Document of The World Bank€¦ · 2 Nepal Disaster Report, 2019, Government of Nepal, Ministry of...

Document of

The World Bank

FOR OFFICIAL USE ONLY Report No: PGD27

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT FOR A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 36.2 MILLION (US$ 50 MILLION EQUIVALENT)

TO

NEPAL

FOR THE

DEVELOPMENT POLICY FINANCING WITH A

CATASTROPHE DEFERRED DRAWDOWN OPTION

AND PANDEMIC EMERGENCY FINANCING FACILITY

FEBRUARY 11, 2020

Urban, Disaster Risk Management, Resilience and Land Global Practice South Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official

duties. Its contents may not otherwise be disclosed without World Bank authorization.

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The World Bank Nepal Development Policy Financing with Cat DDO (P166788)

Nepal

GOVERNMENT FISCAL YEAR

July 16 – July 15

CURRENCY EQUIVALENTS

(Exchange Rate Effective as of January 29, 2020)

Currency Unit = Nepalese Rupee (NPR)

US$1.00 = 114.01 NPR

ABBREVIATIONS AND ACRONYMS

CPF Country Partnership Framework MOF Ministry of Finance DDO Deferred Drawdown Option MOFE Ministry of Forest and Environment DPC Development Policy Credit MOHA Ministry of Home Affairs DPF Development Policy Financing MOHP Ministry of Health and Population DRM Disaster Risk Management MOUD Ministry of Urban Development DRRM Disaster Risk Reduction and

Management PEF Pandemic Emergency Financing Facility

GDP Gross Domestic Product PER Public Expenditure Review GON Government of Nepal PDNA Post Disaster Needs Assessment HEOC Health Emergency Operations Center SDR Special Drawing Rights IBRD International Bank for Reconstruction

and Development SCD Systematic Country Diagnostic

IDA International Development Association UNDP United Nations Development Program IMF International Monetary Fund WHO World Health Organization LDP Letter of Development Policy WBG World Bank Group MDG Millennium Development Goals

.

Regional Vice President: Hartwig Schafer

Country Director: Idah Z. Pswarayi-Riddihough

Regional Director: John Roome

Country Manager: Faris H. Hadad-Zervos

Practice Managers: Christoph Pusch, E. Gail Richardson

Task Team Leaders: Armando Guzmán, Kamran Akbar, Manav Bhattarai


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NEPAL

DEVELOPMENT POLICY FINANCING WITH CAT DDO

TABLE OF CONTENTS

SUMMARY OF PROPOSED FINANCING AND PROGRAM ...................................................................... iii

1. INTRODUCTION AND COUNTRY CONTEXT ...................................................................................1

2. MACROECONOMIC POLICY FRAMEWORK ....................................................................................3

2.1. RECENT ECONOMIC DEVELOPMENTS ............................................................................................ 3

2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY .......................................................... 6

2.3. IMF RELATIONS ............................................................................................................................ 10

3. GOVERNMENT PROGRAM ........................................................................................................ 11

4. PROPOSED OPERATION ............................................................................................................ 12

4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION .......................................... 12

4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS .................................................. 14

4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY .......................................... 19

4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS ............................... 20

5. OTHER DESIGN AND APPRAISAL ISSUES .................................................................................... 20

5.1. POVERTY AND SOCIAL IMPACT .................................................................................................... 20

5.2. ENVIRONMENTAL ASPECTS ......................................................................................................... 21

5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS .......................................................................... 22

5.4. MONITORING, EVALUATION AND ACCOUNTABILITY .................................................................. 24

6. SUMMARY OF RISKS AND MITIGATION ..................................................................................... 24

ANNEX 1: POLICY AND RESULTS MATRIX .......................................................................................... 26

ANNEX 2: LETTER OF DEVELOPMENT POLICY ..................................................................................... 28

ANNEX 3: FUND RELATIONS ANNEX .................................................................................................. 30

ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE .................................................. 33

ANNEX 5: HOW THE PANDEMIC EMERGENCY FINANCING FACILITY (PEF) WORKS.............................. 34

ANNEX 6: PRESENT VALUE OF DEBT TO GDP ..................................................................................... 35

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This operation was prepared by an IDA team consisting of Armando Guzmán Escobar (Task Team Leader, SSACD), Kamran Akbar (Co-TTL, SSACD), Manav Bhattarai (Co-TTL, HSAHP), Avani Mani Dixit (DRM Specialist, SSACD), Naho Shibuya (DRM Specialist, SSACD), Atishay Abbhi (Young Professional, SSACD), Kene Ezemenari (Sr. Economist, ESAMU), Nayan Krishna Joshi (Economist, ESAMU), Hiroki Uematsu (Sr. Economist, ESAPV), Shambhu Uprety (Sr. Procurement Specialist, ESARU), Annu Rajbhandari (Env. Specialist, KTMWB), Hiska Noemi Reyes (Sr. Social Development Specialist, SSAS1), Jaya Sharma (Sr. Social Development Specialist, SSAS1), Sarah Elizabeth Haddock (Social Development Specialist, SSAS1), Franck Bessette (Program Manager, ESAG2), Rocío Schmunis (Sr. Health Specialist, HHNGE), Junko Funahashi (Lead Counsel, LEGES), Alejandro Alcalá Gerez (Sr. Counsel, LEGES), Nikolai Soubbotin (Legal Consultant, LEGES), Sulochana Nepali (DRM Analyst, SSACD) and Rupa Shrestha (Team Assistant, SACNP). This operation was undertaken under the general guidance of Idah Z. Pswarayi-Riddihough (Country Director, SACSL), Sameh Naguib Wahba Tadros (Global Director, SURDR), John Roome (Regional Director, SSADR), Christoph Pusch (Practice Manager, SSACD), E. Gail Richardson (Practice Manager, HSAHP), Faris H. Hadad-Zervos (Country Manager, SACNP), Bigyan Pradhan (Sr. Operations Officer, SACNP), and Mukesh Chawla (Adviser, GHN03). Peer reviewers were Shyam KC (Sr. Water Resources Management Specialist, SSAW2), Raul Alfaro-Pelico (Consultant, SLCUR), Lizardo Narvaez Marulanda (Sr. Disaster Risk Management Specialist, SLCUR), Ana Elisa Bucher (Sr. Climate Change Specialist, SCCAO), and Mickey Chopra (Lead Health Specialist, HHNDR).


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SUMMARY OF PROPOSED FINANCING AND PROGRAM

BASIC INFORMATION

Project ID Programmatic

P166788 No

Proposed Development Objective(s)

To support the government in enhancing its technical and institutional capacity to manage the risk of climate change and natural disasters including disease outbreaks.

Organizations

Borrower: NEPAL

Implementing Agency: MINISTRY OF FINANCE (MAIN), MINISTRY OF HOME AFFAIRS, MINISTRY OF FORESTS AND ENVIRONMENT, MINISTRY OF URBAN DEVELOPMENT, MINISTRY OF HEALTH AND POPULATION

PROJECT FINANCING DATA (US$, Millions) SUMMARY

Total Financing 50.00 DETAILS

International Development Association (IDA) 50.00

IDA Credit 50.00

INSTITUTIONAL DATA

Climate Change and Disaster Screening

This operation has been screened for short and long-term climate change and disaster risks

Overall Risk Rating

Substantial


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. Results

Indicator Name Baseline (2020) Target (2023)

1. National Disaster Risk Reduction and Management (DRRM) Authority is established and operational.

No Yes

2. Number of Climate Change Coordination Committees in seven provinces.

0 7

3. New Government buildings built that comply with the

technical seismic-resistant criteria of the updated Nepal

National Building Code 105.

0% 75%

4. Simulation exercises on the activation and use of the National Pandemic Preparedness and Response Plan (NPPRP) are carried out, while also ensuring Essential Health Care Services (EHCS) to meet the direct needs of women during emergencies and issues faced by other vulnerable groups.

0 3

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IDA PROGRAM DOCUMENT FOR A PROPOSED DPF WITH CAT DDO TO NEPAL

1. INTRODUCTION AND COUNTRY CONTEXT

1. This operation will provide access to immediate liquidity to the country in the aftermath of natural disasters through an IDA US$501 million-Development Policy Financing (DPF) with Catastrophe Deferred Drawdown Option (Cat DDO). This Cat DDO operation also offers access to parallel grant financing from the Pandemic Emergency Financing Facility (PEF) that complement the Cat DDO coverage for health-related disasters by ensuring timely support to address large-scale disease outbreaks, before they reach pandemic proportions. The program supported through the Cat DDO responds to the GoN’s aspiration to be more proactive towards disaster risk and the recognition that disaster management is a key priority of all tiers of government (federal, provincial and local) as reflected in the Constitution of Nepal2 and in the 2017 Disaster Risk Reduction and Management Act.

2. Given its geographical location, topographical and geological conditions, and rich cultural heritage, Nepal is one of the most vulnerable countries in the world to the impact of adverse natural events, climate change and disease outbreaks, which threatens its sustainable growth and development. All of Nepal is exposed to significant earthquake hazard resulting from the convergence of the Indian tectonic plate with the Eurasian plate, which also drives the uplift of the Himalayan mountain range. In addition, much of the country is susceptible to floods and landslides, with some areas vulnerable to drought during winter months (from December to February). These hazards and the country’s high level of vulnerability have made Nepal the second most vulnerable country in the world in terms of mortality risk from two or more hazards.3 Climate change impact in Nepal is expected to increase due to winters projected to be drier and monsoon summers wetter4. Nepal has also been experiencing increased incidence of emerging diseases in the recent years such as dengue, Japanese encephalitis, chikungunya, and leptospirosis, which have a high potential of creating outbreaks with widespread morbidity and mortality at any time.

3. On April 25, 2015 a devastating 7.8-earthquake struck Nepal causing massive loss of lives and property, and highlighted the limited technical and institutional capacity to manage disaster risk. Subsequent aftershocks, including one of magnitude 7.3 on May 12, 2015, caused additional losses of life and property. As a result of these earthquakes, a total of 8,790 people lost their lives and more than 22,300 people were injured, requiring immediate response from the health sector for urgent treatment and resumption of regular health services.5 A post disaster needs assessment (PDNA) showed that approximately 725,000 houses, 2,656 Government buildings, and 30,000 classrooms were partially or completely damaged. Approximately 375 schools retrofitted between 2012 and 2015, sustained no damages in the earthquake. According to the PDNA, approximately US$7 billion (about one third of GDP in FY 2013-2014) was required to reconstruct damaged properties and infrastructure and to support recovery in affected sectors of the economy. After the earthquake, in the absence of a contingent financing line such as the Cat DDO, it took approximately 300 days for the first recovery and reconstruction

1 To be funded 50% from the country’s concessional resources (PBA) and 50% from IDA’s overall resources. 2 Nepal Disaster Report, 2019, Government of Nepal, Ministry of Home Affairs, June 2019. 3 Natural Disaster Hotspots, A Global Risk Analysis, The World Bank (2005). 4 Rising Precipitation Extremes across Nepal. Karki, R, Hasson, S, Schikhoff, U., Scholten, T., and Bohner, J. 2017. 5 Post Disaster Needs Assessment (PDNA), Government of Nepal (2015).


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loan to flow into the Government’s treasury. The level of damages exposed the weaknesses of building practices and the limited adherence to building codes. The 2017 floods killed over 150 people and around 460,000 people were displaced6, and the incessant rainfall in July 2019, caused 92 landslides and 83 instances of flooding, killed over 100 people and temporarily displaced over 16,520 households (approximately 80,000 people) in Central and Eastern Nepal.

4. Every year the Government spends billions of rupees to respond to impacts of natural and health hazards across the country. The understanding of climate and disaster risk in the current institutional framework, has allowed the country to only appropriate a small amount of budget as contingency funds in the annual budget that can be used to deal with post-disaster situations. In the aftermath of a disaster, line ministries and the Ministry of Finance (MOF) reallocate existing development budget to cover costs for response, relief, recovery and reconstruction. Given the government’s challenge of high health care costs and addressing health sector fiscal sustainability, even a small disease outbreak that is not addressed early could have significant consequences on the sector and the economy as a whole. It is therefore prudent for Nepal to continue investing in improved emergency preparedness and having access to readily available financing instruments such as this Cat DDO-PEF operation.

5. This Cat DDO operation supports GON’s reforms that aim to improve the country’s climate and DRM institutional and regulatory framework, and enhance health crises preparedness and response systems, which is particularly important during the current transition of the country towards federalism, that provides opportunities to institutionalize a much more decentralized system of disaster risk management while implementing policies to increase resilience at the national level. The supported reforms will enable the country to establish the institutional structure set by the 2017 DRRM Act, to better coordinate and monitor the implementation of all DRRM activities in the country by the federal, provincial and municipal governments.

6. Gender Analysis. This Cat DDO takes into account the impact of disasters and the experience of post-disaster response and recovery that varies according to pre-existing inequalities on the basis of identity and socio-economic status (gender, class, ethnicity, etc.). In Nepal, women lack adequate access to sexual and reproductive healthcare services during and in the aftermath of disasters. A 2018 survey supported by the Inter-Agency Common Feedback Project in ten flood-affected districts of Nepal found that 50% of female respondents did not have proper access to healthcare. Data from the 2017 floods show that 21,000 pregnant women lacked access to healthcare in the wake of the floods, of whom 6,700 faced pregnancy-related complications in the following three months.7 An estimated 70-90% of birthing centers across 14 rural districts were either damaged or destroyed by the 2015 Earthquake. A large number of women had to give birth outside medical centers, putting the health of the mother and child at-risk.8 For a variety of reasons, Gender Based Violence (GBV) can spike in the wake of disasters, putting greater demand on already-strained health services for survivors. UNFPA reports that 28,000 women required post-rape treatment after the 2015 Earthquake.9 In the aftermath of the 2014 August Floods in Western Nepal, unwanted pregnancies rose after the floods disrupted the supply of contraceptives.

6 https://reliefweb.int/report/nepal/nepal-monsoon-rains-neoco-government-nepal-mfd-moha-media-echo-daily-flash-19-july-2019. 7 Nepal Floods 2017, nepal.unfpa.org, 03/09/2019. 8 “Birthing Centre Infrastructure in Nepal Post 2015 Earthquake”, Nepal Journal of Epidemiology, P.K.Mahato, et al, 5(4), 518–519, ncbi.nlm.nih.gov, 10/09/2019. 9 Dignity First: UNFPA Nepal 12 Month Earthquake Report, July 2016, nepal.unfpa.org, 04/09/2019.

https://reliefweb.int/report/nepal/nepal-monsoon-rains-neoco-government-nepal-mfd-moha-media-echo-daily-flash-19-july-2019

https://reliefweb.int/report/nepal/nepal-monsoon-rains-neoco-government-nepal-mfd-moha-media-echo-daily-flash-19-july-2019


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7. Despite fragility, poverty has been on a declining trend. The proportion of Nepalese households living in poverty as measured by the international extreme poverty line fell from 46 percent in 1996 to 15 percent in 2011. Nepal has also had impressive performance on shared prosperity. From 2003 to 2010, consumption growth of the bottom 40 percent was 7.5 percent compared to 4 percent on average across all households. The key drivers of improvement in the twin goals included an increase in the amount and the number of households receiving remittances, an increase in labor income derived from wage and non-wage employment, and changes in the demographic structure with a lowering of the dependency ratio. Inequality of per capita consumption as measured by Gini coefficient was 32.8, which is at the lower end of global range10. However, these results need to be interpreted with caution because there is a paucity of official data on poverty, shared prosperity and inequality since 2010. The Bank’s Systematic Country Diagnostic (SCD 2018) states that poor households and Nepal’s welfare gains are vulnerable due to high levels of exposure to natural disasters, which will increase with climate change, and the continued dependence on rain-fed agriculture. Health shocks also push many into poverty11.

2. MACROECONOMIC POLICY FRAMEWORK

2.1. RECENT ECONOMIC DEVELOPMENTS

8. Gross Domestic Product (GDP) growth in Nepal remained strong at 7.1 percent in FY2019. On the supply side, the main growth drivers were the service and agriculture sectors. Within services, there was a boost in retail, hotel and restaurant subsectors, primarily driven by an uptick in tourist arrivals and remittance fueled private consumption. Agriculture grew by 5.0 percent year-over-year in FY2019, well above its 30-year average of 3.1 percent. This was due to good monsoons together with the commercialization of agriculture, availability of fertilizers and seeds, and improved irrigation facilities. Industrial growth was equally strong at 8.1 percent year-on-year in FY2019, well above its 25-year average of 4 percent, due to increased electricity generation and reduced system losses. Higher imports from India and post-earthquake housing reconstruction (which is in full swing) also helped support strong industrial growth. On the demand side, the main contributors to growth were private investment and private consumption (grew by 19.5 percent and 6.5 percent, respectively). However, foreign direct investment (FDI) continues to pose a challenge, declining by 31 percent to reach the very low level of 0.4 percent of GDP in FY2019. 9. Inflation remained subdued in FY2019, driven by good agricultural production and the peg to the Indian Rupee. Average inflation was 4.5 percent in FY2019, lower than the revised monetary policy target of 5.5 percent. Prices for non-food items grew at 5.8 percent, driven mainly by housing and utility prices. Food prices rose by 3 percent. The Nepalese rupee is pegged to the Indian rupee at the rate of 1.6 Nepalese Rupees to 1 Indian Rupee (India is the largest trading partner) and, thus, inflation follows the price movements of the nominal anchor but with a lag. 10. The trade deficit for goods narrowed slightly to 37.1 percent of GDP in FY2019 from 37.5 percent of GDP in FY2018 as the growth in good imports growth down significantly. Good imports grew at 4.9 percent in FY2019, markedly lower than the 28.1 percent recorded for FY2018, due to lower demand for

10 Nepal Living Standard Survey 2011/11. 11 http://documents.worldbank.org/curated/en/361961519398424670/pdf/Nepal-SCD-Feb1-02202018.pdf

http://documents.worldbank.org/curated/en/361961519398424670/pdf/Nepal-SCD-Feb1-02202018.pdf


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industrial supplies (such as cement clinker which are now also produced in Nepal). Capital goods imports declined as one-off capital imports to support federalism ended. Goods exports also registered a decline in growth from 16.5 percent in FY2018 to 11.5 percent in FY2019, as exports of eight of the nine products identified by the Nepal Trade Integration Strategy (NTIS) dropped. Nepal’s goods exports to key receiving countries (China and European Union) declined. Nepal’s competitiveness is impacted by the product quality and high labor costs, which are constraints to exports. Nevertheless, FY2019 saw the significant export of two new products (non-crude palm oil and soybean oil) to India, as Nepali traders started taking advantage of: (i) zero tariffs provided on goods exported from Nepal under the South Asian Free Trade Area Agreement with India; and (ii) high tariffs imposed on the import of non-crude palm oil and soybean oil by India. The decline in goods import growth relative to exports resulted in the reduction of the trade deficit by 0.4 percentage points to 37.1 percent of GDP in FY2019. 11. The growth rate of remittances, which financed almost all imports in previous years, has slowed down. The volume of remittance inflows is still large at US$7.8 billion in FY2019. Remittances grew by 7.8 percent, lower than the 10.2 percent recorded for FY2018, but as a share of GDP marginally increased from 24.9 percent in FY2018 to 25.4 percent in FY2019 (Table 1). Various factors contributed to recent trends in remittance receipts. The depreciation of the Nepalese rupee against the US dollar has encouraged migrant workers to remit a greater share of their savings to benefit from the favorable exchange rate. This coupled with an increased use of formal channels for remittances contributed to higher officially recorded remittance inflows. In addition, Nepali migrants are increasingly remitting money from Japan and the Republic of Korea, where wage rates are much higher. However, growth in remittances are expected to slow down from FY2020 as the impact of the depreciation and one-off increase from the use of formal channels wanes. The main destinations for Nepali migrants are countries in the Gulf (Qatar, Saudi Arabia, United Arab Emirates, and Kuwait) from which the country receives almost 70 percent of total remittances based on World Bank estimates. In May 2018, the Government of Nepal banned migration to Malaysia, the largest destination of Nepalese migrants (or 29.4 percent of the total), because outsourcing agencies were overcharging Malaysia-bound workers for visa processing and health and security screening. Also, fiscal pressures in the Gulf countries have led to expenditure cuts which could adversely affect the demand for migrant workers.

Table 1: Key Macroeconomic Indicators

FY2017 FY2018 FY2019(e) FY2020(f) FY2021(f) FY2022(f) FY2023(f)

Real economy (Percentage change, unless otherwise stated)

Nominal GDP, current prices (NPR, billions) 2,674 3,031 3464 3993 4571 5051 5581

Real GDP growth (at market prices) 8.2 6.7 7.1 6.4 6.5 6.6 6.7

Real GDP growth (at factor prices) 7.7 6.3 6.8 6.4 6.5 6.6 6.7

Contributions to GDP growth (at factor prices):

Agriculture (percentage points) 1.8 0.9 1.6 1.3 1.3 1.3 1.4

Industry (percentage points) 1.8 1.5 1.3 1.3 1.4 1.5 1.5

Services (percentage points) 4.1 3.9 3.9 3.8 3.8 3.8 3.9

Consumer prices (period average) 4.4 4.2 4.5 5.0 5.0 4.9 4.8

Fiscal sector (As percentage of GDP, unless otherwise indicated)

Total revenue and grants 24.1 25.3 25.3 26.0 26.4 26.7 27.0

Expenditures 27.2 31.9 27.2 28.6 29.7 30.8 31.2

Net incurrence of liabilities 3.0 6.0 3.6 4.2 5.4 4.9 5.5


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Foreign 1.3 2.4 1.8 2.8 3.7 3.7 4.1

Domestic 1.7 3.6 1.8 1.4 1.8 1.3 1.3

Total public debt 26.1 30.2 30.1 30.3 31.4 32.2 33.0

Domestic 10.6 12.9 13.1 12.8 12.9 13.0 13.1

External 15.5 17.3 17.0 17.5 18.5 19.2 19.9

Monetary sector (Percentage change, unless otherwise indicated)

Broad money 15.5 19.4 15.8 …. …. …. ….

Domestic credit 21.4 26.5 20.1 …. …. …. ….

Private sector credit 18.1 22.4 19.3 …. …. …. ….

Balance of payments (As percentage of GDP, unless otherwise

indicated)

Current account balance -0.4 -8.2 -7.7 -6.8 -5.9 -5.1 -4.3

Exports of goods and services 9.0 8.9 8.7 8.7 9.3 9.5 9.7

Imports of goods and services 42.4 46.4 46.2 45.7 44.7 44.2 43.8

Remittances (as percentage of GDP) 26.0 24.9 25.4 25.0 25.0 24.9 24.8

Gross official reserves (USD, millions, eop) 8,730 9,479 7995 7284 7330 7707 8859

Gross official reserves (in months of prospective imports of

goods and services) 9.0 8.5 6.8 5.5 4.9 4.7 4.9

Rupees per U. S. dollar (period average) 106.2 104.4 112.9 … … … …

Memorandum items:

Nominal GDP, current prices (USD, billion) 25.2 29.0 30.7 … … … …

Population, million 28.7 29.1 29.5 … … … …

GDP per capita, USD current 877 998 1041 … … … …

12. Consequently, the current account deficit has narrowed marginally but the deficit is still large. Despite a narrowing in the trade deficit as a share of GDP, it continues to surge against a slower level of remittance growth, putting pressure on the current account. The trade deficit reached a historic high of US$11.4 billion in FY2019. Remittance inflows of only US$7.8 billion were insufficient to offset the trade deficit. Consequently, the current account deficit remains high at 7.7 percent of GDP in FY2019, compared to its level of 8.2 percent the previous year. Given that FDI and external borrowing and other financing sources remained low, Nepal’s central bank reserves fell to US$8 billion in July 2019 (6.8 months of prospective imports) from a peak of US$9.5 billion in July 2018. 13. Private sector credit growth declined while slower deposit growth continues. Credit growth peaked at 25.2 percent (y/y) in October 2018 and declined to 19.3 percent in July 2019. Credit growth was close to the monetary policy target of 20 percent and was driven mainly by lower credit demand for industrial supplies and capital goods. Deposits also grew by 17.7 percent (y/y) in July 2019 mainly due to the uptick in remittance inflows. However, deposits growth lagged that of credit and resulted in liquidity tightening. Interest rates remain elevated as the banking sector’s core capital plus deposit ratio remained close to the 80 percent regulatory limit – 75.2 percent in July 2019. 14. The banking sector remains stable but faces pressures on the availability of loanable funds. The Capital Adequacy Ratio (CAR) of commercial banks stood at 14 percent as of July 2019, meeting the regulatory minimum of 11 percent. In addition to the non-performing loan (NPL) ratio remaining low at 1.4 percent of the total loan portfolio, the loan loss provisions cover 146.4 percent of NPLs. Liquidity


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pressure in the financial market persists driven by high demand for credit to fund business expansions and new investments, resulting in interest rates hikes. Businesses are vulnerable owing to the scarcity of funding and the high cost of financing. In response, the Nepal Rastra Bank (NRB) has taken macroprudential measures to contain rapid credit growth by reducing loan-to-value thresholds for several category of retail loans, especially real-estate financing. While the real estate loan portfolio as a proportion of the total loan portfolio declined by 12.5 percent over the last five years, real estate backed loans as a share of the total loan portfolio increased by 10.2 percent over the same period, indicating that the real estate-based collateral continues to be the banks’ preferred collateral for mitigating the risk of potential default. However, the NRB remains committed to maintaining financial sector stability through tighter regulatory measures, increased frequency of supervision, including prompt and corrective action for breaching prudential norms; and more recently it raised paid-in capital and provisioning buffers. For example, to curb excessive credit growth, NRB issued a circular on August 5, 2019 requiring commercial banks to maintain countercyclical capital buffer requirements of 2.5 percent of risk-weighted assets, comprised of Common Equity Tier 1 capital, by the end of FY2020. 15. Robust revenue growth coupled with underspending of the budget resulted in a lower fiscal deficit. In FY2019, revenue growth was robust (17.7 percent) but only 90.5 percent of the revenue target was met mainly due to lower imports, resulting in lower revenues from trade taxes. Delays in the enactment of Federal, Provincial, and Local Civil Service Acts and in the establishment of provincial civil service commissions adversely impacted the hiring of new staff at the subnational level. These delays together with the lack of technical capacity of existing staff led to an underspending of the federal budget by 18.8 percent, with recurrent and capital spending standing at 83.2 and 75.9 percent of the budgeted target, respectively. There was also bunching of spending, with 14.4 percent of recurrent and 36.5 percent of capital spending occurring in the last month of the fiscal year. As a result, the fiscal deficit decreased from 6.7 percent of GDP in FY2018 to 1.9 percent in FY2019. Consequently, public debt in FY2019 (30.1 percent of GDP) remained close to the FY2018 level (of 30.2 percent of GDP).

2.2. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

16. GDP growth is projected to average 6.6 percent over the medium term driven primarily by investments. On the supply side, growth will be driven by services, underpinned by steady remittance inflows and high tourist arrivals. The latter will be supported by the Visit Nepal 2020 program, the completion of the second international airport, and the construction of big hotels. However, lower agricultural growth is expected in FY2020, given recent delays in monsoons coupled with climate-related natural disasters. Industrial growth will be supported by construction activities, new investments in the cement and hydropower sectors and improved capacity utilization in the manufacturing sector, as the availability of electricity improves. On the demand side, the main drivers will be investment and government consumption. Government consumption will be supported by increased spending on salaries, goods and services. In addition, efforts aimed at building capacity at the subnational levels and the implementation of performance-based contracts will also raise government spending. Also, the implementation of the 2019 national work plan to minimize the trade deficit along with investment-related laws such as establishing a one-stop service center will support private investment. Overall, infrastructure investment needs are estimated at 10-15 percent of GDP annually for the next 10 years, to accelerate growth. Given the low levels of FDI, critical reforms will be needed to address the factors that are constraining its flow. Many reforms that are expected to boost growth are being supported through the MFD DPC, which focuses on improving the environment for domestic and foreign investors and


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deepening credit markets for private financing of investments. In addition, the recently concluded financial sector DPC series focused on financial sector stability and improving access to formal financial services while the on-going energy DPC focuses on improving the financial viability and governance of the electricity sector. Inflation is expected to increase marginally with increased public sector salaries, higher import duties on agricultural and industrial goods (to support import substitution policies), and the removal of value-added-tax (VAT) exemptions on some intermediate goods and services. On the other hand, the regular supply of electricity at low cost and low inflation in India will help anchor inflation expectations and keep inflation below 5 percent over the medium term. 17. NRB’s stated monetary policy stance aims to maintain the exchange rate peg with the Indian rupee and currently, there are adequate reserves to maintain the peg. Open market operations are the main instrument used to conduct monetary policy. For fiscal and monetary policy coordination, the Secretary of Finance sits on the NRB Board that sets the monetary target (broad money growth). The target is based on projected economic growth and inflation as stipulated in the budget speech. The target aims to achieve two explicit goals: price stability-maintaining inflation at a level stipulated by the annual budget speech, and external sector stability-keeping foreign exchange reserves to cover at least seven months of imports of goods and services. The NRB also sets the target for private sector growth in line with monetary targets and conducts open market operations by monitoring the excess liquidity of the banking and financial institutions (BFIs) and uses the interbank rate of BFIs as the operating target. The interest rate corridor (IRC) is used to minimize the volatility of interbank rates. However, most recently, interbank rates in Nepal have fallen below the IRC lower bound of 3 percent, while the same rates in India were above 5 percent. This accommodative policy of NRB has increased the interest rate gap with India and has put pressure on the exchange rate peg. The NRB, however, remains committed to the peg. 18. The current account deficit, which decreased marginally in FY2019, is expected to narrow over the medium term. The current account deficit is likely to moderate to 4.3 percent of GDP by FY2023 as the one-time spending on federalism-related infrastructure and post-earthquake reconstruction taper down and the government starts implementing a work plan for encouraging export-oriented and import-substituting industries. Some increase in exports, particularly of hydroelectricity, is anticipated in the next few years, but broader growth in exports will happen only in the longer term as structural reforms start yielding results. Remittances as a share of GDP are expected to stabilize at around 25 percent over the medium term. The external gap will be financed primarily by long term borrowing and a drawdown of international reserves. International reserves are likely to cover around 4.9 months of imports by FY2023. There are negligible portfolio investments in the country and despite some expected increase in FDI, it will continue to remain low, over the medium-term (Table 3). 19. Government expenditure is expected to remain elevated over the medium-term primarily because of the implementation of fiscal federalism. Government spending as a percent of GDP decreased by 4.7 percentage points between FY2018 and FY2019, primarily driven by capacity constraints and challenges in hiring new staff. This caused the wage bill as a share of GDP to decline from 3.7 to 2.9 percent. As capacity issues are addressed, spending will increase to just above 3 percent over the medium term. In the next four years (FY2020-FY2023), government spending is expected to gradually increase due to salary increases, higher social security spending, and a pick-up in capital investments (Table 2). It will take time to address the challenges linked to planning and procurement that have persistently led to underspending and this is reflected in the gradual increase in spending. Some degree of underspending may persist over the medium-term. Staffing shortages and capacity challenges (including those linked to


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procurement and planning) have also impacted spending on goods and services. Spending on goods and services is expected to recover the slump in FY2019 then gradually increase with improved implementation capacity. Transfers to the provincial and local governments will keep government expenditure elevated and spending will stabilize around 31 percent of GDP over the medium term. 20. Revenue mobilization efforts are primarily aimed at shifting gradually from a system based on import taxes to one based on domestic economic activities. These efforts can broadly be classified into (i) broadening the tax base; (ii) promoting exports and discouraging imports of unnecessary and health-damaging goods; (iii) creating a private-investment friendly environment for promoting productive industries and business; and (iv) tax administration improvements, including the operationalization of a vehicle and consignment tracking system, biometric registration system, electronic payments for all types of taxes, strengthening VAT collection by providing an incentive for the partial VAT refund when payments for the purchase of goods and services are made through bank cards or electronic means, and formulating the Single Tax Code. Taxes on imports, luxury items and higher income brackets and a broadening of the tax base will help increase revenue and grants to 27 percent of GDP by FY2023 (Table 2). Non-tax revenues are also expected to increase because of dividends from institutions (such as Nepal Telecom) and royalties from new hydropower projects. Some of these measures were adopted as part of the FY2020 budget. At the provincial and local level, efforts are focused on establishing the legal and institutional framework to support enhanced own-tax revenue collection. However, sharp revenue increases are not sustainable in the long run. Therefore, reforms are also being undertaken to increase spending efficiencies over the short to medium term. This is being supported by the Programmatic Fiscal and Public Financial Management DPC (through reforms to strengthen the MTEF, fiscal procedures, and delegation of spending authority) and technical assistance from the Integrated Public Financial Management Reform Project on budget execution. A World Bank-UNDP led Federalism Capacity Needs Assessment including assessments of all three tiers of government, as well as a mapping of donor support is being undertaken to assess capacity gaps for the transition to federalism at the request of the Government and its development partners. There is also a ‘federalism working group’ comprising several Development Partners (DPs) that meets regularly to harmonize assistance to the government on the federalism transition. 21. In subsequent years, as provincial and local governments become fully functional, the fiscal deficit is projected to increase to 4.2 percent of GDP by FY2023. From FY2023 onwards, greater expenditure efficiencies will help reduce the growth of the fiscal deficit (as a share of GDP). The transition to federalism is the key factor driving the fiscal deficit. Initially, the assumed cost was 3 to 4 percent of GDP per year over the medium-term. The government has set up a commission to review and suggest measures to improve spending efficiency. In addition, Development Partners, including the World Bank, are working to improve various facets of Public Financial Management and Public Investment Management. Also, once the Federalism transition has ended and there is more information on unit costs for service delivery at the local level, some spending efficiency can be achieved. The fiscal deficit will be financed by a mix of domestic and international borrowing and availability of concessional financing from international Development Partners is expected to continue, as the transition to a federal structure proceeds. 22. Results from the most recent Debt Sustainability Analysis indicate that Nepal remains at low risk of debt distress, primarily due to the important role of remittances. All external debt and debt service indicators are projected to be comfortably below their policy-dependent indicative threshold


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values. Following a prolonged decline, to 25.6 percent of GDP in FY2015, the sum of external and domestic public debt rose to 30.1 percent of GDP in FY2019. A further rise in total public debt is projected to average about 32 percent of GDP over the period FY2020 to FY2023 and around 46 percent over the long term. The present value of debt to GDP will remain below 30 percent (see Figure 1 and 2 in Annex 6). Fiscal and current account deficits will persist, as the GoN proceeds with key reforms to implement fiscal federalism, and ease constraints to investment and finance, with the goal of accelerating growth. Stress tests show a vulnerability to growth shocks and natural disasters and underscores the importance of implementing sound macroeconomic policies, including structural reforms in support of productivity-led growth and improved spending efficiency.

Table 2: Fiscal Indicators (As percentage of GDP, unless otherwise indicated) FY2017 FY2018 FY2019(e) FY2020(f) FY2021(f) FY2022(f) FY2023(f)

Total Revenue and Grants 24.1 25.3 25.3 26.0 26.4 26.7 27.0

Total revenue 22.9 24.0 24.7 25.4 25.9 26.3 26.6

Tax revenue 20.7 21.1 21.7 23.0 23.5 23.8 24.0

Taxes on goods and services (incl. VAT and excise) 10.4 11.5 11.7 12.1 12.3 12.6 12.8

Direct taxes 6.0 6.8 7.0 7.2 7.2 7.3 7.4

Taxes on international trade 3.9 4.2 4.1 4.5 4.6 4.7 4.7

Other taxes (incl. social security contributions) 1.0 0.3 0.2 0.2 0.2 0.2 0.2

Nontax revenue 2.1 2.9 2.7 2.4 2.4 2.5 2.6

Grants 1.2 1.3 0.6 0.6 0.4 0.4 0.4

Total Expenditure 27.2 31.9 27.2 28.6 29.7 30.8 31.2

Current expenditure 19.4 23.0 20.3 21.5 21.3 22.2 22.5

Wages and compensation 4.4 3.7 2.9 3.0 3.0 3.1 3.1

Goods and services 2.1 2.0 1.1 2.3 2.3 2.4 2.5

Interest payment 0.4 0.5 0.6 0.8 0.7 0.8 0.8

Current transfer 12.4 16.8 15.8 15.4 15.3 15.9 16.1

of which: fiscal transfer 0.0 8.0 9.0 8.1 8.1 8.1 8.1

Capital expenditure 7.8 8.9 6.9 7.2 8.4 8.6 8.7

Overall balance (excluding grants) -4.3 -7.9 -2.5 -3.2 -3.7 -4.5 -4.6

Fiscal balance (including grants) -3.1 -6.7 -1.9 -2.6 -3.3 -4.1 -4.2

Net financial transactions (inc. overdraft) 2.9 6.0 1.1 2.6 3.3 4.1 4.2

Net acquisition of financial assets (includes on-lending) 1.7 2.0 2.5 1.6 2.1 0.8 1.2

Net incurrence of liabilities (financing needs) 3.0 6.0 3.6 4.2 5.4 4.9 5.5

Foreign 1.3 2.4 1.8 2.8 3.7 3.7 4.1

Domestic 1.7 3.6 1.8 1.4 1.8 1.3 1.3

Table 3: BoP Financing Needs and Sources In US$ millions FY2017 FY2018 FY2019(e) FY2020(f) FY2021(f) FY2022(f) FY2023(f)

Financing requirements -263 -2,550 -2528 -2555 -2594 -2504 -2387

Current Account deficits -95 -2,372 -2351 -2395 -2399 -2282 -2126

Debt amortization -168 -178 -178 -159 -195 -221 -261

Financing Sources 263 2,550 2528 2555 2594 2504 2387

FDI and portfolio investment (net) 127 168 116 212 324 447 593

Long term borrowing 589 956 722 1152 1683 1860 2303

Others (trade credits, currency deposits, misc items etc) 129 1,673 975 480 632 573 643

Changes in reserves (minus sign indicates increase) -583 -247 716 711 -46 -378 -1152

23. Nepal’s macroeconomic policy framework is adequate for development policy financing.


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Despite several severe shocks in the past (including conflict, unstable governments, earthquakes, and trade disruptions), Nepal’s macroeconomic fundamentals have been sound. Indicators show high growth in revenue, low debt to GDP ratio, a stable financial sector, and comfortable reserves. Going forward, the GoN remains committed to macro-fiscal prudence, as evident in its efforts to increase revenues to finance the higher cost of federalism, its decision to undertake a spending review to contain expenditures and improve their efficiency and continued commitment to maintain the peg with the Indian Rupee. After more than a decade, the country now has policy stability that will support growth. The key risks are on the fiscal and external front. The transition to a federal structure will increase government spending and keep the fiscal deficit high. Risks are mitigated, to an extent, by the fact that there is considerable donor support for this transition, both in terms of technical assistance and concessional financing. The external deficit is also likely to remain elevated. Reforms supported by the Programmatic Fiscal and Public Financial Management DPC series will help improve spending efficiency to reduce fiscal risks, particularly during the federalism transition. It will also support government efforts to raise additional revenues. In addition, through the Federalism Platform, the World Bank will provide technical assistance to strengthen local revenue generation and fiscal discipline which should have a positive effect on the twin deficits. Large external deficits are especially vulnerable to developments in migrant receiving countries, particularly Malaysia and the Gulf countries. The ongoing global slowdown (arising from uncertainties around the possibility of more protectionist policies) could cause a reduction in remittance inflows to Nepal. This would limit availability of foreign exchange and could reduce liquidity in the financial system. The projected slowdown of India’s economy could cause a depreciation of the Indian rupee, which in turn would translate to a depreciation of the Nepali rupee (given its peg to the Indian rupee). This would put more pressure on Nepal’s import dependent economy. The Government of Nepal’s program to reduce the trade deficit partially mitigates these risks. The MFD DPC series will also help improve the investment climate and competitiveness, which will support export growth and help maintain reserve adequacy. Nepal is also vulnerable to climatic shocks which could adversely impact agricultural production and existing infrastructure and reverse the gains in poverty reduction. The implementation of the 2017 Disaster Risk Reduction and Management Act will help mitigate some of these risks. The Act governs coordination and management of all activities pertaining to disaster management, disaster risk reduction, disaster recuperation and disaster response as well as monitoring and mitigation measures on climate change and global warming. Follow-on legislation and policy guidelines have been adopted at the local level to incorporate disaster risk management in local government development plans, which also define the procedures for responding to disasters. The current operation supports further reforms to help manage the impacts of climate change and natural disasters.

2.3. IMF RELATIONS

24. The last Article IV Consultation mission that took place in January 2020 noted the prudent fiscal stance, including recent upgrades to tax administration and highlighted the need to maintain fiscal sustainability. The Article IV Consultation noted the progress made in establishing the fiscal federalism framework, highlighted the need to make budgets more realistic and spending more efficient. It also emphasized the importance of building policy implementation capacity and instituting a sound public financial management framework at the provincial and local level. Of particular importance would be the need to ensure that the overall expenditure envelope of subnational governments’ needs is aligned with available funding, with tight limits on any subnational borrowing. Reform efforts in recent years have helped improve the investment climate. To boost foreign investment, new legislation and regulations need to be supported by an enabling implementation environment. This will require adequate staffing,


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better skills matching, and aligning incentives across and within Ministries to ensure high-quality projects move forward in a clear and timely manner. The Bank team is closely coordinating with the Fund on Public Financial Management capacity building, the federalism agenda, and overall reforms to raise investment and accelerate growth.

3. GOVERNMENT PROGRAM

25. The 2017 Disaster Risk Reduction and Management Act (DRRM Act) is the foundation of the GoN disaster risk management program (Program). This Program is aligned with the 2009 National Strategy for Disaster Risk Management in Nepal, consistent with the Sendai Framework 2015-203012, and sets in motion strategic actions to reduce climate and disaster risk and loss of life, livelihoods and health.

26. Over the last two decades, the GoN has taken concrete policy and regulatory steps towards managing climate and disaster risks. After the 1982 Natural Calamity (relief) Act, the 1988 Udaypur earthquake prompted the development of the Nepal National Building Code (NBC) in 1994 and the Building Act of 1998. In 2009, the GoN also developed the National Strategy for Disaster Risk Management. Starting 2010, the Government has been including a separate section on disaster, environment and climate change in the periodic (3-5 years) national development plan. In 2011, a Climate Change Policy was prepared in response to climate risk challenges. The MOF has implemented a Climate Change budget code in the annual budget since fiscal year 2013.

27. The GoN developed a National Adaptation Programme of Action (NAPA) in 2010 to assess climate vulnerability, and systematically respond to climate change adaptation. Since 2013, the Government started implementing a Local Adaptation Plan for Action in most at-risk areas in western Nepal. After the Paris Agreement, the GoN submitted its National Determined Contribution (NDC) in 2016, and is revising it following the new Climate Change Policy 2019 and the country’s new federal structure.

28. The GoN’s 2012 National Disaster Response Framework (NDRF) was prepared to guide the effective coordination, implementation of disaster preparedness and response. Annual disaster response drills started in 2009 and since 2013 they have been guided by the NDRF. In 2010, a National Emergency Operations Center (NEOC) was established under MOHA. 29. In 2015, in the aftermath of the earthquake, the Parliament passed the “Act relating to reconstruction of the earthquake affected structures” that established the National Reconstruction Authority (NRA) to coordinate and manage reconstruction efforts in various sectors, including private housing, public schools, government buildings and heritage building and sites. The Act also establishes a National Reconstruction Advisory Council and a reconstruction fund.

30. The 2017 DRRM Act has changed the country’s reactive to a more proactive DRM approach. The Act addresses climate and disaster risk reduction, mandates the creation of a National Disaster Risk Reduction and Management Authority and Disaster Committees at the Federal, Provincial, District and Municipal levels (the former are in place).

12 The Sendai Framework for Disaster Risk Reduction is the successor instrument to the Hyogo Framework for Action (HFA) 2005-2015: Building the Resilience of Nations and Communities to Disasters.


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31. Preparing and responding to health impacts of natural disasters and climate change is part of the Nepal Health Sector Strategy (2015-2020). With WHO’s support, the MOHP is implementing the Early Warning and Reporting System (EWARS) in various hospitals. There is a Health Emergency Operation Center (HEOC) in Kathmandu and there are provincial HEOCs in Gandaki, Karnali and SudurPaschim; and a national plan to address large-scale disease outbreaks has been a priority.

4. PROPOSED OPERATION

4.1. LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION

32. The overall Program Development Objective (PDO) of this operation is to support the government in enhancing its technical and institutional capacity to manage the risk of climate change and natural disasters including disease outbreaks. This takes into account Nepal’s fast development rate in the last two decades, its proactive approach towards adverse natural events and climate change, and its resilient and sustainable development agenda. The policy reforms supported in this operation will consolidate the ongoing DRM dialogue with the GoN on post disaster and reconstruction. The PDO will be achieved by supporting policy reforms under three pillars: (i) improving the climate and disaster risk management institutional and regulatory framework, (ii) integrating climate and disaster resilience in key sectors, and (iii) enhancing human health crisis preparedness and response.

33. The proposed Cat DDO will incorporate ex-ante arrangements for co-financing from the PEF. This risk financing product is consistent with the Bank’s emphasis on disaster prevention, as opposed to only disaster response. The country’s establishment of an adequate macroeconomic policy framework and the existence of a satisfactory DRM program make Nepal eligible for the Cat DDO. As an IDA country, Nepal is also eligible to benefit from PEF in the form of grant funds, when the emergency experienced by the country is one that meets the activation criteria for PEF, that will flow to the country through this operation. The Cat DDO, which in the case of Nepal fully addresses pandemic risk as part of the country’s DRM program, makes available PEF funds to the country for a public health emergency or disaster of epidemic nature. As mentioned, there are no other financial mechanisms in place beyond government’s ad-hoc allocations13. However, this operation is a step forward to address the GON’s interest to adopt a disaster risk financing strategy with the support of the Bank and other development partners such as ADB. 34. Where possible, this Cat DDO-PEF operation will complement and will be complemented by other potential DRM interventions or Bank projects with DRM components, such as the ongoing Earthquake Housing Reconstruction Project (EHRP), EHRP Additional Financing I and II, where relevant building standards are applied, and Building Resilience to Climate Related Hazards (BRCH). This operation is also complementing the Bank support to DRM policy reforms such as the approval of the 2017 DRRM Act, included as a prior action in the First Programmatic Fiscal and Public Financial Management DPC (2018). A new Bank funded programmatic DPC, Finance for Growth is expected to include a prior action on Disaster Risk Financing and Insurance (DRFI). Development partners such as DFID, USAID and ADB have

13 There are two fund-flow mechanism within the GoN allocations system at the national level: (i) Prime Minister’s Disaster Relief Fund, and (ii) National Disaster Management Fund. They have a minimal annual allocation which may increase in case of a disaster event through budget reallocations.


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shown interest in collaborating with the Bank on DRFI.

35. The design of this operation is built on conclusions from several pieces of analytical work, including the Independent Evaluation Group (IEG) Report “Hazards of Nature, Risks to Development: An Evaluation of World Bank Assistance for Natural Disasters”14, “Natural Hazards, UnNatural Disasters ‐ The Economics of Effective Prevention”15, the “Sendai Report”16, and “Financial Protection against Natural Disasters”17.

36. Cat DDO

• Drawdown triggers. Funds may be drawn down by the Recipient either (i) upon imminent or occurring any adverse natural event in the country followed by a declaration of disaster by the Ministry of Home Affairs, the leading disaster management entity as specified in the Government of Nepal (Allocation of Business) Rules of 23rd of February of 2018, Schedule 2, Section 8, page 15, points 18 and 19, or (ii) upon imminent or occurring health-related shock in the country followed by a declaration of state of public health emergency by the Ministry of Health and Population as per the provisions of the Public Health Service Act of 2018, Chapter 6, section 48, each in such manner as the Recipient deems appropriate.

• Drawdown period and renewals. The drawdown period for the proposed operation will be three years and may be renewed once, for a total drawdown period of six years. The World Bank will periodically monitor the satisfactory implementation of the disaster risk management program during the project implementation period. If the Bank concludes that the DRM program is not being implemented in a satisfactory manner, the Bank would promptly advise the borrower of the need for a subsequent review to confirm that the program is implemented satisfactorily before it would be able to grant any request for drawdown. Renewals would require that the original DRM program remain largely in place. The adequacy of the macroeconomic framework is assessed only at effectiveness and reconfirmed at renewal. Renewal would take place no earlier than one year and no later than six months before the expiration date. The renewal would be aligned with World Bank procedures for extension of closing dates beyond two years.

37. PEF. As described in more detail in Annex 5, the Pandemic Emergency Financing Facility is a financing mechanism designed to provide additional resources to help IDA countries respond to large-scale disease outbreaks with pandemic potential. Nepal is eligible to receive PEF funds, contingent on the following conditions: (i) having the disease outbreak affecting Nepal meet the activation criteria of the PEF (the PEF Operations Manual sets out guidelines related to the operating arrangements and procedures, including the activation criteria of the facility and the processes for fund allocations); and (ii) the PEF having sufficient resources available.

38. Upon the occurrence of a large-scale disease outbreak and declaration of a public health emergency (as described above under Drawdown triggers), funds may be accessed from two different

14 Hazards of Nature, Risks to Development: An IEG Evaluation of World Bank Assistance for Natural Disasters. 2006. World Bank Independent Evaluation Group, World Bank, Washington, DC. 15 Natural Hazards, UnNatural Disasters ‐ The Economics of Effective Prevention. 2010 WB and UN. 16 The Sendai Report: Managing Disaster Risks for a Resilient Future. 2012. World Bank. 17 Financial Protection against Natural Disasters: An Operational Framework for Disaster Risk Financing and Insurance. 2014. World Bank.


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sources (Figure 3 below). The GoN may draw down funds from its IDA financing or, if conditions (i) and (ii) described above have been met, the GoN may submit a request for funds to the PEF for their approval and release of funds. Access of PEF grant funds may happen before, after, or at the same time of drawing down funds from the IDA financing, if any.

4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS

39. The prior actions under this operation reflect the GoN’s commitment to policy reform on disaster, climate and health risk management which will create an enabling environment for physical and fiscal impact mitigation in the federal context. The Cat DDO-PEF operation will support the GoN’s efforts to advance and consolidate its ongoing DRM program, and further enhance preparedness for response in case of large-scale disasters. Pillar A: Improving the climate and disaster risk management institutional and regulatory framework. 40. Over the years, the GoN has developed various regulatory and institutional arrangements to plan and manage the country’s DRRM activities18. To align its DRM program with the new federal government system, the Sendai Framework for Disaster Risk Reduction 2015-2030 and the emerging climate change risks, the country is adjusting its regulatory framework by amending and consolidating its disaster risks reduction and management legislation. Taking into account the lessons learned from the implementation of the National Strategy for Disaster Risk Management 2009, the impact of the 2015 earthquake and other recent disasters, the 2018 National Disaster Risk Reduction Policy, the 2018-2030 Disaster Risk Reduction National Strategic Plan of Action and the 2019 Disaster Risk Reduction and Management Regulation were prepared to move forward with the implementation of the DRRM Act. They will help the country to better coordinate and streamline all activities related to climate and disaster risk management under the federal structure.

41. Prior Action #1: Approval of the Disaster Risk Reduction and Management Regulation, which defines DRRM operational procedures and institutional roles and responsibilities in the country, including the functions of the National DRRM Authority as mandated by the 2017 DRRM Act. The Regulation sets procedural, operational and legal aspects to enable the existence of a functional DRRM institutional structure in the country. 42. Legal evidence: Disaster Risk Reduction and Management Regulation was approved by the Council of Ministers and published in Gazette on May 6, 2019 – Section 69, Number 4.

43. Following the 2015 Constitution and the DRRM Act 2017, the DRRM Regulation 2019 was prepared to define the organizational structure needed to be established, including a NDRRM Council, Executive Committee, Authority, and DRRM Committees at the Provincial, District, and Municipal levels

18 In addition to the Constitution of Nepal 2015, and the Local Government Operation Act 2017 and DRRM Act 2017, key legal and policy documents related to DRRM include the Natural Calamity Act 1982, Local Self Governance Act 1998, Building Act 1998, National Building Code 2004, National Strategy for Disaster Risk Management 2009, Climate Change Policy 2011, Land Use Policy 2012, Water Induced Disaster Management Policy 2015, National Reconstruction and Rehabilitation Policy 2015, National Disaster Response Framework 2013, Basic Guideline on Settlement Development, Urban Planning and Building Construction 2016, and National Urban Development Strategy 2016.


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under the new Federal structure in Nepal. This Regulation, mandated by the DRRM Act of 2017, is the first Regulation ever related to disaster risk management in the country. 44. The DRRM Regulation 2019 paves the way for the establishment of the National Disaster Risk Reduction and Management Authority under the MOHA. The Regulation gives the legal mandate to the DRRM Authority to coordinate and monitor the implementation of DRRM activities by the national, provincial and municipal governments. Similarly, it also sets out the compliance standards and reporting requirements for physical and fiscal progress related to implementation of DRRM activities by Provincial and Municipal governments. On the fiduciary side, the Regulation also specifies how the different DRRM Funds at Federal, Provincial, District and Municipal levels will be operated and managed, and defines: (i) types of activities that can be funded by the various DRRM funds, e.g. relief and response, search and rescue, risk reduction measures, etc. (ii) annual reporting requirements of expenditure, and (iii) external audit requirements. The main result of the implementation of this Regulation will be the establishment of the DRRM Authority.

Pillar B: Integrating climate and disaster resilience in key sectors

45. Nepal is rich in natural endowments, but its varied topography and social vulnerability make the country particularly susceptible to geological and climate-related disasters. Nepal is predominantly an agrarian economy; 67 percent of the workforce is engaged in agriculture, which accounts for 33 percent of value added, on average.19 Water resources derived from glaciers, snowmelt, and rainfall feed the country’s major river systems of Koshi, Gandaki, and Kamali, which supply freshwater to a large portion of the 500 million people who live in the Ganges river basin.20 Floods and rain-induced landslides are annual phenomena in Nepal, causing annual losses approximately US$270 to 360m per year from 1980 to 2010, which is 1.5 to 2 percent of the GDP at 2013 value21.

46. Prior Action #2: Approval of the updated Climate Change Policy 2019 that reflects national and international commitments made by the Government of Nepal, in line with the country’s federal governance structure. The CC policy also guides national institutions and their sectoral plans towards building a climate resilience society by reducing the risk of climate change impacts. The policy integrates climate change mitigation and adaptation into policies and programs of central, provincial, and local governments under the federal structure. The roles and responsibilities of national institutions, particularly the collaborative approach among the three tiers of the government, is a major improvement featured in the updated policy.

47. Legal evidence. Updated Climate Change Policy 2019 has been approved by the Cabinet of the Government of Nepal on 8/21/2019. http://mofe.gov.np/downloadsdetail/8/2018/36366627/ (first link, published date 2019-09-03).

48. In 2011, the Government of Nepal approved for the first time a Climate Change Policy (CCP 2011), emphasizing the importance of mainstreaming climate change mitigation and adaptation in the country’s development processes. Two of the most prominent features articulated in the CCP 2011 were the GoN’s

19 http://documents.worldbank.org/curated/en/361961519398424670/pdf/Nepal-SCD-Feb1-02202018.pdf 20 http://sdwebx.worldbank.org/climateportal/countryprofile/home.cfm?page=country_profile&CCode=NPL 21 Ministry of Home Affairs. (2018). Nepal Disaster Report, 2017: The Road to Sendai, Kathmandu: Government of Nepal.

http://mofe.gov.np/downloadsdetail/8/2018/36366627/

http://documents.worldbank.org/curated/en/361961519398424670/pdf/Nepal-SCD-Feb1-02202018.pdf

http://sdwebx.worldbank.org/climateportal/countryprofile/home.cfm?page=country_profile&CCode=NPL


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commitment to: (i) follow the low carbon economic development pathway, which prioritized renewable energy as its primary source of energy over the conventional source, and (ii) allocate 80% of the climate change funds to local institutions and communities for implementing climate change adaption measures. However, an updated CCP was needed to address some important policy aspects such as: (i) integrating climate change mitigation and adaptation into all sectors; (ii) addressing the evolving national and international dimensions of climate change; and (iii) incorporating the new government climate change approach under the federal system. The CCP 2019 takes into account a restructured MOFE to facilitate policy coordination by establishing e.g. a CC Coordination Committee and assigning this Ministry the responsibility to monitor its implementation. 49. The updated CCP 2019 is the umbrella national policy with wider and deeper implications to respond climate change issues22. The policy has articulated guiding principles in line with the spirit of the Paris Agreement, the Nepal’s First Nationally Determined Contributions (NDC), Sustainable Development Goals 2016-2030, Sendai Framework for Action 2015 – 2030, and GoN’s sectoral development plans and 5-year periodic development plan (2019-2024). In the federal context, the updated CC Policy 2019 prescribes ministries to formulate and implement laws and standards consistent with the policy, and provincial and local governments to formulate and implement provincial and local policies, directives, standards, and plans in line with the policy. In addition, the CC Policy 2019 prescribes climate change coordination mechanisms at provincial and local levels, through the establishment of Climate Change Sections, Units or Coordination Committees.

50. While the Provincial Ministry of Industry, Tourism, Forests and Environment (MoITFE) is the focal ministry at the provincial government in climate change, in order to ensure effective planning, implementation and reporting of climate change related activities at provincial level, section 9 of the CCP 2019 has clearly articulated the provision to establish inter-ministerial Climate Change Coordination Committees at the provincial level. The main responsibility of the Committees will be to plan, implement and monitor climate change activities. They will also screen budget and work plans of respective provincial line ministries, and provide inputs to mainstream climate resilience in the sectoral development plans, programs and budgets. 51. Prior Action #3. Approval of the updated Nepal National Building Code 105: 2019, Seismic Design of Buildings in Nepal, aimed to enhance seismic resilience of the buildings, through the Building Construction Management and Improvement Committee, as required by the Building Act of Nepal 1998, which will help to prevent new buildings from suffering significant structural damages during earthquakes of moderate intensities, and without total collapse during high intensity seismic events. The NBC 105 governs seismic design of all types of buildings prevalent in Nepal, and this is the first time it has been revised. This GON’s milestone will promote the revision of other key NBCs.

52. Legal evidence. Nepal National Building Code 105 update was endorsed by the Building Construction Management and Improvement Committee on January 1, 2020, as required by the Building

22 The CCP 2019 includes the following themes: (i) agriculture and food security; (ii) forest, biodiversity and watershed; (iii) water resources and energy; (iv) rural and urban settlements; (v) industry, transport and physical infrastructure; (vi) tourism and natural and cultural heritage; (vii) health, drinking water and sanitation; and (viii) disaster risk reduction and management. The two crosscutting areas include: (ix) gender, social inclusion, livelihood and governance; and (x) public awareness, education and capacity development. Finally, the two strategies include: (xi) study, research and dissemination; and (xii) climate change finance management.


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Act of Nepal 1998.

53. Until 1994, Nepal didn’t have a building code or regulation and the practicing engineers were following Indian Building Code. After the 6.8 Mw Udayapur Earthquake23 of 1988, the GON published the Nepal NBC in 1994, governing all safety measures to be considered while designing and constructing buildings. Over the years, new technologies, construction materials and building practices were introduced but the NBC was not updated. The 2015 Gorkha Earthquake24 made the GoN to realize the high importance and urgency to update some of the provisions in the NBC 105 to make the buildings built in Nepal more resilient to earthquakes25. 54. The NBC 105 is technically the most important of the NBCs due to the high-level seismicity in the country. The updated NBC 105’s approach and format is different from the previous design and construction provisions in the earlier version, and considers new calculation parameters and sets a higher level of safety requirements, which will ensure higher degree of structural safety of buildings. It has higher seismic demands than the current standard for earthquake loading, which in some cases increase the sizes of structural elements, increasing the cost to some extent but making structures safer. 55. The approval of the updated NBC 105 by the Government of Nepal will be reflected in the application of the technical seismic-resistant criteria on the design of at least 75% of new Government buildings under the responsibility of MOUD during the first three years of this project.

Pillar C: Enhancing human health crisis preparedness and response.

56. This pillar will support the government’s efforts to strengthen health systems to be better prepared to respond to pandemics and epidemics. The country needs to effectively coordinate and control outbreaks disease outbreaks, epidemics and pandemics through well-established emergency preparedness and response plans and operations. Experience shows that countries with established plans and response mechanisms take shorter time from detection to response and result in a smaller number of cases and deaths. 57. Prior Action #4: Approval of the National Pandemic Preparedness and Response Plan (NPPRP), which enhances government’s preparedness and response capacities for pandemic crisis. As per provisions of the Public Health Service Act of 2018, Chapter 6, this plan guides the Federal ministry and sub national governments to plan and respond to pandemics and epidemics, or disease outbreaks of epidemic and pandemic potential to minimize its health and economic consequences. The NPPRP defines the roles of various levels of governments to manage disease outbreaks.

58. Legal evidence. The National Pandemic Preparedness and Response Plan was approved by the Ministry of Health and Population through a letter dated November 26, 2019 (2076.08.10).

59. A robust health preparedness and response mechanism is essential for the GoN to address the

23 The August 1988 Nepal earthquake occurred near the Indian border and affected much of northern Bihar. The earthquake shook the region killing at least 709 persons and injuring thousands. 24 The April 2015 Nepal earthquake killed around 9,000 people and injured nearly 22,000. 25 According to the NBC 105: 2019, “Requirements of the provisions of this standard shall be applicable to buildings made of reinforced concrete, structural steel, steel concrete composite, timber and masonry”.


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emerging disease outbreaks of epidemic and pandemic potential. This will enable the country to properly address the steady increase in the frequency and diversity of diseases outbreaks in the last three decades. Unlike the previous plan, which only covered influenza viruses, the NPPRP covers six groups of viruses including influenza, which have potential for greater social and economic impact if they cause widespread outbreaks including epidemics and pandemics. New human pathogens have emerged such as pandemic influenza, Ebola and Zika viruses and Middle East respiratory syndrome (MERS). At the global level, many lives have been lost due to epidemics of Ebola, HIV, SARS, Avian Flu, etc. So far, Nepal has not been affected by the novel viruses. However, Nepal is considered at high risk due to its location to the global “hotspots”. Small rural and backyard poultry farming with mixed animal farming and seasonal migration of wild birds from affected countries and the significant number of Nepal’s youth population working in various countries are two factors for easy transmission of novel virus.

60. Taking into consideration the identification of newer pathogens, a need has arisen to expand the scope of the layers of coordination mechanisms. The new NPPRP defines the roles and responsibilities of the three tiers of the government and their coordinating mechanism in the evolving federal structure during emergency response to disease outbreaks. The NPPRP establishes command and control mechanisms, risk assessments, surveillance, responses to different pandemic phases, communication strategies and, during outbreaks, the rapid deployment of emergency services including treatment and prevention of spread of diseases, while continuing to provide the essential health care services.

61. Simulation exercises play a key role in the development and implementation of preparedness and response capacities at all levels (national, regional, community and global) and have been identified as a key component in the validation of core capacities under the International Health Regulation monitoring and evaluation framework. MOHP in collaboration with WHO and other government agencies conduct simulations for disasters. Currently, simulation exercises have not been regularized for disease outbreaks in Nepal. The MOHP will conduct and regularize simulation exercises not only for disasters but also for the activities under the NPPRP every year.

62. Gender-specific actions and indicators under NPPRP. The Plan will notably improve the availability and quality of services for women and other vulnerable populations. During implementation of the NPPRP, the MOHP will ensure Essential Health Care Services26 by liaising with relevant health units, particularly in relation to: (i) the identification of priority groups; (ii) the delivery of medical attention to pregnant women, persons with disabilities (PWDs), young children, etc.; (iii) delivery of psychological, clinical and legal support for GBV survivors; and (iv) delivery of psychosocial counseling for disaster survivors. The MOHP will conduct a series of three simulation exercises by 2023 that will incorporate the afore-mentioned actions to respond to women’s needs (and those of other high-risk populations) so that the delivery mechanisms for these specific actions are tested explicitly.

26 Essential Health Care Services (EHCS) is a package that includes priority reproductive and maternal health (including for cases of gender-based violence) and child health.


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Table 4: DPF Prior Actions and Analytical Underpinnings

Prior Actions Analytical Underpinnings

Pillar A: Improving the climate and disaster risk management institutional and regulatory framework

Prior action #1 DRRM Regulation

“Sendai Framework for Disaster Risk Reduction 2015 - 2030”, United Nations, 2015. It outlines seven targets and four priorities for action to prevent new and reduce existing disaster risks http://www.unisdr.org/we/inform/publications/43291


Prior action #2 Updated Climate Change Policy Prior action #3 Updated Nepal National Building Code

GoN Ministry of Population and Environment, Intended Nationally Determined Contributions (INDC), Communication to the UNFCCC, February 2016. http://www4.unfccc.int/Submissions/INDC/Published%20Documents/Nepal/1/Nepal_INDC_08Feb_2016.pdf

Ministry of Home Affairs. (2018). Nepal Disaster Report, 2017: The Road to Sendai, Kathmandu: Government of Nepal. It highlights Nepal’s periodic experiences in DRM, documenting key learning issues and challenges in the course of managing disaster risk and identifying future priority actions for effective disaster response, risk reduction and recovery from disasters.

“Nepal Climate Change Policy”, Ministry of Environment, Government of Nepal, 2011.

http://www.climatenepal.org.np/main/downloadFile.php?fn=fcy7m8j1h3v.pdf&ft=application/pdf&d=publication “Nepal National Building Code NBC105”, Ministry of Physical Planning and Works, Government of Nepal, 1994. The document sets down requirements for the general structural design and seismic design loadings for structures. https://www.dudbc.gov.np/uploads/default/files/c25f315ba97fe50b056e7803296704b5.pdf

Pillar C: Enhancing human health crisis preparedness and response

Prior action #4 NPRR Plan

“A strategic framework for emergency preparedness” lays down the principles and elements of effective country health emergency preparedness. http://who.int/ihr/publications/9789241511827/en/

4.3. LINK TO CPF, OTHER BANK OPERATIONS AND THE WBG STRATEGY

63. The proposed operation is consistent with the Country Partnership Framework (CPF) for Nepal FY 19–23. In particular, it responds to “Focus Area 3: Inclusion and Resilience”. Increasing the resilience of the country to shocks and climate impacts would enable more inclusive and sustainable growth, which is the over-arching Strategic Goal of the current CPF. The 2018 Systemic Country Diagnostic (SCD) identifies a number of challenges including exposure to external demand shocks from natural disasters and limited macroeconomic and fiscal space to deal with an external shock. The SCD also recognizes that improving preparedness for disasters and climate change would have a medium- to long-term impact on reducing

http://www.unisdr.org/we/inform/publications/43291

http://www4.unfccc.int/Submissions/INDC/Published%20Documents/Nepal/1/Nepal_INDC_08Feb_2016.pdf

http://www4.unfccc.int/Submissions/INDC/Published%20Documents/Nepal/1/Nepal_INDC_08Feb_2016.pdf

http://www.climatenepal.org.np/main/downloadFile.php?fn=fcy7m8j1h3v.pdf&ft=application/pdf&d=publication

http://www.climatenepal.org.np/main/downloadFile.php?fn=fcy7m8j1h3v.pdf&ft=application/pdf&d=publication

https://www.dudbc.gov.np/uploads/default/files/c25f315ba97fe50b056e7803296704b5.pdf

http://who.int/ihr/publications/9789241511827/en/


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macro fiscal risk. The proposed operation is consistent with Priority Area 3 of the SCD by increasing macroeconomic resilience to external shocks.

64. Building disaster and climate resilience is essential to supporting the Bank’s twin goals of ending extreme poverty and boosting shared prosperity. Climate change and natural disasters have their greatest impact on the vulnerable populations who generally live in higher-risk areas, where even frequent, low intensity events may have crippling and cumulative effects on livelihoods and communities. A recent World Bank report “Unbreakable: Building the Resilience of Poor in the Face of Disasters” (2016), demonstrates that multiple reasons exist why the poor are often hit the hardest, including their inability to cope and recover, and the permanent impact of disasters on their health and education.

65. The proposed operation will complement other World Bank interventions that support the resilience agenda in Nepal. For example, the BRCH Project (US$31 M, 2013 – 2018) seeks to modernize and automate the whole hydro-meteorological observation network; the EHRP (IDA US$200 M, 2015 – 2020) and it’s Additional Financing (IDA US$300 M, 2018-2022) is contributing to reconstruction of disaster resilient houses in the earthquake affected areas. The World Bank is also preparing an operation to support the Government of Nepal in facilitating federalization of DRM responsibilities among all government levels. All these projects contribute to Focus Areas 3 of the CPF.

4.4. CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS

66. Citizen Engagement. All prior actions under this operation have been drafted after consultations with a wide range of citizens and community members including the most vulnerable community representatives, leaders and private sector. The consultations took place at both the national and provincial level. In some cases, comments on the drafts were publicly solicited through the internet (e.g. Prior Action 2 by MOFE). The Prior Action 3, related to the updated Nepal National Building Code 105, also involved consultations by MOUD with representatives from the academia and civil society, including the Structural Engineers Association of Nepal. A wide range of public health experts, including female health volunteers at the grassroot level, were consulted during the preparation of the National Pandemic Preparedness and Response Plan (NPPRP) by MOHP. 67. Among development partners, the ADB is a key partner in the areas supported by the proposed operation by conducting the Country Diagnostic Assessment: “Enabling for Disaster Risk Financing in Nepal”. WHO supported the GoN in preparing a Health Emergency Operation Plan which provides guidance and structure to the MOHP on emergency preparedness and response.

68. Throughout the drawdown period, the Government and the World Bank will maintain a close policy dialogue on DRM issues through both ongoing and new initiatives. Close coordination will also be maintained with national organizations and development partners.

5. OTHER DESIGN AND APPRAISAL ISSUES

5.1. POVERTY AND SOCIAL IMPACT

69. Overall, the Cat DDO is likely to have a long-term positive impact on poverty reduction and


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shared prosperity. The policy reforms supported by this operation will likely benefit the poor and the bottom 40 percent, who are often more overexposed to natural hazards yet less prepared to cope with and recover from negative shocks27. The activation of the Cat DDO will help to ensure the continuity of development plans, targeted at alleviating the needs of the poor making resources quickly available to respond to the needs of the affected populations. The activation of the PEF will help to specifically address potential and actual high-severity disease outbreaks and to prevent them from becoming pandemics.

70. Pillar A includes a policy reform to improve institutional and regulatory framework. The 2019 Disaster Risk Reduction and Management Regulation (Prior Action 1) assigns institutional responsibilities based on the 2017 DRRM Act which are likely to accrue indirect but positive impacts on the poor and the bottom 40 percent in the long run. The implementation of key actions identified under Prior Action 1, such as public awareness on disaster risk reduction, systematic information dissemination at the time of a disaster, safe storage and distribution of relief supplies, etc., will inform the decision-making process to increase the safety of vulnerable groups, such as the poor, women, and people with special needs in the face of disasters. This regulation also establishes Provincial Disaster Management Committees which will be responsible for the reallocation of settlements in high-risk prone areas to safer locations. This will complement the work of e.g. the Ministry of Urban Development in making settlements more resilient to natural and human-made disaster in coordination with MoHA.

71. Prior Actions under Pillar B integrates the roles and responsibilities of key sectors responsible for climate and disaster resilience. Updated Climate Change Policy 2019 (Prior Action 2) guides national institutions to address climate change impacts, which on the poor may not be directly visible but nonetheless likely be positive in the long run as this policy supports climate change adaptation capacity of persons, families, groups and communities. Prior Action 3 supports the update of the Nepal National Building Code 105 to ensure that new buildings are free from structural damages during earthquakes of moderate intensities, which will likely benefit the entire population including the poor as this applies to public buildings such as schools and hospitals.

72. The National Pandemic Preparedness and Response Plan (NPPRP), prior action under Pillar C, will enable Nepal to respond to public health emergencies including high-severity disease outbreaks with the potential of becoming pandemics. This will likely have positive effects on the poor as it reduces vulnerability to disaster risk and enables the poor and other vulnerable groups to return to, or improve, the socioeconomic, health, and environmental conditions found before the disaster event.

5.2. ENVIRONMENTAL ASPECTS

73. The prior actions selected for this operation are likely to have a positive and mainly indirect effect on Nepal’s environment, forests or other natural resources. Enhancing the government’s capacity to manage disaster will lead to preservation and sustenance of natural resources and the environment. Prior Action 1 will enable DRM authorities to better mitigate damage on the environment and natural resources during any type of disasters by, for example, establishing an Expert Committee to guide the relevant agencies, at the federal, provincial and local level, on how to effectively implement disaster risk

27 World Bank, 2016: Unbreakable : building the resilience of the poor in the face of natural disasters, Washington D.C., World Bank Group http://documents.worldbank.org/curated/en/512241480487839624/pdf/110618-PUB-Box396333B-PUBLIC-PUBDATE-11-24-16-UNIT-ITSKI.pdf

http://documents.worldbank.org/curated/en/512241480487839624/pdf/110618-PUB-Box396333B-PUBLIC-PUBDATE-11-24-16-UNIT-ITSKI.pdf

http://documents.worldbank.org/curated/en/512241480487839624/pdf/110618-PUB-Box396333B-PUBLIC-PUBDATE-11-24-16-UNIT-ITSKI.pdf


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reduction, disaster preparedness, recovery and reconstruction activities, while ensuring economic and social development as well as environment protection. This prior action will also complement existing environmental laws and regulations on environmental management for considering disaster risk in investment of particularly large infrastructure.

74. Prior Actions 1 is also expected to have a positive effect on natural resource and environmental management. The implementation of the DRRM regulation internalize environment concerns into other key sectoral policies and enhance delivery of environmental mandates, especially through Nepal’s participation in the REDD+ and World Bank’s Forest Carbon Partnership facility (FCPF), and the approval of the Environmental Protection and Climate Change Act. Basic environmental considerations are to be included in the implementation of the NPPRP, Prior Action 4, and in its standard disaster response procedures, in order to prevent irreparable harm to the environment.

75. Prior action 2 on Climate Change Policy 2019 reflects recent international and national commitments made by the Government of Nepal, in line with the country’s federal governance structure. The policy aims to implement various strategies and plans to, among others, conserve wetlands and biodiversity, prevent degradation of the environment and natural resources, develop climate resilient ecosystem, and build adaptation capacity for strengthening the ability of local communities to take ownership of their natural resources and to manage them in a sustainable manner. This prior action supports the upcoming sustainable Forest Management for Carbon Sequestration project, which is one of the key activities under the World Bank’s Forest Carbon Partnership facility (FCPF), and the Forest for Prosperity project under preparation.

76. Nepal has a fairly robust environmental legal framework in place but implementation capacity is still weak. However, the new umbrella Environmental Protection Act 2019 has been considerably improved to strengthen the current system through the inclusion of climate change aspects on EIA/IEE procedures, Strategic Environmental Assessment, and stringent provisions for penalties to improve the quality of EIA/IEE procedures.

5.3. PFM, DISBURSEMENT AND AUDITING ASPECTS

77. The government’s Public Financial Management (PFM) systems are being strengthened. The PFM areas are being strengthened by a Bank administrated PFM MDTF, which supports a PFM reform plan at the three tiers of the government. These reforms are also supported at the policy level by a Bank-financed Development Policy Operations (DPO) which strengthens the policy framework for PFM particularly in the country’s transition to federalism. 78. The government is compliant to Government Financial Statistics (GFS) which is publicly available. Budget information by geographical locations and monthly expenditure reports by functions are all available at Financial Comptroller General Office website. An integrated budget execution platform is operational and information is shared with the line ministries. All financial transactions have been unified under a single treasury system.

79. The public procurement framework is adequate. The Public Procurement Monitoring Office (PPMO) continues to improve transparency in public procurement processes by adopting international


23

standards and IT. The Public Procurement Act and Public Procurement Regulations, compliant with UNCITRAL (United Nations Commission on International Trade Law), provide an international standard procurement legal framework. Anchored in this Act and the supporting Regulations is the single Electronic Government Procurement (e-GP) portal which makes all the standard bidding documents of all common procurements on-line to all interested parties. Although the e-GP portal has all features, contract management feature has not been yet used and therefore the PPMO can only partially monitor the procurement progress using this portal. The full-fledged e-GP portal (also called e-GP, phase II) was launched in 2016 and it is capturing contract level data only up to bid submission. This e-GP portal has drastically reduced paperwork, fostered transparency and competition and enabled faster remedial actions by the authorities. As part of the government’s ongoing procurement reform program, the Bank is supporting the government in implementing its PFM reform agenda through an Integrated PFM Reform Project, with a procurement reform component which includes enhancement of e-GP features including performance measurement, and strengthening of the PPMO. However, recent frequent amendments (6th,

7th, 8th, and 9th) in the Regulations, brought within a short period of time (from August to December 2019), have made the procurement environment difficult by inserting some unusual provisions in contract management and bidding which are not in line with the core procurement principles and good international procurement practices. 80. As per the 2018 IMF Staff Report, Nepal’s foreign exchange management and safeguards are adequate but there is room for strengthening. The recent IMF Staff Report, issued on February 8, 2019, noted some areas in need of improvement related to safeguards. Specifically, external and internal audit also need to be enhanced to strengthen the central bank’s autonomy and governance arrangements. The IMF is providing technical assistance on the internal audit function and will continue to engage with the authorities on necessary remedial steps. Vulnerabilities to cyber risks at the NRB, due to weak IT infrastructure and practices, which have been noted in the 2018 Article IV mission, are being addressed.

81. Disbursements. The proposed credit and PEF grant will follow World Bank’s disbursement procedures for development policy operations. The credit proceeds will be made available to the Government upon approval of credit effectiveness and occurrence of a natural disaster including health-related shocks. The credit needs to be approved and the World Bank needs to notify the credit effectiveness to the government. Once the Cat DDO is triggered (see “Drawdown triggers under Section 4.1), the Government may submit a withdrawal application in the requested format to the World Bank after submission of Authorized Signatories Letter of IDA. At the request of the MOF, the disbursement will be made into the Treasury account of the government maintained in US$ at the NRB that forms part of the country’s foreign exchange reserve which will later be transferred in local currency equivalent to the Government’s consolidated fund (the General Fund). The Government will confirm to the World Bank, within 30 days, receipt of the proceeds and its credit in the Treasury account, including the date of receipt, the exchange rate applied to convert the credit proceeds into Nepalese rupees, and the name and number of the Government’s bank account in which the funds have been deposited. These disbursement arrangements would also apply to the PEF Grant.

82. Confirmation and eligible expenditure. The MOF will provide to the Bank a confirmation that the amount of the operation has been credited to an account that is available to finance budget expenditures. If, after the proceeds are deposited in the government account, the proceeds of the operation are used for ineligible purposes as defined in the Loan Agreement, the Bank will require the Government, upon


24

notice from the Bank, refund an amount equal to the amount of said payment to the Bank. Amounts refunded to the Bank upon such request shall be cancelled.

83. Reporting and auditing. No separate audit will be required for the proposed operation as fund will be transferred to treasury and not to a dedicated account. The Office of the Auditor General conducts audit of the government treasury including foreign currency account and provides annual audit report by nine months from the end of each fiscal year.

5.4. MONITORING, EVALUATION AND ACCOUNTABILITY

84. The Ministry of Finance is leading the effort in coordinating the overall implementation of the Cat DDO-PEF. MOF has experience and is conversant with World Bank policies and procedures through lending and TA operations with the responsibility to monitor program progress and to ensure the accountability of relevant institutions to the commitments made. The MOF will have an overall coordination and decision‐making role, while the MOHA, MOFE, MOUD, and MOHP will monitor the implementation of the indicators to ensure the progress of the proposed operation during the entire drawdown period. The World Bank team will continue to provide support to the government in monitoring the reform progress and results.

85. The Bank will monitor the status of the program implementation through regular implementation support missions and by tracking the baselines and output indicators provided in the policy and results matrix (Annex 1), based on the data provided by the Government agencies and disclosed in the official sources. The Bank team will maintain the dialogue with the authorities and assess the compliance of the authorities with legal provisions under the loan agreement.

86. Grievance Redress. Communities and individuals who believe that they are adversely affected by specific country policies supported as prior actions or tranche release conditions under a World Bank Development Policy Operation may submit complaints to the responsible country authorities, appropriate local/national grievance redress mechanisms, or the WB’s Grievance Redress Service (GRS). The GRS ensures that complaints received are promptly reviewed in order to address pertinent concerns. Affected communities and individuals may submit their complaint to the WB’s independent Inspection Panel which determines whether harm occurred, or could occur, as a result of WB non-compliance with its policies and procedures. Complaints may be submitted at any time after concerns have been brought directly to the World Bank's attention, and Bank Management has been given an opportunity to respond. For information on how to submit complaints to the World Bank’s corporate Grievance Redress Service (GRS), please visit http://www.worldbank.org/GRS. For information on how to submit complaints to the World Bank Inspection Panel, please visit www.inspectionpanel.org.

6. SUMMARY OF RISKS AND MITIGATION

87. The proposed operation faces substantial risk, with political and governance, institutional capacity, fiduciary and stakeholder risks assessed to be substantial.

88. Political and governance risks are substantial. They arise from jurisdictional overlap between the three tiers of government, lack of clarity and coherence between policies and devolved powers that may

http://www.worldbank.org/GRS

http://www.inspectionpanel.org/


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undermine coordination across government agencies, leading to a duplication of efforts that impedes reform implementation. These risks will be mitigated through continuous consultations with key stakeholders and ongoing TA to support progress on the implementation of DRM policy reforms.

89. Institutional Capacity for Implementation and Sustainability risk are substantial, which could impact on government’s ability to deliver on policy actions expected results. This risk is mitigated through ongoing dialogue with and support to the agencies responsible for delivering on the agreed policy actions results indicators.

90. Fiduciary risk is substantial. With the approval and implementation of the new financial procedural act, increased accountability and transparency should lower fiduciary risks. Fiduciary risks are also mitigated through on-going institutional capacity strengthening activities funded through a MDTF centered around the rules governing budget implementation. The frequent procurement and financial management clinics that have been held for Bank funded project officials, have yielded positive results and fewer audit observations have been observed. The government is revising the PFM strategy in the federal context and its implementation is expected to further assist in mitigating fiduciary risks.

Table 5: Summary Risk Ratings

Risk Categories Rating

1. Political and Governance ⚫ Substantial

2. Macroeconomic ⚫ Moderate

3. Sector Strategies and Policies ⚫ Moderate

4. Technical Design of Project or Program ⚫ Moderate

5. Institutional Capacity for Implementation and Sustainability ⚫ Substantial

6. Fiduciary ⚫ Substantial

7. Environment and Social ⚫ Moderate

8. Stakeholders ⚫ Moderate

9. Other

Overall ⚫ Substantial

.


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ANNEX 1: POLICY AND RESULTS MATRIX

Lead entity Prior Action Results

Baseline (2020) Target (2023)

Pillar A: Improving the climate and disaster risk management institutional and regulatory framework

Ministry of Home Affairs

Prior Action #1: Approval of the Disaster Risk Reduction and Management Regulation, which defines DRRM operational procedures and institutional roles and responsibilities in the country, including the National DRRM Authority as mandated by the 2017 DRRM Act.

Legal Evidence: Disaster Risk Reduction and Management Regulation was approved by the Council of Ministers and published in Gazette on May 6, 2019 – Section 69, Number 4. (http://rajpatra.dop.gov.np/welcome/book/?ref=23669).

National Disaster Risk Reduction and Management Authority established and operational: No

National Disaster Risk Reduction and Management Authority is established and operational: Yes28


Ministry of Forests and Environment

Prior action #2: Approval of the National Climate Change Policy 2019 that reflects national and international commitments made by the Government of Nepal, in line with the country’s federal governance structure, and guides sectoral plans to build a resilient society by reducing the risk of climate change impacts. Legal evidence: Updated Climate Change Policy 2019 has been approved by the Council of Ministers on August 21, 2019. http://mofe.gov.np/downloadsdetail/8/2018/36366627/ (first link, published date 2019-09-03).

Number of Climate Change Coordination Committees formed under the ministries of: Industry, Tourism, and Forest and Environment in seven provinces: 0

Number of Climate Change Coordination Committees formed under the ministries of: Industry, Tourism, and Forest and Environment in seven provinces: 7

28 The National DRRM Authority would be established and operational when a Chief Executive is appointed and, under his leadership, the Authority has: (i) an organizational structure, (ii) a work plan, (iii) a financial/budget plan, and (iv) physical offices.

http://rajpatra.dop.gov.np/welcome/book/?ref=23669

http://mofe.gov.np/downloadsdetail/8/2018/36366627/


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Lead entity Prior Action Results

Baseline (2020) Target (2023)

Ministry of Urban Development

Prior Action #3: Approval of the updated Nepal National Building Code 105: 2019, Seismic Design of Buildings in Nepal, aimed to enhance seismic resilience of the buildings.

Legal Evidence: Nepal National Building Code 105 update was endorsed by the

Building Construction Management and Improvement Committee on January 1,

2020, as required by the Building Act of Nepal 1998.

New Government buildings built that comply with the technical seismic-resistant criteria of the updated Nepal National Building Code 105: 0%

New Government buildings built that comply with the technical seismic-resistant criteria of the updated Nepal National Building Code 105: 75%

Pillar C: Enhancing human health crisis preparedness and response

Ministry of Health and Population

Prior action #4: Approval of the National Pandemic Preparedness and Response Plan (NPPRP), which enhances government’s preparedness and response capacities for pandemic crisis.

Legal evidence: The National Pandemic Preparedness and Response Plan was approved by the Ministry of Health and Population through a letter dated November 26, 2019 (2076.08.10).

Simulation exercises29 on the activation and use of the NPPRP are carried out, while also ensuring Essential Health Care Services (EHCS) to meet the direct needs of women and issues faced by other vulnerable groups: 0

Simulation exercises on the activation and use of the NPPRP are carried out, while also ensuring Essential Health Care Services (EHCS) to meet the direct needs of women and issues faced by other vulnerable groups: 3

29 The MOHP has been conducting simulation exercises of disaster and emergency preparedness with the support from WHO. With NPPRP in place, elements of this plan will also be included in these exercises and documented through a brief report.

The World Bank Nepal Development Policy Financing with CAT DDO (P166788)

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ANNEX 2: LETTER OF DEVELOPMENT POLICY


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ANNEX 3: FUND RELATIONS ANNEX

Nepal—Assessment Letter for the World Bank

September 11, 2019

This note provides the IMF staff’s assessment of Nepal’s recent economic developments and outlook,

and economic policies. The assessment was requested in relation to a proposed development policy

credit to Nepal to be considered by the World Bank.

Recent Developments and Outlook

Growth remained robust but macroeconomic stability risks have risen. Nepal’s Central Bureau

of Statistics estimates growth at 7.1 percent in FY2018/19 (mid-July 2018 to mid-July 2019). The

pickup reflects cyclical factors—including the ongoing reconstruction from the 2015 earthquake, a

rebound in agricultural production, and strong tourism-related activity—as well as structural

improvements such as improved electricity supply and greater political stability. With output above

potential, headline inflation rose to 5.3 percent (y/y) in May 2019, from 4.6 percent in FY2017/18,

due to higher food prices and strong domestic demand. In the first ten months of FY2018/19, the

current account deficit amounted to about 8 percent of GDP, on account of buoyant imports and

softening remittances growth. International reserves fell to US$ 8.4 billion in May 2019, though

remain adequate at 6 months of prospective imports. Nepal’s external position in FY2017/18 was

moderately weaker than the level consistent with medium-term fundamentals and desirable policy

settings. Weak implementation capacity for capital expenditure and lower than expected transfers to

subnational governments (due to their weak execution capacity) will bring the central government

deficit to around 4.3 percent of GDP in FY2018/19, well below the revised budget target of 7.3

percent of GDP. Private sector credit continues to grow strongly, at 21.3 percent in May (y/y), rising

to about 85 percent of GDP. Against the backdrop of weak financial sector oversight, the rapid credit

expansion raises concerns about the quality of lending.

While the near-term outlook for growth is favorable, macroeconomic and financial

vulnerabilities are expected to continue to build. In FY2019/20, growth is projected to moderate to

6.3 percent as strong activity in recent years has run up against the economy’s productive capacity.

Meanwhile, inflation is expected to rise further to 6.1 percent, due to both food and non-food

inflation. The current account deficit is expected to widen to 10 percent of GDP, in part reflecting

higher oil imports, bringing the reserve coverage to about 5 months of prospective imports. The fiscal

deficit is expected to remain at 4.3 percent of GDP, due to ongoing capacity constraints to fully

execute spending plans.

Under current policies, growth is expected to fall back to its potential of about 5 percent over

the medium term. The economy’s potential is weighed down by structural weaknesses, including

inadequate levels of private investment, weak public infrastructure, and corruption. Although the

current account deficits would narrow somewhat, reserve coverage is expected to decline further to 3

months of prospective imports, although less sharply than envisaged in the last Article IV Staff

Report.


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The joint World Bank/IMF Debt Sustainability Analysis indicates that Nepal’s risk of debt

distress remains low. Nepal’s public debt remains moderate at about 30 percent of GDP in mid-

2018. External public debt remains low at 17 percent of GDP, with a high degree of concessionality.

Stress tests suggest that debt burden indicators are vulnerable to growth/exports shocks and natural

disasters. This underscores the importance of improving the business climate and competitiveness

through high-quality public investment and structural reforms to support growth and expand foreign

exchange income streams.

Economic risks are tilted to the downside. Rising government spending related to fiscal federalism

and capital spending could provide a stimulus to growth in the near-term. However, this would also

be associated with more pronounced balance of payments pressures, leading to greater pressure on

the exchange-rate peg and build up of financial sector risks. Downside risks to growth derive from

subnational government weak implementation capacity, financial sector vulnerability, and slowing

remittances impacting financial sector liquidity.

Economic Policies

Prudent implementation of fiscal federalism is needed to keep public debt and the external

current account on a sustainable path. Although capacity constraints have implied a tighter fiscal

policy than envisaged in the budget, fiscal policy can make a larger contribution toward containing

domestic demand pressures and shoring up external stability. This entails a more front-loaded fiscal

consolidation and the rationalization of the central government budget, as expenditure

responsibilities are devolved. For sub-national governments, a medium-term plan which aligns

spending needs with available funding is vital. More needs to be done to make spending more

efficient and continue to build implementation capacity at all levels of government.

Monetary policy is too accommodative given the cyclical position of the economy, calling for a

tighter stance to support the exchange rate peg to the Indian rupee, which has served Nepal

well. In recent months, the Nepal Rastra Bank’s actions have been insufficient to mop up excess

liquidity. The recent pickup in interbank rates stems from earlier relaxation of the authorities’ loan-

to-deposit ratio, which now counts interbank borrowing as deposits. A tighter monetary policy stance

will help reduce the upward inflationary pressure and contain the build-up of imbalances.

An acceleration of financial sector reforms and tightening of macro-prudential measures will

help temper excessive credit growth. The ongoing sharp credit expansion raises concerns about the

buildup of financial stability risks given the weak underwriting standards, poor risk management

practices, and weak financial sector oversight. This underscores the importance of encouraging banks

to build additional capital and provisioning buffers against potential losses, and strengthening

financial sector oversight and regulations. A tightening of macroprudential policies will slow credit

growth and limit the buildup of financial sector risks.

To promote sustained high and inclusive growth, the economy’s productive capacity can be

enhanced through higher private investment and greater competition. Structural reforms are

needed to improve the business climate, strengthen governance and institutions, and enhance access

to finance to the underserved population. These steps will help encourage private investment,


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including foreign direct investment, which will generate sustained higher economic growth and

employment opportunities.

IMF Relations

Financial support. In the aftermath of the 2015 earthquakes, the IMF’s Executive Board approved

the disbursement, as direct budget support, of the equivalent of SDR 35.65 million (22.7 percent of

quota) under the Fund’s Rapid Credit Facility on July 31, 2015.

Surveillance. The 2018 Article IV Consultation was concluded by the IMF’s Executive Board on

February 8, 2019. The next Article IV mission is planned for January 2020. The joint IMF-World

Bank FSAP was completed in mid-2014.

Capacity development. In recent years, the Fund has been providing technical assistance in the

areas of tax administration, tax policy, public expenditure management, monetary policy operations,

and macroeconomic statistics. A long-term resident advisor is supporting the NRB’s efforts to

strengthen banking supervision. Nepal is a member of the South Asia Regional Training and

Technical Assistance Center (SARTTAC) in New Delhi.


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ANNEX 4: ENVIRONMENT AND POVERTY/SOCIAL ANALYSIS TABLE

Prior Actions Significant positive or negative

environment effects

Significant poverty, social or distributional effects positive or

negative

Pillar A: Improving the climate and disaster risk management institutional and regulatory framework.

Prior Action #1: Disaster Risk Reduction and Management Regulation

Positive Positive

Pillar B: Integrating climate and disaster resilience in key sectors.

Prior Action #2: National Climate Change Policy 2019

Positive Positive

Prior Action #3: Nepal National Building Code 105: 2019 Positive Positive

Pillar C: Enhancing human health crisis preparedness and response.

Prior Action #4: National Pandemic

Preparedness and Response Plan

(NPPRP) Positive Positive

The World Bank Nepal Development Policy Financing with CAT-DDO (P166788)

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ANNEX 5: HOW THE PANDEMIC EMERGENCY FINANCING FACILITY (PEF) WORKS

The Pandemic Emergency Financing Facility (PEF) – a financing mechanism housed at the World Bank – is designed to provide additional resources to help the world’s poorest countries respond to large-scale disease outbreaks. As one part of the global solution to strengthening pandemic risk management, the PEF helps fill the financing gap that occurs after the initial outbreak and before large-scale humanitarian relief assistance can be mobilized.

Beneficiaries: All IDA-eligible countries are eligible to access PEF funds. In addition, international organizations and NGOs that have been accredited as PEF responding agencies and are supporting response efforts in affected countries are also eligible to access PEF funds. PEF premiums are covered by donors, and beneficiary countries are not required to bear any costs. Design and activation: The PEF provides funding for countries and accredited responding agencies to address infectious disease outbreaks. It does so through two complementary windows with distinct activation criteria – (i) the Cash Window for early or emergency stage of large-scale disease outbreaks and (ii) the Insurance Window, for established larger-scale, specific high severity disease outbreaks.

Cash Window activation criteria The determination of an outbreak reaching the Cash Window activation criteria is made by the PEF Coordinator through a sequential three-step process based on: (i) pathogen type; (ii) epidemiological thresholds; and (iii) technical assessment. The final decision on a payout from the Cash Window is taken by the PEF Steering Body. The PEF Coordinator presents the application together with the advice obtained through the technical assessment to the Steering Body, which takes a decision on the payout from the Cash Window. Insurance Window activation criteria The determination of an outbreak meeting the Insurance Window activation criteria is made by an independent calculation agent, based on publicly available data published by the WHO, which activates the flow of funds.


35

ANNEX 6: PRESENT VALUE OF DEBT TO GDP

1

Sources: Country authorities; and staff estimates and projections.

Avg. grace period

Note: "Yes" indicates any change to the size or

interactions of the default settings for the stress tests.

"n.a." indicates that the stress test does not apply.

Commodity Prices 2/

Avg. nominal interest rate on new borrowing in USD

USD Discount rate

Avg. maturity (incl. grace period)

No

n.a.n.a.

No

No

Figure 1. Nepal: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2019-2029

Most extreme shock 1/

No

Size

Customization of Default Settings

Historical scenario

External PPG MLT debt

Baseline

Borrowing Assumptions for Stress Tests*

Shares of marginal debt

Default

Terms of marginal debt

* Note: All the additional financing needs generated by the shocks under the stress tests are

assumed to be covered by PPG external MLT debt in the external DSA. Default terms of marginal

debt are based on baseline 10-year projections.

Market Financing n.a.n.a.

Tailored Tests

5.0%

6

34

5.0%

34

6

Combined CLs

Natural Disasters

1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. Stress tests with one-off breaches are also presented (if any), while these one-

off breaches are deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-

off breach, only that stress test (with a one-off breach) would be presented.

2/ The magnitude of shocks used for the commodity price shock stress test are based on the commodity prices outlook prepared by the IMF research department.

Threshold

0.9%0.9%

100%

Interactions

No

User defined

0

2

4

6

8

10

12

14

16

18

20

2019 2021 2023 2025 2027 2029

Debt service-to-revenue ratio

Most extreme shock is One-time depreciation

-50

0

50

100

150

200

2019 2021 2023 2025 2027 2029

PV of debt-to-exports+remittances ratio

Most extreme shock is Natural disaster-10

0

10

20

30

40

50

2019 2021 2023 2025 2027 2029

PV of debt-to GDP ratio

Most extreme shock is Natural disaster

0

2

4

6

8

10

12

14

16

2019 2021 2023 2025 2027 2029

Debt service-to-exports+remittances ratio

Most extreme shock is Exports


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Baseline Most extreme shock 1/

Public debt benchmark Historical scenario

Default User defined

59% 59%

37% 37%

-166% 4%

0.9% 0.9%

34 34

6 6

-1.3% -1.3%

7 7

1 1

-5% -5.0%

Sources: Country authorities; and staff estimates and projections.

External PPG medium and long-term

Domestic medium and long-term

Domestic short-term

1/ The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is

also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off

breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off

breach) would be presented.

Domestic MLT debt

Avg. real interest rate on new borrowing


Avg. grace period

Domestic short-term debt

Avg. real interest rate

* Note: The public DSA allows for domestic financing to cover the additional financing needs generated by the shocks under

the stress tests in the public DSA. Default terms of marginal debt are based on baseline 10-year projections.

External MLT debt

Avg. nominal interest rate on new borrowing in USD


Avg. grace period

Terms of marginal debt

Figure 2. Nepal: Indicators of Public Debt Under Alternative Scenarios, 2019-2029

Borrowing Assumptions for Stress Tests*

Shares of marginal debt

0

20

40

60

80

100

120

140

160

2019 2021 2023 2025 2027 2029

PV of Debt-to-Revenue Ratio

Most extreme shock is Growth

0

10

20

30

40

50

60

2019 2021 2023 2025 2027 2029


0

5

10

15

20

25

2019 2021 2023 2025 2027 2029

Debt Service-to-Revenue Ratio


PV of Debt-to-GDP Ratio

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