The fact that Nepalhasmade considerable progress on PRSPimplementationdespite theviolent insurgencyinwhichdevelopment programs were carried out is also anindicationoftheresilienceandpotentialto bounce-back to higherperformance levelsinthe event ofanimprovement inthe groundsituation. The achievementsmadesofarhaveresultedfromthe effortsofmanydevelopment actors: governmentandits agencies, non-governmentalorganizations,communityorganizations andsettlementlevelusergroupsandtheir constituentsthe menandwomenofNepal. Theother important actorsthat haveassistedthe changeprocessare the development partners,whosesupporthasbeeninstrumentalintranslatingourvisionsintoprogramsand outputs.Icongratulateallofyoufor your efforts, andrestatethe government'scommitment totheroadmapprovidedbythePRSPandtheMillenniumDevelopmentGoals (MDGs) as strategyto attainour development objectives. Nepal is undergoing through the most difficult time inhistory. The nine-year-old insurgency and continued politicaluncertainty pose the most difficult challenge to development. Our challenge i s to be able to overcome the obstacles and ensure that development activities cancontinue, becauseby addressing to the basicneedsof the people,we mayalsobe able to set the stagefor long-termconflict resolution. Therefore, we haveno choice but to continue our development efforts because therein lies our opportunity to address the age+oldinequalities andgrievances, which are also saidto fueltheviolent insurgency. Ourability toprogressasanationdependsonhowsoonwe candevelop ourvillages, andensuring equalopportunities to every one irrespective ofcaste, class, ethnicity or religious beliefs and language groups. The road ahead is not easy, but what is now certainis that we are headinginthe right direction. Iwouldhketothankallthosewhoprovidedvaluablecontributionstopreparethisprogress report. Furthel; Iappreciatethe support providedbyUNDPtoproduce thisreport, andall development partnersfor their contributiontowards institutionalisation ofthe Poverty MonitoringandAnalysis System-the basisofthisreport. Ifurtherhope allstakeholders will continuously engageandsupportfurtherinstitutionalisation ofthisprocess. DLShankar l? Sharma Vice-Chairman, NationalPlanningCommission v i ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) Abbreviations AGO Office of the Auditor General AMIS Agency Managet IrrigationSystem APP Agriculture Perspective Plan APPSP Agriculture PerspectivePlanSupport Programs ARI Acute Respiratory Infection AsDB Asian DevelopmentBank ASYCUDA Automated SystemofCustomData CBS Central BureauofStatistics CEAPRED Center for Environmental andAgricultural PolicyResearch,Extension andDevelopment CGISP Community GroundWater IrrigationSector Programme CIAA Commission for Investigation ofAbuse ofAuthority CPR ContraceptivePrevalenceRate DADF District Agricultural DevelopmentFund DDC District DevelopmentCommittee DEF District ExtensionFund DFID Department for International Development DPP District PeriodicPlan DPT Diptheria, Pertusis andTetanus EPI ExpandedProgrammeOnImmunisation FCGO FinancialComptroller General's Office FY FiscalYear (mid-Julyto mid-July) GDP GrossDomesticProduct HDR HumanDevelopmentReport HMGN HisMajesty's GovernmentofNepal HMIS HealthManagementInformation System IAP Immediate Action Plan IDA InternationalDevelopmentAgency IDE InternationalDevelopmentEnterprises IMF InternationalMonetaryFund LIF LocalInitiatives Fund LSGA LocalSelf-GovernanceAct MDGS Millennium Development Goals MIS ManagementInformation System MOAC Ministry ofAgriculture andCooperatives MOES MinistryofEducationandSports MOF Ministry ofFinance MTEF MediumTerm ExpenditureFramework NBL NepalBank Limited NDA N e t Domestic Assets NDHS NepalDemographic andHealthSurvey NER NetEnrolment Rate I NFHS Nepal Family HealthSurvey SECOND PROGRESSREPORT vii NGO Non-GovernmentOrganization NLSS NepalLivingStandardsSurvey NPA Non-performingAssets NPBT N e t ProfitbeforeTax NPC National PlanningCommission NRB NepalRastraBank NTFPs Non-Timber ForestProducts NTIP NewTechnology IrrigationPrograms NVC NationalVigilance Centre PAC PublicAccounts Committee PAF PovertyAlleviation Fund PAN Permanent Account Numbers PMAS Poverty MonitoringandAnalysis System PRGF Poverty ReductionandGrowthFacility PRSC Poverty ReductionSupport Credit PRSP Poverty ReductionStrategyPaper PRS Poverty ReductionStrategy RBB RatriyaBanijyaBank Rs. Nepalese Rupee SAPPROS SupportActivities for PoorProducersofNepal SEZ SpecialEconomic Zone SIMI Small IrrigationandMarketing Initiatives SRN Strategic RoadNetwork SWAP SectonvideApproach Program VAT Value Added Tax VDC Village DevelopmentCommittee WB World Bank WUA Water UsersAssociation viii ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) Introduction BACKGROUND epal's Poverty Reduction Strategy (PRS) is also its Tenth Plan. T h e government began implementing the fiveeyear Plan ia the Fiscal Year 2002103. This is the annual progress review for the FiscalYear 2003104. PRS implementation inthe 2002i03 was reviewed in May 2004, and the results were discussed at the Nepal Develope ment Forum (NDF). The implementation of the Poverty ReductionStrategy Paper (PRSP)beganinan extremely adverse political and economic environment. T h e insurgency had be- gunto escalateamidpolitical instability and the economy hadcontractedin2001/ 02. The economy recovered, comparedto 2001/02,while the larger socio-political environment remained fluid and tentative. Insulating the economy from uncer- tainties and maintaining progressinattaining the PRSP targets, therefore remains a major challenge. Nepal's basic economic indicators have improved in the past two years and although still short of the ideal, they remain at acceptable levels. It was possible to attain and maintain the growth levels because of stringent fiscal and monetary discipline, and enhanced efforts to reduce poverty through im- provements ingovernance, corruption control, and continued implementation of targeted and quicksyielding programs inareas affected by the insurgency. ORGANISATIONOFTHE REPORT The report is dividedinto 12 sections. Sections Iand I1include an overview of poverty inNepal, the key elements of the Poverty Reduction Strategy and also SECOND PROGRESS REPORT 1 discussi t s linkageswith the MillenniumDevelopment Goals (MDGs). Section I11 discusses some of the key macroeconomic indicators and achievements. Section IV sums upgovernment efforts to realign public expenditure manage- ment for supporting the PRSP goals. Achievements by sectors, including the treatment of crosscutting themes such as gender and social exclusion, envi- ronment, decentralization, participation, and the mobilization of CBOs and The Tenth Plan is Nepal's Poverty Reduction Strategy Paper (PRSP). It recognises the role of local bodies, community organisarions and NGOs in development and reflects the government's commitment to decentralization and functional devolution. It uses modern planningtools and the logical framework to define institutional tasks and responsibilities, being done for the first time in the history of periodic planning in Nepal. It has clearly defined priorities: PI, P2 & P3 projects and clear-cut allocation/ = disbursement commitments. It has extensive M&E provisions, including a commitment for annual poverty monitoring, andalso for the first time in Nepal-process monitoring. the private sector, are documented insections V to VII. SectionVI11reports performance interms of institutional reforms and governance improvements and Section IX discusses strategies inconflict-affected areas. Section X corn. prises an analysis of the system to track progress and Section XI discusses resource needs and issues about aid harmonisation. The conclusions of the review are presented inSection XII. 2 ASSESSMENT OF THE IMPLEMENTATIOK OF THE TENTH PLAN (PRSP) Key National Objectives and Strategies THENATIONAL SITUATION epal's economic growth was in accordance with the global aiid regional trends. Coritinucd stability anct growth in the Indian economy helped anchor the Nepalese economy, which has re+ covered after contracting by 0.6 percent in 200li02. Political instabile ity and continued violence caused development to sloudown throogh~ out the review period, resulting in: Damage of development infrastructure, Low private sector investment, Slow government spending o n development, Mergers and closures of financial, industrial and service establishments, Disruption of work o f I/'NGOs, community organisations and other devel- opment partners, Disruption of production, trade and transport by frequent closures, and General insecurity inboth urban and rural areas. The most affected economic sectors are trade, industry, tourism and construc- tion. Annual tourist arrivals remainedat almost one-halfof the roughly 500,000 tourists in 1998/99,and tourism income declined by more than a quarter. Politicalinstability and the resultingprotestsandbandhas (generalstrikes) remained throughout the review period, disturbing government efforts to take necessarymea- SECOND PROGRESS REPORT 3 sures to restore peace and create a climate for re-energizing economic activities. Besides, Nepalfaces other development challenges,which include: Structural challenges, such as low factor productivity compared to other South Asian countries and low resource availability. High contribution of agriculture to the GDe while agricultural productivity remains dependent on factors not fully controllable. These include produc- tivity loss caused by low quality fertilizers, seasonal irrigation and high de- pendence on the monsoon, displacement of domestic goods by cheap and low quality imports, lack ofadequatemarket access (ruralroads), andcontin- uedproductionfor subsistencerather than market. Low domestic savings. High reliance on exports that in turn rely o n concessionary agreements and quotas, rather than o n competitive goods. Declining public and private sector investments. Weak project planning and management resulting inlow absorptive capacity. Weak financial sector and regulatory oversight. Inefficient public enterprises, and High dependence o n foreign aid. POVERTY PROFILE The Nepal Living Standards Survey 1995/1996 (NLSS-1996) had reported a povertyincidence (head count estimate) of 42 percent. Itwas highest-as high as 72 percent-in the Far-western Hill and Mountain regions. The Tenth PlanPRSP goalswere set based on the end-2001/02 estimate of poverty, which was about 38 percent. T h e NLSS2003/04 reported a decline inpoverty incidence by 11percentagepoints from 42 to 31percent. It also showedhigher poverty levels inrural areas. However, the rural-urbandisparitiesare stillalarming: NLSS2003/04 reportedruralpovertyat 35 percent compared to 10 percent in urban areas (only 3% in urban areas of KathmanduValley). Bydevelopment region, theincidenceofpovertyislowestinthe Central Development Region (27%) and highest inthe Mid-Western Development Region (45%). There are smaller proportion of populationbelow the poverty line in theTaraiandmoreinthe HillandMountainregions(For detailssee: Annex 2). Nepal's poverty is explained by many factors-high illiteracy, poor health and low sanitation, low food grain productivity, high child malnutrition, poor access to basic servicesand inequities resultingfrom a tradition-drivensocial structure. 4 IASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) Among the population groups, poverty is highestamongpeopleof the so-called "lower" castes and indigenous groups. The NUS 2003/04 reported major im- provements inliving standards and access to basic services (Box-2). -: NLSS-I and NLSS-II Percentageof HHreportinglessthan adequate NLSS-I NLSS-II Food consumption 50.9 31.2 Housing 64. I 40.6 Clothing 57.6 35.6 Health care 58.7 28.3 Schooling 45.4 21.4 Total income 72.6 67.0 Adult literacy,Total 35.6 48.0 (15 +) F 19.4 33.8 M 53.5 64.5 NER in primary school Total 57.0 72.4 Female 46.0 66.9 Male 67.0 77.9 Children fully immunized 36.0 59.4 Access to electricity 14.1 37.2 Access to piped water 32.8 43.9 Access to toilet facility 21.6 38.7 Householdaccessto facility within 30 minutes Primary school 88.4 91.4 Health posdhospital 44.8 61.8 Agriculture centre 24.5 31.9 Commercial banks 20.7 27.8 Paved road 24.2 37.2 Motorable road 58.0 67.6 A comparisonofdataofNUSIandI1revealsmajorimprovementsinthe people's access to basic services. The nominal per capita consumptionhas grown from Rs. 6,802 in1995/96to Rs. 15,848in2003/04.The nominal per capita consumptionof thepoorestpopulationquintilehasalsoincreasedfromRs.2,571 toRs.4,913 during the same period.The share ofnon-farmhouseholdincomehasgrownfrom 22 per- centin1995/96to 28 percentin2003/04.Remittanceswere amajorfactor contrib- utingto increasesinnon-farmincomeandpercapitaconsumption.In2003/04,3 1.9 percenthouseholdswere receivingremittances, upfrom 23.4 percentin1995/96. Boththe RuralHouseholdSurvey,2001 (RHS) and the NLSS-I1report signifi- cant improvements inthe livingstandards of the people, suggestingasubstan- tial decline inthe poverty level. SECOND PROGRESS REPORT 5 However, the findings are still being analysed to better understand poverty in terms of rural/urban, regional, sectoral and caste/ethnic distribution. But the NUSI1indicators support the RHS estimates. Among factors contributing to poverty reduction were increased remittances, higher wages (including agricul- ture) andincreasedurbanisation. Thepopulationlivinginurbanareashasdoubled between the two NLSSrounds. T h e wages are higher inurbanareas, whichhave also contributed towards reducingruralpoverty and improving livingstandards. The following explain the improvement inlivingstandards betweenNLSS-I andNLSS-11: RealGDPgrew by about 5 percent per year between 1996and 2001, which combined with a decline inpopulation growth and average household size, caused per capita and household income to grow. Agricultural growth remained at about 3.9 percent during the review pe- riod: it was higher than population growth (2.1 %), resulting inincreased per capita food availability. Crop diversification and the shift towards high value crops, off-season vegetables, meat and eggs, horticulture products, etc., contributed to in- creasing income of rural farm households even though the two surveys do not show increases in real agricultural incomes of rural households. This could have resulted from decline inrelative prices of agricultural products. Growthinremittances, by more than 30 percent per year, and the increase inthe numberofhouseholds receiving remittances (from 23.4% in 1995/ 96 to 31.9% in2003/04). Improved employment opportunities in the services sector, and Social sector improvements resulting from increased government spending onhealth, educationanddrinkingwater programs, andhigher generalaware- ness about the services available. Poverty reduction could have been sharper, and sustained, and it could also have influencedother economic sectors, if the general environment had been normal. The insurgency and politicaluncertainty negatedsome of the achieve. ments and PRS implementation will remain influenced by the general politi- cal and economic environments. The Tenth Plan/ PRSP: The original goal of the PRSPKenth Plan was to reduce poverty from 38 percent in2001/02 to 30 percent by 2006/07. The Plan i s founded on an inter-related, four-pillar development strategy (Box-3). The 1 first strategy aims to achieve highand sustainedbroad-based growththrough a High broad-based and sustained economic growth. rn Improvement in access and quality of infrastructure, social and economic services in rural areas. rn Greater social and economic inclusion of poor men and women from all groups including Dalit and disadvantaged Janajatigroups through mainstream as well as targeted programs, and rn Good governance to improve service delivery, efficiency, transparency and accountability. combination of approaches. These include promoting faster non-agricultural growth by creating an investment-friendly environment through adherence to liberaleconomic policy and focusing on agricultural growth to raise income, employment and food security inrural areas. The PRS seeks to maintain mac- roeconomic stability through structural and policy reforms in key areas that influence-directly and indirectly-the attainment of poverty reduction tar- gets and the MillenniumDevelopment Goals (MDGs). T h e second PRSstrategy focuses on improving access to and quality of mfrastruc. tures as well as social and economic services. Better roads, reliable electricity and communications facilities are needed not only for achieving h g h and sustained growth but also for ensuring effective service delivery to rural populations. The thirdPRSpillar aims to improve access across all sectors and programsfor socially excluded groups such as Dalits, Janjatis, Muslims and women and to provide safety nets for vulnerable groups, including children, senior citizens and widows and those displacedby the conflict. There is a strong focus o n the importance and role women can play in development, and on measures to assure that they and other excluded groups have access to education, health services and economic opportunities needed to help them overcome poverty and make greater contribution towards increasing national productivity. The fourth PRSP strategy aims at creating a simple, transparent, responsive and accountable government to cater to all inan equitable and efficient man- ner. The actions envisaged include downsizing government by devolving more functions to local bodies and involving local communities in development activities, encouraging Community Organizations (COS),Non-Government Organizations (NGOs), and international NGOs in community awareness and mobilization; income generating activities and service delivery; encour- aging private sector investment for employment generation, streamlining the planning and budgeting system and improving resource mobilisation. SECOND PROGRESS REPORT 7 PRSP AND THE MILLENNIUM DEVELOPMENT(MDGs) GOALS Nepal endorsed the MillenniumDeclarationinSeptember 2000 and has com- mitted to work towards achieving the MDGsby 2015.The MDGsset quantita- tive poverty reduction targets and specific goals inhealth, education, gender equality, the environment and other aspects of Human Development, mea- sured in terms of outcome and impact indicators. Several studies suggest that the linkages between public expenditure and sectoral outcomes remain weak and need to be enhanced througheconomically sound pro-poorpoliciesbacked by strong accountable institutions to implement the programs. T h e MDGsmaynot be attainedbyNepalunless the on-goingefforts are sustained and implementedthrough the 12thPlan period or for two more periodic plans. Most of the MDG-relatedindicators are incorporated inthe PRSPand some spe- cific targets are also compatible with the MillenniumDevelopment Goals. There were doubts about whether Nepalwould be able to attain the MDGsby 2015 in almost every categoryexcept thedrinkingwater sector during the earlyyearsofthe TenthPlan. Itisalso clear that women, DalitsanddisadvantagedJanajatisaccount for a majority ofthose currently not reachedby socialservices.Therefore, bringing these groups into the development mainstream is key to attaining the MDGs.In primary education for example, girls from the Dalit and disadvantaged Janajati households make up most of the out-of-school children. These groups have to be brought into the system if the education MDG is to be attained. Targets and achievements for selectedMDGindicators are given inTable 2.1. Basedonavailable data, progressonthe netenrolmentratioandpeoplewith access to safe drinking water is encouraging, even though there have beenreports about the deterioration inservice quality. Similarly, even though NLSS-I1results show significant improvements inthe poverty headcount, poverty levels insome popu- lation group-rural HillJanajatisandpocketsinthe Hilland Mountainregions throughout the country-appears to have increased. Achieving the poverty re ductiongoal therefore would require restoring economic growth at least to levels attained during the second half of the 1990s, and reducing income inequality. There are also possibilities of Nepal being able to attain some other goals and targets, including those related to child healthand primary education. Net Enrolment Rate (NER) at the primary level may remain slightly short of the MDGtargetbutachevingcompletionoftheprimary cycletargetremainsadistant possibility. Meeting the NERgoal requiresincreasedefforts to target children from very poor families, Dalits, disadvantagedJanajati groupsand girls. T h e attainment 8 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) Goal Base Base period 10thPlan MDG Progress Targets: Period of the 10th target@(2006/07) target 2003/04 12th 1990/95 Plan(2001/021 Normalcase Lowercase (2015) Plan @The Ioh Plan has ~ rscenarior'norrnalcase (peace) and lower case (cononuedconflict).*Adult literacyrate has been revisedfrom o 49 2% as mentioned in the IFPlan to 44 percent by MOES. *esomated from linear wend * refers to 2001102. SourcesThe I Oh Plan,NFHS 1996. NDHS 200 1, NLSS II 2004,MDG Progress Repon 2002,and repomng ofthe MOES. of many other goals depends on the ability to attain the third goal of the MDGs, and therefore narrowing the gender gap is of utmost importance. However, the progress made in the 1990s towards attaining MDGs remains threatened by the conflict. Restoring peace and allowing the economy to func- tion at levels it did during the second half of the 1990sare therefore prerequi- sites for attaining the universal goals. Effective poverty reduction requires continuous economic growth, which i s possible through technological advancement and capital accumulation, in- cluding human and social capital. The MDGs, being ends in themselves, are integral to the poverty reduction goals. Every society desires reduced hunger, gender equality, improved health and better education, etc. The achievement of the goals in these areas i s also equivalent to capital inputs that can re- energize economic growth and lead to greater overall well-being. Healthier, better educated workers and improved water, sanitation and infrastructures can help to raise output per capita. Therefore, investing for achieving the MDGsis part of the overall capital accumulation and empowerment process. Political uncertainty and conflict have affected service delivery and hampered the efforts towards building the social capital discussed inthe preceding para- SECOND PROGRESS REPORT 9 graph. Overcoming the difficulties resulting from the general environment can be possible by devising and implementing non-conventional approaches for servicedelivery anddirect income transfers, whichhasbeenthe approach HMG/ Nhas adopted. For example, after 2001/02 Nepalhas devolved five tasks (pri- mary education, management of health posts, maintenance of rural roads, agri- culture and livestock extension servicesand postal services) to localbodies and communities, and plans to devolve more functions. Since underdevelopment continues to feed the conflict and development can- not wait until the violence is over, the government has shifted its approach to include working directly with communities, inadditionto forming partnerships with local institutions. The devolution processbegan with transfer of manage- ment responsibility of primary schools, sub+healthposts and agriculture and livestock extension services. T h e government is also transferring responsibility for buildinglocalinfrastructures, such as small irrigation schemes, rural drinking water systems and rural roads, to local bodies and community organisations. HMGNwill continue to rely on rapid devolution of functions to local bodies and communities andimplement programs throughparticipation as a strategy to ensure continuity to activities aimed at attaining the MDGs. RECENT INITIATIVES ON THE MDGs Mostof the indicators and targets of the MDGsare included inthe TenthPlan. However, inorder to ensure focused realisationof the goals, the government is undertaking a needs assessmentexercise and also preparing the second MDG progress report. The MDG needs assessment exercise encompasses five sec- tors-primary education, child and maternal mortality, communicable dis- eases, drinking water and sanitation, and ruralroads and electrification and is expected to help identify interventions and estimate resources necessary for meeting the MDGs. Similarly, the MDGs progress report will assess perfor- mance regarding all the MDGs and the policy environment, and recommend policy options needed for achieving the goals. 10 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) - The PathTo Recovery SUSTAINING MACROECONOMIC STABILITY acroecononiic perforniance has been positive-albeit on the lower side-during the years of PRS iinpletnenration. The decline in output in 2001/02 made way for annual growth of 3 to 4 percent during the first two years o f the PRSP/"renth Pian. Inflation remains under control-below 5 percent per year. The budget deficit shrank reflecting buoyant revenue collection and controlled expendie tures while current account deficit widened, reflecting increased im. ports. Significant inflows of external assistance and remittances helped to increase foreign exchange reserves. The achievements are significant given the challengesfaced by the economy that were compounded by the fluid political situation and the insurgency. HMG/N has taken various measures to maintain macroeconomic stability. These include prudent domestic borrowing, strict fiscal discipline, tight mon- etary control and implementation of financial sector reforms. Other reforms aim at making the economic environment investor-friendly. Macroeconomic developments: The economy contracted by 0.6 percent in 2001/02.GDPgrowthrecoveredto3.2 percentin2002/03 and3.3 percentin2003/ 04.The preliminary forecast ofeconomicgrowth isabout 2.5 percentfor 2004/05. Overall, GDP growth remainslower than that targetedfor the Plan period. SECOND PROGRESS REPORTI11 On average, agricultural sector growth was 3.9 percent during the review pe- riod (Table 3.1). However, agriculture still remains dependent on the mon- soon. The non-agriculture sector rebounded from a contraction (1.9 percent) in2001/02 to growth by 3.1 percent in 2003/04. Manufacturing grew by 1.7 percent in 2003/04, and construction by just 0.2 percent. These sectors have been badly affected by the economic and political uncertainties. conomic performance indicators, 1999/00-2004/05 ONOMIC GROWTH Real per capira GDP growth rate 3.8 INVESTMENT AND SAVINGS (46 OF GDP) Totalmvesunent Current account balanc Netaid disbursements * Projected, Sources. Varrous publicattons of NPC, CBS, and NRB Investment (including stock) hasincreased,compared to the pre-TenthPlanlevels (24% ofGDP),reflectingmanly accumulation ofstock.Public investment (devel- opment spending) has declined by about 3-percentage points in terms of GDC 12 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) reflecting disruptions caused by the insurgency and also the rationalization of expenditures and better-targeting. Private investment grew from 17 percent of GDPin2001/02 to 21 percent in2003/04 while domestic savingsrose slightly, by 0.5 percentage points (in GDP terms) during 2003/04. Generally, low economic growth causedthe downturn insavings. Fiscaldevelopment: The reduction inthebudgetdeficit (from5.4% ofGDPin 2001/02 to3.7% in2003/04, Table3.1 andAnnex 3) isdue to two factors, one of which was improvement inrevenue. Revenue collection rose from 11.9 percent of GDP in2001/02 to 12.6 percent in2003/04. Implementation of Automated Systemof CustomData (ASYCUDA) at major custom points, mandatory Value Added Tax (VAT) and Permanent Account Numbers (PAN) registrations and income taxes, andimplementation of three- year custom reforms program resulted inan increase inthe numberof effective tax payers. Another factor that explains the lower budget deficit is the decline indevelopment spending (around 6-7% ofGDP),resulting from implementa- tion difficulties caused by the security situation, and the rationalization of spending through the Medium Term Expenditure Framework (MTEF) . The security situation caused regular expenditures to grow from 11.5 percent of GDP in 2001/02 to 12.0 percent in 2003/04. However, increased revenue, savings resulting from rationalization of development spending and revenue growth covered the increase inrecurrent spending. Therefore pressure o n do- mestic borrowing remained low-borrowing declined inGDP terms after 2001/ 02 aiding to improve fiscal balance. Trade and balance of payments: Both domestic as well as foreign trade were affected severely between 2001 and 2004, despite improvements inthe external environment. Low exports and higher imports caused the trade balance to grow to about 18.6 percent of GDPin2003/04, from about 14.3 percent in2001/02. Export declined from 11.1percent of GDPin2001/02 to 10.7 percent in2003/ 04. The phasing out of quotas in the US. and the inability to develop new markets could further lower readymade garment exports in 2004/05. The ex- port of all major commodities dipped (about 20% for garments, about 9% for pashmina, 14% for woollen carpets), even though there was some recovery in 2003/04. Nepalexported goods and services 82 countries in2003/04 and total exports reached Rs. 55.2 billion in 2003/04-an increase by about 18 percent, from Rs. 46.9 billion in 2001/2002. HMG/N seeks to enhance Foreign Direct I SECOND PROGRESSREPORT 13 (Rs million) 3escription 2001102 2002/03 2003/04 2004/05 2005/06 2006/07 Base Year Actual Rev. Est. Allocation Projection Projectior 50445 23 80072 00 48590 97 3 1482- 03 5209 (including principal repayment) - 3 I 9 I 6 35387 45 I 9 I 584 I I 63230 (at current prices) 207323 228444 251090 274661 302673 337484 reserves 160144 171104 18335 197475 213 I I Grant I .58 2.49 2.3 I 2.89 2.64 Total domestic borrowings 3.6 I 2.6 I I .48 I .69 I .67 I.oo Source. Vanous Reports of NPC, MOF and NRB 14 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) Investment (FDI) by designatinga Special Economic Zone (SEZ), and an ordi- nance to the effect has been prepared. Imports rose from Rs.107.4 billion to Rs.132.9 billionduring the same period. The current account deficit hasbeenreduced, from 4.3 percent of GDPin2001/ 02, to 2.4 in2003/04. The reduction resultedfrom significant growth inremit- tancesevery 11th Nepalese male is working abroad and sending money home. Thegainfromremittances was somewhat offsetbyawidening tradedeficit anda decline in services receipts (mainly due to a decline in tourist arrivals and re- ceipts from tourism). Overall, the balance of payments (also including foreign direct investment and loans to government) recorded a surplus except for the year 2001/02. T h e total foreign exchange reserve in2003/04 was 26.2 percent of GDF:sufficient to cover 11.2 monthsof imports. Inflation and exchangerate: The periodbetween 2001/02 and 2003104 was one of tight monetary management. This helped contain annual inflation at around 4 percent. Exchange rate vis-&vis the USdollar showed a decelerating trend during the review period, and eventually stabilized at about NRs71: US$1andreal exchange rateremained at acceptable levels. Broad money doubled from 4.5 percent in2001/02 to 9.8 percent in2002/03, and increased to 11.8 percent in2003/04. Domestic credit recorded about 10 percent annual growth inthe years 2002/03 and 2003/04. The share ofprivate sector credit was maintained at 68 percent of the total. Government overdraft from the banking sector has beenbrought down to zero and there was abudget surplus of Rs.1.7 billion. The credit volume grew owing to increased private sector demand while government demand for credit remained low owing to "savings" in terms of unspent development expenditure. ForeignEmployment: Nationalincome hasbeenmoredynamic thantheGDP owing to growth inremittances which rose sharply from about Rs. 48 billion in 2000/01 to Rs. 59 billion in 2003/04. The Census (2001) reported more than 762,000 people working abroad, most of them inIndia. The government encour- ages foreign employment by providing essential services such as training, job op- portunity information, travel documents, and safety arrangements, made bilater- ally or through specialmeasures. The number ofworkers headingabroad for foreign employment has beenincreas. ingover theyears, anditincreasedfrom 104,739in2001/02 to 106,660in2003/04. Inspiteoftheincident ofAugust 2004against mapower companies, the number SECOND PROGRESS REPORT 15 *As of April 2005 Source. Department of Labour and Employmmt Promotion ofworkers reached to about 107,438 during the first 10months of 2004/05. Since 2003/04, thegovernment beganencouraging women to seek foreign employment: During 2003/04-2004/05,1,338 women beganjobs abroad, mainly inHongKong andIsrael (Table 3.3). Poverty Reduction and Growth Facility (PRGF): A full-fledged PRSP madeNepaleligible for boththe Poverty Reduction andGrowthFacility (PRGF) with the International Monetary Fund (IMF) and Poverty ReductionSupport Credit (PRSC) from the World Bank (WB). Nepal entered agreements for the PRGF and the PRSC inNovember 2003. The PRGF allows to access credit from IMFequivalent to US$73.9 million, ofwhich the first tranche ofUS$10.6 million was drawn inNovember 2003. Under the PRSC,Nepal obtained US$ 75 million as soft loan from the IDA. Themainelements ofthePRGF-supportedprogramare-sound macroeconomic management, better expenditure prioritisation and enhanced efficiency, struc- tural reform inmajor economic sectors, and improved governance. PRGF em- phasizes these reforms for attaining sustained growth and enhancing the pro- poorbudget focus. UnderPRGF,Nepalhasseveralbenchmarksto attain, includ- ing adjustment inprices of government-controlled products, fiscal and financial I adjustments, and implementation of financial sector reforms. Besides, the gov- ernment has also committed to sectoral and structural reforms, aggressive 16 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) privatisation of public enterprises and institutional reforms including capacity enhancement of the NRB for supervising and monitoring financial institutions. The IMFwas largely satisfiedwith PRGF implementation in the first year of the Planbuthadsome reservationson performance inthe secondyear. Nepaladjusted prices of petroleum products inmid-2004 (and again inJanuary 2005) and raised the VAT rates to narrow down the gap between commitments and performance. Poverty Reduction Support Credit (PRSC):The preparation and implemen- tationofa credible PRSmadeNepaleligible for the annualPRSC (budget support) from the World Bank. The PRSCI(US$75 million) sought to support reforms to expedite PRSP implementation. PRSC Iemphasized creating fiscal space for, and improving the effectiveness of growth-enhancing public investments and mea- suresfor improvingtheinvestmentclimate andthe credit helpedto scaleupservice delivery by accelerating devolution of management authority of primary schools and health posts to communities. It was also instrumental in promoting social inclusionby helping raisethe effectivenessof targeted programs,improve access to schooling for excluded groups and encourage a h a t i v e actions inpublic service. Ongovernance, the PRSCthrust was onraising the effectivenessof the civil ser- vice; strengthening anti-corruption and accountability institutions, and improv- ing financial management and procurement practices. Prudent fiscal and monetary policies have helped spur economic growth, con. tain inflation and maintain a comfortable level of reserves. The progress in fiscal management includes reforms in public spending, streamlining of tax policies and improvement intax administration. The reforms inpublic expen- diture management are being deepened by focussing spending on pro-poor activities. Other PRSC supported reforms include the establishment of the Roads Board (an autonomous entity to fund road maintenance), rationaliza- tion of petroleum pricing and enhanced devolution of management of schools and health posts to local committees, and special programs for supporting de- velopment of Dalits and disadvantaged Janajatis. Overall, the reforms sup+ ported by PRSChave been satisfactory but slow. PUBLICDEBTMANAGEMENT HMG/N has begun a program to strengthen public debt mobilisation with SECOND PROGRESSREPORT 17 puter software (CS-DRMS2000+) hasbeeninstalled at the MOF,FCGOand NRB for recording and producing information required for public debt man- agement. Staffs at these agencies have also been trained o n the use of the software. The government has also prepareda macro modelling framework for continuous debt sustainability analysis. 18 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) Public Expenditure Management ow outcome of public expenditure in ensuring better service delivery, improving governance and accountability had remained a major concern for many years. T h e governnietit has undertaken a wide range of policy actions to address the problem, most important of which i s public expenditure reform. Managing public expenditure is not only about improving spending alloca- tions. It is more about accountability for resource use in terms of results and outputs. The Medium Term Expenditure Framework (MTEF) helps t o improve budget process and outcomes through greater clarity inobjectives, predictability in allocations, comprehensive coverage and transparency in uses of funds. MEDIUMTERM EXPENDITURE FRAMEWORKNEPAL IN The Public Expenditure Reform Commission (2000) recommended several measures to focus planning and budget allocation to outputs by formulating and implementing the MTEE Followingthat, the government introduced sev- eral measures to anchor the Poverty Reduction Strategy (PRS),maintain fiscal discipline and to prioritise and alignresourcesfor poverty reduction. The MTEF was introduced in 2002/03-initially in five sectors and later expanded to include the entire development budget. Inaddition to serving as an expendi- ture framework to strengthen budget implementation, the MTEF process has been useful to introduce the following reforms: SECOND PROGRESS REPORT 19 to ensure predictability, all activities are prioritised and priority activities (P1 activities) are fully funded to enable differential fundingof activities, the fund releasesystemhasbeen changed to ensure that priority activities receive one thirdof the budget in the beginning of the year, while others received one-sixth to ensure accountability, further fund releases are based o n performance to reduce fungibility of allocated expenditures, line ministry secretarieshave beenbarredfrommakingfundtransfersinbudget lines aswas the practice; and to address the concerns of capacity, the Immediate Action Plan (1AP)-a "must" complete annualised list of actions-has been implemented alongside broader expenditure reforms. MTEF was used to classify development budgedexpenditure into two categories-priority and strategy.The priority category was further classified as PI, P2, P3 and N priority-wise. The strategy, on the other hand, was further classified into five heads,as follows: 01 - High, sustainable and broad-based annual growth rate rn 02 Social sector and infrastructure development rn 03 Social inclusion/ targeted programs rn 04 Good governance, and 07 ----General administration. Thedeepeningandwidening of the MTEFprocesshas continued. Stepping in the fourth year of PRS implementation, the government has completed unit costing inseveral sectors, classified the budget into current and capital expen- diture and has continued refining the prioritisation criteria. Sectoral activities have been strengthened by aligning prioritised resource allocations with out- comes, and training government officials. HMG/N has also instituted a prac- tice of screening new projects with a pro-poor bias. Allofthe aforesaid actions andreforms-measured against benchmarks agreed inadvance with theNPC-have helped maintainfiscal discipline, even while beingfaced by risingsecurity expenditures, and to increase pro-poor spending. The reforms have resulted in increased donor confidence, reflected in the government's ability to secure two sectorewide approach programs (SWAPS) and budget support. The SWAPs and budget support have reinforced the per- formance orientation of HMG/N because the flexible financing option has shifted the responsibility of proper use of resources o n government and the line ministries because replenishment is contingent of effective use. MTEF AND FISCALPERFORMANCE Public expenditure reforms have helpedto maintain aggregate fiscal discipline. HMG/Nhasbeensuccessfulatmanagingcompetingclaimsonresourcesto avoid unsustainably large fiscal deficits. Inthe mid-1990s, domestic borrowing aver- aged 1.8 percent of GDl? Inthe same period, the government mobilizedforeign financing equivalent to 5.1 percent of GDP and added domestic resources to maintaindevelopment spending at 9.1 percent ofGDl?Itwas able to finance the total expenditure (18% of GDP) despite the low revenue base (11% of GDP), made possibleby limiting regular expenditure to nine percent of GDl? T h e escalation of the conflict in 2001 increased pressure on fiscal management. Usingthe MTEFas aresponse measure, the government was able to maintaintotal expenditure close to 19percent ofGDPduring 2001/02+2003104; effortsto increase tax collection also netted a revenue increaseof 1.8 percent ofGDPduring the same period. The implementationofthe PRSalongsideexpenditure reformsanchored in theMTEFhelpedtocushonthe pressureofsecurityexpenditureonaggregatespend. ing, whde simultaneouslyhelping to raise allocations to PRSpriority areas. Theaforesaid approachhasresultedinsomevisiblegains. Revenueaspercent- age of GDP has increased to 13 percent and, given Nepal's dependence o n external assistance, HMG/Nhas been relatively successful at restoring donor confidence through the reform actions. Concessional foreign financing ob- tained as a result rose from 3.4 percent of GDP in 2001/02 to 3.7 percent in 2003104; it is projected to grow to six percent in2004/05. The resource avail- ability has allowed government to reduce domestic borrowing, which has de- clined from 3.6 percent of GDP in 2001/02 to 1.5 percent in 2004. HMG/N aims to reduce domestic borrowing from 1.7 percent in2004/2005 to 0.7 per- cent in2006/07 by increasing revenue to cover the fiscal gap (see Annex 3). BUDGET REALISM Budgetary performance has improved over the past three years, resulting ina nar- rower gapbetweenbudget and actual performance-the deviation of total expen- diturefromallocationdeclinedfrom20percent in2002to 11percent in2004.The budget has become more realistic, aided by the elimination of several hundred marginal projects and changesinbudget formulationbyanchoringitto fundavail- ability and legislation of the overdraft limit. SECOND PROGRESS REPORT 21 Although classification of the budget from `regular' and `development' to `recur- rent' and`capital' hasenhanced transparencyandaidedproper costingofactivities, budget formulation still remains input driven-and not outcome-oriented (and backedbyresources).Implementationshortfallsresultingfromgapsintherealisation of committed donor funds and underperformance of activities-resulting from normaldelaysor the insurgency-remain concerns because low capital formation canconstrainfuturegrowth. The table 4.1 showsthat thebudget hasbecomemore realistic despite the conflict-inducedgapbetweenallocations and expenditures for development. What is notable is that the government has performed well inareas where the security situation was not an obstacle. udgetary performance (2001/02 to 2003/04) (Rs in billion) 2001/02 2002/03 2003104 Ekdgst Achml %Ad7leved Bdxlget Ach~al%&&iw&Ekdgst Achml % A c h d kid@ Total expenditure 99.8 80. I 80.2 96. I 6 88.0 102.4 92.1 89.9 I 11.7` 49.3 48.6 98.6 57.4 0 95.8 60.5 59.3 98.0 64.5 50.5 31.5 62.4 38.7 29.0 .9 41.9 32.8 78.1 47.2 83.6 57.2 56.2 98.2 62.2 62.2 I 27.0 15.9 58.9 28.3 22.6 12.0 8.9 74.2 11.8 7.3 `As per the additional budget provision made in January 2005, the total budget increased to 115.3 billion and revenue increased to 73.9 billion. Project size and composition: PRS implementation has enabled the govern- ment to streamline and scrub the portfolio, and tightly align spending with priorities.As recommendedbyPublicExpenditureReviewCommission (PERC) , the government deletedover 70 projects in2001/02. An additional 203 projects were dropped following PRS implementation in 2002/03 and has maintained projects at a manageable level (Table4.2). The rationalisation of projects helped to nearly double the per project budget allocation. Improvements inthe overall budgeting framework and linkages with the priorities justified an increase in development expenditure inthe fiscal year 2004/05. Fiscal Year 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 Source: PRSP and Budget Documents. 22 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) DevelopmentBudget P1 P2 P3 P1 P2 P3 5.8 20.5 3.7 21.3 2.7 -4.4 -1.3 Source Budget speeches for FY 2001/02 to 2004105 and MTEF INTER-SECTORALALLOCATION Social sector investment is important for reducing poverty inrural areas. Gov- ernment efforts to prioritise and realign programs and activities inline with the PRS goals have also brought about changes inthe inter-sectoral composi. tion of the development budget. The share of the social sectorseducation, health, drinking water and local development-has grown from about 37 per- cent of actualdevelopment expenditure in20001/02 to 42 percent in2002/03; and to 47 percent in 2004/05. Within this group, the share of education has grownfrom 8.8 percent to 13.3 percent, healthfrom 6.0 percent to 9.6 percent, drinking water from 5.6 percent to 7.6 percent and local development re- mained constant at about 13 percent (Table 4.4). The implementation modality of social sector projects has shifted to allow increased decentralization and involvement of local beneficiaries inprogram execution inorder to make them more participatory and inclusive. Increased allocations inboth education and health resulted from two Sectorewide Ap- proachprograms. HMGNplans to gradually reduce spendingo n the economic sector to create space for private investors and to remain more focused o n increasing social sector investment. However, much of the reduction in the economic sector so far, except communication, resulted from completion of large projects like the Kali Gandaki and slow implementation of others like Middle Marshyangdi Hydroelectric Project and the MelamchiDrinkingWater Project. Although investments in the economic sector tend to be linked to project life cycles, the inability to design programs with linkages to sectoral and PRS goals is also reason for the lower funding levels. The government is I SECOND PROGRESSREPORT 23 working to reverse the investment trend in the economic sector through the formulation of 'business plans' (refined sectoral strategies). Other socialservices Economicservices 9.59 10 67 9.98 7 36 6.44 6.57 00 1woo Source. Budget documents, MTEF Decentralised public expenditure: In rural areas improvement in living standards canbe achieved only if the beneficiaries participate indevelopment, and there is accountability and transparency of spending through democratic governance. The fiscal decentralisation measures underway are the first steps toward the direction. The budget allocated to districts has nearly doubled, and the emphasis oncapital spending inthe districts ishigher compared to central level projects (Table 4.5). It must, however, be acknowledged that the insur- gency has affected absorption capacity. There is therefore the need to design more activities for implementation by local bodies through people's participa- tion inorder to 'insure'activities against possible disruption, especially inthe insurgency-affected areas. The increased efforts of HMG/Nto devolve activities and funds to communi- ties have resulted as response to the threats of the insurgency o n development. The government strongly believes that service delivery can be enhanced only ifcommunities are empowered to control development activities. Prior to the 24 ASSESSMENTOF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) penditure,1999/00-2004/05 (Rs million) implementation of the PRS, communities controlled less than 1.5 percent of the total expenditure. It increased to 4 percent in2003/04, and the allocation for 2004/05 was raised further to 6 percent of the total budget. The amount of money controlled and spent by communities has surpassed the block grant spending by local bodies since 2003/04. The experience so far suggests that truly community-owned development initiatives are more likely to be pro- Community and Local Bodies Expenditure I ~ i 7.0% 1 6.0% ._ $ 5.0% 70 Y 4.0% -3 xn 3.0% W P 2.0% I.O% 0.oX 9 9 9 9 9 9 N 0 N H h) E 0 0 h) &#Communitycontrolled funds W Block Grants to Local Bodies Sources: Ministry of Finance tected by the people compared with projects where the ownership levels and participation are lower than the ideal. Inmany of the truly community-owned and managed programs, the people have managed to negotiate the 'develope ment space' needed to continue activities, suggesting that the approach has greater resilience and could therefore be usefulto duplicate for giving continu- ity to development despite the insurgency. SECOND PROGRESS REPORT 25 Broad-Based Growth Performance ACCELERATINGAGRICULTURAL GROWTH lie PRSP seeks to attain broad+basedand sustainable agricul turd growth by niodernising agriculture to enhance producrivs ity, food security, promote agribusiness and empower farmers. The Aga riculture Perspective Plan (APP), 1995, is the main strategy for agricui. tural development. I r envisages diversification atid commercialisation of agriculture by enhancing the following outputs: cereal production in the Ximi and production of fruits, high value crops including NTFPs, and livestock in the Hills and Mountain regions. The goals are to be achieved by managing key inputs: need-based research and extension, improved fertilizer supply, controlled year-round irrigation, linkage of potential production pockets and markets through rural agricul- tural roads and expansion of rural electrification. APP implementation was initially constrained by funding difficulties. The PRSP renewed government commitment to the APP because both agriculture and rural development are high priorities for poverty reduction. The Tenth Plan builds o n the APP with emphasis o n progressive private sector involvement in input and out- put marketing, commercialisation of agriculture, strategic and coordinated provision of critical public infrastructure and services with stakeholder par- ticipation, partnership with private providers including NGOs, and devolu- tion of rural services. SECOND PROGRESSREPORT 27 A new institutional approach, the District Agricultural Development Fund (DADF), hasbeeninitiated in20districts underthe DFIDmpported Agriculture Perspective Plan Support Program (APPSP). The districts for APPSP were se- lected using the poverty and deprivation index as basis.The DADFhas two fund sub-componentsDistrict ExtensionFund(DEF) andLocalInitiativesFund(LIF). As of May 2005 proposals of 140 service providers and 798 farmer groups are funded under the DADF.These projects provide agriculture extension services to over 36,000 farm families in the program districts.The DEF projects comprise mainly of cattle-raising, goat-raising, piggery, seasonal and off-season vegetable production, orchard establish- ment, bee keeping, provisionof veterinary services and market development. Likewise,the majority of LIF projects comprise goat raising and vegetable production combined with small irrigation (treadle pump, sprinklers, etc.). The beneficiaries of the DADF projects included 37 % janjaties, 30% Dalits and 33% others.About 35% of the MDF beneficiaries are women. Early experiences indicate that DADF modality can be responsive, produc- tive and efficient to deliver agriculture extension services. An APP Implementation Plan is being prepared under the guidance of the NPC.The goal is to reorient the agricultural sector to create more responsive, productive and efficient services for the ruralpoor. There are, however, several reforms that need to be completed inorder to fulfil WTO and SAFTA mem- bership commitments. The MOAChas 32 P1and 10P2projects in2004/05. Fiveof the P1projects- Agriculture/Livestock Extension Program, APP Monitoring, APPSE:Crop Di- versification Project and Small Irrigation Special Program-have been allo- cated Rs.2.52 billion, or 43 percent of the development budget allocated to the sector. Some of the main activities inthe agriculture sector are: w Mobilizationof the private sector andNGOs as partner service providers on a contract basis w Monitoring, quality control and regulation of inputs supplied by the pri- vate sector m Transfer of subsidies inthe form of grants o n goods and services of public nature Transfer of extension services to local bodies and veterinary services to the private sector w Conversion of agricultural farms/stations into resource centres w I Promotion of cooperative and contract farming Development of market centres, and 28 Integration of irrigation and micro-irrigation with agricultural intensifi- cation for mainstreaming women and disadvantaged groups. IRRIGATION Irrigation is a key input for increasing agricultural productivity, especially in Nepalwhere rainfall is highly erratic. Boththe APP and PRSPemphasiseirriga- tion as key to raising householdincome and food security inruralareas. Roughly 43 percent of Nepal's net cultivated area of 2.64 million hectares has access to irrigation, largely "flooding systems" that provide only seasonal irrigation and benefit mainly large farmers. About 465,000 hectare of land has year-round irrigationfacility. As a consequence, and inconjunctionwith delaysinavailabil- ity of other inputs, agricultural productivity remains low and highly dependent o n rainfall. The major objectives inirrigationare to develop new infrastructures capable of providing controlled year-round irrigation, to attainsustainable man- agement of existing Farmer Managed Irrigation Systems, and to support non- conventional irrigation methods inorder to enable the poor to benefit. The new irrigation policy implemented since 2003 seeks to empower Water Users' Associations (WUAs) to operate and manage their own systems, and to involve local bodies in development and management of small and medium operations. The Department of Irrigation (DOI) is fine tuning the strategy and aims to have a "Business Plan" ready for implementation in 2005/06. There was a setback inground water irrigation (mainly through Shallow Tube Wells) after subsidieswere withdrawn during the early years of PRSimplementa- tion. TheCommunity Groundwater IrrigationSupportProgram (CGISP), amajor initiative to promote shallow tube well irrigationinTarai, is expected to bring a turnaround in agricultural production. Preliminary estimates show additional 5,175 ha of landwas irrigated usingDTW and S T W in2003/04. The irrigation sector had 17P1,14 P2and 1P3 projects in2004/05 anddevelop- ment budget of about Rs.2.2 billion. Five projects, the Operation and Mainte- nance of existing AMIS, BagmatiIrrigation Project, Praganna IrrigationProject, CGISPand BabaiIrrigationProject shared nearly 56 percent of the budget. For the first time in Nepal, the DO1has begun planning implementation of non-conventional irrigation schemes using mostly micro technologies that are both pro-poor and environment-friendly. A New Technology Irrigation SECOND PROGRESSREPORT 29 Program (NTIP) has been established to promote the new initiatives. NTIP aims at facilitating irrigation of an additional 10,000 ha of land within the TenthPlanperiod, starting in2005.Thegovernment hascompleted afeasibil- ity study to promote non-conventional micro-irrigation technologies, which prior to this, was largely promoted by I/NGOs. Another significant development in micro-irrigation promotion is the implemen- tation of the Small Irrigation and Marketing Initiatives (SIMI) project jointly by Winrock International, IDE,SAPPROSandCEAPREDin2003. SIMIaims at pro- viding integrated agricultural serviceswithirrigationas entry-pointto about 27,000 householdsin7 districts of the West and Mid-westemDevelopment Regions. ROADS DEVELOPMENT FOR T h e road sub-sector objective of the PRSP i s to develop and manage a cost effective transport network to support the socio-economic development efforts. The growth targets are to be met by expanding the road network to improve accessbetween rural areas and market centres, and enhancing the management of existing assets (including maintenance). An additional 540 kmof roads were built intwo years after PRSPimplementation began. Additionally, inDecember 2004 the government transferred 300 kmof roads to the DDCs. Maintenance: The government has established an autonomous Roads Board and RoadFundto provide stable funding for roadmaintenance from user fees. In 2003/04, the BoardreceivedRs.220millionfrom fuel levy; it is expected to grow to Rs.363 million in2004/05 and to Rs.400millionin2005/06. It has also made provisions to ensure sufficient budget allocations for the maintenance of the Strategic RoadNetwork (SRN). Expansionof strategic roads: The PRSP aims to complete road construe. tion to connect 10 district headquarters that are not connected with the na- tional network. But, progress hasbeenslow indistricts affectedby the conflict; construction had to be abandoned in some areas owing to the security situa- tion. The `savings' from disrupted constructionwas diverted for upgrading fair weather roads and this action is expected to remain focussed o n the PRSP objective of providing efficient nationwide road services. In 2003/04, 140 kilometres of additional rural roads were built, inaddition to rural roads initi- I ated and built by local communities. 30 ASSESSMENT OF THE IMPLEMENTATIOK OF THE TENTH PLAN (PRSP) Private sector participation: The participation of the private sector is es- sential for meeting the transport needs cost effectively. The government has enacted an ordinance to facilitate Build-Own-Operate-Transfer (BOOT)con- tracts. The responsefrom the private sector remains to be tested. The govern. ment is strengthening the BOOT cell to assess construction risksand to con- duct studies on geological and traffic conditions, regulatory framework and the security situation, which it believes are needed to improve conditions for at- tracting private investment. Institutional reforms: The government has carried out several reforms to enhance the technical and managerial capacity of the Department of Roads (DOR).They include updating policiesand design standards, establishing and operating modern IT-based financial and data management systemsand work- ing o n a road map for efficient institutional transformation. The government plans to devise a performance-based incentive system within the DOR to facilitate i t s transformation into an efficient agency for road building and supervision. Roadebuilding duringthe conflict: The conflict hasbecome amajor opera- tional concern for expanding road construction in remote areas. The risks associated with project implementation increased after the escalation of the conflict, and the areas most-affected are those where there is greater need to build roadsandincreasedevelopment assistance.Thegovernment isbuildingamajorroad, connecting Surkhet andJumla,whichis targeted to be completed by 2005/06. % road will lmk the Kamali Zone, comprising districts with the lowest social and economic indicators, withthe rest ofNepalpaving the way for enhancing develop. mentinthe region.The Surkhet-Jumla roadis aprioritygovernment project that is beingbuilt through a participatory approach involving the local community, POWER TO THE PEOPLE Easy access to electricity can create the conditions for involving people inother development activities. Per capita electricity consumption is also a measure of general welLbeing. Nepal's hydropower generation potential is one of the high- est inthe world but the indicators for electricity use are s t i l lmuchlower than the ideal. Electricity is available to about 40 percent of the population. Nepal's installed hydro+generationcapacity was 584 megawatts in 2001/02. Of this, 546 megawatts (MW) is connected to the Nepal Integrated Power System SECOND PROGRESS REPORT 31 The 232-km Surkhet-JumlaRoad has the potential to emerge as a developmental catalyst for districts in the Mid and Far-western Development Regions, which are also the most deprived. Upon completion, it will connect Surkhet Dailekh, Kalikot and Jumladistricts of Bheri and Karnali zones and provide direct and indirect benefits to people of Achham, Bajura, Mugu, Jajarkot and other remote mountain districts. The construction was frequently disrupted by violence, following which the local people prepared a 40-point statement to explain t o the insurgents why road-building should be allowed to continue.The 232-km road has been divided into sections, and user groups have been given the responsibility to build the different sections.The involvement of local communities has helped address many of the implementation level problems. Some lessons learnt from involving communities in road-building are: (i) communities commit themselves to the tasks that address their needs and contribute t o project implementation, (ii) community involvement helps t o resolve local conflicts and implemen- tation hold-ups and can also help to devise new ways to continue work even in insecure environments; and (iii) development cannot wait for the conflict to be resolved and community involvement can create the conditions needed to ensure continuity to devel- opment programs. (NIPS) and the rest is non-grid based, including private-sector promoted micro projects that contribute about 7.5 MW T h e hydro-generation capacity reached 609 megawatt in2003/04. The Census (2001) reportedthat 39.4 percent house. holds use electricity as a sourceof lighting. HMG/Naimsto addressstructuralanomaliesinaccesstoelectricpower through a pro-poor approach, incorporated in its long-term vision (1997-2017), by expanding efficient power generation and distribution inrural areas. There are 13 P1,4 P2and 3 P3 projectsinthe power sector in2004/05 and adevelopment budget allocation of Rs.6.14 billion. Five projects, the Middle Marshyangdi, Reinforcement and Distribution System Improvement, Community and other Rural Electrification, Kaligandaki A and Kailali+KanchanpurRural Electrifi- cation, share 82 percent of the allocation. In 2003/04 micro-hydroelectric projects added 498 kilowatts of electricity to the national total, which is ex- pected to increase by another 1500kilowatts in2004/05. PRO-POOR FORESTRY I Nepal has about 4.27 million hectares of land under forest, which is more than that used for agriculture (3.09 million ha). The forestry sector can therefore 32 ASSESSMENTOF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) make major contribution towards improvinglivelihoods and reducing poverty. The PRSP thrust on forestry is to promote community and leasehold forestry program. The government had transferred 8,271 ha of forest area to commu- nity user groups compared to 4,378 ha in2001/02. Other pro-poor activities in the forestry sector are: a Promotion of herbs and other Non Timber Forest Products (NTFPs) Soil conservation inChuria range, and Bio-diversity and watershed conservation. The leasehold forestry program aims to enhance equity inthe distribution of forest resources. About 401 user groups comprising 2,719 poor and disadvan- taged households were formed between 2002/03 and 2003/04. In2003/04 the households were leased additional 1,210 ha of degraded forest land that they are to manage and use for poverty reduction. The leasehold forestry program has been very effective at reducing poverty. A study by the FA0 reveals that about 80percent of the poor engaged inthe programhave elevated their status to the "non-poor" category. There are 16P1, 12P2 and 6 P3 projects inthe forestry sector inFY 2004/05. The sector has a total development budget allocation of Rs.0.7 billion. NON-AGRICULTURAL GROWTH Growth inthe non-agriculture sector-contributing about 60 percent of GDP- is very important for meeting and maintaining growth targets set by the PRSP. The Tenth Plan emphasizes continuation of a private sector policy that is liberal, transparent and supportive of a market-driveneconomy through broad policy reforms, and continued efforts to reform the financial sector. The non- agricultural sector includes manufacturing, trade and tourism as well as the services sector and real estate. Activities in the non-agriculture sector are mostly private-sector led. How- ever, there are some key sectors such as electricity, telecom, drinking water and, to an extent, the financial sector, where the public sector dominates. The conflict, political instability and weak external and domestic demand have constrained non-agricultural growth. Low spending o n development and a general slowdown of economic activities caused domestic demand to shrink. HMGNhasattemptedto implement severalmeasures,includingBOOTcon- SECOND PROGRESS REPORT 33 tracts to solicit private participation ininfrastructure building, opening up to international airlines, eliminating monopolies of key public enterprises and facilitating private sector development through improvements in the regula- tory environment and accounting standards. Public sector reforms: Nepal has begun dismantling public monopolies and introducing competition. A joint-venture private operator has been allowed to provide basic telephone services inKathmandu and another private opera- tor has begun work to provide telecom services in 534 VDCs in the Eastern Development Region. The Nepal Telecommunications Corporation was con- verted into Nepal Telecom, a public company, inApril 2004. A private opera- tor has also beenlicensed to provide mobile telephone services. The government has a policy to promote private investmentfor buildingsmall and mediumscale power projects. The Power Development Fund was estab- lished in 2003 to finance such investments. The Nepal Electricity Authority (NEA) has also begun decentralising electricity sales and distribution in ac- cordance with a new government policy allowing communities and coopera- tives to distribute power inrural areas. The government has hired a Nepal-India joint venture company to manage the InlandContainerDepot at Birgunj andhas approved anew policy to allow the private sector to import and sell petroleum products. The BOOT Ordi- nance 2003 provides abasisfor involving privatesector ininfrastructure build- ing. The government is also working o n handing over the Kathmandu opera- tions of the Nepal Water Supply Corporation to a private operator. Besidesdismantling public monopolies and encouraging private sector invest- ment in sectors traditionally dominated by government, since 2002/03, the government has been devolving a number of tasks and functions to local bod- ies and community organizations. Several semi-independent funds-the Drink- ing Water FundBoard, Road Maintenance Fund Board and the Poverty Alle- viation Fund-have alsobeenestablished to 'contract out' service delivery func- tions to entities with relevant expertise, with the government taking on the role of monitoring performance to make the agencies accountable for the ser- vices provided. Public enterprises: Public enterprise reform has been a sensitive issue and has never been easy. The government has revitalisedprivatisation by prepar. ing a l i s t of companies to be leased, liquidated or converted into public lim- 34IASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) ited companies to be run under performance contracts. Among major privatisations completed so far are the sale of shares of the Butwal Power Company and the leasing ofthe Bhaktapur Brick Factory. Similarly, the Handi- crafts Emporium, Nepal Coal, Hetauda Textiles, Nepal Transport Corpora- tion and Birgunj Sugar Mill have been liquidated. The Nepal Telecommuni- cation Corporation has been converted into Nepal Telecom, a public limited company. The evaluation of the assets and liabilities o f the Royal Nepal Airlines Corporation (RNAC), as first step towards converting it into a company, is underway. The government has begun management improve- ments of public enterprises, including two large cement factories at Udaypur and Hetauda, through performance contracts. Financial sector reforms: Nepal's financial sector is very weak and lacks competitiveness. In the past, the government made attempts to inject fresh capital inpublicly-owned companies and to introduce expertise by opening up the sector to foreign joint ventures. However, the sector remains dominated by two-government owned and semi owned- commercial banks that account for almost one-half of the total transaction volume. Both of these banks are in serious trouble, as their N o n Performing Assets exceed the acceptable limit. The government has been implementing a financial sector reform program since July 2002 to addressthe weaknessesof the sector, which even though not directly pro-poor has a direct bearing o n the larger economic environment that in turn influences economic growth and poverty reduction. The reform objectives include makingthe two problematic banks financially sound through improved accounting and auditing standards and loan recovery, strengthen the monitoring and regulatory capacity of the centralbank and the legislative and institutional framework, and to eventually restructure and privatise the banks. The reforms also include restructuring the state-owned Nepal Indus- trial Development Corporation, an industrial financing institution, and the Agriculture Development Bank, bothofwhich face serious financial problems. the speed at which the two banks were failing but they still have large stocks of non+performingassets. The reforms have also resulted inprogress in terms of SECOND PROGRESS REPORT 35 rationalising the workforce, financial disclosure, credit appraisal mechanisms, improved revenue and cost controls. The banking sector also has a new legislative framework that grants greater independence to the central bank and empowers it to better perform its regu- latory functions. The central bank has also introduced new accounting stan- dards in the financial sector. Nepal began reformingtwo troubled banks, Nepal Bank Limited(NBL) and the Rashtriya Banijya Bank (RBB) in July 2002 and January 2003 respectively. It began with the takeover and placement of external managers at the two banks by the central bank In 2003104 the two banks were short of the target for reducing the NPA but had made significant debt recovery efforts. In mid-January 2005, NBL had recovered about Rs.4.7 billion in cash and the RBB, Rs.5.2 billion. NPA levels at the banks remain above 50 percent (of their assets) even though the provisioning is adequate. The two management teams have had difficulties dealing with delaying tactics em- ployed by large wilful defaulters who have tended to use the court system t o frustrate Profitability (NPBT) I Rs in millions 4000 1 2000 0 I I I 2005 2006 -2000 .** -4000 4 / -8000 J ..-+.- .NBL .+ RBB debt recovery attempts. This remains a very serious concern because it threatens the entire financial reform program. Business and revenue growth, and improved operating efficiency, have helped NBL and RBB to perform better than their profitability targets in 2003/04. Better interest collection on loans, lower interest payments on deposits and significant reduction in overhead costs have contributed to the profitability. 36 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) Other factors are write-back of provisions that were not required after collection of some fully provided debts, and in case of NBL, sales of its stock at the Standard Chartered Bank NepaLThese actions have improved the net worth of the two banks, which, however,is still negative. Staff efficiency levels have also improved but were short of the target set for 2003/04.The processto rationalise staff comprised implementation of two phases of the Voluntary Retirement Scheme (VRS) in 2003/04. The first VRS phase was very successful and the second one less so. Staff Level 1 ::I I I I I ~ 0 Jul-03 Jul-04 Jan-05 Jul-05 Jan.06 Jul-06 Jan-07 ....l..NBL -RBB The modernisation of the banks was somewhat slower than anticipated due to un- anticipated delays in procurement of computers and time taken to run trials of new software. Data validation and inadequacy of staff training were major barriers to fully computerising the operations. Improved financial disclosure is the other major achieve- ment. The banks have significantly improved the audit of their books, which are now completed within six months-compared to several years in the pastand provisional accounts are published within a month. The indicators discussed above underscore both the timeliness and effectiveness of the financial sector reform agenda, and especially the actions undertaken at two banks.The government, however, would like to enhance the pace of the reforms.To facilitate this, it has initiated steps to help the banks with debt recoveywhich has remained the major stumbling block. SECOND PROGRESS REPORT 37 Social Sector Performance EDUCATION roviding all children coniplete primary education of good qual ity is highest priority in the education sector. The six major goals of the Education for All (EFA) program guide the basic and pri- mary education sector. T h e goals are expanding early childhood de. velopment; ensuring access for all children; meeting the learning needs of all children including indigenous peoples and linguistic minorities; reducing adult illiteracy; eliminating gender disparity; and improving all aspects of quality education. Improving access to primary education for disadvantaged children and the education quality are two major challenges that have to be overcome inorder to meet the MDG of achieving universal primary education of good quality. The two mainstrategies adopted by the PRSPfor overcoming the challenge are decentralization of school management including transfer of management to communities, and scholarships targeted to children from disadvantaged com- munities. Expanding teachers' training, improving curricula and teaching materials, and strengthening school monitoring and supervision are the other strategies. The government hasbegun to provide grants to schools-both block grants and those earmarked for specific activities-to enable them to improve service delivery by covering nomsalary recurrent costs inaddition to the sals. ries. The funding of unaided schools through block grants represents another I SECOND PROGRESS REPORT 39 Community schools Responding to the widespread public discontent on the performance of public schools, in 2001 the Parliament adopted the Seventh Amendment of the Education Act. One of its provisions was to rename public schools as community schools, which also paved the way for transferring schools to communities. In 2002, the government issued directives for the transfer of schools to management by communities, and subsequently the Immediate Action Plan 2002 set a target for transferring 100 primary schools for community man- agement by the end of 2002/03. This initiative generated intense public debate and despite significant resistancefrom different interest groups, the government went ahead with the reform. Up to mid-July2004 the government had transferred over 1,500 schools to communities. Schools managed by communities have also established a network Com- munity School National Network, with a view to promote the interests of such schools as well as to assist in the improvement of their perf0rmance.A baseline survey of community- managed schools, primarily to evaluate their performance, is underway. significant step towards enhancing equity inaccess to schooleducation. Above everything else, the transfer of schools to community management-to im- prove service delivery-is among the boldest developmental reforms ever at- tempted inNepal. There are 7 P1,7 P2 and4 P3 projectsinFY2004/05 withRs.6.3 billiondevel- opment budget in the education sector. The major P1 projects include EFA, Secondary EducationSupport Program, Teacher EducationProject, Secondary Education, and the New EFA. Achievements: Some results achieved intwo years of PRSP implements. tion include an increase in the number of primary schools and trained teachers, and increases in the number o f primary schools handed over to local management (Table 6.1). Source. Admmistratwe records of MOES, HMGN 40 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) I Significant increase has been recorded in the certification process. The number of certified teachers increased from 27,875 in2002/03 to 120,988 in2003/4 and the numberofprimary school transfers increasedfrom 90 in 2002/03 to 1,500 in 2003/04. Likewise, the number of girl students receiv- ing scholarships rose from 120,742 to 224,656 during the same period. The numberoffemales completing adult education is also growing significantly. Implementation of a sector wide approach inthe basic and primary education sub-sector is another major achievement. The new funding and project imple- mentation modality has helped to improve coordination of donor assistance by firmly anchoring it to national policies and plans, and existing administra- tive structure and procedures. HEALTH Highpopulation growth, low life expectancy, highburdenof diseases, prema. ture mortality and inadequate health care remain major impediments to poverty reduction and attaining faster economic growth. The reforms being implemented are aimed at improving the health of all, especially that of vulnerable groups who depend o n manual labour for subsistence. The health objectives and strategies of the PRSP are also designed to contribute to the attainment of the MDGs. Policymeasures: The Second Long Term Health Plan 1997 to 2017 (SLTHP) provides the road map for investments inthe sector. T h e objective is to have "a health systeminwhich there is equitable access to coordinatedquality healthcare services inrural and urban areas, characterized by: self-reliance, full community participation, decentralization, gender sensitivity, effective and efficient manage- ment,andprivateandNGOsectorparticipationintheprovisionandfinancing of healthservicesresulting inimproved health status of the population". The main policy thrusts in within the PRSP and SLTHP framework are: a) implementing a MTEFto allocate the healthbudget interms of three prioritised services, with the first priority to Essential Health Care Services (EHCS). Key elements of the strategy are: (i) ensuring provision of essential health care services (EHCS); (ii) decentralizing management of service delivery; (iii) pro+ moting public-private partnerships (PPP); and (iv) improving sector manage- ment and the provision, deployment, utilization and efficiency ofhealth inputs. The government has alsoprepareda planto implement the HealthSector Strat- SECOND PROGRESS REPORT 41 egy which defines actions to be taken and programs to be undertaken upto July 2009.The NepalHealthSector Program Implementation Plan (NHSP-IE 2004- 2009) will be reviewed in2006/07 and the outcome will be used to adjust pro- gramming to better support the Eleventh Plan that will come into implementa- tion inJuly 2007. Achievements: An important policy-reform achievement is the shift to sec- tor-wide planning and management as envisaged by the Health Sector Strat- egy, which also outlines major reform areas for program and sector manage- ment.The strategy was developedincollaboration with a wide rangeofstake- holders including 11 development partners ( U N agencies and multilateral agencies: WHO,UNICEFUNFPA,ILO,TheWorld Bank, and bilateralagen- cies-DFID, USAID,GTZ, KFW,Japan, SDC and AUSAID) .All development partners have endorsed the government proposal to scale up harmonization through joint planning, programming, reviewing and monitoring of interven- tions in the sector. Another government policy allows it to provide maternity benefits to women and incentives to service providers andhealthinstitutions assistingduring child- birth.The policy is expected to result insafer motherhood, especially becauseit is backedby the decision to train Mother and ChildCare Workers and upgrade them to Assistant Nurse Midwifes and place them at sub-health posts. T h e government has alsopursuedapolicy to decentralise management of health facilities by putting communities in charge of the institutions. HMG/N has handedover 1,114sub-health postsin25 districts (Table 6.2). The management responsibility of two health posts and one primary health care centre has also been devolved. Some of the outcomes of the devolution have been increased ownership by local communities, improved problem-solving, enhanced moni- toring, quicker decision-making, greater transparency and improved financial management. The benefits, however, have not been reported inall districts ow- ingto area-specific implementation weaknesseswhichthegovernment hastaken up on a case-by-casebasis. HMG/Nhas also expanded the Community Drug Program to 25 districts-full coverage at public health facilities in 12 districts (except district hospitals) and partial coverage in 13 (30-50%). The government remains committed to increase public spending on health. Most of the essential public health care programs are classified as P1 under the MTEFand donor fundingonP1programs remainshigh. MOHis implementing 21 P1, 12 P2 and 5 P3 projects in2004/05 with an allocation of Rs.4.4billion. 42 ASSESSMENT OF THE IMPLEMENTATIOK OF THE TENTH PLAN (PRSP) There has been an increase in availability of health facilities compared to that of Ninth Plan period resulting in decrease in travel time to reach the facilities.According t o NLSS II 2004 access to health posts and hospitals within 30 minutes of travel has increased significantly42 percent households compared t o 45 percent in 1996. However, the number of health facilities has declined from 4,429 in 2001/02 to 4,408 in 2002103 and 4,401 in 2003/04 (HMIS reports).The reduction reflects the number of facilities de- stroyed or damaged in the conflict Child health:The incidence of diarrhea in children under-5 is 222 per 1,000,a reduction resulted from wide use of oral re-hydration solutions, improved water supply and sanita- tion and hygienic practices. Diarrhea used t o be Nepal's number one childhood killer. According co the HMIS 2003/04, acute respiratory infection (ARI) and pneumonia are now the major killers of children:The under-5ARI incidence is 344 per I,000.The NLSS II reported DPT-3 coverage at over 90 percent-78% in the Far Western Development Region and 85%in the Midwestern Region. Overall, according to NLSS II,DPT 3 coverage has increased from 36% in 1996 t o 60% in 2004. Maternal health: The maternal health indicators (HMIS 2003/04) show that only 18% of the deliveries are assisted by health workers, and only 9.9 percent deliver babies at health institutions. On average pregnant mothers make two antenatal visits to health institutions and the provision of basic and comprehensive obstetric care remains low.The use of family planning devices and methods has reached 40 percent. ranging from 28 to 46 percent by regions,and lowest in the Far Western districts. Source Ministry of Health, (HMIS 2003104) SECOND PROGRESS REPORT 43 T h e government is also introducing special programs in 25 districts with low Human Development Indices (less than 0.400, national value 0.471), many of which are alsoaffected by the conflict. Anecdotal evidences alsosuggest that the insurgency may not have affected healthservice delivery-one indicationof that it theability ofgovernment to satisfactorily carry out nationalcampaigns against measles, polio, and Vitamin A supplementation and de+worming. DRINKING WATER SANITATION AND Unsafe drinking water and poor sanitation are reasons for high incidence of communicable diseases inNepal. The PRSP/TenthPlan seeks to increase ac- cess of deprived communities to safe drinking water and basic sanitation (See Box IO). The aim is to raise drinking water supply coverage to 85 percent and sanitation by 50 percent by the end of the Plan period. HMG/N hopes to achieve the goal through decentralized demand driven approaches and the involvement of NGOs/CBOs and other support organizations to plan and implement schemes demanded by local communities. The communities will thenberesponsible for the operation and management of the schemes. Two policy decisions have been taken to facilitate changes in the drinking water and sanitation sector: (i) Revision of the NationalWater Supply and Sanitation Policy, 1998, clearly defining the roles and responsibilities of different stakeholders including local bodies, community organizations and beneficiaries in planning and upkeeping of water supply and sanitation services; and (ii) Abolition of district offices of the Department of Water Supply and Sani- tation (DWSS) and their reorganization as 'facilitator' and 'monitor' of . small projects, and 'planner' and 'implementer' of larger schemes. The following activities are planned and/or are underway inthe sector: Revision of sector policy for defining roles and responsibility of different actors Enhancing the autonomy of the Rural Water Supply and Sanitation Fund Board Makingsanitation aninalienable component ofnew drinkingwater projects and appending the sanitation component o n old schemes Involvingcommunities inthe management of the drinking water schemes Implementing cost recovery mechanisms 44 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) Developing national water quality standard/guidelines and strengthening water quality monitoring (this was inspired by reports of high arsenic con- centration, above safe level or 50 ppb; tests of most Tarai tube wells have been completed and unsafe wells have been marked), and Reducing water supply losses inKathmandu Valley and other municipali- ties by 4 percent annually. The DWSSisimplementing16P1,8P2and 1P3projectswith atotaldevelop- mentbudgetofRs.3.42billionin2004/05.ThemajorP1projectsareMelamchi Water Supply Project, KathmanduValley Water Supply Management Prepara- tion Committee, Small Town Water Supply and Sanitation Project and the Community BasedWater Supply and Sanitation Project. These projects share 74 percent of the sector's development budget. The drinking water and sanitation sector is expected to achieve and even exceed the sectoral MDG. The population with access to potable water has increased from 72 percent at the beginning of the Tenth Plan, to 73 percent in 2003/04 (Table 6.3). The major sectoral concerns are the rehabilitationof the I04 in20 Source Ministry of PhysicalPlanningand Works old schemes and difficulties of maintaining water quality caused by increasing salinity of ground water and arsenic levels inthe Tarai and poor service deliv- ery. Bothprogress and coverage insanitation remain low. The reasons for low coverage are lumping of the sanitation budget with drinking water and the low priority accorded by rural households to toilet construction and use. I SECOND PROGRESS REPORT 45 The Riiral Water Supply and ~anicla~on Futtrf Board ~ ~ IS ~tirni-~w~o~oni~ws~ W ~ ~ bnrfy tilac ~ } s and User Croups to b maintain their owti wxer systems It IS on0 of rile governrrtcrtr's inmi approaches to m a i n the MDG tJrgets br delivery of drinktrig water "Itr WSSFBfully rocognrrtix chc central roto women Figure 6.1 Average ~n~t r n b i n ~ ~ I ~ m p ~ w ~ rande inclusion Index ~ , A recettt empirical srvdy af I nirn 045 a 4099 empowerment, and ~nclusi~n levels U 13 1 t,han the xxher 40 v i l i q e ~(See Fig- Nn$ehcrn@Batch 4 Batch S titc 6 I f . 7he study alro looked at rrtales and hat It w35 incn who wnrnerl were and tnclwd Figtrrc 6.2 e Evtid Board of MIS dacla ~ d t s ~ ~byr caste tand ethtricrcy) had t cvcaled chit ~rdhmaii/~hhetrt e ~ ~ ~ ltwsc- Figure 6.2 Average Combined ~ ~ p o w ~ r ~ ~ n t nclusion I Gender 042 a 44 Batch 5 Performance InSocial Inclusion AndTargeted Programs INCLUSION he NLSS I1 data reveal that certain caste, ethnic and religious groups-particularly the HillJanajatis (exclusive of Newars and Thakalis), Dalits and Muslims have poverty levels well above the na- tional average. Additionally, women, people living in remote areas, the very poor, as well as many marginal and small farmers living in difficult circumstances face additional harriers in getting access to so- cial services and economic opportunity. T h e recognition of this fact inthe Planis reflected inthe t h d P E Ppillar o n social inclusion and the targeted programs. Implicit inthe Tenth Plan is the recognition that Mid-andFar-westemDevelopment Regionsare the mostdisadvantagedareas, and women, Dalit and Janajatis (indigenous groups) are the most disadvantaged groups. These groupsrequire not only specialprograms, butevenmore importantly, they require the government to lookat all mainstream programsto identdybarriers inaccessanddevelopmechanismstoovercome the obstacles.The coreideaofthe inclusion pillar is that while targetedprogramsare essentialto reach the excluded, a truly level playing field requires that these groups have equal access to mainstream programsas well-and the fullweight of the budget allocated to these programs. WHOAREEXCLUDED? Women: Nepalese women have historically faced discrimination due to the male-centred social structures that prevail inalmost all of the country's SECOND PROGRESS REPORT I49 diverse ethnic and caste groups. Women have lower outcomes than their male counterparts o n almost all indicators o f poverty. Realising this, several efforts have been initiated under the Tenth Plan to improve the situation of women, including legislation to correct laws that discrimi- nate against women. Dalits and Janajatis (indigenous groups): The National Foundation for Development of Indigenous Nationalities (NFDIN) was established by law in 2002. It has taken on the implementation of a number of special programs (such as the Chepang Development Program) and special scholarship pro- grams for disadvantaged Janajatigroups. TheNFDINalso keeps watch to en- sure that Janajati needs and interests are reflected in national policies and programs. The NationalDalit Commission was established under an executive order in2002. Since the NinthPlan, national scholarships have been provided exclusively to Dalit students for study from primary to higher levels. Inaddi- tion, a total of 65 income and skilloriented projects are beingimplementedfor the welfare of Dalit households. The LSGA has made provisions for the nomi- nation the Janajati and Dalit representatives inlocalbodies. Notwithstanding these efforts, much more needs to be done to eliminate economic and social discrimination against Dalits, and to bring both Dalit and Janajati groups into the development mainstream. Remote areas: Most of the poor live in remote areas and are difficult to reach even by the targeted programs. These are also areas where the insur- gency has more influence, mainly because their remoteness has made it diffi- cult to fully secure the regions. The greater insecurity-both real and per- ceived-has added to the difficulties in implementing development pro- grams. Despite the difficulties, HMG/N has managed to implement some infrastructure projects in parts of the Mid- and Far-western Development Regions, which may have also contributed to reducing poverty-reported by NLSS11-in the regions. TARGETED PROGRAMS ANDSAFETYNETS There are about 32 targeted programs under implementation. The programs are designed to addressissues of social inclusion, poverty reduction, participa- tion, service delivery, gender balance and equity and focus o nreaching women, Dalits, disadvantagedJanajati groups and those living below the poverty line. 50 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) The policy initiatives taken to improve the program performance, efficiency and targeting are: Basing sector activities on poverty mapping Developing framework for addressing the problems of deprived communi- tiedregions Increasing grants to local bodies o n the basis of district poverty index Strengthening social mobilization Using PAF to support NGO/CBO activities to supplement and complement targeted programs Designing special mechanisms for monitoring output/input indicators for targeted groups Assisting overseas employment Providing special incentives to girls ineducation, Eliminating legal discrimination, and Introducing affirmative action in public services. Theimplementation modality oftargeted programs haschanged-from the tra- ditional welfare -oriented approach to social mobilization. The programs and projects based o n social mobilization include activities such as formation and development of groups, saving mobilization, skill development, and construc- tion of small infrastructures. The targeted programs are complemented by a safety-net initiative, whichincludes providingspecialallowances towidows above the age of 60years, senior citizens above age 75 and setting upold-age homes. In order to promote representation of women, Dalits and Janajatis in the civil service, HMG/Nconducted coaching classes for these groups to enhance their capacity so as to compete inthe civil service examination. T h e natureof the targetedprogramsandsafetynetsdlffer becauseof the diversity of needs. Ingeneral, the programscanbe groupedinto the followingbroadcategories: (i) Geographical and sectoral targeted programs which include construction of infrastructures and local development initiatives; and (ii) Grouppbased targeted programs, which include the following: rn provision of subsidy rn programs focusing o ncapabilitydevelopment throughimprovementsinHDI rn programs offering income generating opportunities rn food for work program rn skill oriented training rn programsfocusedonparticularsubjects,basedoncomparative advantage,and rn programs aimed at increasing access (of the poor) to productive resources. SECOND PROGRESS REPORTI51 Source Budget and FCGO data The Ministry o f Women, Children and Social Welfare (MOWCSW) i s implementing about 26 percent targeted programs but i t s share inthe total budget is only a little over 6 percent. The Ministry of Educationand Sports (MOES) has about 17 percent of the targeted programs but commands about a third of the budget. The apparent discrepancy suggests that the size and scope of the programs differ. There has been a 79 percent increase in terms of allocation to targeted programs, upfrom Rs1.67 billionin2000/01 Rs. 2.97 billion in 2003/04. Inaddition to the public resource allocation, some donors, I/NGOs have also channelised resources to implement vari- ous targeted and social inclusion programs. the rate of 0.17 ha per household. 52 ASSESSMENTOF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) MONITORINGTARGETED PROGRAMS A separate mechanism for monitoring targeted programs is being finalised (further details appear inthe Chapter X) at the NPC.The mechanismwas first piloted in two targeted programs- Free Text Book and National Scholarship Program. Some highlights of the monitoring results are given inBox 11. The mismatch between academic year and fiscal year delays the flow of authority and funds. Annual budget allocation for free textbook program has declined by almost a quarter in the recent years despite the growing number of primary school students. There are frequent changes in the allocation modality, which hampers smooth book distribution. Coupon system of distribution was more effectivefor timely delivery of the complete set of textbooks. The book distribution under the bill repyment system is self-targeting,as the better-off households do not seek reimbursement. Textbooks are not available for purchase throughout the year because of the monopoly in production and distribution. The targeting mechanism for scholarships is good, but there are errors of exclusion because all disadvantaged castes of the Tarai are not included in the targeting definition, and The allocation for the scholarships is increasingbut it is still inadequate; the amount is also low in view of the increase in prices. BEYOND TARGETED PROGRAMS TO INCLUSIVE MAINSTREAM PROGRAMS Table7.2 showsbudget allocatedto development programsintermsofthefour PRSP pillars. Ifthe socialinclusionandtargetedprogramspillaris understoodtomeanthe 32 targeted programs, then only a little over seven percent of the development budget was allocated to the area in 2003/04. The inability of the government to Good governance Source: Annual Development Program of 2003104,National PlanningCommission,HMGN, 2003 SECOND PROGRESS REPORT 53 fmalise a better targeting mechanism tied to actual outputs for target groups deter- minedunderaverifiablemechanismexplainsthe low allocation. The PEP'Ssocial inclusion pillar strategy also involves initiatives aimed at bringing about structural changesto facilitate inclusion inthe mainstreamprograms.The aimis to ensurethat all mainstream programsare designedand implementedinways that recognizethe barriers some citizens face ingetting access, and buildmechanism and incentive structures to help overcome those barriers during implementation. EVALUATIONOFTARGETED PROGRAMS A joint staff assessmentofNepal's PRSby the World Bank and IMFsuggested four improvements. One was the need to further elaborate pro-poor ruralstrat- egies to ensure social inclusion through changes in the way in which public services are delivered. T h e aggregate contribution of targeted programs to pov- erty reduction also remains short of expectations, owing mainly to scattered implementation, weak monitoring and evaluation, non-replication of effective programs and poor targeting. Another weakness has been the inability to ex- clude the `not-poor' from targeted programs and weaknesses inservice delivery. 54 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) Performance In Institutional ReformsAnd Governance ood governance i s the critical fourth pillar of the I'KSP: Xm proving governance i s important for achieving all the outconies envisaged by the Tenth Plan. The gorernance improvement approaches include ensuring accountability, controlling leakages, and increasing inclusion and stakeholder participation. These are to he attained by enhancing the efficiency of the civil service and deepening decentraii0 zation, including fiscal devolution. CIVIL SERVICE REFORMS HMG/Nhas typically hadanimbalance betweenprofessionalandsupport staff and a highly centralised bureaucracy.Increasing decentralization and devolu- tion of authority to local bodies and community organizations has necessi- tated the re-definition of conventional bureaucratic roles and functions, and evendownsizing.The PRSPrightsizingobjective was toreduce/eliminate 7,500 positions inthe bureaucracy by 2003, of which 7,000 reductions were done in 2002/03. The government hasbegun training workers on MGrEand the use of computers to assist the bureaucracy to adapt to its changing role within decentralisation now taking place. SECOND PROGRESS REPORT 55 communities to demand services is desired at the clientbeneficiary levels, while increased debate on public policy are desired at the centre, taking care to ensure non-interference in day-to-day program implementation. The government has undertaken various measures to make the civil service effi- cient, responsive, accountable and transparent. One is raising the remuneration ofgovernment employees to matchthe costsofliving, revisingthe packageperi- odically, and establishing and implementing reward and punishment mecha- nisms.Nepal's civilservicesalariesandbenefits remain thelowest inSouthAsia. Other reforms include the computerisation of the personnel information sys- tem (PIS) of public employees, preparation of a governance road map, estab- lishment of governance reform units at key ministries and re-organisation of some HMG/N agencies into autonomous organisations, etc. The government has prepared a draft Governance Act and is finalising an amendment of the Civil Service Act. HMG/N has also begun implementing an Internet-based Personnel Information System that is being extended beyond the Ministry of General Administration (MOGA). A new law for procurement has also been drafted. However, much still remains to be done towards creating an "ideal)' bureaucracy, especially interms of fair representation of women and Janajatis. The accountability mechanism of the executive has traditionally had an im- balance between authority heldby the Ministers and the government secretar- ies. The new law seeks to clarify the roles of the political leader and secretary and also establish an accountability system. The new law also seeks to make secretaries responsible for managing government employees. There is now an understanding in the government that true decentralization involves more than a provisioning role (allocation, monitoring and regula- tion). HMG/Nbelieves that decentralisation is about giving actual production responsibility to others such as the private sector, CBOs and NGOs that have greater flexibility and institutional arrangements for optimising outputs, which i s what now guides public policy. DECENTRALIZATION Decentralization is the key crosscutting element of the PRSE Ingeneral, the decentralization efforts were constrained during the review period, because of the absence of elected authorities bothinParliament and at the locallevels. 56IASSESSMENT OF THE IMPLEMENTATION OF THE TENTH P L A N (PRSP) The preparation of District Periodic Plans (DPP) in52 districts is one positive beginningtowards decentralisation. The centralbudgetary allocations are aligned with the district plans and sectoral ministrieshavebeen directed to be guided by DPP priorities. Fifty-four districts have prepared Citizen's Charters and 11 have begun publishing notices on job opportunities. Sectoral and block grants (share of budget implemented by local bodies) were raisedby 25 percent in2004/05 compared to 2003/04 andnew areashave been opened up to enable localbodies enhance their revenue. The government also implementedcapacity enhancement training programs to support staff devel- opment at the local level-such training included about 578 VDC secretaries up to mid-July 2004. The government has set up Management Information Systems,GeographicalInformationSystemsand accounting systemsat 60 DDC offices to facilitate planning and implementationof localprograms. The analysis ofpublic expenditure (for years 2002/03 to 2004/05) by localbodies shows that it grew by nearly 33 percent interms of allocation/expenditure compared to the 15 percent increase in central level activities. This is a modest move to- wards fiscal decentralization even though it remains to be determined if the VDCs are actually using the funds or not. Many laws and regulations still conflict and contradict the provisions of the LSGA, 1999; following ten such laws were submitted for amendment in2003/04: Local Administration Act 1971 Film (Production, Show and Distribution) Act 1969 Sports Development Act 1991 Consumer Protection Act 1997 Statistics Act 1958 Construction Business Act 1998 Environment Protection Act 1996 Animal Health and Livestock Services Act 1998 Animal Slaughtering House Act 1998 Disaster (Relief) Act 1982 Another major decentralization initiative of the Tenth Planhas been the trans- fer of management of basic facilities such as primary schools and healthposts to local communities. The government has drafted a human resources develop- ment plan and is discussing proposalsfor setting upLocal Service Commissions as measures to enable local bodies to handle their new functions effectively. SECOND PROGRESS REPORT 57 CORRUPTIONCONTROL Effective corruption control remains a major national challenge and also a concern of Nepal's development partners. Corruption control is vital for im- proving effectiveness of public spending and service delivery. HMG/N has implemented various measures to control corruption besides re-vitalising the bureaucratic control mechanisms. The Judicial Commission for Property Investigation was instituted in April 2002 to investigate assetsof politicians and officials inpublic office after 1990. The Commission for the Investigation of Abuse of Authority (CIAA) initi- ated judicial action against public officials suspected of having amassedwealth disproportionate to verifiable sources of income. Table 8.1 summarises the activities and outcomes of actions taken by the C I M . Particulars 2001/02 2002/03 2003/04 Source. Admmistratiue records of ClAA Other measures taken to control leakages include the establishment of the National Vigilance Centre (NVC) under the Office of the Prime Minister in late 2002, and the institution of mandatory public auditing for controlling misuse of resources at the project level. These measures and other legislative reforms, have contributed towards reducing the high levels of impunity for corruption. The CIAA also performs a preventive role by sharing and disseminating infor- mation, publishing posters, pamphlets, booklets, newsletters and so on. It also organises interaction programs with government and non-governmental organisations to discuss ways to curb corruption. 58 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) The ConflictAnd The Development Response he conflict in Nepal has continued to affect PRSP implenien. tation, especially because some of the badly affected regions are also those where social exclusion is more pronounced. Generally, the areas affected badly by the conflict are also those that lag behind the national average in terms o f poverty incidence and development. By 2001, the insurgency that began in early 1996 in a handful of dis- tricts in the Mid*western and Central regions had a reported presence inalmost every district. The conflict intensified after the PKSI' implee mentation began and remains a major obstacle to generating and main. taining high growth needed for reducing poverty. Nothingjustifies the violence and inhumanity that hasbeen associatedwith the insurgency. Continued violence threatens not only to impede the achievement of the PRS, but also to arrest and reverse the progress. The PRSP incorporates strategiesneededto address what are now said to be some of the "root causes" of the conflict but the ability to implement programs to attain desired outcomes dependson the peace and security situation. HMG/Nbelieves equitable devel- opment and equal sharing of benefits can result inlong-term conflict resolution and lasting peace. Nepal is implementing i t s PRS in a very difficult development environment. The outcomes would therefore be influenced by how the conflict and the SECOND PROGRESS REPORTI59 government's efforts to restore peace and security evolve. Some of the possible scenarios are: Continuedviolence andgovernment efforts to restorepeaceandsecuritycould cause difficulties inPRSPimplementation, delaying outcomes of efforts aimed at addressingthe historical inequalities said to be fuelling the conflict Enhanced efforts to maintain security could contribute towards creating a climate conducive for PRSP implementation and pave way for revitalising and speeding updevelopment programs leading to long-term peace, stability, and economic wellbeing, and Nepal may need to devise special mechanisms to cope with continued vio- lence inorder to be able to continue delivery of basic services for prevent- ing regression of progress made inthe first three years of PRS implementa- tion. This scenario may demand higher investment towards ensuring secu- rity of all stakeholders working to reduce poverty and restore peace. The government attempted to resolve the conflict through negotiations twice (August-November 2001 and January-August 2003) and this is its preferred way towards resolution. However, the efforts did not lead to desired results while implementation of development activities remained very difficult, espe- cially because violence limited the reach of government institutions. The dif- ficulties associated with traditional implementation methods have led HMGi Nto increasinglyrely onnewer modalities, especially one whichputscommu- nities in the centre, as drivers of development. Development cannot wait untilthe conflict is resolved and Nepal also has n o choice but to continue implementing the PRS by making adaptations to suit the situation as it unfolds. The ability to implement the PRS could help win the confidence of the people and wean away those that may have resorted to supporting viblence as a means to achieve development goals, towards sup- porting HMG/N's efforts to reduce poverty and restore peace and security. One approach to ensure continuation of PRS implementation is to transfer basic development functions and decisions to the people, and re-orient gov- ernment and i t s agencies to take o n the role of facilitators of the processes rather than implementers. Experience so far shows that it is difficult even for the insurgents to go against the wishes of the people when the poor and the deprived take true charge of their development. The PRSrecognises the valid- ity of the modality, which, however, remains to be adequately reflected invari- ous hierarchies of development governance. 60IASSESSMENT OF THE IMPLEMENTATION OF THE T E N T H P L A N (PRSP) T h e challenge now is to stretchevery rupeeavailable for development to produce the maximumpossible impact because therein lies the opportunity to influence long-term conflict resolution and restoration of lasting peace. T h e ability of the government to pursuet h s development approachis contingent on the continued availability of resources, and additional flexibility, in order to be able to match resourcesto the needs-as they emerge. The approaches used for implementing programs in conflict-affected areas include involving local communities and NGOs and CBOs for delivering pub+ lic services in participatory ways. HMG/N plans to implement more projects relying o n bottom-up planning and beneficiary participation, and those that use labour-intensive and environment-friendly techniques. Such programs are typically owned and implemented by localcommunities assistedby govem- ment agencies, NGOsand CBOs. The government also implemented the Integrated Security and Development Program (ISDP) to continue development inthe conflict-affected areas. The ISDPwas designed to provide asecurity umbrella for carryingout development activities inareas where service delivery had been disruptedby violence. The Poverty AlleviationFund (PAF) also envisageslarge-scale, community-owned and driven interventions for poverty reduction to address the root causes of conflict, mainly exclusion and the resulting deprivation. In December 2004 the PAF had approved 54 projects in 168 village development committees (VDCs) of six districts. HMG/N has also instituted a flexible ImmediateRelief Fund(IRF) to addressthehumanitarianneedsthat couldemerge ifthe conflict continues or escalates. SECOND PROGRESS REPORT 61 Tracking Mechanisms And Learning ontitwous monitoring of poverty is essential for a sound pov erty reduction strategy. LMonitoritig i s needed to geii+eratein- formation and provide feedback for refining policy, monitor progress on investments and to ensure accountability. At the inost basic level, the systemfor poverty nionitiwingand analysis mustfocus on the dynamics of poverty and the outcomes-or relate die inputs (budget) and outcomes (PRS achievements).The governnient has instituted a separate sectionfor continuous monitoring at the NPC. The functions of this sectionwould be to facilitate policy refinement, monitor progress and ensure ace countability through timely analyses and information dissemination. Information System, annual, and Public ExpenditureTracking Survey, annual. SECOND PROGRESSREPORT 63 POVERTY MONITORING ANALYSIS AND SYSTEM The PMAS was instituted as part of the PRSP implementation process. The main objective of the PMAS is to coordinate, consolidate, harmonize and analyse data from existing poverty monitoring systems (discussed above) and communicate results in a manner that continuously help to refine the policy process. The PMAS stresses on: Implementation (or input/output) monitoring Outcome or well-being monitoring Impact assessment H Poverty management information system, and H Communication/advocacy. IMPLEMENTATION MONITORING Implementation monitoring relies primarily o n input and output indicators and intermediate process indicators. The aim is to: a) monitor budget alloca- tions of all priority programs and policies; b) monitor process/activity indica- tors of the policies and programs; and, c) monitoring the level of achievement of outputs of main PRS policies and programs. Thegovernment has refinedthe mid-termbudget review process and has also completed "Public ExpenditureTracking (PET)' surveys inhealth, education, and the works and transport sectors. These surveys enable tracking ofresource flows to spending units. EIMSand HMISannual reports provide facility-level data for the two sectors. Additionally, HMG/N's performance-based budget release system also captures progress in all Priority1 programs. OUTCOME MONITORING Outcome monitoring tracks changes inoverall well-being or impacts over time. Thegoalisnotto attribute outcomes to specific programs or policiesbutto focus o n impact indicators, or a subset of closely related indicators. Well-being moni- toring has a number of objectives: assess overall performance with respect to living conditions; assess relative performance of different geographical regions, districts, VDCs and socio-economic groups; and facilitate analysis of the causes and changes inthe poverty situation. Inorder to generate survey data for this 64IASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) type of monitoring, HMG/Nhas decided to streamline household surveys and rely primarily on the NUSand NDHSconducted at the interval of five years. The PMAS incorporates data from the different surveys and monitoring sys- tems and continuously refines the monitoring indicators, using inputs from different ministries.Also included are intermediate indicators sourced from administrative records, including management information systems at the ministries,national accounts and price data from the central bank. IMPACT ASSESSMENT Impact analysis establishes linkages between outcomes/ impacts and the pro- grams being monitored. Impact analysis has two main objectives: to assess the effect of a specific policy, program/ project o n poverty or some other well-being outcome, and to assess the efficiency of different policies/programs in achieving a given well-being outcome, i.e. could other policies or programs have improved well-being at lower cost? In2003/04, animpact assessmentsurveywas conductedinSiraha district. Some major findings of the Survey is given inBox 12. sment conducted in Siraha District Highlights of findings of an impact assessment study in Siraha District of programs in four sectors-education, health, drinking water and agriculture: Growth in productivity was higher for sugarcane, potato and livestock products. Public agencies had a monopoly in extension services whereas the input market was dominated by the private sector. There was encouraging achievement in EPI coverage, nutritional status of children, and CPR rate, bur the outcome was poor in terms of ARI, dianhoea and kala-azar control. rn Among children of the survey settlements, 58% were going to public schools, 14% to private schools and the rest were not attending school. rn More than two-fifths of highly food insecure (food sufficiency up to three months) families were not sending children to school. "Economic problem" was the main reason for school dropour Access t o education, health services and drinking water had improved. Targeting Dalits was more effective in the education sector but the magnitude of support was small. rn There was low participationof beneficiaries in the development pmgtams.The participation ~ ~ of Dalits and religious groups was found higher in drinkingwater projects. SECOND PROGRESSREPORT 65 Participatory monitoring:Participatory monitoringat different levels comple - ments the macro-monitoring systems. HMG/Nwill institucionalise participa- tory monitoring as part of the PMAS to ensure greater accountability at all levels, and also to facilitate quick interventions for making necessary correc- tions. The participatory monitoring tools include citizens' report cards, social audits, budget reviews by civil society groups and parliamentary reviews of program and policy performance. HMG/N is developing a participatory pov- erty monitoring mechanism, using appropriate tools, in order to take into account the voice of the people. POVERTY MANAGEMENT INFORMATION SYSTEM (PMIS) The PMAS i s to grow into a central repository of all data on poverty in Nepal. The data o n PMASwould be accessible through the Poverty Man- agement Information System (PMIS), which would link all major data- bases relevant to poverty monitoring. The main objective of PMIS i s t o assist decision-making by: (i) providing instant access to relevant, cor- rect information o n poverty, (ii) making existing information coherent, compatible and consistent, (iii) serving as a flexible and evolving mecha- nism for data storage and analysis, and (iv) ensuring data access while continuously generating information through greater control and moni- toring functions. However, before developing a complex and integrated PMIS, Nepal Info, an easyto-use CD-ROMwith MDG, PRSP and other indicators-maintained by CBS-is tobeexpandedanddisseminated. TheNepalInfois adatabasesoftware tool that features a comprehensive set of social development indicators se- lected to monitor the PRSC MDGs and other key development parameters. Nepal Info provides information for poverty monitoring and thus helps in operationalising and institutionalising the PMAS for effective monitoring of PRSPand MDGsindicators.Nepal Infodatabase i s updated annually with information o n MDGs for global as well as local level monitoring systems. Additional PRSP indicators and some other prioritised indicators as identi, fied by the'Nepal InfoTechnical Committee are added and updated annually. NepalInfo2 was released at the endo f 2004. This latest versionof Nepal Info contains informationo n 73 PRSPindicators and 94 other prioritised indica. tors. Additional steps have also been taken to develop a training package o n 66 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) Nepal Info to train key personnel of line ministries and civil society in the use of data. MONITORING MECHANISMTARGETED FOR PROGRAMS Building upon the government's monitoring and analysis system, a mecha- nismhas been developed inorder to determine: (i) whether the budget spent o n the targeted programs and projects reaches the final service delivery insti- tutions, and (ii) whether the output and servicesof suchprograms reachdisad- vantaged areadgroups, including women and Dalits. The mechanism was pi- loted in two districts to monitor the free textbook distribution program and national scholarship program, and is being finalised. DISTRICTPOVERTY MONITORING ANALYSIS AND SYSTEM (DPMAS) The DPMASwas drafted in2003, and was shared with differentstakeholders both at local and national levels in 2004. Regional workshops were held to share DPMASwith the district levelstakeholders of all 75 districts. Ithas been refined based on the comments received from the stakeholders. RESULTS-BASED MANAGEMENTMONITORING AND The government has adoptedthe Results-basedManagement (RBM) as a moni- toring approach to improve development effectiveness. EU3Mis a management tool that provides a coherent framework for planning, implementation, moni- toring and learning. RBM moves the attention from inputs and activities to HMGlN has developed and adopted the RBM.The main elements include strategic planning and prioritization in the PRSPmenth Plan, annual budgeting based on the medium-term expenditure framework (MTEF), the Poverty Monitoring and Analysis System (PMAS), the Immediate Action Plan (which identifies activities to be given priority attention for imple- mentation), and Sector Business Plans (which are beingdeveloped to make priorities, formu- late objectives,specify resource needs, identify targets, set timeframes, and define risks). The RBM will be further refined and integrated at sectoral and local levels. SECOND PROGRESS REPORT 67 results and impacts. Itemphasises effectivenessinservice delivery while focusing o n transparency and participation. It also helps clarify goals and objectives; sys- tems aimed to provide measures of performance and results; a learning culture grounded inevaluation; beneficiary participation at all stagesof programdesign and implementation; clear accountabilities in a decentralized framework; and builds links between planning, resource allocation and results. 68 ASSESSMENT OF THE IMPLEMENTATIOK OF THE TENTH PLAN (PRSP) Resource NeedsAnd Aid Harmonization RESOURCE NEEDS here was a slowdown in developnient spending after PRSP irnplementation began-owing mainly to external factors in. cluding the conflict. The spending levels have increased compared to previous fiscal years but the overall level still remains low. Investment in developmenr is critical for attaining the PRS goals and therefore the need to tnaintain fairly high and predictable expenditure levels. Theability toincreasespendingdependsonthepeaceandsecurity situationand implementation level efficiencies. The government's ability and flexibility to increase spending on development remains constrainedby increasing recurrent expenditure and debt servicing obligations-the pressure of which was offset to some extent by low levels of development spending-causing it to rely onexter- nal sources of financing. The conflict also continues to pressure government finances, causing more resources to be spent for maintainingpeace and security. The progress towards attaining MDGs remains slow and Nepal may be able to achieve the goals, only if it can substantially increase investments o n related programs. Additional resources are needed for the following reasons: To plug the investment gaps of the past years of PRS implementation and attain the levels envisaged by the TenthPlanby 2006/07, and to be able to raise investments o n areas related to attaining the MDGs m To rebuild/ repair infrastructures damaged during the conflict; and w To be able to fund new, quick-yieldingprojects/ programs that could also contribute to conflict-resolution. SECOND PROGRESS REPORT 69 The ongoing MDG needs assessment exercise dlidentlfy the resource require- ments and gaps. Table 11.1shows the gap between estimated investment require- ments for the remaining years of the Tenth Plan and the anticipated government ndfinancingfor 2005/06-2006/07 (Rs. bi1hon) Expenditurelsource 2005106 2006107 Total Sotace An assessment o f k t h Plnn (PRSP) implementorion, Moy 2004 revenues. The estimate of investment required-based on the assumption of nor- malcy-suggests that the government would needRs.84 billioninforeign financing inorder to meet the targetedexpendituresduringthe remaining two years of the Tenth Plan. However, becausedevelopment financing levels are contingent o n the ability to spend, the actual levelsneededmaybelower. Foreign financing increased slightly in 2003/04 to reach about Rs22 billion; the need may be slightly higher in2005/0Gassuming that the ground situa- tion changes for the better-and increase proportionately with advances made o n restoring peace and security. Based on the aforesaid estimates of foreign financing, development spending could be around Rs.40 billion in 2005/06 and Rs45billion in2006/07. The other issueof financing is less the willingness of partners to contribute to the development process, but the availability of quick financing when it is needed (for example, funds for quick interventions ifthere is a dramatic change inthe peace and security situation). AIDHARMONIZATION Nepalbeganplanned development inthe 1950s. Early foreign aid tendedto be influenced more by the global political priorities and less by the needs of re- cipients, despite all the good intentions associated with development assis. tance. Aid became less political over time but remained constrained by weak institutional capacity to manage and administer assistance at the recipient end. In order to increase aid effectiveness, many donors tried to design pro- grams bypassing government institutions causing aid to become a `donor busi- ness', which remained so until about the end of the millennium. 70 IASSESSMENTOF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) In2002 Nepal prepareda ForeignA d Policy anchored on the premise that the government shouldset the development vision, framework andpriorities anddevel- opment partnersshould fit into the arrangementusing the PRSPand the MTEFas reference.The policywas presentedat the NepalDevelopment Forum (NDF) 2002 where the development partners endorsed the fundamental policy thrust. Several donors have alreadyaligned their assistancestrategies and programswith the PRSP and the specificallocation decisionsremain integrated to an extent withthe MTEE ToovercometheweakintegrationwiththeMTEF,thegovernment proposedanaid integrationprocessat theNDF,2004,anditslogic for integration andharmonisation was endorsedby the donors. HMG/Nisnow beginning to implementthe idea,even thougheffectiveintegration couldbedelayedowing to anumber offactorsincluding the natureofaidprograms, the immediateimpact onallocation, andthe time needed by donors to make preparationsfor the modality shdt. T h e move towards integration and harmonisation can end the unpredictability of resources and help increase the effectivenessof aid-which has remained a major donor concern.ThePRSPhasbeenacceptedasthelargerframework toguideinvest. ment indevelopment. Aid harmonisation and its resultant benefits interms of resource predictability, program-wide support rather than project specific invest- ments andaclearlyfocusedinvestment framework (PRSP)cantherefore supportthe attainment of the development goals and increaseaid effectiveness.Gains can also result fromlower transaction costs, resultingfromamonitoringandreportingframe- work acceptable to all, andbetter alignment of assistancewithnational priorities. Themovetowards harmonising aidbeganwiththe Rome DeclarationonHar- monization (February, 2003), necessitated largely by two major concerns: a The high transaction costs resulting from a large numberof donorefunded projects with different policies, procedures, and reporting and accounting requirements, and w Thelackofcountry ownership and leadershipindevelopment causing itto be donor driven. At the NDF 2004 Nepal proposedharmonizationat three levels: a Overall program level, or aligning aid with HMG's priorities a Individual program level or aligning aid with HMG's sectoral policies, and Financial modality level or aligning aid with HMG's financing system. The NDF 2004 also endorsed the National Action Plan for Harmonisation, a two-year rolling plan that i s reviewed annually. The action plan is expected to serve as roadmap inthe move towards greater harmonization through actions SECOND PROGRESS REPORT 71 to respond to both outstanding as well as emerging foreign assistancemanage. ment issues. The plan also includes guidelines to steer sectoral actions. Nepal is the only country in South Asia that has a fully operational PRS, MTEF and an Immediate Action Plan. Together, these instruments address most of the implementation-related concerns, includingmonitoring and evalu- ation, and reporting. Nepal's annual budget hasbeenalignedwith the PRSand the IAP provides the basis for implementing and monitoring reforms on an annual basis. T h e PRS outcome therefore depends o n effective aid harmonisation, a process which has already begun in terms of increased and considerable coordination among the development partners. As a group, Nepal's development partners have endorsed and strongly sup- ported the PRSP,MTEFprioritisation and the annualised reforms being imple- mented on the basis of the IAP The progress in devolution of functions in basic service delivery, including health and education, to communities is an- other success story that has accompanied changes in the policy regime. The government has also instituteda mechanism for greater coordination between HMGN agencies and donors. HMGNs coordination mechanisms include reviews by the Ministerial DevelopmentAction Committee (MDAC) and the National Development Action Committee (NDAC); the development part- ners alsomeet regularly insectoral working groups to discuss andreviewprogress. The government is fully committed to continuously enhance its outcome focus, developing clear sectoral strategies and pursuing rigorous prioritisation using the MTEF. It has also continuously broadened and deepened coverage of the MTEF-it now covers the entire budget. To make expenses more realistic and comparable internationally, in 2004/05 Nepal began classifying spending as recurrent and capital expenditures. T h e government is finalising businessplans ofselectedsectorsfor aid-integration, andhascontinuously fine tunedthe MTEF by rationalising the budget envelope. It expects development partners to fit into the framework, especially upon completion of the business plans. The slow progresstowards the attainment of MDGscalls for scalingup actions in all sectors. Traditional service+deliverymechanisms do notwork inthe context of theconflict, whichcontinuouslyposesnewchallenges.Nepalhasnochoicebutto continue implementing development programs, which inturn depends o n con- tinuous support from the development partners. Effective aid harmonization and predictable donor support are therefore very criticalinNepal's quest to attainboth the PRSPobjectives and the MillenniumDevelopment Goals. 72 ASSESSMENTOF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) Conclusions he mideperiod achievements of the PRSPKenth Plilli are gener ally satisfactory, given the difficult development environment re+ sultingfrom the violent conflict, which escalatedat arouiid the same time that I'RSP implementation began. Neyal's macro level indicators remain stable and HMG/N remains fully committed to take all nieasures chat w d d he necessary to sustain the stability. The gains made in PRSP implementation so far are not self-sustaining and would therefore needconcertedefforts to prevent reversal. The HumanDevel- opment Report 2004 has called on Nepal to continue bolder reforms and de- velopment measures. A prerequisite for being able to do so is restoration of peace and security. The government has n o optionbut to ensure continuity to development because the inequalities in Nepalese society will continue to grow as long as they are left unaddressed. Continued conflict can also result in greater damages o n development infrastructures and delay further the recov- ery process. The possibility of long-term conflict resolution and establishment of lasting peace lies inthe ability of the government to deliver unhinderedservices and ensure inclusive development. The key for implementing these actions would be to devolve more and more tasks and functions to localbodies and commu- nity organizations and encourage the widest possible participation of stake- holders during implementation. The way forward is empowering people by putting them in charge of their development, with government, donors and other agencies playing a supportive role. SECOND PROGRESS REPORT 73 Thegovernment acknowledges that there isagapbetweenwhat isplannedand what actually takes place on the ground, resulting from the transitional con- tingencies. The donors, therefore, need step back and let government take fuller charge of development and support its efforts through more cost-effec- tive modalities, of which moving towards aid harmonisation is one. The ab- sence of elected localbodies has impeded the mobilisation of people and their participation in development resulting in a slowdown in local level service delivery. The situationis expected to change over time and the policy reforms, includingdevolutionefforts now underway are expectedto change-for ever- the manner inwhich services have traditionally been delivered. Restoringan environment conducive to enhanced participation by stakeholders at all levels is urgent, especially in the context of devolution of management functions to communities for bringing greater efficiencies in rural education, health care, agriculture and livestock extension services and for building rural infrastructures. These efforts needtobebackedupwith predictable flow offunds and strong monitoring of expenditures. These measures can take Nepal closer towards attaining the objectives of the PRSe and the longer-term Millennium Development Goals, notwithstanding the unanticipatedobstaclesthat mayhave to be overcome inthe process as long as the conflict remains unresolved. 74 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) References ProcessMonitoringofTargetedPrograms:FreeText BookDistributionandNational ScholarshipProgramsinDoti andBankeDistricts, NPCAJNDE2004. EvaluationofProgramsat the LocalLevel: A CaseStudy of SirahaDistrict, NPCAJNDT: 2004. PovertyMonitoring andAnalysisSystem: FrameworkDocument,NPC,May2004. Progress Reporton PovertyReduction,NPC, 2004 NationalAccounts, CBS,2004. EconomicSurvey:FiscalYear 2003/04,MinistryofFinance,2004. MediumTermExpenditureFramework,2003,2004, NPC TenthPlan (2002-2006),NPC, 2002 MillenniumDevelopment Goals,ProgressReport,NPC/UNDI: 2002. PovertyReductionStrategy Paper,NPC2001 Populationcensus 2001, CBSNPC,2001 AgriculturePerspectivePlan,APROSCOMA. 1995 SECOND PROGRESS REPORT 75 S jectorflheme Outcorne/impact IntermediateIndicators 2001/02 2002/03 2003/04 lndicaton hame/ rn Population below rn Percentageof population Consumption poverty line belowpovertyline 38 30.85 Poverty rn Share of poorest quintile in national consumption 6 Ginicoefficient 0.34 I 0.414 Economlc rn FasterEconomic rn Overall GDPgrowth Growth Growth (real) % pa -0.6 3.2 3.5 rn Agriculture (real) % pa 2.2 2.5 3.9 rn Non-agriculture (real) % pa -1.9 3.2 3. I m Per capita income growth (real) % pa -2.8 I.o I.3 Macro rn Fiscal Balance a Revenue/GDPratio (%) 11.9 12.3 12.6 Economic Development Exp/%tal Stability Exp. rauo (%) 39.4 34.4 26.6 Y Development ExplGDP rat10 (x) 6.4 6.4 6.6 # rn Domesticborrowingl GDP rat10yk) 3.6 2.6 I.5 Balanceof rn ExportslGDP ratio (%) 1 1 . 1 11.0 10.7 payments Workers remittances/ GDP (%) 11.3 11.9 12.6 rn Grossreserves (Rs billion) 105.9 108.2 130.2 Current account balance (Rs billion) 18.16 11.61 14.60 MonetaryStability koa 4.5 9.8 11.8 rn Domesticcreditgrowrh Tk) p.= 10.4 10.2 9.5 Inflation rn Consumer prices (%)p.a. 2.9 4.8 4.I Ns P,=59 P,=72.5 P1=33 P1=23.3 against allocationto PI yk) Health of Financial Capital adequacy ratio I 2 I I II SectorInstitutions rn Non-performingassets ratio 30.4 28.8 28.9 Completionof on-site inspection (number) of commercialbanks -Corporate Level - Branch 7 7 9 Level 30 26 24 Y = Capirnlrxpendirurr/ E d espendrrurr # =Capirnlexpedrrure / GDP rario 78 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) Sectorflheme Outcome/lmpact Intermediate lndicaton 2001/02 2002/03 2003/04 lndicaton Agnculture Foodsecurw Number of districts served by NFC 32 3 1 30 Quantity of food sold (mt) 8.2 I3 5,693 6.100 m Overall agricultural Length of rural roads growth (W 2.361 905 840 Number of VDCs electrified C 1,600 1,800 2,000 B Number of public marketcollecuon centers Imarketyards 31 33 750 Agricultural credit (ADBINonly, Rs in million) 7.1 I O 7,669 10,151 m Area under irrigation (ha) c 937,722 985,546 I,128,000 Useof chemicalferulizer (mt) 193,I54 172.270 16I,3 I 6 Crop producuon No. of functioning farmers groups C 7,508 9,383 Improvedseeds (mr.) 2,654 2,574 Number of pocket t 97 1,967 rticulrure credit (Rs million) 2,028 2,222 h'ertock Numberof livestock production farmers'groups 6,623 6,954 6,965 Number ofArtiticialb Inseminated(AI) 53,641 52,049 44,344 Producttonof milk (rnt) I,158,780 1,195,931 1,238,000 Numbersof pocket programs 455 455 807 B Lwestockcredit (Rs. million) 1,570 1,634 1.597 Meat Egg production (mt) 737,060 761,250 783,760 Irrigation Area under year Number and hectare of round irrigation -19,969 I -129,586 irrigation (ha.) Management Number of rehabilitated transfertoWUAs. and handed over schemes 5 50 Fbwer Percentageof populationwith electricityservices. IncreasedRural Per capita rural consumption electricity consumpuon NMberdVDCscod C 1.600 1,800 2,000 C = cummulntive SECOND PROGRESS REPORT 79 Sectorflheme Outcome/lmpact Intermediateindicators 2001/02 2002/03 2003/04 Indicators Forestryand sol1 a Area under intense forestcoverage 1,028,473 1,062,823 Conservation 4.378 7,061 8,27 I 9.070 10,027 13,706 18 18.3 39.6 39.6 usersgroup(CFUGs) Women participationin a No.of leaseholdforest usersgroups (LFUGs) a Women participationin LFUGs(%) lncomefrom a incomegeneratedby forestry FUGs(CFUGsonly; Rr. in million) I29 I24 industry,Trade a Expansion of a andTourism industrial production a -Services a Credit to industrialand s w c e s sectors a FDI(Rs million) - Addiuod employment a Additional a Number of training employment in course and trainees 414,272 139113,615 I18/13,259 SMEs rn Number of industries registered -Tad 9,890 5,225 6,035 -Cottage& Small 5,l 16 5,958 -Medium& Large I09 77 a Additional employment generated a Trade Promotion a AverageTariffrates (%) 12.9 11.5 Number of trade and industrialfairs II 7 Labour a Remittances a Number of Nepali workers employed overseas 104,739 105,055 106,660 a Proportion of skilled migrantworkers = cummulative 80 ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) SectoriTheme Outcome/lmpact IntermediateIndicators 2001/02 2002/03 2003104 lndicaton urism rn Tounsm Contribution 275,468 338, 7,994 6,88 Lengthof stay of tourists (days) 12 7.9 9 5 rn Number of flights outside Kathmandu (per week) 70 rn Number of beds available outside Kathmandu 13,666 14,795 n Number of star hotels C I04 I08 I08 7,799 I 1.747.7 18,147.4 re of tourism in GDP 2.5 2.6 rn Increasedroad Number of district HQs access connected 60 61 10 rn Reducedtransport Le CCMI 283 306 Environment rn Environment rn Proportion of traditional Improvement fuel in total energy use 87.4 87.4 rn Energy per capita use (Ton. of oil equivalent) Decentrahakm rn lmprovedservice delivery 75 468 NS I C = cummulorive SECOND PROGRESSREPORT 81 Sectornheme Outcome/lrnpact IntermediateIndicators 2001/02 2002/03 2003/04 lndicaton Informatron rn Telephone rn Private sector entry C I 2 ad carmvrcam penemtion per rn Number of new thousand telephoneIinesC 2 19,000 422, I83 608,084 inhabitants rn Number ofVDCswth telephone facility C I,76I I,76I 1.959 rn Access to radiorrV rn Coverage (% of servics population) radio and televisionservices 90150 90/60 90162 Number of newtelevision and radio providers(to -- Radio increaseintensity) C 30 56 Television C 2 3 5 Educatmn rn ImprovedAccess rn Number of primary schoolsC 25, I94 26,638 26,858 rn Net primary enrolment rate 81.1 82.4 84 rn Proporuon of population within 1/2 hourswalk to 9 I.4 rn Qualityof Number of cerufied Education teachersC NA 27.875 120,988 rn Percentageof pupil completingprimary level 60 67.7 69 rn Share of age 5 children in school rn Primary teachers trained v=) 15 15 3 1 rn Secondaryteachers trained (%) 46 2 48 rn Proportion of vacant teachers'positions Not vacant rn Number of schools transferred to communitiesC NS 90 I500 rn Primary cycle compleuon 50 4 rn Adult literacy (IS+) 20 40 44 educaoon expenditure (%) 0.9 Femaleadult rn Number of programsfor literacy (I5+) women literacy(class) 1,400 1,600 1,745 rn Adult female literacyrate 33.8 rn Number of people . . completingadult education 23,941 26,733 39,262 rn Girls' enrolm 224,656 82IASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) Sectorllheme Outcome/lmpact IntermediateIndicators 2001/02 2002/03 2003/04 lndicaton Health Accessto health Number of primarj healthcentres, health posts, sub-healthpostand district hospitals 4,429 4,408 4,40 I Number of sub-health posts transferredC NS 468 1.1 14 Propomon of population within 30 minuteswalk to healthfacilitiesloutreach clinics 62 ImprovedQuality Expenditureon medicine for healthcentres (Rs.) 80,000 80,000 80,000 Number of healthfacilities where I5 of the most essentialdrugs are available 1568 lnfantmortality Percentageofwomen rate receivingat least4ANC virm Percentageofwomen receivingadequatePNC (post natal care) visits Infant mortality rate Child mortality Percentageof one year rate olds receivingDPT3 againsttarget diseases 80.3 86.2 90.3 Child mortality rate (Per thousand) 91 Maternalmortality Percentageof births by rate skilledattendants 18.0 Improvementin National health General Health expenditure/per capita II02 I25 I 1,351 Numberof healthcentres, PHC and hospitals upgraded. 4 I m R populatton growth year olds 3.2 2.2 2.4 38.9 37.8 40.02 IncidenceoffW Number ofTB and Malaria Malariacases detection and treatment -- Detection -TB 70,189 71,190 70,514 Mal.(per 10,000 population) 5.73 5 23 3 30 -Treatment - Mal.(per 10,000 population) 4.4 I 5.20 3.20 12.8 tablets 57 68 88 = cummulatiue SECOND PROGRESS REPORT 83 ;ector/lheme Outcome/lmDact IntermediateIndicators 2001/02 2002/03 2003/04 lndicaton Irinking Accessto safeand PrOportiOn of population Naterand sustainabledrinlung servedwith accessto safe ;anitation water drinlungwater 71.6 72.8 73 Propomon of unac- cwntedforwater (%) 40 38 Incidenceofwater- = Proportion of households borne and water with sanitationfaciliues % 20 26.2 39 w h e d diseases ;ocial lncluston HDIof Far-Mst w Budgetallocauonfor Far sndTargeted andMid-West we& Midwest regtons xograms development (Rs. million) 5,0 13.3 3,869.5 4,368.1 regions Grants allocation to DDCs bodies on poverty based formula (Rs in million) 810 810 rn Numberof districts covered by PAF 6 rn Accessto Number of Women, education of Dalits,Janajatisbenefited women, Dalitsand from scholarships and Janajatis training Numberwomen, Dalits andJanajatisreceiving scholarshipsfor higher education -Women -- Janaiatis 403 403 Dalits rn Rauoof girls to boys in primarylevels Proportion of D Numberofwomen, D a h women, Daliuand and Janjausin teaching Janajausin political Number ofwomen, Dalits acuviues and public andJanpur in civil service posioons -Women C - Dalits 8,008 -janajaus Govmance Rightsizing Number of positions CivilService bureaucracy abolished C 7000 7160 Reform Percentageof women, ethnicand disadvanraged in civil 21,247 25,174 16,014 I35 1,028 810 3,199 29,030 2 1,423 Anti- rn Corruptioncases rn Number of corrupuon corruptron reduced casesRegisteredMiled 61 I47 98 Adjudicated 55 I29 Convicted(fully) 43 I20 Convicted(partially) 4 HumanRights Reduced human w Number of human rights ri&sviolations complaintsfiledlrwistered. 483 1,083 C = cummularive Prouisiml Esttmnrer NA= Not Appl~~nbie. NS= Not Sturted. 84IASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP) Area Numberof Poor Depthof Poverty Severity of Povert (Percent) (Percent) (Percent) 1995/96 2003/04 1995/96 2003/04 1995796 2003/@ Nepal 41.8 100.0 1000 Urban Area 21.6 4.7 15.0 RuralArea 43.3 34 6 96.4 95.3 93.1 85 0 SurveyAreas/Domams UrbanArea of KathmanduValley 0 6 5 4 Other UrbanArea 31.6 13.0 3.3 4.I 4 4 9 7 RuralWest MountainlHill 55 0 37.4 32.7 23 6 24 8 19.4 Rural East MountainlHill 36. I 42.9 19.4 29.4 22.4 21.1 RuralWestTarai 46. I 38. I 18.4 18.9 16.7 153 Rural EastTarai 37.2 24.9 25.9 23 5 29.1 29.1 DevelopmentRegon EasternRegion 38.9 29 3 21 0 23.4 22.5 24.7 CentralRegion 32.5 27. I 26.9 32.2 34 6 36.6 WesternRegion 38.6 27. I 187 16.7 203 18.9 Mid-fisternRegon 59 9 44.8 18.5 17.7 12.9 12.2 Far-Western Region 63.9 41.0 14.8 9.9 9.7 7.5 GeographicalAr Mountain 57.0 32.6 10.7 7.5 7 9 7. I Hill 40.7 34.5 41.9 47.1 43.0 42.1 Tarai 40.3 17.6 47.4 45.4 49.2 50.8 SECOND PROGRESS REPORT 85 (Rs. million) Description 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 Baseyear Actual Revlsed AUocaOon Projection Projection Estimates evenu ture Regular expenditure 48590 54973 59302 64488 71618 73025 Development expenditure 31482 29033 32805 47202 52922 57989 Recurrent expenditure 52090 56720 67608 66129 67784 Capital expenditure (including principal repayment) - 31916 35387 44082 58411 63230 Revenuesurplus 1855 1257 2925 5832 7862 16115 Government revenue-recurrent expenditure 4140 5507 2712 13351 21356 defici Grant 6686 11339 11457 15351 16950 17050 Loan 7699 4546 IIIII 16959 18300 18370 Domestic borrowings 8000 8880 7312 9060 9810 6454 Cash balance(-surplus) 7242 301 I 0 0 0 0 ing Narrow money supply (MI) 77I56 83754 90287 99767 III340 I248I 2 Broad money supply (M2) 223988 245911 274931 309291 351052 400552 Total domestic credit glpwth (at current prices) 207323 228444 250190 274661 302673 337484 Gross foreinn exchannereserves I06996 I09306 I2734I I38293 I5143I I6733 I 18.96 18.47 18.61 20.81 21.26 20.27 Regular expenditure 11.51 12.08 11.98 12.02 12.22 11.30 Development expenditure 7.45 6.38 6.63 8.80 9.03 8.97 Recurrent expenditure 0.00 11.45 11.46 12.60 I 1.29 10.49 Capital expenditure 0.00 7.02 7.15 8.21 9.97 9.78 5.43 3.61 3.72 4.85 4.80 3.84 3.4 I 3.49 4.56 6.02 6.02 5.48 1.58 2.49 2.32 2.86 2.89 2.64 1.82 1.00 2.25 3.16 3.12 2.84 Domestic borrowing I.89 I.95 I.48 I.69 I.67 I.oo 0.66 0.00 0.00 0.00 0.00 Source,MTEF111 Note: Some hgures presented in Table 4.3 may not resemble rhat of this annex because 7ible 4.3 has latest available data. 86 A S S E S S M E N T OF T H E I M P L E M E N T A T I O N OF T H E T E N T H P L A N ( P R S P )