The World Bank INTERIM Strategy...

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INTERIMStrategy

NoteFoRNePALJune 2011

July 2009

The World BankNepal OfficeP.O. Box 798Yak and Yeti Hotel ComplexDurbar MargKathmandu, Nepal Tel.: 4226792, 4226793Fax: 4225112

Websites www.worldbank.org.np, www.bishwabank.org.np

Public Information Center1st Floor, West WingLal Durbar Convention CenterYak and Yeti Hotel Complex, Durbar Marg, Kathmandu, NEPALTel: (+9771) 4268195, 4249731, 4238545, Fax: (+9771) 4238546Email: [email protected]

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INTERIM Strategy Note FoR NePAL July 2009 TO June 2011

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INTERIM Strategy Note FoR NePAL | 2

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Nepal’s development agenda is closely intertwined with its peace building agenda. While hostilities have ceased, Nepal is still seeking to secure a robust peace. The Comprehensive Peace Agreement broadly defines key success criteria for achieving peace and development in Nepal, among others, as: (i) ending discrimination of all kinds; (ii) state restructuring and enhancing the state’s accountability to citizens, people’s empowerment, provision of fundamental rights and access to basic services; and (iii) better governance, including economic and social rights, transparency and anti-corruption.

This joint IDA-IFC Interim Strategy Note (ISN) was prepared under the guidance of Susan Goldmark, IDA Country Director, and Per Kjellerhaug, IFC Country Manager, by a team led by Philip O’Keefe, Task Team Leader (TTL) and Roshan Bajracharya, co-TTL. The IFC team integral to the development of the ISN was led by Shamsher G. Singh, Head of Strategy and Coordination, Rita Bhagwati, Senior Econo-mist and Rajeev Gopal, Operations Officer. The ISN Core Team included: Myrna Alexander, Stephanie Borsboom, Daniel Boyce, Sean Bradley, Chris-tine Kimes, Rajashree Paralkar, Hisan Shishido, and Rajib Upadhya. Core team support was provided by: Kiran Gautam and Lalima Maskey.

The following country team members and other colleagues have also made important contributions to the draft strategy: Gayatri Acharya, Rajendra Dhoj Joshi, Vikram Menon, Bigyan Pradhan, Tashi Tenz-ing, from IDA; Neeraj Gupta, Roger Handberg, Shaun Mann, Bradford Roberts, Rajesh Sinha, Nilesh Srivastava from IFC; and Edward Bell (consultant). The team also acknowledges the contribution and guidance received from the IDA-IFC Secretariat led by Nigel Twose and including Deepa Chakrapani and Vyajayanti Desai.

Special thanks are extended to the Government of Nepal counterpart team and World Bank Group development partners for their contributions.

Design:WordScape, 5521865, Kathmandu

Cover Photo: Hari Maharjan, ECS Media

Printer:Jagadamba Press, Kathmandu

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The last Country Assistance Strategy for Nepal (Report No. 26509-NEP) was discussed on November 18, 2003 and Interim Strategy Note was discussed on January 22, 2007

Currency and EquivalentsCurrency Unit = Nepali Rupee (NRs.)US$1 = NRs. 79.78 (as of May 5, 2009)

Fiscal YearNepal: July 16–July 15 (fiscal year starting on July 15, 2008 is designated as FY08/09)World Bank: July 1–June 30 (fiscal year starting on July 1, 2008 is designated as FY09)

IDA IFCWB Vice President/IFC Regional Director Isabel Guerrero Paolo M. Martelli

Country Director/Country Manager Susan Goldmark Per Kjellerhaug

Task Team Leader Philip O’Keefe Rita Bhagwati

Co-Task Team Leader Roshan Bajracharya Rajeev Gopal

INTERIMStrategyNoteFoRNePAL

Nepal is a country at crossroads, an “open moment” in its history. The key challenges facing Nepal at this juncture are to rebuild the legitimacy of the state, sustain the peace, maintain law and order, and deliver benefits to those traditionally excluded and to society at large.


Nepal presents a range of diversities which contribute to a rich cultural fabric but create challenges for state building. The country has huge ethnic and linguistic diversity and wide discrepancies in social and economic standing depending on geographic location, ethnicity, caste and gender.

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AAA Analytical and Advisory Activities

ADB Asian Development Bank

AGEI Adolescent Girls’ Employment Initiative

AIDS Acquired Immunodeficiency Syndrome

BOD Board of Directors

CA Constituent Assembly

CAE Country Assistance Evaluation

CAS Country Assistance Strategy

CDD Community Driven Development

CEA Country Environmental Analysis

CMU Country Management Unit

CPA Comprehensive Peace Agreement

CPAR Country Procurement Assessment Report

DFID Department for International Development

DPC Development Policy Credits

e-GOP e-Government Procurement

ESMAP Energy Sector Management Assistance Program

FY Fiscal Year

GAAP Governance Accountability Action Plan

GAC Governance & Anti-Corruption

GDP Gross Domestic Product

GEF Global Environment Facility

GFDRR Global Facility for Disaster Reduction & Recovery

GON Government of Nepal

GPF Governance Partnership Facility

GTEF Global Trade Finance Program

HIV Human Immunodeficiency Virus

ICA Investment Climate Assessment

ICRP Investment Climate Reform Program

ICT Information Communication Technology

IDA International Development Association

IEG Independent Evaluation Group

IFC International Finance Corporation

IFMIS Integrated Financial Management Information Systems

IMF International Monetary Fund

IMR Infant Mortality Rate

ISN Interim Strategy Note

JICA Japan International Cooperation Agency

LGCDP Local Government and Community Development Project

M & E Monitoring & Evaluation

MDG(s) Millennium Development Goal(s)

MOF Ministry of Finance

NC Nepali Congress

NDF Nepal Development Forum

NDSP National Development Strategy Paper

NLSS Nepal Living Standards Survey

NLTA Non-Lending Technical Assistance

NPC National Planning Commission

OECD Organization for Economic Cooperation & Development

PAF Poverty Alleviation Fund

PEFA Public Expenditure & Financial Accountability

PEM Public Expenditure Management

PER Public Expenditure Review

PFM Public Financial Management

PIC Public Information Center

PLA People’s Liberation Army

PPMO Public Procurement Monitoring Office

PPP Public Private Partnership

PRGF Poverty Reduction & Growth Facility

PSIA Poverty and Social Impact Analysis

PSM Public Sector Management

RTI Right to Information

SAWI South Asia Water Initiative

SEDF Small Enterprise Development Facility

SEZ Special Economic Zone

SIL Specific Investment Loan

SMC(s) School Management Committee(s)

SME Small and Medium Enterprises

SWAp(s) Sector wide Approach(es)

TA Technical Assistance

UCPN-M Unified Communist Party of Nepal - Maoist

UK United Kingdom

UML Unified Marxist Leninist

UNDP United Nations Development Programme

USA United States of America

WBG World Bank Group

ABBREVIATIONS AND ACRONYMS

ExECUTIVE SUMMARY 12

MOTIVATING THE INTERIM STRATEGY 18

A. COUNTRY CONTExT 22

(a) Political and Security Developments 23

(b) Economic Background 24

(c) Poverty and Social Development 31

B. GOVERNMENT OF NEPAL’S EMERGING DEVELOPMENT STRATEGY 32

C. THE BANK GROUP INTERIM STRATEGY 36

(a) Proposed Approach of the Strategy 38

(b) Principles Underlying the Strategy 38

(c) The Overarching Goal and Proposed Pillars of the Interim Strategy 41

(d) Proposed WBG Program and Instruments 64

D. ISN PROCESS 74

TABLES

Table 1: Indicators of Macroeconomic Performance, FY 04-08 26

Table 2: Selected Social Indicators for mid-1990s and 2000s, Various Years 29

BOxES

Box 1: The Pressing Challenges in the Tarai 25

Box 2: Nepal Development Strategy Paper and Growth Assumptions 28

Box 3: Community Service Delivery of School Education - a Unique Nepalese Tradition 31

Box 4: Observations from the Previous CAS/ISN Implementation 39

Box 5: Proposed ‘Peace Filter’ for Bank Group Operations in Nepal 43

TABLE OF CONTENTS

APPENDICES

Appendix I Debt Sustainability Analysis 78

Appendix II Donor Mapping at Sector Level 90

Appendix III Governance and Risks Assessment 92

Appendix IV IEG – Country Assistance Evaluation 95

Appendix V Summary of CAS Consultations 98

Appendix VI Country Financing Parameters 100

ANNExES

Annex A1: Key Economic & Program Indicators – Change from Last ISN 102

Annex A2: Nepal at a Glance 103

Annex B2: Selected Indicators of Bank Portfolio Performance and Management 107

Annex B3: IDA Indicative Program Summary 108

Annex B3: IFC and MIGA Program Summary 109

Annex B4: Indicative Non-lending Activities – IDA 110

Annex B4: Indicative Non-lending Activities – IFC 111

Annex B5: Poverty and Social Development Indicators 112

Annex B6: Key Economic Indicators 113

Annex B7: Key Exposure Indicators 114

Annex B8: Status of Bank Group Operations and Grants 115

Annex B8: Statement of IFC’s Held and Disbursed Portfolio 116

Annex B9: ISN Results Framework 117


While stable macroeconomic management and modest growth over the past decade are to Nepal’s credit, this performance underscores the opportunity costs that conflict imposed on the economy. Nepal has fallen behind its neighbors on many fronts.

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ExECUTIVESUMMARY


i. Nepal is a country at a crossroads, an “open moment”

in its history. Nepal’s decade-long conflict formally ended in

November 2006. In 2008, the country voted in a Constituent

Assembly (CA), named a President, elected a Prime Minister,

formed a coalition government, and set about the task of

writing a new constitution by 2010, with a new round of

elections planned for 2011. It also abolished the monarchy

and declared Nepal a federal democratic republic, vastly

altering administrative and decision-making powers. Over the

next two years, the country will continue to confront long-

standing development challenges at a time of global economic

downturn. The challenges of the transition were highlighted

on May 4, 2009, with the resignation of the Prime Minister,

which is expected to result in a period of heightened political

uncertainty. The former Prime Minister, however, will head a

caretaker government until political realignments stabilize and

a new government is formed. The key challenges facing a new

Government at this juncture are to rebuild the legitimacy of the

state, sustain the peace, maintain law and order, and deliver

benefits to those traditionally excluded and to society at large.

ii. Nepal is one of the poorest countries in the world,

averaging GDP per capita of US$470, with adverse —

though improving — social indicators. There are wide

discrepancies depending on geographic location, ethnicity,

caste and gender. Nevertheless, progress on social indicators

in the last decade and more has been impressive: the

poverty rate and gap fell sharply, and a number of MDG

indicators improved markedly. However, inequality increased

sharply. Prudent fiscal management was pursued and

the economy grew moderately despite the conflict. Nepal

has been able to retain much of its basic infrastructure,

functioning bureaucracy and service delivery mechanisms.

iii. Significant challenges remain. A new government

needs to be formed, and the law and order situation remains

difficult, with continued regional, ethnic and political

tensions. By 2007, remittances approached 25 percent of

GDP, making Nepal vulnerable to a reversal which could fuel

unrest. So far, all indicators are holding up. Nevertheless,

the impact of the global crisis may hurt exports, tourist

arrivals and remittances. So, even though Nepal has

many strengths, the pace and severity of crisis witnessed

elsewhere in the world — combined with Nepal’s already

fragile situation — strongly caution against complacency.

Draft National Development Strategy and the World Bank Group’s response

iv. Nepal’s development agenda is closely intertwined

with peace building. The Maoist coalition Government

produced a draft of its development strategy for the next

three years. This was built upon the previous government’s

Three Year Interim Plan which expires in July 2010. The

draft strategy contains a strong emphasis on spurring

investment, job creation and growth, while reducing

ExECUTIVE SUMMARY

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inequality and exclusion. Consistent with the previous plan,

the draft highlights investments in power, roads, education,

health, water supply and local development, and improved

social protection. Agriculture, rural finance and rural

institutions also play a significant role in the strategy.

v. Given the transitional nature of Nepal’s current

situation, with a new government to be formed, a

new constitution being drafted and elections for the

federal state expected in 2011, the Bank Group has

prepared an Interim Strategy Note (ISN) covering FY10

and 11. This joint IDA-IFC strategy aims to leverage Bank

and IFC resources and realize synergies. It builds on the

areas which have shown to be robust and to modalities of

implementation tailored to Nepalese traditions. Further, we

are also taking on board the lessons of working in countries

in post-conflict situations: to be modest and to keep it

simple. The strategy will improve our project’s sensitivity

to the root causes of the conflict and social tensions by

adopting a “peace filter”. In addition, we are prepared to

respond to possible effects of the global downturn and/or

sustained political fragility.

vi. The overarching goal is promoting the complementary

processes of pursuing peace and development. During

consultations with the Government, donors and civil society,

three thematic pillars emerged supporting that goal. Cutting

across these pillars is the unifying goal to help Nepal to

consolidate peace, the essential underpinning of development

and poverty reduction. Social inclusion runs across all of

these themes as one of the foundations for the new Nepal.

vii. The three intertwined pillars of the joint IDA-IFC strategy

are: (i) promoting capable state structures and systems and

fostering accountable institutions which addresses the cluster

of challenges in adapting and constructing the public systems,

institutions and capacities needed for the new Nepal; (ii)

laying the foundation for sustainable, inclusive and equitable

economic growth which focuses on over-coming constraints

in the productive sector in terms of job-creation, productivity,

connectivity and sustainability; and (iii) enhancing equitable

access to the benefits of growth, services and social inclusion

which concentrates on expanding and honing social programs

to increase opportunities and wellbeing, especially for the poor

and excluded.

Proposed Bank Group Program

viii. IDA: Nepal can benefit from an IDA15 allocation of

SDR488.8 million along with trust funds supporting global

and regional initiatives. The ISN covers last two years of

IDA15 (FY10-11) with the overall indicative envelope of

SDR332.3 million, with the average annual allocation of

about SDR166 million. IDA’s indicative lending program

Nepalis have shown remarkable resilience throughout their history. Thus, this is a period not only of risk but also great opportunity.


ExECUTIVE SUMMARY

Nepal’s traditional social relations marginalized many of its diverse social groups and a clear mandate exists for greater inclusion of all citizens in the “new Nepal”. Citizenship defined in terms of both rights and responsibilities — based on full inclusion of Nepal’s diverse social groups in political, economic and social life — can become a solid basis for national unity.

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envisages about four to five new operations per year that

would entail investment operations — some on the basis of

sector-wide approaches. A proposed series of Development

Policy Credit (DPCs) to address critical policy constraints

would only proceed if the triggers for such lending are

met. IDA’s lending program would be complemented with

non-lending services, adapted to Nepal’s expectations

of just-in-time advice and taking a more programmatic

approach. Consistent with the recommendation of the

recently completed Country Assistance Evaluation, we have

maintained flexibility in the proposed strategy which will

allow us to respond quickly to the changing circumstances

in the country. This includes possibility of project redesign

during supervision when this is required to achieve results.

ix. IFC: IFC expects to expand its exposure in Nepal

by potentially committing US$15-20 million on

average annually, depending on the availability of viable

investments and improvements envisaged in the business

climate. IFC’s investment program will be accompanied

by technical and advisory services in areas including

infrastructure, financial markets, improving the business

climate and capacity building. Most of these commitments

will potentially be in infrastructure (mainly hydropower)

and the financial sector. In addition, IFC will facilitate trade

by partnering with Nepalese banks under its Trade Finance

program and support projects that have a positive foreign

exchange impact in sectors such as tourism, airlines and

agribusiness exports.

x. Portfolio Management and Monitoring Results: Weak

governance and security risks make implementation

even more challenging at this juncture. A comprehensive

risk assessment, including governance and anti-corruption

(GAC)-related risks, was used to help design the proposed

strategy and to make portfolio management and business

processes more sensitive to those risks. The strategy includes

a partial results framework in keeping within the ISN’s

two-year timeframe that identifies key actions, processes

and intermediate outputs, more than indicators of specific

outcomes.

xi. Aid Management and Donor Harmonization: Thirty

eight donors operate in Nepal. Although the IMF’s last

program with Nepal ended in 2007, the Government may

consider renewed support. The challenge for donors is to

transition from scattered donor projects and programs outside

Government to harmonized delivery through Government

systems and institutions. However, Government needs to

strengthen its capacity to manage resources efficiently

with greater focus on results. Joint portfolio reviews occur

with the Government and include action plans to improve

performance. Sector-wide approaches are operating in the

health and education sectors, and are planned for rural roads,

rural water supply and sanitation, and possibly agriculture.

xii. The Decentralized Kathmandu Office: The Bank Group’s

presence in Nepal has increased substantially since the

end of conflict. The IFC re-opened its office, co-located

with the Bank, in 2008 and there has been an increase in

international and Nepalese staff based in Kathmandu. One

of the lessons of working in post-conflict countries is that

the Bank tended to have insufficient numbers of staff on

the ground. This had been the case in Nepal. Already, the

impacts on the timeliness and diversity of policy engagement

have been noted by the Government of Nepal (GON) and other

development partners in a number of cases.

xiii. Mitigating Risks: The Bank Group faces substantial

risks working in Nepal, but it is also a time of enormous

opportunity. The proposed strategy attempts to take

those risks into account, both in design and modalities of

implementation. Nevertheless, not all of the significant

political, social and economic risks facing Nepal can be

mitigated, and the ISN proposes approaches to the portfolio

in the event of more acute and/or sustained economic and

political difficulty. At the same time, Nepalis have shown

remarkable resilience throughout their history. Thus, this

is a period not only of risk but also great opportunity.

While many of the political, economic and social transitions

outlined in this ISN will not be completed in a two-year

period, the directions which are set and the progress made

in the coming years will be critical to these processes.


Despite the very real challenges, Nepal’s transitions present opportunities to move to the goal of a “New Nepal”.

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MOTIVATING THE INTERIM STRATEGY1. Nepal is a country at a cross-roads, an “open mo-ment” in its history, that if properly managed can change the nation. Over the next two years, the country

will continue to confront long-standing development chal-

lenges at a time of global economic downturn and in the

face of political uncertainties. Recent events suggest that

the coming period will be critical as a new government

is expected to be formed and political alignments stabi-

lize. The key challenge for the new Government will be

to rebuild the legitimacy of the state, sustain the peace,

maintain law and order, and deliver tangible benefits to

those traditionally excluded and to society at large. It

will be undertaking several difficult transitions at the

same time. Despite the very real challenges, together the

transitions present an opportunity to move to the goal of

a “new Nepal” which is stable and peaceful, inclusive of

all its citizens, prosperous and accountable to its people.

INTERIMStrategy

NoteFoRNePAL


The transitions include:• Moving from conflict to peace. While hostilities have

ceased, Nepal is still seeking to secure a robust peace. Con-

solidating peace remains the overarching priority for the coun-

try. Ongoing violence, regional tensions, civil disturbance and

considerable political fragility slow the consolidation of the

peace and create risks of escalation. At the same time, Nepal

did not have a typical conflict period collapse. The basic

administrative systems of the state continued to function dur-

ing conflict, growth slowed but remained mildly positive, and

progress on key social indicators and access to basic services

did occur. Policies to build a robust peace underpin develop-

mental policies, and successful implementation of develop-

mental policies will help to build sustainable peace.

• Defining the new republican Nepali state and “rules of

the game” in the post-monarchy era. Traditionally, Nepal

has had feudal political relations, with power concentrated

among certain social groups and geographically in the Kath-

mandu Valley. The conflict, the popular uprisings of Jana

Andolan II in 2006 and the 2008 election results provided a

mandate for changing the political dispensation and power

structures that was unimaginable only a short time ago.

While important steps have been taken — such as agree-

ment by all parties on a “federal” republic — recent events

indicate that defining the new state in the constitution will

present major challenges for building consensus across party,

regional, ethnic and social lines.

• Transforming social and economic relations. Nepal’s

traditional social relations marginalized many of its diverse

social groups and a clear mandate exists for greater

inclusion of all citizens in the “new Nepal”. The oppor-

tunity and challenge in light of this mandate is to create

a notion of shared citizenship which moves away from

traditional patronage politics and results in competing and

multiplying demands. Citizenship defined in terms of both

rights and responsibilities — based on full inclusion of Ne-

pal’s diverse social groups in political, economic and social

life — can become a solid basis for national unity.

2. None of the transitions underway in Nepal are

easy. The fact that the country faces them simultaneously

increases the challenges and associated risks. The situa-

tion is made even more difficult in the face of uncertainty

about the potential impacts of the global crisis on Nepal

and the timeframe over which such impacts are likely to

manifest. However, Nepalis have shown remarkable resil-

ience throughout their history. Thus, this is a period not

only of risk but also enormous opportunity. While many of

the transitions will not be completed in a two-year period,

the directions which are set and the progress made in the

coming years will be critical to these processes. In this

light, the preparation of the Bank Group’s Interim Strategy

Note (ISN) is timely.

MOTIVATING THE INTERIM STRATEGY


The social protection system in Nepal is characterized by fragmented interventions across different ministries and between the public and donor sectors. At the same time, enhanced emphasis has been placed on transfer programs to promote equity and protect the most vulnerable.

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The work of the Constituent Assembly in drafting a new constitution is expected to lead to dramatic changes to the state as it decentralizes. Ensuring the viability of new levels of government is a key element, as is making sure that the hierarchy of functions and responsibilities between the new layers of administration enhances service delivery, especially for the poor.


COUNTRYCONTExT

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(a) Political and Security Developments

3. A decade-long conflict between the forces of the Government of Nepal (GON) and the People’s Liberation Army (PLA) of the Unified Communist Party of Nepal-Maoist1 (UCPN-M) formally ended in November 2006 with the signing of the Comprehensive Peace Agreement (CPA). The armed conflict imposed a heavy toll in terms

of human suffering, with more than 14,000 killed, large

numbers displaced (with estimates ranging from around

25,000 to 100,000 people), and unknown numbers

wounded, tortured or “disappeared”. Major destruction of

social and economic infrastructure occurred, along with

further erosion of trust between the state (and its agents)

and the population at large, particularly where the fighting

was the worst.


4. Nepal’s progress since the end of the conflict

in maintaining peace and defining new political

arrangements has been significant, but is vulnerable

to setbacks, as recent events demonstrate. In 2008

the country made progress on several fronts: it voted in a

Constituent Assembly (CA), abolished a feudal monarchy,

named a President, elected a Prime Minister, formed a

coalition government, and set about the task of writing a

new constitution. The CA is by far the most diverse and

representative political body ever elected in Nepal. The

UCPN-M emerged as the biggest winner in the elections,

but fell short of a majority. Nepali Congress (NC), long the

dominant party, finished a distant second and formed the

opposition, while the Unified Marxist Leninist (UML) party

finished third and until very recently was part of the UCPN-

M-led coalition government, which also included Madhesi

parties. One of the CA’s first acts in May 2008 was to declare

Nepal a federal democratic republic. The Interim Constitution

gives the CA two years to 2010 (with no more than six

months extension) to deliver a new constitution. Political

parties have been cooperating to complete this complex

task, which will be followed by another round of elections in

2011. However, the resignation of the Prime Minister on May

4, 2009, and the attendant uncertainties as efforts are made

to form a new government, adds new dimensions to existing

challenges.

5. While the conflict has ended, the political and

security situation in the country remains challenging.

Key elements of the peace agreements are not being fully

addressed, and the political discourse around these issues

remains partisan. Three issues stand out as potential flash-

points for political discord. These are military integration

and the reform of the armed forces (with limited progress on

democratization and integration of the Nepal Army and the

People’s Liberation Army1); the role of and control over party-

affiliated youth groups (which have been intensifying their

tactics of violence and intimidation); and a surge in divisive

regional-cum-identity politics which also pose challenges to

state building and security. In the past two years, there has

been considerable unrest, mainly in the Tarai region (Box 1),

though also well beyond that, frequently bringing economic

activity to a standstill through rolling bandhs (strikes).

Government attempts to resolve this situation have been

unsuccessful. Finally, the political transition has created

opportunities for groups to mobilize support on the basis

of ethnic and caste identity, including Dalits and Janajatis.

Though several partners are advising on aspects of the

security sector, there appears to be little joint planning or

an agreed approach with the Government.

(b) Economic Background

6. The economy of Nepal has shown a great deal of

resilience, with modest growth averaging 3.35 percent

per annum realized from FY01/02 to FY07/08. This helped

social indicators to improve impressively.3 Prudent fiscal

management was pursued, notwithstanding strong pressure

for higher security spending (Table 1). As a result, when

peace arrived, growth rebounded to 4.7 percent in FY07/08.

This was also aided in part by good weather, the buoyant

regional setting and higher tourist arrivals, among other

factors.

7. During the conflict, the economy became increasingly

dependent on remittances from Nepalese workers

abroad, estimated as one-third of the working age male

population, or 3 to 4 million people. By 2007, remittances

from countries other than India exceeded US$2 billion

and, if estimated inflows from India are included, the

total approached 25 percent of GDP. These inflows kept

the economy afloat during difficult times. Remittances

contributed to higher consumption and spending on

education, housing and other real property investment. In

particular, half the reduction in poverty incidence noted

below is directly linked to remittances.

8. Some projections for FY08/09 put annual growth at

around 3.5 percent, less than the 4.7 percent achieved in

COUNTRY CONTExT


FY07-08. Besides the deteriorating economic environment,

growth in FY08/09 has been affected by floods during the

last monsoon season, poor rains this winter, and serious

power shortages across the entire country. Given the present

global uncertainties and labor unrest, growth for the next

two years or so will likely be less than what the Government

would like to see.4 On the fiscal side, projections for the

fiscal deficit in FY08/09 stand at about 4 percent of GDP,

in line with past performance. So far, FY08/09 has been a

banner year in terms of revenue collections, which have

jumped 34 percent largely reflecting the GON’s greater

collection efforts. At the same time, capital expenditures

have fallen by 17 percent, reflecting the learning curve that

the new GON was undergoing in managing its development

program. Because of the cash build-up, the GON suspended

its borrowing program for the last six months of the current

fiscal year. At the same time, Nepal’s balance of payments

continues to be in surplus, despite its chronic trade deficit,

thanks to remittances which have continued to increase to

date. Foreign exchange reserves remain ample — equivalent

to about nine months of imports. The banking system,

while underdeveloped, is sizeable relative to some other

countries in South Asia, with about one-third of deposits in

two large public banks. The past three years have seen a

rapid expansion of financial institutions and credit fueled by

loose monetary conditions and aggressive lending by smaller,

newer banks. Non-performing, politically motivated lending

and willful defaulters, along with weak regulation and

compliance, underscore the vulnerabilities of the system and

the need for continued strengthening of the financial sector.

9. While stable macroeconomic management and modest

growth over the past decade are to Nepal’s credit, this

performance underscores the opportunity costs that

conflict imposed on the economy. Nepal has fallen behind

its neighbors on many fronts. Domestic investment during

the past ten years has been low as compared to the 1990s.

This is particularly evident for public sector investment,

which was typically about 5-6 percent of GDP in the 2000s,

two percentage points less than in the 1990s. Private sector

investment fell quite sharply as the conflict expanded, but

has rebounded somewhat. Private investment increased two

percentage points of GDP in FY07/08, reaching around 18

percent of GDP, although there is concern that this might

have helped fuel a real estate price bubble. The structure of

the economy has shifted gradually over the conflict period:

agriculture now stands at about 33 percent of the economy

(down from 38 percent), industry at about 16 percent (down

from 20 percent), and services have grown to 51 percent.

The Tarai, the densely populated southern plains of Nepal, is where much of the country’s industry has traditionally been located. Twenty two districts make up the Tarai, which occupies 17 percent of Nepal’s land area and is home to nearly 48 percent of the total population. Because of migration from the hill regions and the porous border with India, the Tarai now has an extremely heterogeneous and complex population, the majority of which are Madhesi (who officially account for 31.2 percent of Nepal’s population), but with people of hill origin making up over one-third of the Tarai population. Apart from mainstream Madhesi political parties and representatives of other ethnic and linguistic groupings in the Tarai representing diverse interests (e.g. Tharus), armed groups have proliferated in the past two years, adding to the sense of lawlessness and impunity pervading parts of the country. The declared interest of some of these groups is to take control of the region, its resources, and associated political and economic power. While some of these groups are funded largely through extortion and derive their strength through intimidation, they also draw on long-standing feelings of exclusion from decisions made in Kathmandu. Violence has caused government administration to shrink back to district headquarters and civil servants and businessmen to fear living in or visiting affected areas. There is dan-ger that tensions between diverse political and social groups in the Tarai could deteriorate. If that occurs, the damage to Nepal’s main trading routes, invest-ment and livelihoods could be far worse than during the “People’s War” which was largely concentrated in Nepal’s hill regions.

The Pressing Challenges in the TaraiBox 1


This mirrors what has been happening in the labor force, and

the urban-rural shares of population: the rural population

has dropped to about 80 percent from 84 percent of the

total. Nepal continues to rank poorly on measures such as

“Doing Business”, and largely missed benefiting from the

robust growth of its two neighbors, India and China.

10. The dependence on remittances has made Nepal

increasingly vulnerable to the adverse impact of the

current global financial crisis. As Nepal is largely isolated

from international financial markets, the direct impact of

the crisis so far has been minimal.5 Nevertheless, indirect

negative effects are expected on export proceeds, tourist

arrivals and remittances, which could affect the balance of

payments, local consumption, savings and investment and

the overall fiscal position. Tighter liquidity, falling collateral

value and increased defaults could also potentially impact

the financial sector. Among these risks, a significant drop

in remittances would be the most serious. Not only are

remittances the country’s single largest source of foreign

exchange — with exports at only 7 percent of GDP — they

are a major source of income spent on consumer goods

(often imported), services such as health and education,

and investment in housing and small businesses. Cutting

COUNTRY CONTExT

Indicators of the Macroeconomic Performance, FY04-08

Annual Data Period Average FY04 FY05 FY06 FY07 FY08 FY95-99 FY02-06 FY07-FY09 FY04 Economic Growth:GDP Growth (Real) 4.7 3.1 3.7 3.2 4.7 3.9 3.1 3.9Per Capita GDP Growth (Real) 2.5 1.1 1.8 1.2 2.6 1.4 1.0 1.9

Government Finances:Government Revenue Growth 10.9 14.4 1.3 21.4 22.6 13.9 8.3 22.0Government Expenditure Growth 6.5 10.9 11.8 19.9 22.8 13.1 6.9 21.4Government Budget Balance/ GDP -2.9 -2.8 -3.8 -4.1 -4.0 -7.3 -3.5 -4.1

Balance of PaymentsExport Value Growth (in US$) 14.7 11.2 2.2 4.9 6.9 6.5 5.9Import Value Growth (in US$) 15.8 12.2 17.3 11.9 14.1 5.3 13.0Current Account Balance /GDP 2.7 2.0 2.2 0.5 1.2 -8.6 0.9Gross Foreign Exchange Reserves 8.2 7.4 7.6 7.5 7.0 7.3 7.3(In months of imports of goods and services)

Monetary dataBroad Money Growth 12.8 8.3 15.4 14.0 18.0 17.0 10.2 16.0Domestic Credit Growth 9.8 13.9 16.3 12.0 21.2 18.5 11.1 16.6

Inflation:Consumer Prices 4.0 4.5 8.0 6.4 8.0 8.0 4.8 7.2

memo: Nepal: Indicative External Debt Burden Indicators Indicative Threshold 2004/05 2005/06 2006/07 Projected Average (2007/08- 2027/28)NPV of debt, in percent of Exports 150.0 172.0 163.0 148.0 116.0 GDP 40.0 28.0 25.0 22.0 15.0 Revenue 250.0 213.0 211.0 163.0 114.0

Debt Services, in percent of Exports 20.0 9.0 9.0 11.0 7.0 Revenues 30.0 12.0 12.0 12.0 6.0

Table 1


During the conflict, the economy became increasingly dependent on remittances from Nepalese workers abroad. Remittances contributed to higher consumption and spending on education, housing and other real property investment. In particular, half the reduction in poverty incidence noted below is directly linked to remittances.

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The draft National Development Strategy Plan (FY10-12) aims to “bring about visible positive changes in the lives of com-mon people through lasting peace and promoting economic dynamism with distributive justice”. The overarching goal of draft NDSP is to promote the complementary process of pro-moting development and sustaining peace though inclusive growth and expanded services to the people.

To meet the expectations of its people, the draft NDSP aims for an ambitious target of 7 percent GDP growth in FY10, rising to 8.5 percent in FY12. To achieve this outcome, it assumes that with peace and political stability, higher and more efficient expenditures can be made in social sectors and economic infrastructure. It also assumes that the private investment climate will improve significantly, with changes in industrial policy and institutional reforms that include improved law and order and increased flexibility in labor markets. IPPs would start investing in the power sector as impediments to investment are removed. Also assumed is fairly expeditious recovery of India and the rest of the world from the global recession and good weather conditions that support agriculture. With expansion of economic and devel-

Nepal Development Strategy Paper and Growth AssumptionsBox 2

COUNTRY CONTExT

opment activities, revenue collection and aid absorption capacity are also expected to increase. If most of these assumptions — particularly regarding policy improvements and stability — are met, growth can reach or even exceed 5 percent annually in the medium term.

But the Government recognizes that downside risks are signifi-cant in the coming few years. The growth scenario is at risk given the global downturn that affects Nepal’s major trading partners and destination economies for Nepali migrant workers. Internal disturbances could continue in the run-up to the next election as the new constitution is drafted, and the investment climate may not improve if labor militancy and load shedding continue.

A more conservative range of scenarios during the ISN period is presented below, taking into consideration these risks and the current level of economic activity, the impact of global downturn on Nepal’s major trading partners and the limited ability of the economy to take advantage of India’s growth. The lower ends of the ranges are realistic projections for the coming years and are the basis of the framework for the ISN period.

WB National Development Historical estimates Strategy estimates av. Av.2002 2009 2012 1990s -2007 2008 2009 2010 2011 2012 (est) (Average)

GDP growth (real) 4.9 3.2 5.3 3.6 3.5-4.3 3.8-4.8 4-5.5 3.9 8.1GDP per capita (US $) 194 313 468 461 487 516 548 GDP Deflator 69 118 146.1 161.2 172.5 182.8 193.8 Inflation (CPI) 10 5 7.7 12.0 7.0 6.0 6.0 5As percent of GDP Fiscal Revenues 9.0 11.2 12.8 15.0 15.2 15.5 15.5 14.5 16.7Grants 1.7 2.1 2.8 3.0 3.0 3.0 3.4 4.0 5.1Total expenditures 16.4 15.0 17.6 18.3 19.1 20.4 21.5 22.5 25.6 Current Exp. 10.3 10.5 11.2 13.3 13.5 14.3 15.0 14.6 15.0 Capital Exp. 6.8 4.8 6.5 5.0 5.6 6.1 6.5 7.9 10.6Deficit before grants 7.4 3.9 4.8 3.3 3.9 4.9 6.0 8 8.9Deficit after grants 5.7 1.8 2.0 0.3 0.9 1.9 2.6 4 3.8Financing 5.7 1.79 2.03 0.28 0.90 1.90 2.60 4 3.7 Dom. (net,incl.adj.) 2.3 0.4 0.6 (0.6) 0.4 0.9 1.1 2.6 1.7 External (net) 3.4 1.4 1.4 0.4 0.5 1.0 1.5 1.4 2


off this lifeline could have a serious impact on growth and

the ability of vulnerable groups to make ends meet. The

discontent of the unemployed, combined with returning

workers facing poor employment prospects in Nepal, might

spill over to an already delicate social situation. The risk of

further deterioration of law and order would only exacerbate

the weak investment climate, worsening the overall

situation.

11. Still, Nepal has a number of strengths as it manages

its economy over the next two years. The nature of Nepal’s

exports and its tourism sector, combined with available

data on remittances to this point, suggest that the impacts

on Nepal are likely to be gradual.6 To date, remittances,

tourist and export flows are maintaining the 2008 levels

although, in the case of remittances, it is too early to

say if recent inflows represent one-time repatriation of

savings.7 The balance of payments position now appears

manageable, as falling remittances are likely to feed into

lower demand for imports (and could even help cool an

overheated property market). Moreover, Nepal’s debt levels

are low by international standards, and its fiscal situation,

albeit fragile, benefits from impressive revenue growth and

liberal aid availability (80 percent of capital expenditure and

28 percent of the total budget). This ought to give Nepal

some room to run a counter-cyclical policy. Finally, despite

the conflict, Nepal retains much of the basic infrastructure,

functioning bureaucracy and local service delivery

mechanisms to meet many of the economic challenges for

inclusive growth. These are assets on which it can build.

Nonetheless, the pace and severity of the crisis witnessed

elsewhere in the developing world — combined with

Nepal’s fragile situation and the additional uncertainties

due to recent political developments — strongly caution

against complacency. Key indicators (in particular net labor

migration and remittances) require careful monitoring and

the Government and donors should develop contingency

plans. Box 2 discusses the country’s macroeconomic outlook

and challenges.

Selected Social Indicators for mid-1990s and 2000s, Various Years

Indicator Mid-1990s Latest availableHeadcount poverty rate 42% (1995-96) 31% (2003-04)Gini coefficient 34.2 (1995-96) 41.4 (2003-4) Net primary school enrollment 67.5% (1995) 89.1% (2007)Gender parity ratio in primary education 0.66 (1995) 0.96 (2007) Under 5 mortality rate (per 1000) 118 (1996) 61 (2006)IMR (per 1000 live births) 79 (1996) 48 (2006)Full immunization coverage 43% (1996) 83% (2006)

Table 2

Source: Nepal Poverty Assessment, 2006; DHS; and GON data.

The nature of Nepal’s exports and its tourism sector, combined with available data on remittances to this point, suggest that the impacts on Nepal are likely to be gradual.

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The structure of the economy has shifted gradually over the conflict period: agriculture now stands at about 33 percent of the economy (down from 38 percent), industry at about 16 percent (down from 20 percent), and services have grown to 51 percent. This mirrors what has been happening in the labor force, and the urban-rural shares of population: the rural population has dropped to about 80 percent from 84 percent of the total.

COUNTRY CONTExTKi

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(c) Poverty and Social Development

12. Nepal is one of the poorest countries in the world,

with GDP per capita of US$470, and with adverse, though

improving, social indicators.8 In 2007/08, it ranked

142nd in the world on the Human Development Index,

with life expectancy of 63 years and adult literacy at 63

percent for 2008.9 In addition to its poverty, the armed

conflict which ran from 1996 to 2006 imposed a heavy toll

in terms of human lives. Nepal also presents a range of

diversities which contribute to a rich cultural fabric but

create challenges for state building. These include diverse

topography of mountains, hills and plains, with some of

the most remote and inaccessible areas in the world. The

country has huge ethnic and linguistic diversity and wide

discrepancies in social and economic standing depending on

geographic location, ethnicity, caste and gender.

13. While Nepal remains a very poor country, progress

on a number of social indicators has been impressive,

especially in light of the conflict (Table 2). Between the

Until 1939, only two government schools delivered modern education in Nepal. The establishment of the first community school in 1940 marked the beginning of community initiatives in education. Every school established in Nepal from 1940 to 1971 was a community school. In 1971, the government replaced community-based boards of directors with government-appointed committees. The most glaring negative consequences of government management of schools were teacher absenteeism and a serious funding gap. Responding to extreme public dis-satisfaction with school quality, the Parliament in 2001 amended the Education Act, paving the way for the transfer of public schools back to community management. The cornerstone of the amendment

Community Service Delivery of School Education - a Unique Nepalese TraditionBox 3

was the formation of school management committees (SMCs) comprised of parents, thereby making SMCs accountable to parents. SMCs have wide ranging pow-ers that include hiring teachers, mobilizing resources, power to approve budgets and all expenditure deci-sions. In 2002, the government announced a program of voluntary transfer of schools to communities with an assurance that it would continue to provide financial and technical assistance. To date, communities man-age over 20 percent of schools with the support of the donor community, including IDA, under an ongoing SWAp. Community management has benefits which include increased levels of resource mobilization, com-munity monitoring, community participation in school activities and greater commitment of teachers.

mid-1990s and mid-2000s, the poverty rate and gap fell

sharply,10 and MDG indicators such as primary enrollment,

educational gender parity, under-5 mortality, infant mortality

(IMR) and immunization coverage improved markedly.

However, some of these successes create new challenges,

such as meeting the “bulge” of children entering secondary

education, and some old problems (in particular, high

malnutrition rates among children) remain. Inequality has

risen to the highest level in South Asia and presents a major

challenge to contain and, if possible, reverse.

14. A distinctive feature of basic service delivery in

Nepal is the importance of community involvement. To

some extent this was always present in the absence of the

state in remote regions. Community involvement in service

delivery is increasingly evident in recent years in education,

health care, rural water and sanitation, micro-hydro and

community forestry. While in some areas the spread of

community management was accelerated by the challenges for

Government during the conflict, in sectors such as education

it built on a long tradition of community involvement (Box 3).


Nepal has embarked on the long road to reducing the risks of weak governance and systemic corruption by strengthening the country’s overarching governance framework and institutional capacity. Long-lasting peace also hinges on progress in these areas.

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GOVERNMENT OF NEPAL’S EMERGING DEVELOPMENT STRATEGY

INTERIMStrategy

NoteFoRNePAL


15. Nepal’s development agenda is closely intertwined

with its peace building agenda. The CPA broadly defines

key success criteria for achieving peace and development

in Nepal, among others, as: (i) ending discrimination of

all kinds; (ii) state restructuring and enhancing the state’s

accountability to citizens, people’s empowerment, provision

of fundamental rights and access to basic services; and (iii)

better governance, including economic and social rights,

transparency and anti-corruption. The theme of change is

one that the voters of Nepal have clearly endorsed, but what

this entails — and the constraints to be overcome — re-

main uncertain. The high hopes of the population create

challenges for policymakers in terms of expectations on the

scope, depth and timetable for change.

16. The Maoist coalition Government prepared a draft

development strategy built on the foundations of the

Three Year Interim Plan prepared by the previous seven

party coalition Government. The vision is to build a

peaceful, prosperous and just new Nepal. The Government

initiated preparation of this three-year National Develop-

ment Strategy Paper (NDSP) in November 2008. The idea

was to build on the existing Three-Year Interim Plan (which

ends in FY09/10), extending it to FY11/12. A draft strategy

was shared with the donor community in April 2009 for

comments.11 The National Planning Commission Vice Chair-

man drove the NDSP process, with technical teams focusing

on the macro framework, economic policies, social sectors,

infrastructure and governance. The NDSP will be further

reviewed and refined after the new government is formed. A

Nepal Development Forum is expected to be held sometime

thereafter.

17. The draft NDSP outlines GON’s approach to peace

and development in the country. It elaborates on the

peace building agenda and the mutually reinforcing linkages

between peace and development. The overarching vision

of the draft NDSP is a peaceful, prosperous and integrated

Nepal, which assures both efficiency and distributive justice

to its citizens. To this end, the objective of the draft NDSP

is “...to bring visible positive changes in the lives of com-

mon people through lasting peace, and promoting economic

dynamism with distributive justice”. The NDSP draft notes

that it builds on the Three-Year Interim Plan, the Interim

Constitution of Nepal and the Millennium Development Goals

(MDGs). In pursuing the vision and objectives, the draft

NDSP outlines the following priorities which reflect a high

degree of convergence with those in the Three Year Plan:

• Pursuing employment-oriented and broad-based high

economic growth.

• Improved governance and service delivery systems.

• Investment in infrastructural development (physical,

social and economic).

• Social development.

• Inclusive development and targeted programs.

• Sustainable peace building.

• Harnessing international cooperation and regional

economic prosperity for national development (including

trade integration and foreign direct investment).

18. In addition to these strategic priorities, the draft

NDSP identifies a number of more specific “major thrust

areas” which received wider support during NDSP consul-

tations. These include:

• Agricultural transformation, with a focus on commercial-

ization of agriculture and food and nutritional security.

• Specific infrastructure focus on hydropower, irrigation,

roads and airports, tourism, information and commu-

nications technology, institutional infrastructure and

reforms in trade and investment policies.

• Empowerment of the population in governance and

judicial reforms, and service delivery by governmental,

non-governmental and private sector actors.

• Emphasis on basic social services, notably basic and

secondary education, health services, and water and

sanitation.

GOVERNMENT OF NEPAL’S EMERGING DEVELOPMENT STRATEGY


• Emphasis on social security and inclusion, especially for

vulnerable groups such as disabled people, women, the

elderly and marginalized social groups, as well as com-

mitment to including such groups in the public sector

and developmental programs.

19. As is appropriate given Nepal’s recent history,

peace building receives special attention in the current

version of the NDSP. The draft NDSP notes that its peace

and development strategies are “intertwined in a holistic

and comprehensive framework of peace and development

so as to ensure synergies between the opposite faces of

the same coin”. The priorities under the peace building

pillar of the draft NDSP therefore reflect a mix of policies

and directions which are directly related to deepening the

peace process, and others which reflect broader objectives

of social harmony and equitable development, with an eye

towards promoting socio-economic conditions conducive

to avoiding future conflict. The measures specific to the

peace process include: delivering on the commitments under

the peace process, in particular the CPA; supporting peace

building institutions (including local ones), strategies and

processes; relief, rehabilitation, reconciliation and reintegra-

tion of conflict-affected persons; security sector reforms;

cantonment management; and transitional justice. The

broader “conflict prevention” priorities include: promoting

employment through public works; inclusive and democratic

state restructuring; having a “pro-peace” constitution; and

addressing socio-economic disparities in both spatial terms

and across social groups. The political developments of May

2009 highlight the importance of the peace agenda but also

the ongoing challenges and complexities that it involves.

The theme of change is one that the voters of Nepal have clearly endorsed, but what that entails — and the constraints to be overcome — remain uncertain.

Sanu

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Dummy Text: Nepal’s traditional social relations marginalized many of its diverse social groups and a clear mandate exists for greater inclusion of all citizens in the “new Nepal”.

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THE BANK GROUP INTERIM STRATEGY

INTERIMStrategy

NoteFoRNePAL


(a) Proposed Approach of the Strategy

20. In light of the transitions currently underway

in Nepal, we propose to present an Interim Strategy

covering FY10 and FY11.12 The ongoing peace process is

still fragile, with many milestones yet to be met and risks of

further setbacks; the political transition will not be complete

until approval of a new constitution in 2010/11 and fresh

elections in 2011; the new Government to be formed after

elections will need time to translate its vision for the new

Nepal into specific policies and programs that the World

Bank Group could support. The current global economic

crisis adds further uncertainty. An Interim Strategy will

thus help the Bank Group and the Government exercise the

flexibility needed to deal with these uncertainties and lay

the basis for a full Country Assistance Strategy (CAS). As a

contingency in light of the electoral cycle, we are including

in this ISN a tentative outline of a FY12 program. This has

the added advantage of synchronizing with the three-year

planning horizon used by Government and the rest of the

donor community. This ISN follows the first Interim Strategy

for FY07-09 and the last CAS for FY04-06.13 The proposed

ISN reflects considerable continuity with both the last CAS

and ISN, emphasizing the areas of strength but suggesting

more flexibility to respond to opportunities and challenges

(see Box 4 and Appendix IV on the findings of Independent

Evaluation Group’s Country Assistance Evaluation).

21. We are also taking on board the lessons of working

in countries in post-conflict situations. The first lesson

is to be modest in terms of outcomes. While Nepalis have

demonstrated strong resilience, the current transition

is demanding on all actors in society. These demands

would only increase if Nepal were to confront at the same

time a significant economic downturn. We will focus on

fundamentals and step-by-step change, as Nepal’s capacities

will be stretched and could be diverted from long-term

development to immediate needs should the peace progress

falter and/or the impact of the global crisis manifest itself

in a sharp downturn. The second lesson is the need to

be sensitive to the root causes of the conflict and social

tensions. Some actors may value peace and stability over

efficiency and equity, while others may take advantage of

the transition to press for their own interests. This may

make structural reforms more difficult. The third lesson is to

remain flexible and open to changes in the lending program

as well as restructuring projects in response to evolving

circumstances. Analytical work must also be designed to

be timely and responsive to rapidly evolving needs. While

the above lessons are crucial, in many policy areas the Bank

Group can continue to share global experiences, help lay the

foundations for state building, and continue to help improve

basic service delivery for Nepal’s poor.

22. Nepal has been selected as a Bank Group-wide pilot

country for a fully integrated and enhanced joint strategy

which leverages Bank and IFC resources and realizes

synergies. Building upon the co-location of the IFC and

Bank offices, the past year has seen greater collaboration

and interaction between the Bank and IFC in Nepal,

particularly in financial markets, infrastructure and business

enabling environment. In preparing this joint strategy,

IFC and Bank staff held sector-specific consultations and

jointly participated in drafting and reviews. In addition,

private sector consultations led by IFC in Kathmandu were

coordinated with the Bank team and IFC advised on the joint

donor consultation agenda. Such interactions, supported

by the IDA-IFC Secretariat, are to continue during ISN

implementation.

(b) Principles Underlying the Strategy

23. In light of the above challenges the Bank Group’s

strategy should:

• Be driven by and aligned with country priorities. In

addition to grounding its thematic and operational



The Independent Evaluation Group (IEG) has prepared a Country Assistance Evaluation (CAE) to be discussed with the Committee for Development Effectiveness in May 2009. The CAE examines whether: (a) the objectives of Bank assistance were relevant; (b) the Bank’s assistance program was effectively designed and consistent with its objectives; and (c) the Bank’s program achieved its objectives and had a substantial impact on the country’s development during this period.14 During the period covered (FY03-08), IEG considers that the goals of the Bank assistance program remained broadly aligned with the 2003 PRSP: improving governance and development effectiveness by bringing resources to grassroots levels, but with increased emphasis on growth and inclusion.

While recognizing that Nepal’s considerable political turmoil and changes had a major impact on CAS implementation during the period under review, one of the CAE’s conclusions is that little progress was made against CAS stated objectives in two of the four main strategic themes — achieving broad based growth and good governance. This was partly because specifi c objectives under these two pillars are considered by IEG to have been unrealistic and overly ambitious given country circumstances. on the other hand, IEG’s evaluation concludes that some progress was made in social inclusion, especially with regard to mainstreaming inclusion in sector projects and, to a lesser extent, achieving greater diversity in the civil service. IDA’s program was most relevant and successful in social development, particularly in improving and expanding health services, signifi cantly increasing access to basic education, and increasing access to safe drinking water in rural areas. In addition, even in those pillars showing less progress in meeting objectives, there were some notable achievements despite the very diffi cult country circumstances.

Based on these experiences and in light of the challenges ahead, IEG believes that IDA should

Observations from the Previous CAS/ISN ImplementationBox 4

inject more realism into future country strategy and program design, retaining fl exibility to adjust to changing country circumstances and consulting widely with national stakeholders and development partners throughout program design and implementation. In terms of sectors and instruments, the CAE recommends: making agriculture and rural development the centerpiece of the assistance program; establishing a mechanism to track the impact of the PAF on poverty and social inclusion (and adjusting its design as needed to optimize the benefi ts to the poor and socially excluded); and continuing support for public fi nance management and other institutional reforms through policy-based lending, if feasible, or through sectoral SWAps which have proven successful in health and education.

Regarding IFC’s operations in Nepal, the IEG notes that as the political and security situation deteriorated in 1999, IFC withdrew its local fi eld presence and had very limited activities from 1999-2006. IFC’s inability to develop successful investment projects through much of the decade can be largely attributed to the diffi cult investment environment. Since 2006, IFC’s gradual re-engagement in Nepal has resulted in two GTFP investments, an investment in a domestic airline, a pipeline of investment projects in the fi nancial sector, and a constructive dialogue with the government on business enabling environment issues. This approach of cautious re-engagement has the potential for replication in other post-confl ict countries.


While Nepal remains a very poor country, progress on a number of social indicators has been impressive, especially in light of the conflict. However, some of these successes create new challenges, such as meeting the “bulge” of children entering secondary education, and some old problems remain, in particular high malnutrition rates among children.

THE BANK GROUP INTERIM STRATEGYH

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priorities in the Three Year Interim Plan and draft

NDSP, the strategy has followed a participatory process

to ensure that the alignment with country priorities

reflects a representative spectrum of views in Nepali

society. Joint consultations with ADB and DFID in

three regions of the country and Kathmandu gathered

the inputs of a wide range of civil society actors into

the strategy development process. An ongoing client

perception survey will also contribute to framing

how we implement the strategy. An overarching

element of the strategy is to be fully supportive of the

consolidation of peace in Nepal, which is the sine qua

non of stability and development.

• Beharmonizedandcoordinatedwiththesupport

provided by other development partners using common

management arrangements where feasible. For the ISN,

joint strategy consultations have been undertaken with

ADB and DFID. In addition, the Ministry of Finance is

completing a mapping exercise of donor support in all

sectors to provide the basis for discussions on how to

increase complementarity and selectivity across donor

programs. To provide an improved framework for aid

effectiveness, the Ministry of Finance has prepared a draft

new foreign aid policy inspired by the Paris Principles

and commitments made in Accra and Doha. An action

plan on aid effectiveness has also been developed and its

implementation will be monitored during the ISN period.

• Build on the Bank’s and IFC’s areas of comparative

advantage and capture synergies. Because of the strong

presence of other development partners and because of

our own capacity constraints, the Bank and IFC have to be

selective in Nepal, based on our strengths and areas where

we have the human and financial resources to deliver.

• Retain a degree of modesty, consistent with the country

and global environment and timeframe of the ISN. Given

the multiple uncertainties, the ISN should not propose an

overly ambitious program. Activities will concentrate on

areas where the Bank Group has demonstrated strengths

and a cautious “one step at a time” approach in areas of

expanded or new engagement. In addition, the program

needs to have a “do no harm” approach which places

emphasis on the sensitivity to conflict.

• Be flexible to respond to the fluid situation and Nepal’s

evolving needs. This is especially so in light of the global

downturn and Nepal’s complex political situation and

points to the need for “just-in-time” responses. Careful

monitoring of the impact of the crisis on the country

should conditions worsen will be critical. The short-run

responsiveness of the program to the uncertain impacts

of the crisis is unusually important and underlines the

need for careful attention to governance, enhanced

portfolio monitoring and risk mitigation strategies.

(c) The Overarching Goal and Proposed Pillars of the Interim Strategy

24. Reflecting the above challenges and principles

of engagement, three thematic pillars have emerged

that support the overarching goal of pursuing the

complementary processes of consolidating peace and

promoting development. Consultations revealed a strong

consensus on the three themes and the relevance of the donor

community in helping Nepal address them. There is also a

demand for strategies and approaches that would function

regardless of the risks that the country faces in the next

few years. This recognizes that progress on Nepal’s main

transitions is hard to predict, even more so in light of the

recent political developments and the current global financial

crisis. Nepal’s main transitions could proceed steadily (albeit

at different speeds), they could stall, or there may even be

deterioration with external developments exacerbating local

conditions. The proposed ISN program aims to be durable and

robust to these eventualities. The broad stance of the Bank


Group’s approach, the proposed pillars and options - with

peace and readiness to respond with emergency support as

cross-cutting themes - are outlined below.

25. In designing the ISN program, we have focused on

strengthening the implementation and performance of

the current portfolio. The overall emphasis is on “keeping it

simple”. Firstly, this means having a solid core of the program

which either involves completing existing operations or

building on past areas of effective engagement. This should

enhance the robustness of the program to the uncertainties

in the present environment. Secondly, it means continuing

the emphasis on community-based operations, while opening

cautiously in other areas. With new or expanded areas of

engagement, the strategy is to start small and expand based

on a track record of performance. Thirdly, it means minimizing

the number of projects which may place high demands on

project implementation capacity and fiduciary systems.

26. We have also structured the ISN to be prepared for the

contingency of a significant decline in economic growth

arising from the current global crisis. It this were to happen,

it would likely be triggered by a significant decline in foreign

exchange earnings, especially from remittances, Nepal’s area

of greatest vulnerability. This would fuel falling consumption,

revenues and liquidity, weakening both the state’s capacity

to respond to the crisis and the financial sector’s ability to

counteract the negative impacts. The slowdown in economic

activity would have the dual effect of increasing poverty and

aggravating social tensions. Hence, in preparing the ISN, we

were conscious of the need to preempt if we can and respond in

case an emergency response is needed, identifying those areas

which are amenable to quick turn-around and quick impact.

Overarching Goal: Building a Peaceful, Prosperous and

Just New Nepal

27. Cutting across the ISN pillars is the unifying goal

of helping Nepal to consolidate peace, the essential

underpinning of development and poverty reduction.

IDA’s direct contribution to the peace process has been

the financing for compensation to conflict-affected groups

through a transparent process under the on-going Emergency

Peace Support project. The Bank would also support South-

South knowledge exchanges on peace building efforts with

countries such as South Africa and Rwanda. As well, sector

operations such as education, health, rural roads, irrigation

and water supply, could address some of the immediate

needs for reconstruction of damaged public facilities. Based

on our engagement to date, comparative advantage and

the current programs and plans of other partners, it is

proposed that IDA continue to be selective in engaging on

other aspects of direct peace building support.15 Equally,

IFC’s contribution toward peace building would be via the

second order effects of its focus on investment, improving

the business climate and job creation, and could come in the

future through linkages and community programs associated

with its advisory and investment activities. Neither IDA nor

IFC envisage direct support for security sector reform.

28. In order to ensure that the ISN contributes to peace

building in Nepal, there will be a structured effort to

make the portfolio more conflict sensitive, taking into

consideration the underlying causes as well as consequences

of conflict. IDA is committed to trying to ensure that

all new interventions “do no harm” and, where possible,

enhance peace building, job creation, and social inclusion.

This would be done through social risk analysis that would

identify: (i) at the strategy level, inconsistencies between

the choice of instrument and program and the macro- and

micro-level context analysis; (ii) at project design level,

issues relating to selection of beneficiaries and locations

and to the real or perceived interests of other (indirect)

stakeholders; and (iii) at project implementation level,

concerns relating to implementation arrangements and their

consequences on voice and participation, the selection and

competence of contracted partners, and the transparency of

decision-making.



29. A specific screening tool — or “peace filter” —

has been prepared and will be piloted in the coming

months for projects under preparation. It draws on best

practices of social mobilization and the extensive work by

the international community over the last 10-15 years,

including efforts by the Bank, on conflict. The peace filter

will help project teams to focus on a range of issues during

the preparation and implementation processes, including:

national and local level political dynamics; the security

situation in given areas of operation; transparency and

accountability in decision-making and resource use; and

inclusion, voice and benefit capture. In operationalizing

this tool, linkages will be made with other risk assessment

tools regarding governance, anti-corruption and fiduciary

risk assessment frameworks, as well as social mobilization

practices that promote inclusion. Since employment

generation is seen as a critical factor in maintaining social

stability, the peace filter would also track employment

effects in relevant projects. The approach of the proposed

peace filter is presented in Box 5 and is being piloted on a

sample of projects under preparation. Based on these pilots,

the filter will be refined.

The Strategy’s Three Pillars

30. Supporting the overarching goal of promoting peace

and development, the proposed strategy is organized

around the three interlocking themes that emerged

during consultations within the Bank Group and with

the Government, donor partners and civil society. These

The ISN proposes a peace filter tool for task teams to use in the selection, design and implementation of operations. The intention is to proactively seek opportunities to promote social harmony, build social capital and sustain and create jobs, as well as identify and mitigate potential sources of conflict. The filter identifies key conflict and political economy issues for task teams to consider early in project design, appraisal and supervision. The aim is to respond to those issues which: (i) are likely to affect project outcomes in the areas where benefits are being delivered; and (ii) may arise due to the project’s operating environment. In applying the filter, task teams will first disaggregate the different direct and ancillary benefits that will flow from the project and may be contested by different stakeholders. Against the backdrop of the project’s national and local context, the task teams will then identify who controls those benefits, the criteria on which they are allocated and how such information is circulated in the public domain. Teams would then integrate this information as appropriate into the risk identification worksheet developed during project preparation and appraisal. Mitigation actions to prevent harm and maximize positive impacts can then be prioritized and targeted accordingly.

Proposed ‘Peace Filter’ for Bank Group Operations in NepalBox 5

The first part of the filter, drawing on poverty and social impact analysis (PSIA) tools, identifies and qualifies direct and indirect project benefits. The second part helps task teams to better understand the national and local level environment in which projects will operate, and prompts them to seek information from internal and external sources. The final filter would provide guidance on where such information can be found in Nepal. The last set of questions focuses on the analysis of important direct and secondary benefits by the different beneficiaries, decision makers and other stakeholders in order to better identify the social dynamics around given aspects of the project as well as discuss any potential mechanisms to strengthen the positives.

The Nepal Country Management Unit is committed to supporting this conflict-sensitive approach to operations in the country. During the ISN period, a team with skills and knowledge in social and peace related areas of analysis should be available to support task teams to apply this filter, and, more importantly, assist in appropriate follow-up of operations during implementation.


are also consistent with priorities of the Three Year

Interim Plan. The first pillar addresses the cluster of

challenges facing the state in adapting and constructing

the systems, institutions and capacities needed for the

new Nepal. The second focuses on overcoming constraints

and bottlenecks faced by the productive sector, especially

in terms of productivity, connectivity and sustainability.

The third concentrates on expanding and honing programs

and activities that can increase opportunities and well-

being, especially for the poor and excluded. These three

pillars reinforce each other, with a more capable and

accountable state essential for building confidence and

policy predictability that then channels into an improved

business climate, which in turn generates employment and

demands for greater provision of public goods and services

by the state. Social inclusion runs across all of these themes

as one of the foundations for the new Nepal. Within each of

these pillars, the strategy identifies specific areas where the

Bank Group can make a difference.

Pillar 1: Promoting Capable State Structures and Systems and Fostering Accountable Institutions

31. The ISN period will be a crucial time for the country

as it moves towards sustaining peace and defining the

structure of a new federal state. Key political leaders

recognize that lasting peace depends on being able to

deliver tangible results, and that hinges on the effectiveness

of the state in delivering on its promises. In this period,

the country will seek to refine — and in some cases redefine

— public sector management systems and the institutional

framework and modalities for the interaction of the state

and its citizens. The Bank Group proposes to support

these processes through several channels, but with a clear

recognition of the need to focus on areas of comparative

advantage within an agenda that is very wide, contingent on

political consensus and where many development partners

are active.

32. In this light, the first pillar focuses on three

areas of engagement: (i) strengthening core public

sector management systems which are robust to eventual

decisions on the shape of the State; (ii) making selective

contributions on defining the institutional framework for

the new state, with a particular focus on decentralized

administration; and (iii) helping to articulate and

implement new “rules of the game”, including transparency,

accountability, and anti-corruption among key players,

including the private sector, and strengthening institutions

for regulation and governance. IDA will concentrate on

public institutions, while IFC will focus on corporate

governance in the private sector. IFC’s initial efforts

in raising corporate governance awareness in Nepal will

focus on the banking sector and on large founder-owned

firms. Improved corporate governance in the private

sector, followed by IFC investments, could be a powerful

demonstration to market leaders.

33. In consultations with the GON, development partners

and the country team, there is clear endorsement for

IDA remaining closely engaged on core public sector

management systems. This has been an area of strength

in IDA’s engagement to date and would include areas

such as public financial management (PFM) reform and

institutional strengthening, public procurement capacity

strengthening, core governance functions, and enhanced

monitoring and evaluation (M&E) systems. This support for

strengthening country systems would have added benefits

in terms of facilitating donor harmonization and enhancing

aid effectiveness (see para. 77). Consolidating and building

on past achievements in governance and public sector

management is seen by all players as a sine qua non for an

effective state and implementation of public policies. It is

therefore proposed to continue support through a mixture of

analytical and advisory activities (AAA) and policy dialogue.

The PFM agenda would also be a core element of the proposed



Growth alone is insufficient if Nepal is to realize its goal of building a society which offers opportunities and inclusion for all its citizens. Moreover, given the vulnerabilities of the Nepalese economy to the global economic downturn and the continuing risks of set-backs in the peace process, it is doubly important for there to be strong social services and livelihood opportunities, especially for the poor.

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Development Policy Credits (DPCs) if triggers for budgetary

support lending are met (see para. 68).

34. In the field of PFM/financial accountability,

numerous challenges need to be addressed. This proposed

program builds on the PFM review carried out in 2005 and

the Public Expenditure and Financial Accountability (PEFA)

Action Plan which benchmarks Nepal’s performance in the

areas of fiscal discipline, strategic allocation of resources,

efficiency, transparency and accountable management of

public finances. That benchmarking showed that Nepal

was particularly lagging in managing payment arrears,

tax collections and the effectiveness of both internal and

external audits. A recent assessment of public sector

accounting and auditing further revealed the need to

accelerate movement towards internationally accepted

accounting and auditing standards. IDA will continue

to work closely with the Government and development

partners to consolidate achievements and prioritize actions

year by year. This includes sustaining technical support

on basic budgeting and treasury functions; outreach

and consensus building on the need for these reforms

among public and civil society stakeholders; leveraging

information technologies such as Integrated Financial

Management Information Systems (IFMIS); strengthening

the audit function of the Auditor General; and moving from

rules-based to principles-based accounting in line with

international standards. The ISN will also support a sound

institutional development plan and strengthen performance

monitoring. This will be supported through ongoing PEFA

Action Plan Implementation AAA and could be included in

the proposed DPCs.

35. In the area of public procurement, legal reforms

have been enacted but institutional capacity needs to

be further strengthened. Continuing reforms in public

procurement is a challenging task, as it requires concerted

efforts at all levels. In order to address these challenges,

IDA will work closely with the Government and development

partners to improve procurement performance, including

strengthening the capacity of the Public Procurement

Monitoring Office (PPMO) to implement the new procurement

law (developed with past IDA support), implementing

e-government procurement (e-GOP) systems, helping to

establish procurement performance monitoring indicators as

agreed in the PEFA action plan, and supporting movement

towards full alignment of the procurement law with

international standards. To this end, a joint Government-

donor review team has developed recommendations to

enforce a more effective procurement system in terms of

both policy and implementation, and IDA is committed

to implement the recommendations. IDA’s procurement

engagement is being supported through an Institutional

Development Fund (IDF) grant, and could be further

supported through PEFA Action Plan Implementation

AAA and inclusion in a DPC program. Finally, one of the

growing concerns is that public procurement processes are

being undermined at times by acts of intimidation to deter

competition. This could affect donor willingness to provide

resources through Government systems.

36. In addition to supporting core public sector

management, the ISN proposes to engage selectively on

the framework for effective decentralized administration

and service delivery. The work of the Constituent

Assembly in drafting a new constitution is expected to

lead to dramatic changes to the state as it decentralizes.

Ensuring the viability of new levels of government is

a key element, as is making sure that the hierarchy of

functions and responsibilities between the new layers of

administration enhances service delivery, especially for

the poor. This is particularly important in a country which

has a long tradition of community management and where

the capacities of local bodies — where they exist — were

weakened during the conflict. The CA has requested that

IDA contribute to the consultative process by providing

advice and analytical work on fiscal federalism, building

on the above work on public financial management and



global knowledge. This would center on fiscal transfers,

equalization (horizontal and vertical), expenditure and

revenue assignment, and the economic viability of federal

states. The Bank team proposes to produce a series of

notes and workshops under a Fiscal Federalism AAA funded

by the Governance Partnership Facility (GPF) (see para.

37). Complementary to the Bank’s support for community-

driven development (CDD), we would engage in a dialogue

on the role of local governing bodies, which is being

coordinated by the GON through the Local Governance and

Community Development Program (LGCDP). A proposed

Local Governance Study under the GPF or other trust fund

would help to further define options for what could be an

appropriate engagement for IDA.

37. The broader governance and anti-corruption

agenda is also part of this focus on building the new

state. Rethinking the role of the state and its attendant

core institutions under the new constitution creates a

window of opportunity to strengthen Nepal’s governance

framework. Nepal presently rates relatively poorly

on governance measures, with corruption one of the

growing concerns. Anchoring this part of the proposed

strategy would be efforts to enhance transparency and

accountability, strengthen citizens’ voice and engagement,

promote performance-results based results management

and establish new “rules of the game”. The specific areas

in which IDA proposes to engage are: (i) advice and

assistance to promote and operationalize the potentially

powerful new Right to Information (RTI) Law. This would

include the “demand” side of promoting use of the RTI to

access information and the “supply” side of the capacity

of public agencies to be responsive to RTI requests; (ii)

support to strengthen social accountability mechanisms in

service delivery, including non-lending TA on demand side

approaches in Bank operations and country systems, and

technical advice, capacity building, and grant funding for

mainstreaming social accountability tools (e.g. citizens

score cards and social audits); and (iii) strengthening M&E

systems both at national level and sub-national levels,

including participatory approaches. The umbrella tool for

this engagement would be the recently-approved GPF for

implementation of governance and anti-corruption (GAC)

initiatives, with specific outputs in the identified areas such

as a Social Accountability Mainstreaming Review and Right

to Information Implementation Non-Lending TA. Enhanced

project supervision and use of tools such as technical audits

would complement this effort.

38. The interface of the state and the private sector is

a further important area of activity. In terms of the new

rules of the game, IDA and IFC would exploit their respective

comparative advantage. IFC would focus on corporate

governance and improvement in investment climate via

support for the Business Advisory Forum which will facilitate

public-private dialogue, while IDA would support regulatory

reform in banking and telecommunications, for example,

and the role of the Central Bank in banking supervision.

Possible reform of the Bankruptcy Law is another area for

IFC. IDA would also help the new Government develop a

framework for public-private partnerships (PPPs), and IFC

would provide support for PPP projects through transaction

advisory services and investment, once a functional PPP

policy framework is in place. Some of these themes could be

part of a possible series of DPCs.

Pillar 2: Laying the Foundation for Sustainable and Inclusive Economic Growth

39. As in any country, the key driver for sustainable

poverty reduction in Nepal is growth. In the case of

Nepal, this dimension has heightened importance because

of the sensitivity of sustaining peace to the generation of

tangible benefits for the population and risks of the global

crisis. As a result, the Bank will continue to monitor macro-

developments and to assess the economy’s vulnerabilities


A centerpiece of the country’s current strategy going forward is to transform the agriculture sector from subsistence based to commercial production as well as to reduce on-farm underemployment and increase more productive off-farm employment. The current thinking is to encourage high value commodities and programs to focus on market orientation and trade promotion.

THE BANK GROUP INTERIM STRATEGYRa

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particularly with respect to remittances and the financial

sector, and will engage with the new Government to examine

mitigation measures and contingency planning. Over

the longer term, with an improved global situation and

lasting peace, higher growth performance is feasible. This

will require renewed consumer and business confidence

and reductions in the costs of doing business. Actions are

needed on several fronts. The first is maintaining macro-

economic stability and increasing fiscal space for growth

and, second, improving the investment climate for private

sector-led growth through implementation of reforms that

remove structural and regulatory constraints, enhance

accountability, and increase policy predictability. However,

it should be stressed that a critical prerequisite for increased

private investment is an improvement in the law and order

situation in the country. On the fiscal front, on-going

non-lending TA is focused on preparation of a Medium-Term

Expenditure Framework and the centrality of the budget

as an instrument of policy. This will be enhanced by a

Public Expenditure Review (PER), with a focus on critical

sectors, including health, education and roads (including

maintenance).

40. Cognizant of the ISN’s two year coverage, IDA and

IFC will adopt a two-pronged approach under this pillar.

This entails helping to lay the foundations for achieving

higher growth and employment in the medium to long

term, and focusing immediate attention on enhancing

productivity. Nepal has considerable untapped potential for

long-term growth: its hydro-power and water resources are

vast and it is well positioned between two giant markets

— China and India. Numerous niche markets in agriculture

are still to be exploited. Tourism — with Nepal’s obvious

natural attractions — can also play an important role. But

new investments alone will not be enough. Our approach

will involve ensuring linkages between the ISN support

under Pillar One on the broad governance and state building

initiatives to activities under this pillar geared at alleviating

sector constraints. IFC’s support for the Business Advisory

Forum will be an important mechanism to build that linkage.

Towards this end, the Bank Group will focus on the following

areas:

41. Agriculture and Irrigation: Inclusive growth will

require raising agriculture productivity and expanding

off-farm employment. A centerpiece of the country’s

current strategy going forward is to transform the agriculture

sector from subsistence based to commercial production as

well as to reduce on-farm underemployment and increase

more productive off-farm employment. The current thinking

is to encourage high value commodities and programs to

focus on market orientation and trade promotion. IDA did

not have an active lending program in Nepal during the

last ISN period, but is now re-engaging with the proposed

Agriculture Commercialization and Trade Project. At the same

time, there are opportunities in a variety of commodities

with potential for niche market exports (e.g., tea, ginger,

cardamom, specialty coffees, honey, non-timber products,

horticulture, and off-season vegetables) which could be

explored by IFC. While direct investment opportunities in

Nepalese agribusiness companies are limited due to size,

IFC will look to support agribusiness growth through two

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distinct investment strategies. As a means to increase

the financing flows, it will consider wholesale financing

relationships with local commercial banks to increase

lending. In addition, IFC will invest in funds focused on

agribusiness. It has recently invested in two funds, India

Agri Fund which supports agribusiness and investments

in the South Asia region, and IFC SME Ventures, a global

initiative which can provide direct financing as well as

advisory assistance to small agribusiness players in Nepal

for which IFC direct financing may not be available. IFC’s

agribusiness advisory services can complement the work

done by IDA and other donors via investment climate and

business enabling environment work. IFC will also explore

support to IDA’s agriculture commercialization project with

technical assistance and investments through the IFC SME

Venture Fund. For IDA, this entails possible investment

in programs that improve access to agricultural inputs —

including expansion of irrigation coverage, extension and

knowledge, and access to market towns. The two past

coalition governments have asked for support to address

the wide gap in uptake of improved technologies by

farmers required to raise productivity, and this is expected

to remain a priority. IDA will provide analytical support

within a broader policy engagement as part of a non-

lending Revitalizing Agriculture TA. These interventions

and associated policy dialogue with the GON and donors

could lead to a programmatic and coordinated support to

the sector, possibly through a sector wide approach, down

the road. To date, IDA’s focus in irrigation has been mostly

on rehabilitation of farmer-managed irrigation schemes

in the hills and the Tarai. The ISN proposes to continue

the existing irrigation operation and also help to develop

medium irrigation systems through a proposed Small and

Medium Sized Irrigation Project. However, this is contingent

upon improved performance of the ongoing small-scale

irrigation project.

42. Infrastructure and Connectivity: Years of under-

investment in infrastructure are partly responsible

for current levels of low economic development. This

has happened across the board — in power, roads,

other transport and telecommunications. Improving and

expanding access is important to reducing the cost of doing

business, enhancing productivity, and improving access to

markets and information. Investment in infrastructure is

one of the areas in which the synergies between IFC and

IDA are particularly strong. IFC would need to have a solid

policy framework in place before it could support PPPs,

and thus IFC’s operations would be determined based on

progress in establishing a PPP policy which would benefit

from non-lending TA and advice from IDA. Synergies are

also evident in planning for the long term. IDA could help

finance feasibility studies and project preparation and

studies to develop financially viable infrastructure projects,

and IFC, where feasible, could provide long-term limited

recourse financing to credible private sector sponsors and/

or transaction advisory services to government to expand

the private sector’s role in infrastructure. Key sectors

where such support may be targeted include power, roads,

renewable energy, information technology, airports and

airlines.

43. The negative impact of years of under-investment

is perhaps most highly visible in the power sector with

load shedding of up to 16 hours per day in the winter of

2008/2009. Twin actions are anticipated. First, on the

supply side, in order to support the GON’s policy to jumpstart

investment in power, IDA will continue to strengthen the

achievements of the on-going power sector portfolio through

investments in transmission, generation rehabilitation and

distribution strengthening. In the short term, emergency

additional financing is proposed for the Power Development

Project. The longer-term agenda, in which both IDA and

IFC will play a role, includes new medium-sized hydro-power

generation and associated transmission capacity to connect

Nepal to its neighbors for export of power. IDA would

likely keep its support to mid-size or smaller investments

under the proposed Mid-Sized Power Generation Project if



appropriate projects can be developed. IDA also initiated

an ESMAP-funded AAA on Removing Barriers in Hydropower.

Given the extreme shortage of power in Nepal, IFC’s foremost

strategic priority is to support hydropower development,

mainly hydropower generation across a range of project

sizes. IFC’s support for large hydro-projects, likely to

come up for financing only at the end of the ISN period,

will be dependent on progress in establishing cross-border

transmission lines to export power from Nepal to India

and other neighboring countries. In the near term, IFC

will consider financing expansions of existing hydropower

projects, which may be the fastest available response to the

power crisis. It is also studying early-stage opportunities

where IFC could partner with the private sector and finance

project preparation and studies to develop viable projects.

The downside risk will come from the private sector’s lack of

confidence in National Electricity Authority’s (NEA) capacity

to deliver on PPAs and a possibly difficult political situation

that deters private investment.

44. On the demand side, IDA is providing ESMAP-funded

TA to the NEA to identify and assess opportunities to

improve efficiency and quality of service, reduce peak

capacity deficits, and reduce costs of power supply through

implementation of demand side management measures.

Just-in-time advisory support is also being provided to help

design and launch the NEA 2009 Compact Florescent Lights

(CFL) Distribution Program which will ultimately target

installation of 450,000 of these lights for evening peak load

reduction. In turn, IFC is likely to pursue opportunities with

the private sector on energy efficiency, including an advisory

project with local banks on Sustainable Energy Finance, and

a possible Risk Sharing Facility with local banks to boost

energy-efficiency lending. The objective of the proposed

Advisory Services project is to improve the financial

performance of Nepalese industry by reducing energy costs

and, at the same time, reduce emissions of greenhouse

gases.

45. Constraints to connectivity and movement of people,

goods and services have been identified as root causes of

conflict and low growth. Given its mountainous geography

and land-linked position, transportation and communications

are vital sectors for Nepal. At present, Nepal has some of

the highest costs of trade reflecting both poor connectivity

and the lack of functioning trade agreements with its

neighbors. Removing barriers (e.g. restrictions on trucks,

customs procedures) and improving infrastructure would do

much to increase trade and investment. Exports currently

only account for 7 percent of GDP and Nepal has a low

density of road system (less than 100 km of road per

1000 square km of land area, as against almost 1600 km

in Bangladesh). The roads sector, one of the consistent

priorities of public policy over time, is an area in which IDA

and IFC can collaborate. This might be the case of strategic

roads, for example, depending on the evolution of PPPs. The

road sector presents challenges: while there is much to do

in this sector, there are substantial risks. These are being

addressed through close attention to sector governance,

including an on-going Road Construction Sector Analysis

Note which will inform planned risk mitigation measures

to ensure the quality of the current and future roads

portfolio. This should also provide a base for expanding

IDA investment in strategic roads under the proposed

Roads Sector Development Additional Financing, which

would facilitate road links to district headquarters and

serve as trunk routes for planned districts roads expansion

to link rural markets to production centers. This, plus an

assessment done through the peace filter mechanism, should

also provide a basis for undertaking the proposed Rural

Access Improvement and Decentralization Project Additional

Financing.

46. Assistance for emerging towns requires further dialogue

to elaborate what this would entail beyond marketing and

transportation links. This will be done under the Emerging

Towns Programmatic AAA, which will inform a possible


Emerging Towns Project. In other areas of connectivity,

IFC has recently financed a domestic airline which helps

improve regional connectivity within Nepal, and could

expand its participation in the air transport sector through

advisory support to the GON on building airports outside

of Kathmandu and in supporting private airlines going into

India. IDA would not likely engage in this area. In the

area of telecommunications, we do not anticipate expanding

direct IDA support beyond the closing Telecommunications

Project which helped strengthen government regulatory

capacity, spectrum management and rural telephony.

However, an ongoing trust-funded Information Infrastructure

for Growth AAA would continue policy engagement, which

might be built on under possible DPCs.

47. Expanding Access to Finance. Access to financial

services remains limited for most people and small

businesses in Nepal, even though the banking system and

credit have expanded rapidly in recent years. Under the

ISN, IFC will take the lead to enhance access to finance

and increase financial inclusion, with IDA concentrating

its efforts on the continuation of central bank reform and

related regulatory issues of banking supervision under the

ongoing Financial Sector TA project. IFC’s program will

explore potential investment and advisory services for the

following: (i) institution building (supporting strong, well

managed SME-oriented commercial banks, infrastructure

related institutions, microfinance sector); (ii) developing

financial infrastructure (supporting modernization of a

credit information bureau, a secured transaction registry,

and — depending on demand from the new Government

— helping to develop payment and clearing systems, a

rating agency, and a central depository and automated

clearing in capital markets). IFC’s immediate impact

would come from working with the credit bureau and the

secured transaction registry that will be lodged within the

same unit, i.e., the Credit Information Bureau; (iii) using

technology and a Small and Medium Enterprise Survey

to expand banking into underserved rural areas; and (iv)

enhancing regional integration (trade finance facilities for

local banks). IFC’s potential investment in an infrastructure

related financing institution would not probably materialize

as strategic foreign investors refrain from investing during

the continuing global downturn. On the advisory side,

IFC’s Small Enterprise Development Facility (SEDF) will

complement investment projects where feasible and continue

to work with partner banks on credit review strategies for

SME lending. Finally, within the framework of building

regulatory reform mechanisms, SEDF is working to build

capacity of stakeholders to address micro-regulatory and

modernization issues.

48. Private sector-led employment. Peace is not

sustainable nor can the economy reach its potential if jobs

are not created within domestic borders. Private sector

development is critical for generating off-farm employment.

While recent figures are not available, as of 2003-04, Nepal

was characterized by moderate (low) unemployment rates in

urban (rural) areas, but by worryingly high underemployment

in rural areas (of around 20 percent) and among women in

urban areas. Some 500,000 youth enter the labor force each

year with low education completion rates, on the one hand,

and few places open for them to continue their education

at a higher level, on the other. While migration has been

an outlet for some 3-4 million Nepalis and a major source of

income, that door could close as the effects of the current

global economic crisis cause the receiving countries to

shed labor. These conditions only heighten the importance

of harnessing the energies of the private sector to create

well-paying jobs in the country. IFC’s contribution to

private sector growth comes through three channels: (i)

direct investments across agriculture, manufacturing and

services; (ii) working with the Bank to highlight constraints

to private sector investment (both domestic and external);

and (iii) improving the investment climate. Based on the

joint IDA-IFC Investment Climate Assessment (ICA), IFC will



Constraints to connectivity and movement of people, goods and services have been identified as root causes of conflict and low growth. Given its mountainous geography and land-linked position, transportation and communications are vital sectors for Nepal. At present, Nepal has some of the highest costs of trade reflecting both poor connectivity and the lack of functioning trade agreements with its neighbors.

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work with the Bank to engage the GON in advancing reforms

to streamline regulations for business entry, operation and

exit, rationalizing inspections and certification regimes,

accreditation for export markets, and simplifying the tax

regime. IFC’s Investment Climate Reform Project (ICRP)

which has started work with the Ministry of Industry on the

Special Economic Zone (SEZ) regime is planning to engage

the GON on regulatory reform under the Business Advisory

Forum in 2009. The implementation of some reforms in

the near term, such as enactment of a reformed Special

Economic Zone Law, could have a significant impact on

attracting FDI and generating employment. In turn, IDA

will concentrate on the macro-framework, understanding the

sources of growth and the dynamics and options through

an ongoing Migration and Remittances Programmatic

AAA. It will also engage in a Jobs and Skills Development

Programmatic AAA and continue work on education. Beyond

that, the Adolescent Girls’ Employment (AGE) Initiative will

support a program to enhance school-to-work transition for

young women. The pilot is expected to provide an entry

point for more sustained engagement on youth employment

in coming years.

49. Water resource management, environment and

climate change. Nepal is the “water tower” of the Ganges

River Basin and yet its water resources remain largely

untapped, and its population highly vulnerable to water

hazards. The development and management of water

resources will not only support growth nationally, but will

also provide capacity to adapt to climate change in the

Ganges basin where impacts will likely manifest in increased

floods, droughts and glacier lake outbursts. With more

than 6,000 rivers, Nepal has immense water resource wealth

and a central role to play in regional water management.

The country’s terrain has the potential for world class,

multipurpose reservoirs and hydropower sites that could

generate 40,000-80,000 MW of power (now only 600MW

developed), as well as mitigate floods and provide irrigation.

But the country has negligible water storage infrastructure,

and its institutional capacity and information systems for

water management are weak. At this stage, we anticipate

continuing to work in irrigation, micro-hydro and rural water

supply. Nepal will also benefit from the recently initiated

regional work on interconnectedness of water resources.

Under the South Asia Water Initiative (SAWI), Nepal will

receive support to strengthen its national capacity for

water management, deepen understanding of Nepal’s role

in regional water dynamics, and explore opportunities for

water infrastructure investments in a trans-boundary basin

context. An important product is the hydro-economic

modeling of the Ganges River, which will be done for the first

time. This can help to lay the basis for further support down

the line, together with the Water Resources and Climate

Change AAA already initiated. Given the short timeframe

of the ISN, and the uncertainties of the transition and the

potential impacts of the global crisis, during the ISN period

activities will be launched to identify and establish the

pre-conditions for a large-scale water infrastructure project.

The activities will include technical assistance to help the


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Government update their river basin master plans so that

potential projects can be considered within a broader basin

context, and to improve the framework for resettlement and

benefit-sharing.

50. In addition, enhanced focus is needed on the

environment and climate change. Climate change is

likely to intensify the extreme hydrological variability and

monsoons which deliver about 80 percent of the annual

country’s rainfall in just three months. Devastating floods

routinely affect large, very poor populations (as seen in the

Koshi floods of 2008), with extreme low-flows felt across

the Ganges basin into Bangladesh. Nepal has been selected

as one of the countries for the Pilot Program for Climate

Resilience (PPCR) under the Climate Investment Fund (CIF).

PPCR funding will help to address strategically some of the

above-mentioned climate-related issues. In addition, IDA

will pursue dialogue on issues of environment and climate

change, including building on the findings of the Country

Environment Analysis (CEA) in areas such as the current

dialogue on environment monitoring. The CEA follow-up

is expected to focus on strategic environment and social

assessment of the hydropower sector and on solid waste

management in smaller towns. In addition, IDA would focus

on avoided deforestation which would be financed under the

Forestry Carbon Partnership Facility. Helping the country deal

with disasters — such as floods, but also earthquakes — is

part of the Bank’s continuing non-lending TA for disaster and

emergency management. IDA, in collaboration with the Global

Fund for Disaster Risk Reduction (GFDRR), will also explore the

possibility of project support to reduce disaster risks.

51. Tourism sector: Among Nepal’s sources of growth and

employment, tourism is both a historically important sector

and one the country is aiming to expand. Tourism accounts

for about 8 percent of foreign exchange earnings and 2008 was

one of the best years in recent times in terms of the number

of arrivals. The potential is there for expansion but, like many

private sector-led endeavors, the overall investment climate

and prevailing economic conditions are the determining factors

on when and how this sector could take off. The GON aims

to double tourism arrivals in the next two to three years,

particularly focusing on religious and regional markets, and to

see tourism revenues shared more equitably, with an emphasis

on sustainability and eco-tourism. But the present global

downturn could dampen demand especially from non-regional

visitors. Moreover, tourism in Nepal suffers from the absence

of a strategy, poor infrastructure and logistics, and a need

to strengthen spillovers to the rural poor. At this stage, the

main contribution by IDA and IFC would be by addressing

some of the overall constraints to private sector development,

in collaboration with DFID, which has been asked by the

Government to take the lead. For IDA, one of the specific links

to tourism is the proposed work on environmental sustainability

and conservation. The Bank will support the GON’s application

for a GEF grant to strengthen protected area management,

particularly for tiger habitats in a landscape approach. IFC

will also provide TA to support a program to implement locally

operated tourism portals for Nepal which will increase the share

of booking revenue to local hotels. The program expects to

include 50 Nepali hotels once it is operational.

Pillar 3: Enhancing equitable access to services and social inclusion

52. Growth alone is insufficient if Nepal is to realize

its goal of building a society which offers opportunities

and inclusion for all its citizens. Moreover, given the

vulnerabilities of the Nepalese economy to the global

economic downturn and the continuing risks of set-backs

in the peace process, it is doubly important for there to be

strong social services and livelihood opportunities, especially

for the poor. Supporting equitable access to basic social

services and livelihood opportunities and efforts to promote

social inclusion and sustainable social protection programs

are thus key elements of the strategy. The promotion of

basic service access and inclusion is also closely linked to

the country’s peace-building agenda, with improved services


Climate change is likely to intensify the extreme hydrological variability and monsoons which deliver about 80 percent of the annual country’s rainfall in just three months. Devastating floods routinely affect large, very poor populations with extreme low-flows felt across the Ganges basin into Bangladesh.


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Despite the conflict, Nepal has undertaken significant reforms in the education sector which have yielded some impressive results in areas such as primary enrollment and gender parity

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providing the tangible benefits of peace, particularly for

the rural poor, and to the needed response to an economic

downturn should that happen. Past outcomes and the

GON’s priority on inclusive development and human capital

suggest a strong continued role for the Bank in this area.

Coordinated efforts with DFID on addressing social inclusion

and increased efforts through trust funds to address social

accountability in our projects is part of this approach.

53. This pillar proposes to strengthen core diagnostics

and continue programs in sectors where we are already

engaged (education, health, rural water, micro-hydro

and poverty alleviation through community driven

development efforts). In addition, analytical work on social

protection will be pursued. In terms of empowerment of

communities and vulnerable groups, we propose to continue

the ongoing Poverty Alleviation Fund Project (PAF II) which

promotes grassroots livelihood and community infrastructure,

as well as engagement by local level institutions and bottom-

up accountability. The PAF is now sharing information so

that its projects are incorporated into district development

plans and many of the sub-projects are co-financed by local

governments. Early results from the impact evaluation indicate

that PAF is having a positive income effect on households and

communities. Increased engagement with local governments

and building their capacity for service delivery would be

important elements of the ongoing involvement through this

program. These activities would need to be coordinated with

and complementary to the local governance and community

development program. IFC is also exploring further support

for livelihood activities among the poor through helping

commercial and microfinance banks develop their SME/rural

lending strategies. The final element of the basic services

theme is deepening of the rural water program and continued

involvement in the micro-hydro sector and alternative energy

sources, as discussed below.

54. A common element across several of the areas

of engagement in this pillar is a strong role for

communities in service delivery. The role of communities

has proven to be remarkably robust throughout the

conflict. One of the important issues in the decentralization

discussions in the Constituent Assembly is how to sustain

the benefits of community involvement as formal local

administrative structures are created and/or assume new

roles. It is felt that the Bank has useful experience to offer

in terms of sustaining the strengths of community service

delivery and “bottom up” accountability. In the ISN period,

engagement through community-based operations and

dialogue is likely to be an important vehicle for contributing

to the debates on the appropriate roles of communities and

the state. In this light, the community focus of the current

and proposed portfolio is not only about service delivery but

also about the emerging governance structure of the country

and the compact between the state and its citizens. There

is, thus, a close linkage between the agenda under Pillar

Three and the broader governance and state-building support

under Pillar One.

55. Poverty diagnostics and monitoring: While progress

on poverty to 2003-04 was impressive, it is vital to obtain

an up-to-date insight on living standards, particularly in

light of the global crisis. The next round of the household

survey is overdue and the ISN proposes to support a new

Nepal Living Standards Survey (NLSS), and to follow with an

updated Poverty Assessment. This is however contingent on

receiving donor co-financing to fund the survey. In addition

to new data, this will continue the capacity enhancement of

the National Bureau of Statistics which was initiated with

the previous survey. Further progress on poverty monitoring

systems that capture dimensions of exclusion and gender

biases could be supported as part of the potential DPC

series, and the team will also remain aware of needs for

more rapid updates as the global crisis evolves.

56. Education: Despite the conflict, Nepal has undertaken

significant reforms in the education sector which have

yielded some impressive results in areas such as primary


enrollment and gender parity (see Table 2). These reforms

include: (a) the transfer of public schools to community

management; (b) government financing for unaided

community schools; (c) introduction of per capita financing

of schools; (d) opening of textbook printing and distribution

to the private sector; (e) decentralizing higher education,

along with introducing formula-based funding and cost

sharing; and (f) government financing for community

campuses. A number of these reforms have been supported

by a range of donors, including IDA, under the Second

Higher Education Project and Education for All (EFA) SWAp.

Assuming these reforms are maintained, the proposed School

Sector Reform SWAp operation would extend reforms to

cover the whole school sector and universal education to

grade 8, with a focus on quality, accreditation and means-

based financial assistance to students. The team also

proposes that education be included in the proposed Public

Expenditure Review as well as trust fund-financed analytical

work on governance and institutional risks, among other

topics.

57. Health: Significant progress on health outputs has

been achieved and some key outcomes have improved

markedly over time. The 2004 Nepal Health Strategy

aimed to increase access to and use of essential health

services, in particular for the underserved. The ongoing

Health Sector Program SWAp helped consolidate donor-

supported efforts behind the strategy, and increase public

expenditure levels and effectiveness through an emphasis

on basic health services. It also initiated decentralization

or deconcentration of management authority and

promoted PPPs. Although use of essential health care

services expanded across the board, the emphasis on the

inclusion agenda was more limited until recently, when the

constitutional right to health care was translated into a

policy of free essential health care. At the same time, much

remains to be done, with some health outcomes stubbornly

adverse (e.g. under 5 malnutrition stands at around


40 percent). Different dimensions of women’s health,

access to reproductive and family planning services, and

maternal services, along with HIV/AIDS, malaria and non-

communicable diseases, are also lagging. Specific targeted

interventions continue to be needed to address rapid disease

outbreaks. An example is IDA’s support under the on-going

Avian Flu Project which is addressing both animal and

human health components.

58. In collaboration with a broad range of partners, the

Ministry of Health has recently initiated the preparation

of its next sector strategy. Emphasizing inclusion and

equity, the government is expected to put renewed efforts

into decentralization, human resource management,

interaction of the public, private and community sectors in

health service delivery and governance. While maintaining

a strong focus on maternal and child health, it seeks

to address the health challenges noted above. The ISN

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Significant progress on health outputs has been achieved and some key outcomes have improved markedly over time. Although use of essential health care services expanded across the board, the emphasis on the inclusion agenda was more limited until recently.

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proposes to continue to support these efforts through a new

Health Sector SWAp and to engage in elements of the health

agenda such as HIV/AIDS. Analytical work in the areas of

non-communicable diseases and health sector governance is

also proposed to underpin this dialogue.

59. Social Protection: Nepal does not have a robust

safety net for the vast majority, beyond traditional informal

structures. The social protection system in Nepal is

characterized by fragmented interventions across different

ministries and between the public and donor sectors. At

the same time, enhanced emphasis has been placed on

transfer programs to promote equity and protect the most

vulnerable. Such programs are likely to be even more

important as the impacts of the global crisis are felt in

Nepal. National counterparts have identified the following

potential areas that could benefit from technical and

diagnostic advisory services: the overall vision and strategy

for the social protection system, support for implementation

of the planned public pension reform, consolidation and

improvement of targeting systems (in social protection and

beyond), improving delivery of flagship safety net programs

such as social allowances and public works, reforms of social

care services, and building M&E systems and the evidence

base in the sector. IDA is responding to these needs

through a Programmatic Social Protection AAA (building on

earlier analytical work on pensions) and through the safety

net component of the Emergency Food Crisis Project. The

team also proposes that social protection be a core element

of the policy framework for any budgetary support operations

during the ISN period and would be integrated within the

AAA work on skills and employment. If well-designed,

well-targeted and sustainable safety net programs are

identified, it might be possible to incorporate them within

an emergency response operation, in case such support

is required to address the negative impact of the global

economic downturn.

60. Rural Water Supply and Sanitation: Expanding

safe water and sanitation in rural areas will be crucial to

improving the living standards of the poor. The Government

estimates water supply coverage at about 77 percent and

sanitation coverage at 46 percent. Its goal is to raise those

levels over the coming years. However, 10 percent of

existing schemes reportedly need rehabilitation and more

than half need major repairs. The traditional approach to

service delivery, particularly in rural areas, was top-down

and contractor-led. Community involvement was minimal

and users had no ownership over the system, paying little

if anything towards operation and maintenance. Therefore,

under the ongoing Rural Water and Sanitation project, an

inclusive community driven approach has been adopted, to

encourage more robust service delivery with an emphasis

on accountability. Results show that community ownership

is yielding more sustainable water supply and sanitation

services, as they are operated and maintained by the

communities who play the lead role in their planning,

design and implementation. In collaboration with DFID,

UN, JICA, Finland and the ADB, we propose to support the

Government’s efforts to develop a framework for a rural

water and sanitation SWAp during this ISN period.

61. Micro-Hydro and other Energy Sources: Off-grid

rural modern energy and electrification programs have

been making a slow but steady contribution to economic

and human development in rural Nepal. Considering the

challenging operating environment of Nepal, this is a

significant achievement. Demand for electricity in rural

Nepal will continue to be very high for years to come, and

as part of the Bank’s wider energy sector engagement,

it is proposed to sustain the support to micro-hydro

village electrification schemes through the ongoing power

operation and the PAF, with a strong role for the community

in the planning, implementation and operation of these

schemes. To complement these micro-hydro schemes, IDA



Expanding safe water and sanitation in rural areas will be crucial to improving the living standards of the poor. Results show that community ownership is yielding more sustainable water supply and sanitation services, as they are operated and maintained by the communities who play the lead role in their planning, design and implementation.

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will request support from the Global Partnership on Output

Based Aid for the ongoing biogas program, which replaces

traditional sources of energy used by the rural populations

with modern biogas plants delivering clean energy to meet

cooking and lighting needs. Finally, to learn more about

how electrification affects rural families, we are carrying out

an ESMAP-financed AAA study on Social Impacts of Rural

Energy.

(d) Proposed WBG Program and Instruments

62. (a) IDA: In the near term, the Bank Group and

ADB are expected to be Nepal’s largest donors. Nepal’s

IDA15 allocation for FY09-FY11 is SDR488.8 million (about

US$782 million) against the IDA14 allocation of SDR324

million. The ISN covers last two years of IDA15 (FY10-11)

with the overall indicative envelope of SDR332.3 million,

with the average annual allocation of about SDR166 million.

FY10-11 allocations are indicative only and actual annual

allocations will depend on: (i) total IDA resources available,

(ii) the country’s performance rating; (iii) the performance

and assistance terms of other IDA borrowers; (iv) the terms

of IDA’s assistance to Nepal (grants or credits); and (v) the

number of IDA-eligible countries.16 Nepal’s performance has

recently been upgraded from “red” to “yellow” on account of

its improved debt sustainability position. This has allowed

for an increase in total resources for Nepal but also altered

the terms under IDA15 to 55 percent credit and 45 percent

grant (as against 100 percent IDA grant in FY08), but this

can change if the debt sustainability position changes.

63. (b) IFC: IFC’s committed exposure in Nepal is

US$37.5 million as of February 2009 in six projects

and US$7.2 million for the account of participants.

Infrastructure, mainly power generation and one airline

investment, accounts for 84 percent of the portfolio.

Because of the conflict, IFC was not active in Nepal over

the last few years; however, as the situation evolved,

IFC re-opened an office in Kathmandu in January 2008,

with the objective of scaling up both investment and

advisory operations. An Infrastructure Advisory Team was

also set up in New Delhi in 2007 to scale up provision of

infrastructure advisory services in the region, including

Nepal. Going forward, IFC expects to expand its exposure

in Nepal by potentially committing US$15-20 million on

average annually during the ISN, depending on political

stability, the availability of viable investments and

improvements envisaged to the business climate. IFC’s

investment program will be accompanied by complementary

technical assistance and advisory services in a range of areas

including infrastructure, financial markets, improving the

business climate and capacity building. Most commitments

potentially will be in infrastructure (mainly hydropower) and

the financial sector. In addition, IFC will facilitate trade

by partnering with Nepalese banks under its Global Trade

Finance Program (GTFP) and support projects that have a

positive foreign exchange impact in sectors such as tourism,

airlines and agri-business exports.

64. (c) Potential impact of the global economic crisis:

The previous sections outline how the Bank Group would

proceed if the global economic crisis does not have

acute impacts on Nepal. Four to five new operations per

year for IDA would be prepared, with one or two potential

investments per year expected for IFC. The program would

be paced, taking into account the demands of the current

transition on all actors, the step-by-step approach on the

governance front, the investment climate and the fragilities

of the peace process. For IDA, that would entail mainly

the extension of existing programs in health, education,

power and rural roads, often with the CDD focus that has

proven robust under conflict (Annex B3). There would be

an increased emphasis on agriculture and new areas, such

as emerging towns, would proceed on a programmatic

basis. The proposed series of DPCs that would address



Years of under-investment in infrastructure are partly responsible for current levels of low economic development. This has happened across the board — in power, roads, other transport and telecommunications. Improving and expanding access is important to reducing the cost of doing business, enhancing productivity, and improving access to markets and information

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critical policy constraints would only proceed if the triggers

for such lending are met. However, given that this is a

transition period in which a new government has still to be

formed, we need to adopt a flexible approach to respond to

opportunities and retreat when constraints inhibit effective

engagement.

65. If, instead, the impacts of the global economic

crisis on Nepal are more acute and/or sustained, an

alternative approach would reconfigure the IDA program

to emphasize quick, targeted actions that could help

the poor and vulnerable and preserve or create jobs to

cushion the effects of the crisis. Such an emergency

response would front load the program. It would retain the

emphasis on health and education which are vital and would

accelerate already planned programs and/or expand ongoing

programs to alleviate poverty and stimulate job creation.

This would be the case of support for labor intensive

programs such as rural roads and the PAF project. Another

jobs-related program could be modeled after the Emergency

Food Support operation which has been working successfully.

Under this scenario, the IDA would consider emergency

budget support, with a focus on the areas that have already

been identified as potential reform candidates as part of

DPCs (see para. 68). The acute economic crisis scenario

would have to be considered in light of other risks, including

that of a deteriorating political situation (see para. 85).

66. Under such a crisis scenario, IFC would also

reconfigure its approach. If the situation deteriorates, IFC

would focus more on advisory services. If Nepal’s corporate

sector were unable to raise both domestic and international

financing, IFC could step up its program of assistance, first

by focusing on the provision of liquidity and long-term

financing to its few existing strong and well-managed clients

on an “as-needed” basis. Second, IFC’s SME Venture Fund,

designed for quick disbursement, could increase its share

for Nepal to mitigate the reduced flow of credit and advice

to SMEs. Finally, IFC could also provide short term liquidity

support through senior loans and trade facilitation support

via the GTFP. IFC would also explore utilization of its global

crisis response initiatives such as the Bank Recapitalization

Fund.

67. (d) Range of Instruments: The proposed strategy

will be supported by a range of instruments for

engagement under both scenarios. Both IFC and IDA will

employ a combination of financing and technical, analytical

and advisory services. For IDA, lending will continue to

be predominantly in the form of Sector Investment Loans

(SILs). Some of this investment lending would be based on

sector-wide approaches (SWAps) in sectors where donors and

the Government agree on the policy and results framework

and how to work together collaboratively. In some cases,

there may be pooled resources, combined with IDA fiduciary

oversight. In other sectors, development partners may

agree on common management arrangements that rely on

enhanced fiduciary support such as use of procurement

agents. In line with the Bank’s commitment to increase

harmonization and improve aid effectiveness, we would like

to see SWAps play an increased role in the Nepal program.

Moving forward, we expect to work with the Government

and donors to define SWAp frameworks in rural water and

sanitation and for rural roads and trail bridges, in addition

to the existing ones for health and education. To ensure

that our engagement in program-based approaches is well

informed by analysis of sectoral risks, we propose to carry

out sector risk assessments with GPF funding for the health

sector, and possibly education, as well as for all future

sectors in which SWAps are to be adopted. IDA will closely

monitor performance of SWAps under the ISN, including

difficulties with procurement or reversal of reforms which

could endanger use of the pooling mechanism.

68. Based on GON’s request for budgetary support,

a series of programmatic Development Policy Credits

(DPCs) may form part of the IDA program. Reform triggers

for budgetary support include a stable macro/medium-term



Despite the conflict, Nepal retains much of the basic infrastructure, functioning bureaucracy and local service delivery mechanisms to meet many of the economic challenges for inclusive growth. These are assets on which it can build.

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fiscal framework and a clear development strategy. Any DPCs

would be single tranche operations, supporting completed

policy actions. So far, we have identified the following as

possible areas for reforms to be addressed within a DPC

series: (i) deepening implementation of the PSM agenda

with a focus on budget reforms, auditing and accounting

systems, accountability and other dimensions of PFM; (ii)

adopting and implementing a social protection strategy,

including areas relating to pension reform, targeting

mechanisms and M&E; (iii) continuing the strengthening

of banking sector regulations and compliance, secured

transactions, collateral registries, etc.; (iv) enhancing

private sector development and improving the investment

climate, including telecommunications regulation, spectrum

management, ICT, hydro-power licensing procedures,

other aspects of PPPs, etc.; and (v) improving overall

fiscal and macro-management, with particular emphasis

on effectiveness of public spending on areas such as road

maintenance and the social sectors, as informed by the PER.

These potential initiatives will require prior policy dialogue,

advice and AAA.

69. Continuing our analytical engagement is an essential

part of the proposed program, but during the ISN

consultations, national counterparts raised concerns about

the timeliness and utility of past non-lending assistance.

They expressed limited appetite for “big” Bank reports. At

the same time, the client and other partners clearly value the

rigor and scope of the Bank’s analytical work. The consensus

is to undertake more programmatic AAA which incorporates

a “just-in-time” response to client needs. This entails: (i)

initially scoping out the task and defining a range of issues

that the GON and we agree are important; (ii) carrying out

the analytical work in such a way that intermediate products,

including workshops, are produced as the work proceeds;

(iii) interacting with the client on a regular basis during the

course of the work; and (iv) packaging the intermediate and

final products into focused, accessible presentations and

workshops for policy makers, while preserving the full extent

and depth of the analysis for particular audiences. We have

moved towards this approach in FY09 and will continue it

during the ISN period. As the new Government articulates its

development vision, we expect substantial opportunities for

non-lending technical assistance.

70. The indicative non-lending program for IDA

presented in Annex B4 emphasizes areas which underpin

the wider program and/or provide diagnostics building

blocks for the next programming cycle. The listed program

is the “core” AAA program of tasks which are either ongoing

or core mandates and needs of the wider program that would

be financed by the Bank’s administrative budget. The NLSS

requires substantial trust fund resources to complete. In

addition, the team will mobilize trust funds for areas such

as analysis of education reforms, the health sector, disaster

risk management (under the GFDRR), the PPCR (the first

‘adaptation pilot’ of the Climate Investment Funds), and

other areas. A number of additional AAA tasks are either

ongoing or proposed, but are funded entirely from trust

funds and hence do not appear in this core list of AAA.

71. The IFC program in Nepal will seek to design and

implement coordinated programs (rather than projects)

particularly in environmentally friendly “green” infrastructure,

financial sector, agribusiness, climate change and business

enabling environment (Annex B4). This is aligned with the

three strategic pillars of IFC’s regional South Asia Strategy

which include: (a) improving economic inclusion through

increasing private sector investment in labor-intensive

and export-oriented industries, bridging the infrastructure

gap, improving access to finance for the underserved and

accelerating rural growth; (b) addressing climate change

through renewable energy investments and projects which

focus on clean energy; and (c) supporting regional integration

through intra-regional trade facilitation and investment.

72. Like IDA, IFC will support the pillars of the proposed

strategy through a mix of investment and advisory



services. IFC’s investment services currently include US

dollar loans, trade finance lines, and minority equity stake

in companies. IFC will continue to provide long-term and

counter-cyclical financing for companies that are unable to

access financing on appropriate terms. IFC’s additionality

in Nepal comes through providing longer tenor than that

available in the market, patient equity capital, global

and regional expertise and experience, and TA to enhance

areas such as corporate governance and management of

environmental and social risks. IFC will continue to respond

to client needs through initiatives such as IFC SME Ventures,

Infraventures, and transaction advice, as well as to crisis

situations through the Bank Recapitalization Fund. Local

currency debt financing is essential for companies and

sectors that generate local currency revenues. However, as

of now IFC does not have a local currency product, which

could pose a constraint in providing financing for large scale

infrastructure hydro-projects with revenues in local currency.

73. (e) Monitoring Performance and Results: Although

a formal results framework is not necessarily part of an

ISN,17 we have prepared a partial framework that reflects

Nepal’s circumstances. This framework anticipates modest

results, as the country is undergoing a major transformation

of its constitution, political structures and governmental

institutions. With only a two-year timeframe, the results

matrix (Annex B9) focuses on key actions, processes and

intermediate outputs. Only in areas with mature programs,

such as education, health, rural water supply and sanitation,

and rural roads, are we able to include outcome indicators.

Reflecting the substantial risks facing the Nepal program,

we have taken those risks into account in the results matrix,

providing an assessment of the likelihood of the milestones

and outcomes being realized.

74. We will also track progress by the country in meeting

its challenges. This includes the monitoring of Nepal’s

progress towards meeting the MDGs, as well as tracking

indicators under the IDA Results Measurement System.18

We will continue to monitor Nepal’s relative standing

in global surveys such as “Doing Business” and WBI’s

Governance Indicators. Project by project, we will endeavor

to enhance tracking and reporting with increased attention

to inclusion and job creation, to the extent that underlying

data permits, as part of the application of the peace filter

to new operations. The goal is to build the evidence base

and capacity for M&E more systematically for both Bank

operations and country-wide indicators.

75. (f) Portfolio Management: IDA’s Nepal portfolio

has faced challenges, but efforts are ongoing to enhance

portfolio quality. As of May 2009, the Nepal portfolio

consists of 16 active IDA operations and seven recipient-

executed trust funds with net commitments of US$803.3

million and US$29.9 million, respectively. The undisbursed

IDA balance totals US$468.7 million, while US$21.2

million remains to be disbursed from the trust funds. In

terms of portfolio quality, four projects are considered at

risk, reflecting overall country conditions and weak FM

and procurement performance. These four projects have a

combined commitment of US$198.6 million, representing

25 percent of total net IDA commitments. Over the past

year, the Government and the Bank have initiated efforts to

rectify project performance, including project restructurings.

At present, only one project — the Irrigation and Water

Resource Management Project — is rated unsatisfactory

with respect to implementation and none is rated as

unsatisfactory on development objectives. Nevertheless,

more than half the portfolio is rated as moderately

satisfactory on implementation progress, highlighting the

need for intensive follow up and support. Moreover, the

uncertainties of the transition, combined with generally

low institutional capacity, weak systems of governance and

accountability, Nepal’s geography, and its diverse socio-

cultural setting, all make implementation challenging.

Physical security remains a concern in certain areas.


Continued monitoring of the portfolio via the peace filter is

intended to keep a watch on such concerns.

76. Building on the pilot exercise carried out for

the India program, Nepal has recently undertaken a

comprehensive assessment of risks, including those

relating to GAC (see Appendix III for details). This

assessment revealed that the portfolio faces substantial risks

even though risks have been reduced by the judicious choice

of project instrument and design in the on-going portfolio.

Two-thirds of active projects are CDD, are implemented with

community involvement, and/or already incorporate demand

side accountability mechanisms. On the other hand, four

projects are considered as high risk from a GAC perspective.

Of these four, the Telecommunications Sector Reform

Project is to close soon; the risks of the Emergency Peace

Support Project were exhaustively analyzed and mitigation

measures put in place as part of project design when it was

approved one year ago; and the Financial Sector TA Project

is now closely supervised from the field. This leaves the

last high risk project, the Rural Access Improvement and

Decentralization Project (rural roads). A review of risks

and mitigation measures is presently underway.19 Support

from the GPF will be used to reinforce mitigation measures

in several on-going projects, with additional support for

strengthening demand side social accountability mechanisms

anticipated from other trust funds.

77. (g) Aid Management and Donor Harmonization:

Thirty eight donors are active in Nepal. In addition to

the Asian Development Bank, a number of development

partners plan to support substantial programs in Nepal, with

the largest being DFID, the European Commission, Japan,

Norway, the United States, Germany, and Denmark. India

provides substantial aid, including in-kind, and China is also

an important development partner. Reliable and comparable

data on external assistance have been difficult to compile,

as much aid is provided off-budget. In early 2009, the

Ministry of Finance updated information on existing donor

commitments to gain greater clarity on planned donor

support by sector over the next three years (Appendix II).

To deepen this process, MOF launched a comprehensive

mapping exercise at the project level which is expected to

be completed shortly. This will be used to identify gaps,

duplications, and opportunities for consolidation, with the

goal of improving aid effectiveness.

78. The challenge for donors is to support the

government to manage the transition from scattered

donor projects and programs outside government, to

harmonized delivery through government. In 2009, the

Ministry of Finance began to meet with donors periodically

to share information and promote coordination. In addition,

the donors meet frequently to exchange information and to

agree on joint approaches. The Utstein group, composed

of bilateral donors, meets regularly and the World Bank

and ADB participate as observers. At the operational level,

coordination efforts are being consolidated and expanded,

and some progress has been made towards targets set out in

the Paris Declaration and on Fragile States principles. In late

2008, the World Bank, DFID, ADB, and JICA conducted the

fourth joint portfolio review with the GON and agreed on an

action plan to improve performance. Harmonization efforts

are most advanced in sectors which have operationalized

SWAps (such as the health and education sectors). Efforts

are underway to replicate these examples in other areas,

with potential SWAps for rural roads, rural water supply and

sanitation, and possibly in agriculture.

79. IDA’s Nepal country team is closely coordinating

with the IMF team. The Fund approved a three-year Poverty

Reduction and Growth Facility (PRGF) arrangement in

November 2003, amounting to SDR49.9 million (70 percent

of quota), and its last review was completed in November

2007. The Government broadly met the arrangement’s

quantitative criteria under a difficult conflict situation, but

implementation of structural reforms has been slow. The

Government may consider a successor PRGF arrangement with



the Fund, and a mission is expected to discuss preparation

of the FY09/10 budget.

80. (h) Communications and outreach: As part of

implementing the ISN, the Bank will expand its outreach

to civil society groups and strengthen its public

information services beyond Kathmandu. In addition to

the Bank’s Public Information Center (PIC) in Kathmandu,

we hope to establish two satellite PICs in partnership with

universities in Pokhara and Biratnagar. The PIC program

will be retooled to strengthen dialogue and outreach. PIC

products will be redesigned to meet the needs of non-

English language speakers. The PIC in Kathmandu is the

local affiliate of the Global Development Learning Network

and its activities will be tailored to contribute to the

knowledge agenda of the Bank and development partners.

81. Communications will be integrated into Bank

projects, analytical work and knowledge management.

The External Affairs unit will work proactively with project

teams to design communications components and to

strengthen capacity towards ensuring compliance with

Nepal’s Right to Information Law. Emphasis will be placed

on the use of radio, which is the medium of choice for most

Nepalis. In addition, a client survey will be completed in

late FY09 to inform implementation of the ISN. Respondents

include representative samples from government, project

beneficiaries, civil society, private sector and media. Focus

groups are being organized to discuss how best to use the

findings of the survey.

82. (i) The Decentralized Kathmandu Office: The Bank

Group’s presence in Nepal has been substantially

increased since the end of conflict. The IFC re-opened

its office, co-located with the Bank, in 2008 which

has facilitated the interaction and collaboration of the

two teams. Moreover, there has been an increase in

internationally recruited staff based in Kathmandu which is

becoming a de-facto operational base for staff working on

neighboring countries that have restrictions on staff travel

and presence due to security concerns. One of the lessons

of working in post-conflict countries is that the Bank tended

to have insufficient numbers of staff on the ground. This had

been the case in Nepal: there was no international staff,

other than the Country Director, since early 2004. During

2008, eight joined and all Country Sector Coordinators are

The World Bank Public Information Center in Kathmandu is the local affiliate of the Global Development Learning Network and its activities will be tailored to contribute to the knowledge agenda of the Bank and development partners.


field-based. The impacts on the timeliness and diversity of

policy engagement have been noted by the GON and other

development partners in a number of cases. The delivery

of two emergency operations and preparation of a third

in the past 12 months are also testament to the positive

impacts on responsiveness of an enhanced field presence.

That expansion is expected to continue with the placement

of two more international staff by end-FY09. We further

anticipate expanding numbers of Nepali staff, who will

strengthen our capacity to perform our fiduciary functions,

enhance our capacity to deal with governance issues (with

GPF support) and add the expertise needed to apply the

peace filter across the portfolio. This will take highly honed

skills and knowledge of the political economy and effective

ways to work in conflict sensitive situations. SWAps also

need field presence and moving away from the “mission-

based” supervision to day-to-day dialogue. IFC also plans to

increase its staff presence in Nepal.

83. (j) Mitigating Risks: The Bank Group faces

substantial risks working in Nepal (see Appendix III on

governance and risk assessment). The key challenge for the

new Government is to rebuild the legitimacy of the state,

consolidate the peace process and maintain law and order,

and deliver tangible benefits to those traditionally excluded

and to society at large. It is undertaking several difficult

transitions at the same time — political, economic and social

— none of which is easy, as demonstrated by recent political

developments. At the same time, Nepal has embarked on

the long road to reducing the risks of weak governance

and systemic corruption by strengthening the country’s

overarching governance framework and institutional capacity.

Long-lasting peace also hinges on progress in these areas.

The fact that the country faces them simultaneously increases

the associated risks, a situation made even more challenging

in the face of the global crisis and the uncertainty about its

potential impacts on Nepal and the timeframe over which

such impacts are likely to manifest.

84. The proposed Nepal program has been designed

to take those risks into account and to enhance risk

management through a number of dimensions:

• Selectivity in the program is informed by a comprehen-

sive risk assessment of the portfolio and interventions

in different sectors.

• The program is designed to “keep it simple” and to build

on existing strengths, especially in areas in which past

programs have been resilient and robust to conflict.

• The risk of lack of ownership when the government

changes is minimized, first, because the new govern-

ment will likely include some coalition members from

the previous government, and second, almost all the

proposed investment operations will be scaling up pro-

grams that were started and implemented by previous

governments.

• Community management purposefully underpins most

operations. CDD approaches, with communities taking

decisions and managing programs, have built-in checks

and balances and accountability mechanisms that rein-

force effective implementation.

• We will try to “do no harm”. The addition of a peace

filter to the project cycle for new IDA operations is

expected to heighten awareness and sensitivity to the

risks associated with conflict situations that are often

closely linked to poor governance. Design options can

then be addressed early in the cycle and monitored

throughout project life.

• The program tries to avoid making commitments that

would place high demands on “supply” side account-

ability and fiduciary systems while expanding support

for mainstreaming “demand” side mechanisms such as

score cards and social audits that can be reflected in

Governance and Accountability Action Plans.

• Support for policy reforms, addressing areas such as regula-

tory reform in finance and telecom, could be on the basis

of single tranche operations and backed by solid AAA.

• We will continue to strengthen our own capacity to


deal with these risks with a strong focus on enhanced

fiduciary and supervision functions, as well as building

in-house capacity to deal with governance and conflict.

85. Not all of the risks facing Nepal can be mitigated

and significant political, social and economic risks

remain. We need to prepare and to the extent possible

take preemptive action. The impact of an economic crisis

on new Bank Group investments was discussed previously

(para. 65 and 66). Such a crisis would require both IDA

and IFC to undertake contingency planning, now underway,

close consultations with other donors, and monitoring of

the situation particularly with respect to remittances and

the banking sector. Should there be a prolonged period of

political stalemate, a deterioration in the political situation

or a renewal of conflict that inhibits the Bank Group’s

operations, IDA would: (i) adjust individual operations as

needed to reflect the impact of conflict via the peace filter;

and/or (ii) scale back operations selectively and gradually,

depending on other donor responses and the pace and

extent of the conflict and without creating “aid orphans”.

This assumes that the basic functions of government can

continue and that adequate macro-management prevails

and is similar to the stance followed during the conflict

period. It would mean that IDA would likely continue to

emphasize CDD approaches and basic social services while

providing support for strengthening state systems. Finally,

with respect to a third scenario in which the country faces

deterioration along multiple fronts, the Bank Group would

combine elements of the two above responses, although a

situation of a sustained economic and political crisis might

inhibit a workable response. No matter how much effort

goes into project readiness, due to an often unpredictable

and volatile implementation environment, ongoing

supervision will be required which adopts a proactive and

flexible approach to achieving results. It should be assumed

that project design may need to be modified and provisions

made for future adjustments through project restructuring

during the implementation phase.


Peace is not sustainable nor can the economy reach its potential if jobs are not created within domestic borders. Private sector development is critical for generating off-farm employment. Some 500,000 youth enter the labor force each year with low education completion rates, on the one hand, and few places open for them to continue their education at a higher level, on the other.

Kish

or S

harm

a, E

CS M

edia


ISN PROCESS

INTERIMStrategy

NoteFoRNePAL

86. The ISN formulation process has involved consultations in Nepal

and in Washington. Joint Bank Group strategy consultations with

DFID and ADB and a strategy brainstorming with the three donors’ staff,

Secretary of Finance, National Planning Commission Vice Chairman and

government planning and sector specialists were undertaken in Kathmandu

in November 2008. The objective of these consultations was to gather

views from a variety of stakeholders on where and how the three donors

can be most effective in supporting Nepal’s development. This included

civil society actors, representatives of the major political parties, senior

civil servants and youth groups. Consultations were also undertaken in

selected districts of Nepal during October-November 2008. A summary of

the in-country consultations is provided in Appendix V. Prior to the up-

stream review of the ISN in February 2009, further consultations were held

with GON and development partners on the proposed principles and areas

of engagement, with positive responses. Another fuller review sponsored

by the Ministry of Finance with all the major development partners was

conducted in March 2009. The Ministry has been extensively consulted at

each stage of the process and the lending and analytical program reflects

their assessment of the World Bank Group’s comparative advantage and

where we should engage.


1 Originally called the Communist Party of Nepal-Maoist, it was renamed the Unified Communist Party of Nepal-Maoist (UCPN-M) following its merger with a smaller group.

2 This issue was the catalyst in the Prime Minister’s resignation, with open disagreement between the President, several political parties (including coalition partners) and the Nepal Army on one hand and the Prime Minister and UCPN-M on the other.

3 Resilience Amidst Conflict – Assessment of Poverty in Nepal (1996-2004), 2006.

4 The Government is working on a medium-term framework starting FY09/10. An IMF mission had been expected in the near future to assist in the budget process and to help frame a set of consistent medium-term projections. The Bank team is in contact with the Fund to assess the timing of next steps.

5 According to the Bank’s policy note, “The Global Economic Crisis: Assessing Vulnerability with a Poverty Lens”, of February 2009, Nepal’s exposure to the crisis is considered medium, with the country having some fiscal space to react to the crisis, along with a medium institutional capacity to do so.

6 Most of Nepal’s exports, 70 percent, are commodities sold to India. With respect to tourism, about 60 percent of tourist arrivals are from Asia, with India accounting for the single largest share (20 percent) (2007 figures).

7 Recent data on remittances show a significant increase, likely partially due to exchange rate depreciation. Net migration of Ne-palis is still positive, with local labor agencies expecting most foreign labor contracts to be honored. This could change, however, when contracts expire and are not renewed.

8 The GDP per capita figure is the GON figure. The World Bank estimates GNI per capita (Atlas method) as US$340 per capita in 2007.

9 Literacy based on UNESCO EFA data for population 15 years and over.

10 Updated poverty statistics will not be available before 2011.

11 Consultation Draft of Nepal Development Strategy Paper, National Planning Commission, April 2009.

12 This is consistent with OP 2.10 and OP 2.30, along with BP 2.30 and the Guidelines to Staff for CAS Products dated March 2006.

13 The first ISN, dated January 22, 2007, Report no. 38119-NEP, covered 18 months to August 2008.

14 The CAE covers three CAS documents: (i) the CAS Progress Report discussed at the Board in December 2002; (ii) the CAS pre-sented in November 2003; and (iii) the Interim Strategy Note presented in February 2007.

15 A range of donors are involved in direct support to the peace process, including several UN agencies, the EU, DFID, India, the Norwegian, Swiss and German governments, INGOS and others. Two mechanisms coordinate programming and monitoring of this support: the Nepal Peace Trust Fund (chaired by GON), and the UN Peace Trust Fund. Specific donor/bilateral support is described in Appendix II.

16 IDA allocations are made in SDRs, and the US$ equivalent is dependent upon the prevailing exchange rate.

17 The ISN covering FY07-08 did not incorporate any results features.

18 In some cases, these indicators would have to be adapted to Nepal’s circumstances. For example, the indicator on rural access would be framed as the percentage of the rural population within four hours’ walk from all weather roads in the case of the hills, or two hours’ walk in case of the plains.

19 A review is presently being carried out, along with the preparation of a GAC Plan, to put in place additional mitigation measures.

This will be done prior to appraisal of the request for additional financing.

END NOTES

Appendices

theworld bankgroup


I. LOW INCOME COUNTRY-DEBT SUSTAINABILITY ANALYSIS (LIC-DSA)2 A. Size and Composition of Public and Publicly

Guarantee (PPG) Debt1. Nepal’s total public debt stock is estimated at 47

percent of GDP at end 2007 (in nominal terms), of which

roughly 33 percent is external debt. Public external debt is

estimated at US$3.2 billion, of which about US$3 billion was

owed to multilateral institutions, mostly IDA and the ADB.

Bilateral debt stock is estimated at about US$270 million,

with Japan as the largest creditor accounting for more than

half of the bilateral debt. After remaining fairly constant

at around 50 percent of GDP since 1995, the external debt

stock dropped by about 17 percentage points of GDP during

2004-2007, as a result of relatively low external loan

disbursements and the appreciation of the Nepalese rupee.

The domestic debt stock accounts for around 14 percent of

GDP and constitutes an increasing share of total public debt.

B. Assumptions

Debt Sustainability Analysis1

2. Baseline projections of public and publicly guaranteed

(PPG) debt are based on the following key assumptions:

• Real sector: Real GDP growth is projected to rise

gradually from 3.8 percent FY07/08 and stabilize at 5.5

percent after FY10/11, in line with growth rates observed

in the early 1990s—a period of relative stability—and

supported by structural reforms and sound macroeconomic

policies. In the longer term, Nepal’s vast untapped

hydropower potential is expected to contribute signifi cantly

to growth. Infl ation is assumed to decline from around 6.5

percent FY07/08 to an average of about 5 percent in the

medium term in line with projected infl ation developments

in India and as supply bottlenecks are gradually alleviated.

The exchange rate is projected to depreciate against the

dollar, in line with projected movements in the Indian rupee

to which the Nepalese rupee is pegged.

• Fiscal sector: The revenue-to-GDP ratio is projected to rise

from 13.5 percent in FY07/08 to 14.3 percent by FY14-28,

owing to gradual improvements in revenue mobilization. The

expenditure-to-GDP ratio rises from 19.5 percent in FY07/08

and assumed to be maintained at this level thereafter3 .

Offi cial grants are assumed to average 3 percent of GDP

FY07/08–FY12/13 as donors are expected to support the

peace process; from FY13/14 onwards offi cial grants are

projected to decline as a share of GDP.

1 Public debt dynamics are assessed using the Low-Income Country Debt Sustainability Analysis (LIC-DSA) framework, which was jointly prepared by the IMF and the World Bank. The baseline macroeconomic scenario is broadly the same as in the previous DSA. The initial net present value of debt has improved compared to the previous DSA due to the appreciation of the Nepalese rupee and lower than projected loan disbursements in the interim. In view of the improved debt indicators, Nepal’s external debt dynamics are assessed to be subject to a moderate risk of debt distress. This is a change from the previous DSA, which classifi ed Nepal as at high risk of debt distress. Report – May 2, 2008. This analysis, however, does not take into account the rapidly changing global economic conditions and the effect that they will have on Nepal’s exchange rate and economic growth prospects.2 The LIC-DSA produces different results from calculations under the enhanced HIPC Initiative because of different methodologies.3 The projected increase in the fi scal spending in 2007/08 is driven mainly by pre-election and election spending; higher costs associated with clearing Nepal Oil Corporation’s arrears, and increased donor fl ows.

Appendix I

Figure I.1: Composition of External Debt, 2000/01- 2006/07(In millions of U.S. dollars)

0

500

1000

1500

2000

2500

3000

3500

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07

Multilateral Bilateral

• External sector: Exports of goods and services are

projected to average of about 8 percent over the period,

supported by tourism and growth in partner countries.

Imports of goods and services (in dollar terms) are expected

to grow by an average of 11 percent in the medium term,

fuelled by remittances and in line with economic activity.

Import growth during FY13/14-FY27/28 is assumed to

average 6.6 percent. The current account balance is

projected to deteriorate from a surplus of 0.9 percent of GDP

in FY07/08 to a moderate defi cit of 1.6 percent of GDP in

FY27/28 driven by the development needs, with remittances

declining gradually as a share of GDP. New fi nancing is

assumed to rise from about US$200 million FY07/08 to

US$450 million FY12/13; from FY13/14 onwards offi cial

disbursements are expected to gradually decline as a share

of GDP. The grant element of new borrowing is assumed

to gradually decline during the projection period, with an

average of 46 percent.

C. BaselinePPG External Debt

3. A key feature of the LIC−DSA framework is that it

compares debt burden indicators to indicative policy-

based thresholds. The thresholds are based on the empirical

fi nding that low-income countries with stronger policies and

institutions tend to have a higher debt carrying capacity.

Nepal is classifi ed as a medium performer based on its three

year average CPIA score during 2004-06. At end-2007,

Nepal’s NPV of public debt-to-exports ratio is estimated at

148 percent (the relevant policy based indicative threshold

is 150 percent). The ratio is projected to fall to 129

percent by FY12/13 percent and 87 percent by FY27/28.

4 The baseline projections expect the current account, which has been historically a surplus in Nepal, to unwind gradually into a defi cit, as spending and higher growth result in more imports of goods and services and the surge in remittances stabilizes. The average current account defi cit over the projection period 2008-28 is a little over 1 percent of GDP relative to the historical average of a surplus current account of 3.4 percent. The results of the historical scenario, where the current account surplus of 3.4 percent of GDP continues into the projection period, suggests negative borrowing and thereby steady declines in debt. In view of this, debt is constrained to zero in 2018.5 Given the high concessionality of external debt, the debt service-to-exports ratio is low, and at levels similar or lower than to most HIPCs after full HIPC debt relief. The ratio refl ects debt service on existing debt and debt service on projected disbursements.

Other indicators remain below the policy-based indicative

thresholds throughout the projection period.4

4. In the baseline scenario, debt burden ratios are

projected to fall between 2007/08 and 2027/28 (Table

I.1). The NPV of external public debt-to-GDP (20 percent

to 12 percent), NPV of external public debt-to-exports (148

percent to 87 percent); external public debt service-to-

exports ratio (9 percent to 6 percent).5

Total Public Debt

5. Domestic debt accounts for about 30 percent of total

public debt at end-2007. Under the baseline scenario

which does not take into account the possible negative

impacts of the current global economic crisis on Nepal,

the NPV of public debt-to-GDP ratio declines from 35

percent at end FY07/08 to 26 percent by FY27/28 (Table

4 and Figure I.3). Over the same period, the NPV of

Indicative Nepal: Nepal: projected Thresholds 2006/07 average 2007/08 -2027/28

NPV of debt, in percent ofExports 150 148 116GDP 40 22 15Revenue 250 163 114

Debt Service, in percent ofExports 20 11 7Revenues 30 12 6

Table I.1 : Indicative External Debt Burden Indicators


public debt to-revenue ratio falls from 216 percent to

157 percent, and the public debt service-to revenue ratio

decreases from 17 percent to 12 percent.

D. Sensitivity Analysis6. Stress tests and alternative scenarios suggest that

Nepal’s debt profi le is vulnerability to shocks.

• Total public debt: A shock modeled using real GDP growth

at historical average minus one standard deviations FY09-10

results in the NPV of debt-to-GDP ratio increasing from 35

percent in FY08 to 41 percent in FY28; the NPV of Debt-

to-Revenues-and-Grants ratio increases from 215 to 250

percent; and the debt service to revenue ratio increases from

17 to 23 percent. This scenario illustrates the importance

of the peace dividend to generate stronger real GDP growth

and the impact of deteriorating global economic conditions.

Alternative scenarios reveal vulnerabilities from maintaining

the FY08 fi scal stance (primary balance) which could result

in the NPV of debt-to-GDP ratio increasing from 35 FY08 to

44 percent FY28.

• External debt: Bound tests indicate that the NPV of

debt-to-export ratio is sensitive to shocks. Following a

combined, half-standard deviation shock to export growth,

GDP defl ator, and net non-debt creating fl ows, the NPV of

debt-to-exports ratio increases signifi cantly, peaking at near

300 percent FY10, and stays above the threshold for most

of the projection period. Other bound tests (e.g. shocks to

exports and non-debt creating fl ows) also cause the NPV of

debt-to-exports to break the thresholds. These results are

partly driven by Nepal’s volatile export performance in the

past decade. Shocks to other debt indicators, such as the

NPV of debt-to-GDP and debt service-to-revenue, result in

trajectories below threshold values.

E. Staff Assessment7. Based on the LIC-DSA, staffs conclude that Nepal’s

external debt dynamics are subject to a moderate risk of

distress but vulnerable to shocks. The negative impact

of current global economic conditions and/or renewal

confl ict on Nepal’s economy could in fact resemble such

a shock scenario. Since the last DSA in 2007, the initial

net present value of debt improved due to the appreciation

of the Nepalese rupee and lower than projected loan

disbursements in the interim. In contrast to the previous

DSA, the baseline scenario does not indicate a protracted

breach of debt thresholds. In view of this, Nepal’s external

debt dynamics are assessed to be subject to a moderate

risk of debt distress. This said, bound tests refl ecting

shocks to export growth and non-debt creating fl ows could

result in protracted breach of the debt thresholds. The

sensitivity analyses underscore the need to implement sound

macroeconomic policies and reforms, including through

raising the real GDP growth rate and achieving higher

export growth. Stronger and more stable growth in exports

contributing to higher GDP growth, combined with foreign

fi nancing at favorable terms—preferably through grants—

would help Nepal make progress toward achieving its MDG

targets while containing risks to debt sustainability.

6The Nepalese rupee has in fact depreciated by more than 20 percent since November 2008.


Figure I.2: Indicators of Public and Publicly Guaranteed External Debt Under Alternative Scenarios, 2008-2028

(In percentage)

Figure I.3: Indicators of Public Debt Under Alternative Scenarios, 2008-2028

(In percentage) 1/

NPV of Debt-to- Revenue Ratio 2/

0

50

100

150

200

250

300

2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028

BaselineNo ReformMost extreme stress test

NPV of debt-to-GDP Ratio

0

5

10

15

20

25

30

35

40

45

50

2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028

BaselineNo ReformMost extreme stress test

Debt Service-to-Revenue Ratio 2/

0

5

10

15

20

25

30

2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028

Baseline

No Reform

Most extreme stress test

Source: Staff projections and simulations.1/ Most extreme stress test is test that yields highest ratio in 2018.2/ Revenue including grants.

Source: Staff projections and simulations.

NPV of debt -to-exports ratio

0

50

100

150

200

250

300

350

2007 2012 2017 2022 2027

Baseline

Threshold

Historical scenario

Most extreme shockNPV of debt-to-GDP Ratio

0

5

10

15

20

25

30

35

40

45

2007 2012 2017 2022 2027

Baseline

Threshold

Historical scenario

Most extreme shock

0

5

10

15

20

25

2007 2012 2017 2022 2027

Baseline

Threshold

Historical scenario

Most extreme shock

Debt-service-to-exports ratio


Tabl

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Nep

al: E

xter

nal D

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Sust

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bilit

y Fr

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ork,

Bas

elin

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008-

2028

1/

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f GD

P, u

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ise

indi

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d)

A

ctua

l H

isto

rica

l St

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P

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Av

erag

e 6/

De

viat

ion

6/

20

06

2007

20

08

2009

20

10

2011

20

12

2013

20

08-1

3 20

18

2028

20

14-2

8

Av

erag

e

Av

erag

e

Exte

rnal

deb

t (n

omin

al)

1/

37.9

35

.5

29.1

28

.7

27.8

27

.0

26.6

26

.5

24

.6

20.7

o/

w p

ublic

and

pub

licly

gua

rant

eed

(PPG

) 35

.3

33.0

26

.9

26.4

25

.4

24.6

24

.2

24.1

22.1

18

.0

Chan

ge in

ext

erna

l deb

t -7

.1

-.25

-6

.3

-0.4

-1

.0

-0.8

-0

.4

-0.1

-0.6

-0

.3

Iden

tifie

d ne

t de

bt-c

reat

ing

flow

s -9

.9

-5.4

-1

.9

-2.5

-2

.0

-1.8

-1

.1

-0.7

-0.4

0.

3

Non

-int

eres

t cu

rren

t ac

coun

t de

ficit

-2

.5

-0.9

-3

.4

1.4

-0.9

-1

.3

-0.7

-0

.5

0.2

0.8

1.

1 2.

2 1.

6De

ficit

in b

alan

ce o

f go

ods

and

serv

ices

18

.1

18.4

18

.7

20.6

20

.7

20.6

21

.0

21.1

20.1

17

.9

Expo

rts

13.6

13

.2

12.1

12

.3

12.1

12

.1

12.2

12

.1

12

.1

13.3

Impo

rts

31.7

31

.6

30.8

32

.8

32.7

32

.7

33.3

33

.3

32

.2

31.2

Net

curr

ent

tran

sfer

s (n

egat

ive

= in

flow

) -1

9.5

-17.

9 -1

5.7

3.1

-18.

4 -2

0.7

-20.

2 -1

9.8

-19.

6 -1

9.2

-1

8.1

-15.

2 -1

7.0

o/w

offi

cial

-1

.6

-2.0

-1

.9

-3.3

-3

.2

-3.1

-3

.0

-3.0

-1.9

-0

.9

Othe

r cu

rren

t ac

coun

t flo

ws

(neg

ativ

e =

net

inflo

w)

-1.1

-1

.3

-1.2

-1

.2

-1.2

-1

.2

-1.2

-1

.2

-0

.9

-0.6

Net

FDI

(ne

gati

ve =

infl

ow)

0.1

-0.1

0.

0 0.

1 -0

.1

-0.2

-0

.2

-0.2

-0

.3

-0.3

-0.5

-0

.9

-0.6

Endo

geno

us d

ebt

dyna

mic

s 2/

-7

.4

-4.5

-0

.9

-1.0

-1

.1

-1.2

-1

.1

-1.1

-1.0

-0

.9

Cont

ribu

tion

fro

m n

omin

al in

tere

st r

ate

0.3

0.3

0.3

0.2

0.2

0.2

0.2

0.2

0.

3 0.

2

Cont

ribu

tion

fro

m r

eal G

DP g

row

th

-1.0

-0

.8

-1.1

-1

.3

-1.3

-1

.4

-1.4

-1

.4

-1

.3

-1.1

Cont

ribu

tion

fro

m p

rice

and

exch

ange

rat

e ch

ange

s -6

.7

-4.0

…

…

…

…

…

…

…

…

Resi

dual

(3-

4) 3

/ 2.

8 2.

9

-4

.4

2.1

1.0

1.1

0.8

0.5

-0

.2

-0.6

o/

w e

xcep

tion

al fi

nanc

ing

-0.3

-0

.3

-0.2

-0

.2

-0.2

-0

.2

-0.2

-0

.2

-0

.1

0.0

NPV

of e

xter

nal d

ebt

4/

…

22.1

19

.4

19.3

18

.8

18.3

18

.1

18.0

16.9

14

.3

In p

erce

nt o

f ex

port

s …

16

7.3

160.

4 15

7.6

155.

6 15

1.8

148.

4 14

8.5

13

9.9

107.

6

NPV

of

PPG

exte

rnal

deb

t …

19

.6

17.1

17

.0

16.4

16

.0

15.7

15

.6

14

.5

11.6

In

per

cent

of

expo

rts

… 1

48.5

141

.7

138.

5 13

6.1

132.

1 12

8.8

128.

7

119.

6 87

.4

In p

erce

nt o

f go

vern

men

t re

venu

es

… 1

63.0

127

.1

129.

9 12

0.1

113.

3 10

7.8

103.

3

99.9

78

.6

Debt

ser

vice

-to-

expo

rts

rati

o (i

n pe

rcen

t)

13.8

10

.8

10.4

10

.1

10.0

9.

6 9.

3 8.

9

8.2

6.5

PPG

debt

ser

vice

-to-

expo

rts

rati

o (i

n pe

rcen

t)

13.8

10

.8

9.2

9.1

9.0

8.6

8.3

7.9

7.

2 5.

5 PP

G de

bt s

ervi

ce-t

o-re

venu

e ra

tio

(in

perc

ent)

17

.2

11.9

8.

2 8.

5 8.

0 7.

4 6.

9 6.

4

6.0

5.0

Tota

l gro

ss fi

nanc

ing

need

(bi

llion

s of

U.S

. do

llars

) 0.

2 0.

3

0.

3 0.

2 0.

3 0.

4 0.

5 0.

7

1.0

2.2

Non-

inte

rest

cur

rent

acc

ount

defi

cit th

at s

tabi

lizes

deb

t ra

tio

4.6

1.6

5.4

-0.9

0.

3 0.

3 0.

6 0.

9

1.7

2.5

Key

mac

roec

onom

ic a

ssum

ptio

ns

Re

al G

DP g

row

th (

in p

erce

nt)

2.8

2.5

3.6

1.7

3.8

4.5

5.0

5.5

5.5

5.5

5.0

5.5

5.5

5.5

GDP

defla

tor

in U

S do

llar

term

s (c

hang

e in

per

cent

) 17

.5

11.7

4.

0 7.

2 14

.2

1.2

3.5

3.0

2.1

2.1

4.3

1.6

1.1

1.4

Effe

ctiv

e in

tere

st r

ate

(per

cent

) 5/

0.

9 0.

9 0.

9 0.

1 0.

8 0.

9 0.

9 0.

9 0.

9 1.

0 0.

9 1.

1 1.

1 1.

1

Grow

th o

f ex

port

s of

G&

S (U

S do

llar

term

s, in

per

cent

) 2.

0 10

.8

-0.6

12

.4

8.9

7.2

6.9

8.9

8.8

7.1

8.0

7.6

8.0

7.6

Grow

th o

f im

port

s of

G&

S (U

S do

llar

term

s, in

per

cent

) 17

.5

13.9

5.

9 14

.4

15.8

12

.7

8.4

8.5

9.6

7.1

10.4

6.

3 6.

5 6.

5

Gran

t el

emen

t of

new

pub

lic s

ecto

r bo

rrow

ing

(in

perc

ent)

…

…

…

…

47

.0

46.8

46

.7

46.6

46

.5

46.4

46

.7

45.9

45

.0

45.7

Mem

oran

dum

item

s:

Nom

inal

GDP

(bi

llion

s of

US

dolla

rs)

8.9

10.2

12

.1

12.8

13

.9

15.1

16

.3

17.6

25.1

48

.3

Sour

ce:

Staf

f si

mul

atio

ns.

1/ I

nclu

des

both

pub

lic a

nd p

riva

te s

ecto

r ex

tern

al d

ebt.

2/ D

eriv

ed a

s [r

- g

- (1

+g)]

/(1+

g+P+

gρ)

tim

es p

revi

ous

perio

d de

bt r

atio

, w

ith

r =

nom

inal

inte

rest

rat

e; g

= r

eal G

DP g

row

th r

ate,

and

P =

gro

wth

rat

e of

GDP

defl

ator

in U

.S.

dolla

r te

rms.

3/

Inc

lude

s ex

cept

iona

l fina

ncin

g (i

.e.,

cha

nges

in a

rrea

rs a

nd d

ebt

relie

f);

chan

ges

in g

ross

for

eign

ass

ets;

and

val

uati

on a

djus

tmen

ts.

For

proj

ecti

ons

also

incl

udes

con

trib

utio

n fr

om p

rice

and

exch

ange

rat

e ch

ange

s.4/

Ass

umes

tha

t NP

V of

pri

vate

sec

tor

debt

is e

quiv

alen

t to

its

face

val

ue.

5/ C

urre

nt-y

ear

inte

rest

pay

men

ts d

ivid

ed b

y pr

evio

us p

erio

d de

bt s

tock

. 6/

His

toric

al a

vera

ges

and

stan

dard

dev

iati

ons

are

gene

rally

der

ived

ove

r th

e pa

st 1

0 ye

ars,

sub

ject

to

data

ava

ilabi

lity.

7/

Defi

ned

as g

rant

s, c

once

ssio

nal l

oans

, an

d de

bt r

elie

f.8/

Gra

nt-e

quiv

alen

t fin

anci

ng in

clud

es g

rant

s pr

ovid

ed d

irect

ly t

o th

e go

vern

men

t an

d th

roug

h ne

w b

orro

win

g (d

iffe

renc

e be

twee

n th

e fa

ce v

alue

and

the

NPV

of

new

deb

t).


Table 2. Nepal: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2008-28(In percent)

Projections 2008 2009 2010 2011 2012 2013 2018 2028

Baseline 17 17 16 16 16 16 14 12A. Alternative ScenariosA1. Key variables at their historical averages in 2009-28 1/ 17 16 14 13 11 9 0 0A2. New public sector loans on less favorable terms in 2009-28 2/ 17 18 17 18 18 18 19 19B. Bound TestsB1. Real GDP growth at historical average minus one standard deviation in 2009-10 17 17 17 17 17 17 15 12B2. Export value growth at historical average minus one standard deviation in 2009-10 3/ 17 18 20 19 19 19 17 13B3. US dollar GDP deflator at historical average minus one standard deviation in 2009-10 17 18 18 18 18 17 16 13B4. Net non-debt creating flows at historical average minus one standard deviation in 2009-10 4/ 17 22 25 24 24 24 21 14B5. Combination of B1-B4 using one-half standard deviation shocks 17 22 29 28 27 27 23 16B6. One-time 30 percent nominal depreciation relative to the baseline in 2009 5/ 17 24 23 23 22 22 21 17

Projections 2008 2009 2010 2011 2012 2013 2018 2028

Baseline 142 138 136 132 129 129 120 87 A. Alternative Scenarios A1. Key variables at their historical averages in 2009-28 1/ 142 129 117 104 87 72 0 0A2. New public sector loans on less favorable terms in 2009-28 2/ 142 143 145 145 146 151 159 143 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2009-10 142 138 136 132 129 129 120 87B2. Export value growth at historical average minus one standard deviation in 2009-10 3/ 142 184 251 243 236 235 213 144B3. US dollar GDP deflator at historical average minus one standard deviation in 2009-10 142 138 136 132 129 129 120 87B4. Net non-debt creating flows at historical average minus one standard deviation in 2009-10 4/ 142 176 209 202 196 194 171 106B5. Combination of B1-B4 using one-half standard deviation shocks 142 204 291 281 272 269 236 145B6. One-time 30 percent nominal depreciation relative to the baseline in 2009 5/ 142 138 136 132 129 129 120 87

NPV of debt-to-exports ratio

NPV of debt-to-GDP ratio


NPV of debt-to-revenue ratio

Projections 2008 2009 2010 2011 2012 2013 2018 2028

Baseline 127 130 120 113 108 103 100 79 A. Alternative Scenarios A1. Key variables at their historical averages in 2009-28 1/ 127 121 103 89 73 58 0 0A2. New public sector loans on less favorable terms in 2009-28 2/ 127 134 128 125 122 121 133 129 B. Bound Tests B1. Real GDP growth at historical average minus one standard deviation in 2009-10 127 133 127 120 114 109 106 83B2. Export value growth at historical average minus one standard deviation in 2009-10 3/ 127 140 146 138 130 124 117 86B3. US dollar GDP deflator at historical average minus one standard deviation in 2009-10 127 136 134 126 120 115 111 88B4. Net non-debt creating flows at historical average minus one standard deviation in 2009-10 4/ 127 166 185 173 164 155 143 96B5. Combination of B1-B4 using one-half standard deviation shocks 127 170 210 197 186 176 161 106B6. One-time 30 percent nominal depreciation relative to the baseline in 2009 5/ 127 185 171 161 153 147 142 112

Source: Staff projections and simulations.1/ Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Owing to the debt dynamics based on the historical period, the NPV of debt turns negative and is therefore set to zero. 2/ Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.3/ Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after

the shock (implicitly assuming an offsetting adjustment in import levels). 4/ Includes official and private transfers and FDI.5/ Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.6/ Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.


Table 3. Nepal: Public Sector Debt Sustainability Framework, Baseline Scenario, 2005-2028(In percent of GDP, unless otherwise indicated)

Actual Historical Standard Projections Average 5/ Deviation 5/ 2008-13 2014-28 2006 2007 2008 2009 2010 2011 2012 2013 Average 2018 2028 Average

Public sector debt 1/ 56.7 46.7 44.6 44.3 43.0 41.7 40.3 38.8 33.6 32.5o/w foreign-currency 35.3 33.0 26.9 26.4 25.4 24.6 24.0 23.6 21.7 17.7 denominatedChange in public sector debt -2.8 -10.0 -2.1 -0.3 -1.3 -1.3 -1.5 -1.5 -0.7 0.1Identified debt-creating flows -6.7 -8.5 -0.2 -0.6 -1.7 -1.9 -2.1 -2.3 -0.2 0.6Primary deficit 0.7 0.5 1.5 1.5 2.6 1.4 1.0 0.7 0.5 0.1 1.1 1.4 1.9 1.5Revenue and grants 13.1 14.3 16.1 16.4 16.8 17.2 17.6 18.8 16.8 16.4of which: grants 2.1 2.3 2.7 3.3 3.1 3.1 3.1 3.1 2.6 1.9Primary (noninterest) 13.8 14.8 18.8 17.8 17.8 17.9 18.0 18.1 18.2 18.3 expenditureAutomatic debt dynamics -7.4 -9.0 -2.9 -2.0 -2.7 -2.6 -2.6 -2.5 -1.6 -1.3Contribution from interest -4.0 -2.3 -1.7 -2.0 -2.1 -2.2 -2.1 -2.0 -1.5 -1.3 rate/growth differentialof which: contribution -2.4 -0.9 0.0 0.0 0.0 0.1 0.1 0.1 0.3 0.4 from average real interest rateof which: contribution -1.6 -1.4 -1.7 -1.9 -2.1 -2.2 -2.2 -2.1 -1.8 -1.7 from real GDP growthContribution from real -3.4 -6.7 -1.2 0.0 -0.6 -0.5 -0.5 -0.5 … … exchange rate depreciationOther identified debt- 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 creating flowsPrivatization receipts (negative) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Recognition of implicit or 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 contingent liabilities



Debt relief (HIPC and other) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other (specify, e.g. bank 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 recapitalization)Residual, including asset changes 3.9 -1.5 -1.9 0.3 0.4 0.6 0.6 0.8 NPV of public sector debt 43.9 33.3 34.9 34.9 34.1 33.1 32.0 30.8 26.3 26.4o/w foreign-currency 22.6 19.6 17.1 17.0 16.4 16.0 15.7 15.6 14.5 11.6 denominatedo/w external 22.6 19.6 17.1 17.0 16.4 16.0 15.7 15.6 14.5 11.6 NPV of contingent liabilities … … … … … … … … … … (not included in public sector debt)Gross financing need 2/ 3.9 3.7 5.4 4.1 3.7 3.3 2.9 2.5 3.5 3.9 NPV of public sector 335.0 233.3 216.2 213.3 202.8 192.1 182.1 171.3 156.6 161.0 debt-to-revenue and grants ratio (in percent)NPV of public sector debt- 398.8 277.5 258.7 266.9 249.0 234.6 221.4 207.3 185.3 182.2 to-revenue ratio (in percent)o/w external 3/ 204.7 163.0 127.1 129.9 120.1 113.3 108.8 105.3 101.9 80.1 Debt service-to-revenue and 24.1 22.3 17.5 16.5 16.0 15.3 14.1 13.3 12.3 12.2 grants ratio (in percent) 4/Debt service-to-revenue 28.7 26.5 20.9 20.6 19.7 18.6 17.1 16.1 14.6 13.9 ratio (in percent) 4/Primary deficit that stabilizes 3.5 10.5 4.7 1.7 2.3 2.0 1.9 1.6 2.0 1.8 the debt-to-GDP ratio

Table 3. Nepal: Public Sector Debt Sustainability Framework, Baseline Scenario, 2005-2028(In percent of GDP, unless otherwise indicated)



Key macroeconomic and fiscal assumptionsReal GDP growth (in percent) 2.8 2.5 3.3 1.9 3.8 4.5 5.0 5.5 5.5 5.5 5.0 5.5 5.5 5.5Average nominal interest rate 1.0 1.1 1.0 0.1 1.1 1.3 1.2 1.2 1.2 1.2 1.2 1.0 0.9 1.0 on forex debt (in percent)Average real interest rate on -11.5 -4.6 -0.7 4.6 0.0 -0.6 -0.2 0.2 0.2 0.2 0.0 2.8 3.0 2.6 domestic currency debt (in percent)Real exchange rate -8.2 -19.5 -2.6 9.7 -3.7 … … .. … … … … … … depreciation (in percent, + indicates depreciation)Inflation rate (GDP 17.9 8.6 6.4 4.5 6.5 6.0 5.5 5.0 5.0 5.0 5.5 3.5 3.0 3.3 deflator, in percent)Growth of real primary -7.0 8.4 3.3 8.5 33.2 -1.0 5.3 6.2 5.9 5.9 9.3 5.7 5.5 5.6 spending (deflated by GDP deflator, in percent)

Sources: Country authorities; and Fund staff estimates and projections.1/ Public and publicly guaranteed debt.2/ Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period. 3/ Revenues excluding grants.4/ Debt service is defined as the sum of interest and amortization of medium and long-term debt.5/ Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.


Table 4.Nepal: Sensitivity Analysis for Key Indicators of Public Debt 2008-2028

NPV of Debt-to-Revenue Ratio 2/

Projections 2008 2009 2010 2011 2012 2013 2018 2028

NPV of Debt-to-GDP RatioBaseline 35 35 34 33 32 31 26 26

A. Alternative Scenarios 35 35 35 35 36 36 35 34A1. Real GDP growth and primary balance are at historical averages 35 36 36 37 38 38 39 44A2. Primary balance is unchanged from 2008 35 35 34 33 33 38 30 38A3. Permanently lower GDP growth 1/

B. Bound Tests

B1. Real GDP growth is at historical average minus 35 36 37 37 37 36 35 41 one standard deviations in 2009-2010B2. Primary balance is at historical average minus 35 36 37 36 35 33 28 28 one standard deviations in 2009-2010B3. Combination of B1-B2 using one half standard deviation shocks 35 36 37 36 34 33 27 25B4. One-time 30 percent real depreciation in 2009 35 42 41 39 37 36 30 28B5. 10 percent of GDP increase in other debt-creating flows in 2009 35 44 43 41 40 38 33 31

Projections 2008 2009 2010 2011 2012 2013 2018 2028

Baseline

A. Alternative Scenarios 216 213 203 192 182 171 157 161 A1. Real GDP growth and primary balance are at historical averages 214 213 207 204 202 200 201 197A2. Primary balance is unchanged from 2008 215 218 216 214 214 214 232 266A3. Permanently lower GDP growth 1/ 215 212 203 193 185 176 175 230

B. Bound Tests



Debt Service-to-Revenue Ratio 2/

Projections 2008 2009 2010 2011 2012 2013 2018 2028

Baseline 17 16 16 15 14 13 12 12

A. Alternative Scenarios

A1. Real GDP growth and primary balance are at historical averages 17 17 17 17 17 17 16 16A2. Primary balance is unchanged from 2008 17 16 18 19 19 20 20 26A3. Permanently lower GDP growth 1/ 17 17 16 16 15 14 15 20

B. Bound Tests


Sources: Country authorities; and Fund staff estimates and projections.1/ Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 20 (i.e., the length of the projection period).2/ Revenues are defined inclusive of grants


Ongo

ing

and

Indi

cati

ve A

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< $1

mn

$1 -

5 m

n $5

- 1

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n $1

0 -

20 m

n >

$ 20

mn

Com

mit

men

ts J

uly

2009

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Proj

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nlan

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dia

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ronm

ent

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imat

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ange

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s /

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dia,

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stru

ctur

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l Roa

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ADB,

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ay

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man

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ICA*

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C *,

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ID

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nlan

d,

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mar

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pan/

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dia,

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n, N

orw

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opul

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any

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dia,

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Sup

ply

and

Sani

tati

on

D

FID,

UN,

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ia

JICA

Fi

nlan

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52

Soci

al S

afet

y Ne

t /

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Sec

urit

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f

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man

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n W

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ter

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esea

rch)

No

rway

* th

roug

h In

tern

atio

nal N

GOs

or n

on-s

tate

act

ors

Donor mapping at Sector Level

Appendix II


Ongo

ing

and

Indi

cati

ve A

id

< $1

mn

$1 -

5 m

n $5

- 1

0 m

n $1

0 -

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n >

$ 20

mn

Com

mit

men

ts J

uly

2009

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y 20

12

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ID

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ate

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man

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(IFC

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ICA

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ncia

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tor

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rm

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le o

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urit

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Cons

titu

ent

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mbl

y No

rway

, Ja

pan,

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IDA,

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ark,

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, W

B, D

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iss

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IDPu

blic

Fin

anci

al M

anag

emen

t/an

ti-c

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ptio

n No

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nce

(inc

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cal d

evel

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ent

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ark*

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any,

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B, W

B,

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iss

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ark

DFID

5 -

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rnan

ce /

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ce b

uild

ing

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e Bu

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ict

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igat

ion

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uman

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hts

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inla

nd,

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rway

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rman

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N, J

ICA

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iss

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ark

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, W

B, E

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her

(eg,

incl

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n, g

ende

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ay

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ay,

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man

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A


Introduction1. As part of the preparation of the ISN for Nepal, the

country team undertook in January 2009 a comprehensive

review of the risks of its portfolio and the implications of

those risks for future lending.1 The methodology used was

based on the pilot done for the India program in June-July

2008. The framework developed for India, and modifi ed for

Nepal, had been initially constructed in order to address

the systemic weaknesses in the management of risks that

had been identifi ed in the Detailed Implementation Review

(DIR) of fi ve health sector operations in India. Nepal

was the second country in the Region to carry out this

comprehensive risk assessment.

The Framework2. The framework below was developed with the assistance

of external consultants funded with central GAC funds

allocated to the South Asia Region.2 The key features are:

> It establishes a hierarchy of risks, with overall project

risks a function of country, sector and project specifi c

risks, with country risks overshadowing sector risks and

sector risks overshadowing project specifi c risks.

> The approach builds on the Bank-wide Risk

Identifi cation Worksheet, standard for all new operations

since 2007, and uses that system’s four point scale—

high, substantial, moderate and low.

> It takes the CPIA ratings on governance and corruption

as the starting point for country risks. In the case of

Appendix III

Governance and Risks Assessment Nepal Portfolio

Nepal, it added the risks of confl ict based on the 2004

edition of Post-Confl ict Performance Indicators. Following

the approach used by the Africa Region, the framework

converts these numeric ratings to the H, S, M or L scale.

In the case of Nepal, the country risk rating is substantial.

> It adds a set of questions to identify systemic risks at

the sector level. At this point, there is no generalized

guidance on or measurement of sector level risks so that

teams do this based on their respective country and

sector knowledge and operational experiences.

> It does the same thing for project specifi c risks. In

addition, it folds into those risks the IRS ratings on

fi nancial management, procurement and safeguards. The

work sheet indicates the residual risk, after mitigation

measures.

> The standard sets of questions for both sector and

project specifi c risks cover the broad range of concerns

about getting results on the ground and governance,

including fraud and corruption. On this last point, the

questions do so by not rating the incidence of fraud and

corruption per se (which is hard for anyone to know

with precision) but by assessing some of the underlying

factors. These factors have been derived from available

best practices, economic principles and theory, auditing

and accounting, and risk management practices.

> Once sector risks and project specifi c risks are rated,

the framework provides a risk “look-up” table that: (i)

1The risk assessment covers the following broad areas: political economy, governance, corruption, regulation, accountability, institutional capacity, policy coherence, quality and standards, project design, and implementation systems including procurement, FM and M&E. It does not, however, address technical or other risks such as climate, acts-of-god, etc., that also could affect project outcomes. For the framework to be completely comprehensive these risks would have to be added. 2The team that developed the framework, including the specifi c set of questions to assess sector and project specifi c risks, comprised both external consultants and Bank staff, specialized in public sector management, public administration, governance, and operations. Preparation involved a review of PADs, GAAPs, and ISRs, along with interviews with Bank staff, and a review of sector studies, best practices on anti-corruption, corruption mapping, and experiences in the Bank and elsewhere.


combines country, sector and project specifi c risks into

an overall project risk rating; and (ii) ensures that all

teams follow the same methodology thereby reducing

discretion and incentive that individual teams may have

to down grade risks.

> The risks can further be broken down, according to the

particular risk posed in the questions, and analyzed

separately.

The Questions Asked3. The questions of both the sector and project specifi c

risks are framed as assertions, in the manner of the

COSO (Committee of Sponsoring Organizations) Risk and

Opportunity Workshops and other surveys.3 Each assertion

provides the two extremes: what would prevail if the risks

were low and what would prevail if risks were high. The

team can rate the risk of each assertion high, substantial,

moderate or low. Here are some examples:

> Sector-wide risks. There are a set of assertions that

deal with the quality of sector-wide regulations and

institutions. One assertion probes the extent to which

there is a functioning regulatory set-up with the

appropriate separation of powers between the policy-

making institution and the regulatory-compliance

institutions. Other probes the extent to which quality

standards exist, whether they provide the relevant

benchmark, and whether they are adhered to. The

risks would be highest is there was no regulation,

no separation of powers, and no quality standards in

the sector. Conversely risks would be the lowest if

the response were the reverse with intermediate risks

(substantial or moderate) in between.

> Project design and supervision risks: There are a set of

assertions that address the ease by which supervision and

physical monitoring can be undertaken. These assertions

probe, for example, whether the project is dispersed across

a wide geographic area (high risks) or concentrated in a

single location (low risks); or whether the project involves

multiple implementing agencies (high risk) or a single

entity (low risks). Other examples are whether or not the

implementing agency s is new/no experience with the Bank

(high risks) or existing with prior experience (low risks).

Mitigation of Portfolio Risks4. The conclusion of the risk assessment was that the Nepal

program entails substantial risks. The team rated 13 sector

and sub-sectors and fi fteen active projects. The level of

overall risks is driven in large part by the country risks

which are rated as substantial, refl ecting CPIA ratings on

systemic corruption and governance. This is consistent with

the ranking of Nepal in the WBI’s Governance Indicators.

Sector risks are also substantial refl ecting the vulnerabilities

in regulation in key sectors such as telecommunications

and banking; in social protection due to the lack of robust

targeting and M&E systems; and in rural roads because of

the weaknesses in local administrations, combined with poor

quality standards and the nature of procurement.

5. Mitigation measures built into project design helps to lower

project specifi c risks. That brings down those risks overall to

moderate. The main risk mitigation mechanism adopted in

the Nepal portfolio has been the incorporation of community

management in the original project design. Aspects of

community management and community driven development

are features of ten of the fi fteen ongoing operations. While

3There is potential to use COSO-like techniques to have anonymous voting of the risks by participants and then a structured discussion on the ratings and the variations.


not perfect, and still subject to capture by elites, community

management is seen to enhance oversight and accountability and

to offset risks of procurement and quality. Further, this mode of

project implementation offsets the risks of adequate supervision

and physical inspection for operations in widely dispersed and

hard to reach geographic areas. Going forward, community

management will be a continuing feature of new operations

to the extent possible. In the case of the four operations

rated as high risk, mitigation measures are being taken. All

four operations are closely supervised. In one case—the

Telecommunications Sector project—it is soon to close.

6. More broadly, in light of the substantial risks in the portfolio,

the Nepal program is taking the following additional steps:

> Resources allocated to supervision and to fiduciary

functions will be increased in FY10 by about 10 percent.

> Specific trust funds, notably the GPF, are being

mobilized to: (i) advance the overall GAC agenda; (ii)

undertake governance and institutional assessments of

sectors, particularly those in which IDA has or plans to

adopt sector wide approaches; (iii) develop GAAPs for

new IDA operations; and (iv) strengthen demand side

accountability mechanisms in new operations and one-

third of the ongoing IDA portfolio.

> Additional expertise on governance and on peace and

conflict will be brought into the country team with GPF

support.

> Business processes are being reengineered to integrate

the risk assessment, GAAP preparation, and Peace Filter

into critical points in the business cycle.


Introduction1. IEG is presently preparing a Country Assistance Evaluation

(CAE) to be discussed with the Committee for Development

Effectiveness in May 2009. The CAE examines whether: (a)

the objectives of Bank assistance were relevant; (b) the

Bank’s assistance program was effectively designed and

consistent with its objectives; and (c) the Bank’s program

achieved its objectives and had a substantial impact on

the country’s development during this period. Examining

these questions allows the CAE to draw lessons and

recommendations for future Bank assistance. The CAE covers

three CAS documents: (i) the CAS Progress Report discussed

at the Board in December 2002; (ii) the CAS presented

in November 2003; and (iii) the Interim Strategy Note

presented in February 2007. The goals of the Bank assistance

program over FY03–08 remained broadly aligned with the

2003 PRSP and unchanged: the focus was on improving

governance and development effectiveness by bringing

resources to grassroots levels but with increased emphasis

on growth and inclusion.

Main Conclusions2. While recognizing that Nepal’s considerable political

turmoil and changes had a major impact on CAS

implementation during the period under review, one of

the CAE’s conclusions is that little progress was made

against CAS stated objectives in two of the four main

strategic themes —achieving broad based growth and good

governance. Specific objectives under these two pillars

are considered by IEG to have often been unrealistic and

overly ambitious given country circumstances characterized

by political instability, conflict and insecurity, and similar

issues. On the other hand, IEG’s draft evaluation concludes

that some progress was made in the area of social inclusion,

especially with regard to mainstreaming inclusion in sector

projects and, to a lesser extent, diversity of the civil service.

Social development was the area where the Bank’s program

Appendix IV

was most relevant and successful, particularly in terms

of improving and expanding health services, significantly

increasing access to basic education, and increasing access

to safe drinking water in rural areas. In addition, even in

those pillars showing less progress in meeting objectives,

there were some notable achievements despite the very

difficult country circumstances.

3. The areas of minimal or no progress included key parts

of the governance agenda - where the Bank’s strategy

was considered to be highly relevant but strategy

implementation was constrained by the country’s political

context – and sub-areas of the broad-based growth agenda

such as private sector development and agriculture and rural

development. In the specific area of public expenditure

management, the Bank’s AAA was considered to have

achieved some significant steps, such as passage of a new

Procurement Act, but the impact in terms of the quality and

efficiency of PFM has been minimal so far.

4. Education is one of the areas where the Bank’s program

was especially relevant and contributed to strong progress

towards CAS objectives. Among the positive results, the

enrollment of girls and marginalized groups improved

substantially through the Education for All program which is

being implemented under a Sector-Wide Approach (SWAp).

Measurable quality improvements were limited, however, and

textbook distribution continues to be late. The community

school management model, which is currently being

mainstreamed, has shown some good results but IEG believes

that a number of improvements are required to make it fully

effective, such as putting in place a sound M&E system and

ensuring that there are adequate mechanisms for funding

schools in poorer areas. The financial condition of higher

education institutions improved modestly, but fell well short

of being sustainable. The sole new IDA project, Higher

Education Project II (approved in 2007), is innovative and

flexible in its design and IEG considers the project outcome

IEG Country Assistance Evaluation Summary of Conclusions and Recommendations


objectives to be highly relevant. Under the project,

substantial progress has been made in terms of improving

access for under-privileged students, but project start-up

was slowed due to political and security issues, the project

executing agency still lacks administrative capacity, and a

major teachers’ union has blocked implementation of the

plan to allow autonomy for the country’s largest university.

5. Health and Water and Sanitation are two sectors that

showed substantial progress during the period under review.

Through a successful SWAp which became effective in 2004,

basic health care services improved, with an emphasis on

poor and underserved populations, despite challenging

operational conditions on the ground. To the credit of the

SWAp, approximately 70 percent of public funding now goes

to support low-cost, cost-effective interventions of Essential

Health Care Services (EHCS). The signifi cant increase in

supply and accessibility to these services in districts with

low health indicators is interpreted as being at least partly

responsible for improved health outcomes over time. The

expansion of public health facilities at the sub-national

and community levels (sub-health posts, health posts,

and primary health care centers) contributed to increased

access for the poor and underserved populations. Nepal’s

health indicators demonstrate signifi cantly improved

outcomes; for example, the infant mortality rate (IMR)

declined from 79 deaths per 1,000 live births in 1996 to

64 in 2001 and 48 in 2006 while the maternal mortality

declined from 539 per 100,000 live births in 1996 to 281

in 2006. A major persisting shortcoming is the lack of

progress in addressing malnutrition, as Nepal’s level of child

malnutrition remains among the highest in the world. The

quality and access to sustainable rural drinking water and

sanitation services improved over the period, in part thanks

to the IDA-fi nanced First Rural Water and Sanitation project,

which used community-based approaches to facilitate

provision of demand-driven rural water and sanitation

services, infrastructure and hygiene education. However

IEG considers that the second project has thus far failed

to achieve its development objectives related to sector

institutional reforms.

6. Some progress was made with regard to social inclusion,

one of the main pillars of the past strategies. Through its

lending, IDA helped improve access to basic services for the

socially excluded (in terms of gender, caste or ethnicity).

IDA and DFID jointly produced a seminal piece of analytical

work on social inclusion that has contributed to the overall

understanding of these issues in Nepal and infl uenced

the 2003 PRSP.1 The largest Bank-supported program, the

Poverty Alleviation Fund (PAF), was deemed as effective in

channeling funding to the socially excluded and supporting

livelihood improvements, but weaker in terms of improving

access to services and institutional development.

7. Regarding IFC’s operations in Nepal, IEG report mentions

that as the political and security situation deteriorated in

1999, IFC withdrew its local fi eld presence and had very

limited activities in Nepal between 1999-2006. To a large

extent, IFC’s inability to develop successful investment

projects through much of the decade can be attributed to

the increasingly diffi cult investment environment. Since

2006, IFC’s gradual re-engagement in Nepal has resulted in

two GTFP investments; an investment in a domestic airline,

a pipeline of investment projects in the fi nancial sector, and

a constructive dialogue with the government on business

enabling environment issues. This approach of cautious

re-engagement has the potential for replication in other

diffi cult investment climate countries.

1See “Unequal Citizens: Gender, Caste, and Ethnic Exclusion in Nepal.” Published by the World Bank and DFID.2IEG’s draft report concludes that there is little evidence that the PAF has been an effective instrument for poverty reduction and social inclusion. However, an impact evaluation of the PAF was recently completed and it is currently being reviewed by the Bank team. It will be considered by IEG as time allows.


Recommendations Moving Ahead8. Given the challenges facing Nepal, IEG believes the

Bank could be more realistic and pragmatic, and consult

widely and continually with national stakeholders. The new

ISN should take into account the current circumstances

with a flexible program that can be adjusted closely to

the Government’s capacity and a changing political and

institutional context.

9. In terms of sectors and instruments, the coming CAE will

recommend more decisive support for agriculture and rural

development, i.e. placing this sector at the heart of any new

IDA strategy. It also suggests stepping up efforts to increase

poor and marginalized people’s access to basic services, with

a focus on supporting the expanded use of delivery schemes

that have been shown to have worked in Nepal. With regard

to the PAF, the primary recommendation is to establish a

mechanism to track the extent to which its activities are

effectively addressing poverty and the various dimensions of

social exclusion. An additional highlighted recommendation is

to continue support to public expenditures and public finance

management. The SWAp model that has been successful in

health and education could be applied to other sectors, such

as water and sanitation or roads.


Appendix V

Background1. During the months of October and November 2008, the Asian

Development Bank (ADB), the UK Department for International

Development (DFID) and the World Bank Group (IDA and IFC)

undertook joint consultations in order to gain insights from

as wide an audience as possible on what role they should play

in supporting the people of Nepal. These consultations were

jointly undertaken as all three agencies were in the process of

developing their new country assistance plans.

Summary of CAS Consultations (ADB, DFID, World Bank)

Consultation Process2. The consultations were undertaken in three different regions

of Nepal (Central region – Pokhara; Eastern region – Biratnagar;

and Western region – Nepalganj), as well as in Kathmandu. All

consultations included a range of stakeholders. The participants

attending in Pokhara, Biratnagar, and Nepalganj included

representatives from community organizations, political leaders,

civil society, program personnel and others. The group in

Kathmandu included the private sector, government, civil society,

academia, INGOs, NGOs, politicians, staff of ADB, DFID and WB,

sectoral staff of government, youth, and donor agencies.

• Peaceandsecurityo Rehabilitation of displaced and conflict-affected people, reconstruction of damaged infrastructureo Support for making the new constitution and state restructuringo Integration of armieso Special package programs for excluded communities/ regions• Jobcreation/employment/livelihoodso Self-employment and entrepreneurship promotiono MSME (micro, small and medium enterprise) and micro-finance promotiono Commercialization of agriculture and NRMo Tourism promotion• Infrastructuredevelopment(roads,hydropower,irrigation,communications)o Schoolso Rural and agricultural roads, suspension bridgeso Micro and small hydro power development/rural electrificationo Health posts/facilitieso Communication Centres/facilitieso River training/irrigation for Madhesi districts• Goodgovernanceo Awareness programs on awareness creation at all levelso Transparent program design, implementation and monitoring and supervision (with people's participation)o Social/public auditso Reward and punishment system in GOs and NGOs• Socialsector–inclusiveaccessandeffectiveservicedelivery(health–specialfocus on reproductive health/safe motherhood for women, education – focus on skill- based job-/market-oriented education and training etc.)o Equal and equitable access to quality health services (priority to women's health – safe motherhood, reproductive health etc.)o Employment/market oriented education and training for all (scholarships for poor and excluded groups)o Clean drinking water for rural areas• Specialprogramsforsinglewomen,VAW,disadvantagedgroups• Others:agriculture,NRM,supportforM&Esystems/mechanisms,involvementofcommunity(especiallypoor and excluded in decision making), capacity building and empowerment, private sector promotion.

• Peaceprocesso reconstruction, rehabilitation and reintegrationo Constitution making and state restructuring• Jobsandemploymentcreation(focusonyouth)o Market and skill oriented training and education o Promotion of self-employment, trepreneurship, MSME promotion• Infrastructuredevelopmento Roads, hydropower, communications• Socialsector-Health,education,drinkingwatero Equipped and functional health facilitieso Awareness of health programso Facilitating equal access to health and education• Creatinganenablingenvironmentforprivate sectoro Legal and policy reform and their implementation with joint monitoring and follow-up by both GOs and the private sector• Buildinghumancapitalo Awareness, education and trainingo Building and strengthening local institutions (NGOs, cooperatives, CBOs)• Goodgovernance(forallstakeholders)o Transparency, accountabilityo Functioning monitoring and supervision (with involvement of stakeholders)• Greaterinvolvementandparticipationofyouth

Consultations in regions Consultations in Kathmandu

Summary of Findings3. During both the consultations in the regions and Kathmandu, participants expressed similar priorities. A summary of these

is provided in the following table:


4. The recommendations of the participants for the three

donor agencies were to provide financial and technical

support for:

> Growth and employment

> Greater emphasis on commercialization in support for

agriculture, NRM, other IG and livelihoods programmes

> Capacity building of Government

> Facilitate trust building among political parties

> Immediate relief; and reconstruction, rehabilitation and

reintegration

> Support for the peace process

> Support for constitution making, state restructuring

including fiscal federalism

> Good governance

5. Some suggestions on how this should be done were:

> Support GON and people's priorities

> Implementation pluralism (through both GOs and NGOs)

> More transparency in donor programmes

> Ensure involvement and participation of poor & excluded

and youth; ensuring increased access to quality basic

services (health, education, water and sanitation, etc.)

> Inclusive policy formulation

> Greater emphasis on developing appropriate and

participatory M&E mechanism

> Special programs for mid- and far-West, and for youth

> Priority to local experts for technical assistance

> More effective donor coordination, and coordination

with GON

> Budgetary support for government programs; basket

funding based on priorities

> Real partnership with civil society.


Appendix VI

Country Financing Parameters

Item Parameter Remarks/Explanation

Cost sharing. Limit on the proportion of individual Up to 100% Financing of Bank-supported projects is fully integrated into the project costs that the Bank may finance budget, and the Government has full ownership and leadership of the NPPR exercise at the portfolio level. GoN has been increasing its efforts to improve overall expenditure management through a PEFA action plan, and is also progressively moving towards program- based approaches (SWAps) in a number of sectors.

Recurrent cost financing. Any limits that would apply No country- Bank financing of projects is fully integrated into the budget and to the overall amount of recurrent expenditures that level limit thus subject to Nepal’s fiscal management regime anchored in the the Bank may finance Medium Term Expenditure Framework (MTEF), for which the Bank continues to provide technical assistance. The level of recurrent cost financing would be reviewed on a case by case basis to ensure consistency with a prudent fiscal stance. Financing of civil servant salaries may be considered on a selective basis (for example through support for SWAps).

Local cost financing. Are the requirements for Bank Yes The two requirements are met. At the project level, the Bank financing of local expenditures met, namely that: (i) expects to finance local costs as required by the financing requirements for the country’s development development objectives. program would exceed the public sector’s own resources (e.g., from taxation and other revenues) and expected domestic borrowing; and (ii) the financing of foreign expenditures alone would not enable the Bank to assist in the financing of individual projects

Taxes and duties. Are there any taxes and duties None The Bank may finance the costs of taxes and duties as long as they that the Bank would not finance? are reasonable and non-discriminatory. As of May 2009, no taxes are identified as unreasonable or discriminatory vis-à-vis Bank- financed projects.


Annexes

theworld bankgroup


Key Economic and Program Indicators -- Change from Last ISN

Annex A1

Forecast in Last ISN Actual Economy FY06 FY07 FY08 FY07 FY08

Growth rates (%) Real GDP /a 1.9 3.7 4.5 3.2 4.7 Merchandise exports (in current US$) 4.0 8.5 12.8 2.3 -1.9 Merchandise imports (in current US$) 18.3 16.1 10.8 11.2 12.9

Inflation (GDP deflator %) 7.2 6.5 6.0 7.4 7.7

National accounts (% of GDP) Current account balance 2.4 3.9 2.9 0.5 -0.3 Gross fixed investment /b 18.5 18.8 19.8 21.3 21.8

Public finance (% of GDP) /a Fiscal balance (including grants) -1.7 -3.0 -3.2 -1.8 -2.0 Foreign financing 0.3 1.7 1.5 1.4 1.4

International reserves(as months of goods imports) 8.9 8.4 7.9 12.4 11.3ProgramLending (US$ millions) 0 145 210 105 380Gross disbursements (US$ millions) 67 80 110 75 81

/a.GDP at market price /b.GDP at factor cost. Source: Central Bureau of Statistics - 2008


KEY ECONOMIC RATIOS and LONG-TERM TRENDS

Nepal at a glance

Nepal Low-income group

Development diamond*

Life expectancy

Access to improved water

GNIpercapita

Grossprimary

enrollment

POVERTY and SOCIAL South Low- Nepal Asia income

2007Population, mid-year (millions) 28.1 1,520 1,296GNI per capita (Atlas method, US$) 340 880 578GNI (Atlas method, US$ billions) 9.7 1,339 749Average annual growth, 2001-07

Population (%) 2.0 1.6 2.2Labor force (%) 2.8 2.1 2.7Most recent estimate (latest year available, 2001-07)

Poverty (% of population below national poverty line) 31 .. ..Urban population (% of total population) 17 29 32Life expectancy at birth (years) 63 64 57Infant mortality (per 1,000 live births) 46 62 85Child malnutrition (% of children under 5) 39 41 29Access to an improved water source (% of population) 89 87 68Literacy (% of population age 15+) 49 58 61Gross primary enrollment (% of school-age population) 126 108 94 Male 129 111 100 Female 123 104 89

Economic ratios*

Trade

Indebtedness

Domesticsavings

Capital

Nepal Low-income group

1987 1997 2006 2007

GDP (US$ billions)3.0 4.9 8.9 10.2Gross capital formation/GDP21.2 25.3 26.0 25.3Exports of goods and services/GDP 11.8 26.3 13.6 12.5Gross domestic savings/GDP12.1 14.0 7.9 9.4Gross national savings/GDPa 16.3 22.5 28.2 27.9Current account balance/GDP -4.7 -0.8 2.2 0.6Interest payments/GDP 0.5 0.5 0.3 ..Total debt/GDP 33.3 49.1 38.1 ..Total debt service/exports 10.1 5.2 5.1 ..Present value of debt/GDP .. .. 24.8 ..Present value of debt/exports .. .. 81.4 .. 1987-97 1997-07 2006 2007 2007-11(average annual growth)GDP 5.2 3.6 2.8 2.5 4.5GDP per capita 2.6 1.4 0.8 0.8 3.1Exports of goods and services .. .. .. .. ..


0

2

4

6

02 03 04 05 06 07GCF GDP

Growth of capital and GDP (%)

STRUCTURE of the ECONOMY

1987 1997 2006 2007

(% of GDP) Agriculture 50.7 41.4 35.1 33.8Industry 15.8 22.9 17.4 17.2 Manufacturing 6.2 9.5 7.9 7.7Services 33.4 35.7 47.5 48.9Household fi nal consumption expenditure 78.8 77.1 83.3 81.9General gov’t fi nal consumption expenditure 9.1 8.9 8.8 8.7Imports of goods and services 20.9 37.7 31.7 28.5 1987-97 1997-07 2006 2007(average annual growth) Agriculture 2.9 3.4 1.8 1.0Industry 8.1 3.5 4.5 3.9 Manufacturing 10.6 1.9 2.0 2.2Services 6.3 3.7 3.8 2.8Household fi nal consumption expenditure .. .. .. ..General gov’t fi nal consumption expenditure .. .. .. ..Gross capital formation .. .. .. ..Imports of goods and services .. .. .. ..

Note: 2007 data are preliminary estimates.* The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.


PRICES and GOVERNMENT FINANCE 1987 1997 2006 2007

Domestic prices(% change)Consumer prices 13.4 8.1 8.0 6.4Implicit GDP deflator 12.7 7.3 6.7 8.6

Government finance(% of GDP, includes current grants)Current revenue 9.4 10.8 13.1 14.3Current budget balance -0.7 1.0 1.8 3.4Overall surplus/deficit -8.7 -3.9 -1.6 -1.4

0

5

10

15

02 03 04 05 06 07

GDP deflator CPI

Inflation (%)

1987 1997 2006 2007

(US$ millions)Total exports (fob) 138 1,160 833 939 Food and live animals .. 51 99 .. Animal and vegetable oils .. 35 59 .. Manufactures .. 318 606 645Total imports (cif) 503 1,750 2,372 2,653 Food 62 123 184 206 Fuel and energy 43 217 504 691 Capital goods 128 242 293 328 Export price index (2000=100) .. .. .. ..Import price index (2000=100) .. .. .. ..Terms of trade (2000=100) .. .. .. ..

TRADE

0

1,000

2,000

3,000

01 02 03 04 05 06 07Exports Imports

Export and import levels (US$ mill.)

1987 1997 2006 2007

(US$ millions) Exports of goods and services 348 1,506 1,216 1,347Imports of goods and services 604 1,962 2,832 3,225Resource balance -256 -456 -1,616 -1,878

Net income -6 8 68 106Net current transfers 124 410 1,744 1,830 Current account balance -138 -38 197 58 Financing items (net) 156 131 159 118Changes in net reserves -18 -94 -355 -176

Memo: Reserves including gold (US$ millions) 185 657 1,797 2,008Conversion rate (DEC, local/US$) 21.6 57.0 72.3 70.5

BALANCE of PAYMENTS

012345

01 02 03 04 05 06 07

Current accountbalance to GDP (%)


1987 1997 2006 2007

(US$ millions)Total debt outstanding and disbursed 986 2,414 3,409 .. IBRD 0 0 0 0 IDA 392 1,047 1,468 1,524

Total debt service 35 92 140 .. IBRD 0 0 0 0 IDA 5 17 42 46

Composition of net resource flows Official grants 131 140 312 .. Official creditors 130 197 58 .. Private creditors 37 -11 0 .. Foreign direct investment (net inflows) 1 23 -7 .. Portfolio equity (net inflows) 0 0 0 ..

World Bank program Commitments 94 146 0 0 Disbursements 81 55 43 35 Principal repayments 1 9 31 34 Net flows 79 45 12 0 Interest payments 4 8 11 11 Net transfers 75 38 1 -11

EXTERNAL DEBT and RESOURCE FLOWS

146843

1450

Composition of 2006 debt (US$ mill.)

3625

81

A-IBRDB-IDA D-Other

multilateralC-IMF

E- BilaralF- PrivateG- Short

Note: This table was produced from the Development Economics LDB database.


Annex B2

Selected Indicators* of Bank Portfolio Performance and Management

As of 5/5/09

Indicator 2006 2007 2008 2009

Portfolio AssessmentNumber of Projects Under Implementation a 12 13 16 16Average Implementation Period (years) b 2.8 2.9 3.0 3.6Percent of Problem Projects by Number a, c 25.0 23.1 6.3 6.3Percent of Problem Projects by Amount a, c 34.5 25.6 6.6 8.0Percent of Projects at Risk by Number a, d 25.0 30.8 25.0 25.0Percent of Projects at Risk by Amount a, d 34.5 29.5 19.8 24.7Disbursement Ratio (%) e 20.6 28.6 25.7 17.8Portfolio ManagementCPPR during the year (yes/no) Yes Yes Yes YesSupervision Resources (total US$'000) 1,312 1,582 1,816 1,630Average Supervision (US$/project) 109.3 121.7 113.5 101.9

Memorandum Item Since FY 80 Last Five FYs

Proj Eval by OED by Number 69 2Proj Eval by OED by Amt (US$ millions) 1,454.6 65.6% of OED Projects Rated U or HU by Number 33.8 0.0% of OED Projects Rated U or HU by Amt 20.0 0.0

a. As shown in the Annual Report on Portfolio Performance (except for current FY).b. Average age of projects in the Bank's country portfolio.c. Percent of projects rated U or HU on development objectives (DO) and/or implementation

progress (IP).d. As defined under the Portfolio Improvement Program.e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at

the beginning of the year: Investment projects only.* All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio,

which includes all active projects as well as projects which exited during the fiscal year.


Annex B3

IDA Indicative Program Summary1

As of 4/21/09

Fiscal Year Project Name

2009 Emergency Food Support Project2

Power Development Project AF Project for Agriculture Commercialization and Trade

Total FY09 = US$131 million

2010 Rural Access Improvement and Decentralization Project AF School Sector Reform SWApHealth Sector SWAp Social Safety Net AF Development Policy Credit*

Total FY10 = US$350 – US$400 million

2011 Mid-sized Power Generation Small and Medium Irrigation Emerging Towns Roads Sector Development AF Development Policy Credit*

Total FY11 = US$250 – US$340 million

20123 Rural Roads SWAp Rural Water Supply and Sanitation SWAp Agriculture SWAp Poverty Alleviation Fund (subject to evaluation completion, could be moved forward) Development Policy Credit*

* Certain triggers must be met before DPCs could be processed.

1 The IDA envelope for the ISN period (FY10-11) is indicative. Actual allocations in these years will depend on (i) total IDA resources available, (ii) the country’s performance rating; (iii) the performance and assistance terms of other IDA borrowers; (iv) the terms of IDA’s assistance to Nepal (grants or credits), and (v) the number of IDA-eligible countries. US$ equivalent is dependent on prevailing exchange rate.2 Actual – delivered in September 2008.3 Although FY12 is outside the ISN period, an indicative pipeline is listed since there is high probability that we will get into a ‘strategy gap’ period after ISN expiration and before a new CAS is prepared.


IFC and MIGA Program Summary,

FY06-09 (as of March 12, 2009)

2006 2007 2008 2009

IFC Approvals (US$ millions) 0.0 4.0 0.0 10.0

Sector (%)Financial Markets (GTFP) 0% 100% 0% 0%Infrastructure 0% 0% 0% 100% Total 0% 100% 0% 100%

Investment Instrument (%) Loans 0% 0% 0% 100% Equity 0% 0% 0% 0% Quasi-Equity 0% 0% 0% 0% Other (GTFP) 0% 100% 0% 0% Total 0% 100% 0% 100%

MIGA Guarantees (US$ millions) 30 30 30 30

GTFP - Global Trade Finance Program


Annex B4

Indicative Non-lending Activities (IDA)

As of 4/22/09

Task1 Completion FY

For Completion in FY09Technology in Microfi nance 2009Agriculture Insurance Feasibility Study 2009Financial Sector SWAT Assessment 2009Governance Note 2009Evaluation of Community Managed Schools 2009Construction Sector Analysis 2009

UnderwayHydropower – Removing Barriers (ESMAP) 2010Social Impacts of Rural Energy (ESMAP) 2010Energy Effi ciency Study (ESMAP) 2010Investment Climate Assessment 2010Information Infrastructure for Growth(AusAid) 2010Water Resources and Climate Change 2010Fiscal Federalism (GPF) 2010

Planned (preliminary) – Core AAA only2 Right To Information Implementation (GPF) 2010Local Government Study (GPF/other) 2010Social Accountability Analysis(GPF) 2011Nepal Living Standards Survey 2010Poverty Assessment 2011Public Expenditure Review 2011PEFA Action Plan Implementation 2011

Programmatic Activities Migration and Remittances 2009-2011Jobs and Skills Development 2009-2011Revitalizing Agriculture 2009-2011Support to Urban Development 2009-2011Social Protection TA (incl. DFID TF) 2009-2011

1 Includes activities funded from Bank Budget and Bank-Executed Trust Funds.2 Other sector-specifi c AAA tasks will be undertaken based on further discussions with GON and country team and taking into consideration the overall budget constraints and available trust fund resources during the FYs.


Indicative Non-lending Activities (IFC)

As of 4/22/09

Task Completion FY

Financial Sector ActivitiesCredit Information Bureau (underway) 2010> MOU signed on Nov. 2007> Legal framework reviewed> Business Plan prepared> RFP for hardware / software under WB project> Procurement review > Drafting of Directives for Central Bank > Approval of bidding documents by WB > Draft CIB Act> Public Awareness> Training of CIB staff> Exposure and best practices visits of

regulators and stakeholders

Secured Transactions Registry (underway) 2012> Feasibility Study by FIAS> Appointment of Registrar by the GoN> Cambodia exposure visit> Amend Secured Transaction Registry Action/

Notify Regulations> Physical office establishment> Service provider agreement with private operator> Awareness campaign

MSME Survey (underway) 2009> RFP in September 2008> Survey to be finalized by 2009

Micro-Finance (underway) 2010> Preliminary scoping> Explore investments with complementary

advisory work> Identify advisory leads in

coordination with investments

Convergence (proposed) 2010> Scoping public-private sector interest

(underway)> Await Central Bank endorsementPartner Finance Institutions

Himalayan Bank Ltd. (underway) 2010> Diagnostic> MOU signed in March 2007

> SME strategy completed> Next steps to be discussed once SME

survey competed> Renewal of MOU of SEDF II

Bank of Kathmandu (underway) 2010> Diagnostic> MOU signed in May 2007> Strengthening of credit operations (by October 2009)> Micro-finance services> Next steps discussed upon completion of

strengthening of credit

Operations> Renewal of MOU for SEDF II

Nepal Industrial and Commercial Bank (underway) 2010> Diagnostic> MOU signed in February 2007> SME department restructuring> Renewal of MOU for SEDF II

Business Enabling Environment/ICRP (underway) 2014> Economic Zone Regime Review> Regulatory Reform> Business Advisory Forum> Corporate Governance workshops

Agriculture> Support for IDA’s PACT projects (tentative ) 2011

Hydro-Power Sector 2009> Study to identify prospects (underway)

Energy Efficiency> Support for investments in banks for on-lending to energy 2010efficient projects (underway)

Infrastructure/Transport Sector > Joint work with Bank on PPPs> Transaction advisory services for PPP (tentative) 2011

Tourism Sector> World hotel Link-web portal for automated

hotel bookings (underway) 2010

Task Completion FY


Poverty and Social Development Indicators

Annex B5

1980-85 1990-95 2001-07 South Asia Low-income

POPULATION Total population, mid-year (millions) 17.0 21.7 28.1 1,520.4 1,295.7 Growth rate (% annual average for period) 2.3 2.5 2.0 1.6 2.2Urban population (% of population) 7.4 10.9 16.8 29.2 31.7Total fertility rate (births per woman) 5.4 4.6 3.1 2.8 4.3POVERTY (% of population) National headcount index .. .. 30.9 .. .. Urban headcount index .. .. 9.6 .. .. Rural headcount index .. .. 34.6 .. ..INCOME GNI per capita (US$) 160 200 340 880 578Consumer price index (2000=100) 25 72 140 140 150Food price index (2000=100) 24 71 104 .. ..INCOME/CONSUMPTION DISTRIBUTION Gini index .. .. 47.2 .. ..Lowest quintile (% of income or consumption) .. .. 6.0 .. ..Highest quintile (% of income or consumption) .. .. 54.6 .. ..SOCIAL INDICATORS Public expenditure Health (% of GDP) .. .. 1.6 0.9 1.5 Education (% of GDP) .. 2.0 3.4 2.7 ..Net primary school enrollment rate (% of age group) Total .. 63 79 85 73 Male .. 83 84 88 76 Female .. 42 74 83 69Access to an improved water source (% of population) Total .. 78 89 87 68 Urban .. 96 94 94 84 Rural .. 76 88 84 60Immunization rate (% of children ages 12-23 months) Measles 34 56 85 65 76 DPT 32 54 89 64 77Child malnutrition (% under 5 years) .. .. 39 41 29Life expectancy at birth (years) Total 51 58 63 64 57 Male 52 58 63 63 56 Female 51 58 64 66 58Mortality Infant (per 1,000 live births) 117 84 46 62 85 Under 5 (per 1,000) 171 118 59 83 135 Adult (15-59) Male (per 1,000 population) 376 350 235 251 310 Female (per 1,000 population) 395 376 211 172 272 Maternal (modeled, per 100,000 live births) .. .. 830 500 780Births attended by skilled health staff (%) .. 7 19 41 41

Latest single year Same region/income group

Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age or at any time before the survey. World Development Indicators database, World Bank - 10 September 2008.


Key Economic Indicators

Annex B6 Actual Estimated BudgetIndicator 04/05. 05/06. 06/07. 07/08. 08/09.

National Accounts (as %of GDP) /aGross Domestic Products /a 100.0 100.0 100.0 100.0 Agriculture 35.2 33.6 32.5 32.6 Industry 17.1 16.7 16.6 16.0 Services 47.7 49.7 50.9 51.4Total Consumption 92.0 94.5 94.2 31.7Gross domestic fixed investments 20.7 21.5 21.3 21.8 Government Investment 3.0 2.8 3.0 3.2 Private Investment 17.7 18.7 18.3 18.6Exports (GNFS) 15.2 14.0 13.6 12.5Imports (GNFS) 30.7 32.5 32.7 33.7Gross domestic savings 12.0 9.3 10.2 11.9Gross national savings 29.6 30.1 29.7 33.2

Memorandum itemsGross domestic products (US$ million at current prices) /a 7974 8715 9888 12254GNI per capita (US$) 329 352 394 476GDP per capita (US$) 328 350 390 470Real GDP annual growth rates (%, calculated at 2001 prices) /b 3.1 3.7 3.2 4.7Real GDP annual per capita growth rates (%, calculated at 2001 prices) /b 1.1 1.8 1.2 2.6

Balance of Payments (US$ millions) Exports, Merchandise FOB 843.9 850.1 892.3 955 Imports, Merchandise FOB 2050.9 2372 2659.3 3291.1 Resource Balance 23 68.5 105.4 47.9 Net Private transfers 922.5 1350.8 1420.7 1275 Current Account Balance 162.5 196.7 49.6 -37.7Official transfers 503.4 458.7 468.9 337.3

Memorandum itemsResource balance (% of GDP) /b 0.3 0.8 1.0 0.4Annual growth rates (in %) Merchandise exports (FOB) (excluding re-exports) 8.6 2.5 2.3 -1.9 Merchandise imports (FOB) 9.8 11.0 11.2 12.9

Public finance (as % of GDP at market prices) /cTotal revenues 11.7 10.8 11.9 12.8 15.0Total expenditure 14.9 14.5 15.9 17.6 23.4 Current expenditure 10.5 10.2 10.6 11.1 13.7 Capital expenditure and net lending 4.4 4.3 5.3 6.4 9.6Overall deficit before grants -3.2 -3.7 -4.0 -4.8 -8.3Overall deficit after grants -0.8 -1.6 -1.8 -2.0 -3.3Domestic financing (net) 0.2 1.4 1.5 1.8 2.4Foreign financing (net) 1.6 1.3 1.4 1.4 2.0

Monetary indicatorsM2/GDPb 51.0 53.1 54.5 54.7 Growth of M2 (%) 8.3 15.6 14.0 13.3 Private sector credit growth/total credit growth (%) 102.6 112.8 111.3 154.8

Price indices Real exchange rate (eop; percentage change- = depreciation) /d -7.5 -8.2 -19.5 -3.7 Consumer price index (% change) (FY00=100) 5.7 7.7 6.2 7.2 GDP deflator (% change) (FY00=100) 6.3 6.6 7.4 7.7/a.GDP at factor cost. Source: Central Bureau of Statistics - 2008/b.GDP at market price/c.Consolidated central government operation, net terms./d.Includes use of IMF resourses.


Annex B7

Key Exposure Indicators

Actual Estimated

Indicator 04/05. 05/06. 06/07. 07/08.

Total debt outstanding and disbursed (TDO) (US$m)a 3,330 3,385 3,623 3,529Net disbursements (US$m)a 9 55 238 -95Total debt service (TDS) (US$m)a 98 168 146 152 Debt abd debt service indicators (%) TDO/XGSb 3 3 3 2TDO/GDP 45 38 35 29TDS/XGS 8 14 11 10Concessional/TDO 87 89 90 90

IBRD exposure indicators (%)

IBRD DS/public DS 0 0 0 0Preferred creditor DS/public DS (%)c IBRD DS/XGS 0 0 0 0IBRD TDO (US$m)d 0 0 0 0Share of IBRD portfolio (%) 0 0 0 0IDA TDO (US$m)d 1,396 1,468 1,524 1,509

a. Includes public and publicly guranteed debt, private non-guranteed, use of IMF credits and net short-term capital.b. "XGS" denotes exports of goods and services, including workers' remittances.c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank

for International Settlements.d. Includes present value of gurantees.e.Includes equity and quasi-equity types of both loan and equity instruments.


Annex B8

Status of Bank Group Operations and Grants

as of 5/5/09

Closed Projects 75

IBRD/IDA * Total Disbursed (Active) 337.13 of which has been repaid 0.00Total Disbursed (Closed) 1,501.99 of which has been repaid 310.68Total Disbursed (Active + Closed) 1,839.13 of which has been repaid 310.68

Total Undisbursed (Active) 469.55Total Undisbursed (Closed) 6.36Total Undisbursed (Active + Closed) 475.91

Last ISR

Development Implementation Fiscal IBRD IDA IDA TFProject ID Project Name Objectives Progress Year Loan Credit Grant Grant Cancel. Total.

P100342 Avian Flu S MS 2007 18.2 18.2P074633 Education for All Project S S 2005 50.0 60.0 110.0P084219 Fin Sector Restructuring (Phase II) MS MS 2004 68.5 7.0 21.3 54.2P099296 Irrig & Water Res Mgmt Proj S MU 2008 14.3 50.0 64.3P093294 NP Economic Reform TA S MS 2005 3.0 3.0P071291 NP Financial Sector Technical Assistance MS MS 2003 16.0 6.5 9.5P113002 NP Social Safety Net - Food Crisis Response S MS 2009 2.7 14.0 5.0 21.7P050671 NP: Telecommunications Sector Reform S S 2002 22.6 6.8 15.8P040613 Nepal Health Sector Program Project S MS 2005 10.0 90.0 100.0P105860 PAF II S S 2008 100.0 100.0P043311 Power Development Project S S 2003 50.6 25.0 0.8 74.8P110762 Peace Support Project S S 2008 50.0 50.0P095977 Road Sector Development Project S S 2008 42.6 42.6P083923 Rural Access Improve. & Decentralization S MS 2005 32.0 32.0P071285 Rural Water Supply & Sanitation Project S MS 2004 25.3 27.0 52.3P090967 Second Higher Education Project MS MS 2007 60.0 60.0P071291 NP Financial Sector Project (FSTA) DFID 2003 9.6 9.6P090038 NP Biogas Support program (Carbon Finance) 2006 7.0 7.0P103979 NP Biogas Support program (GPOBA/DFID) 2008 5.0 5.0P104445 IDF Reforms to Strengthen Creditor Rights 2008 0.4 0.4aP110760 IDF Strengthening Public Procurement Office 2009 0.5 0.5P090967 Targeted Secondary School Stipend (Japan) 2009 1.9 1.9Overall 0.0 260.0 578.8 29.4 35.4 832.8 Result

Active ProjectsSupervision Rating Original Amount in US$ Millions


Statement of IFC's Held and Disbursed Portfolio

as of 04/30/2009 (In USD Millions)

**Quasi **Quasi FY Approval Company Loan Equity Equity *GT/RM Participant Loan Equity Equity *GT/RM Participant

1996/98 Bhote Koshi 6.9 0 0.0 1.0 6.2 6.9 0 0 1.0 6.22009 Buddha Air, Nepal 10.0 0 0.0 0.0 0.0 10.0 0 0 0.0 0.01994 Himal Power 9.6 0 0.9 0.0 0.0 9.6 0 0.9 0.0 0.01998 Jomsom Resort 4.0 0 0.0 0.0 0.0 4.0 0 0 0.0 0.02007 Bank of Kathmandu GTFP 2.1 0.0 2.1 0.02007 NIC Bank GTFP 0.0 0.0 0.0 0.0 Total Portfolio: 30.5 0 0.9 3.1 6.2 30.5 0 0.9 3.1 6.2

Committed Disbursed Outstanding

Annex B8


Annex B9

Bank Group Program

> Ongoing dialogue on

the draft National

Development Strategy

> Efforts at better donor

coordination

> Application of the Peace

Filter to all new IDA

operations

> Exchange of south-south

post-conflict experiences

(non-lending TA)

> Implementation of IDA’s

ongoing Emergency Peace

Support Project

> Reconstruction of damaged

public facilities (schools,

clinics, roads, etc,)

under sector specific IDA

operations (see below)

> Second order effects of

IFC’s investments and

dialogue on improving

the investment climate

Country Development Agenda

The goal is to bring about visible, positive changes in the lives of the common people, through lasting peace and economic dynamism with equity. This entails: (i) implementing the Peace Agreement, security reform, and cantonment management, among other things; (ii) presenting a vision of the New Nepal and reflecting that vision in public policies and spending; and (iii) grounding the New Nepal in the new Constitution under preparation. Accelerating economic development, addressing poverty and exclusion, and improving service delivery are essential elements of that agenda. This overarching goal is reflected in each of the following pillars

Issues and Obstacles

> Societal

fragmentation

and long standing

discrimination

based on caste,

ethnicity,

language, gender

and/or religion> Pervasive poverty,

income inequality, and inequitable access to services, jobs, and resources

> Lack of trust in political and state institutions

> Resort to violence, intimidation and aggression to deal with grievances

> Law and order does not prevail

Strategy Milestones and Outcomes for end FY111

> Application of the

Peace Filter for

new operations to

understand project

dynamics better and

either “do no harm”

or enhance the peace

building process via

job sustainability

and/or creation, and

enabling inclusive

access to services

and opportunities

> Payments made

under the Emergency

Peace Support

Project using sound

fiduciary mechanisms

to compensate those

affected by the past

conflict

Likelihood of Realization2

Medium: since the overall role of the Bank Group and its influence on the peace process is selective, the specific milestones have a good chance of being realized, notwithstanding the challenges facing the peace process and the economy overall. However, it may be difficult to monitor implementation and to measure robust results by end of the ISN

Overarching Goal: Building a Peaceful, Prosperous and Just New Nepal

1 The ISN’s milestones and outcomes are those areas in which the Bank Group expects to have a major contribution and can influence results. In light of the ISN’s short timeframe, the results matrix focuses on key processes, actions, and intermediate outputs. Anticipated outcomes are provided for select areas that are robust and can demonstrate concrete results. The target date for the milestones is June 2011. In some cases, there may be a lag in availability of statistics. 2 The ISN attempts to establish realistic goals and accomplishments recognizing that the country situation is fluid and there are many uncertainties, including the possible impact of the global economic crisis. The results matrix provides an indication of the likelihood of these milestones being realized. The probability of occurrence of 40 percent or less would be considered low; around 60 percent as medium, and 80 percent or over as high.

ISN Results Framework, FY10-FY11


Bank Group Program

> Implementation of IDF grant for Strengthening Institutional Capacity of PPMO

> PEFA Action Plan implementation (non-lending TA and AAA)

> Close coordination with DFID and ADB to advance reform agenda in public financial management and public procurement

> Analytical work and advice on: (i) international experiences, models, and options for strengthening the CIAA, the Public Accounts Committee, and the Public Service Commission; (ii) pay and incentives reform; and (iii) management of public enterprise reforms (GPF)

> Inclusion in possible Development Policy Credit

> On demand, just-in-time advice and analysis to the CA on global experiences and different models of fiscal federalism (GPF)

> Synthesis of the experiences of local governments to help inform the Bank and others (GPF/AAA)

> Dialogue with the GON and donors on the role of local governments through the Local Government and Community Development Program (LGCDP) (non-lending TA) and analysis of governance, infrastructure and service priorities of selected emerging towns (programmatic AAA)

> Completion of Joint Bank-IFC ongoing Investment Climate Assessment (AAA)

> IFC’s advice and technical support for improving the Investment Climate (ICRP). In particular, engagement


1.1 Strengthening Core Public Sector Institutions and Systems (i.e. public financial management, procurement, accountability institutions), step by step, building on the advances to date and reinforcing the necessary underlying sound public sector management principles

1.2 Within the broader goal of transforming the state, putting in place a new federal government administrative and fiscal structure which, among other things, devolves responsibilities to decentralized local governments that are responsive and accountable to local populations

1.3 Changing the rules of the game to foster a climate of good governance and accountability both within the public and private sectors


> Despite some progress in financial management and procurement, implementation of core PEFA Actions remains and continued weak capacity prevails

> Permissiveness, lack of enforcement, poor accountability and performance measurement in public institutions

> Low salaries and mixed incentives in the civil service which foster “petty” corruption

> No local elections since 1999> The civil service regime is

unclear; many posts are vacant> Various political and

administrative entities exist, with unclear jurisdictions

> Some structures, especially at the lowest level, are too small to be viable

> Regional aspirations for autonomy complicate finding solutions to the fiscal dimensions

> Continuing violence inhibits normal operations

> New Constitution may reorganize current government boundaries and structures

> Nepal ranks relatively poorly on perceptions of corruption and the WBI’s Governance Indicators

> Nepal ranked 122nd out of 188 in the Doing Business 2009 survey


> Implementation of OECD/DAC indicators for public procurement monitoring

> Issuance of standard bidding documents (works and goods) for NCP by PPMO

> Production of financial statements for FY11 according to internationally accepted accounting principles (IPSAS-based) for public sector

> Completed piloting of a single treasury account in two districts

> Endorsement by Cabinet of a set of the Regulations to implement the Right to Information (RTI) Act, 2007


Medium: many of these reforms are on the critical path but their successful implementation depends on political commitment and the resources to make them happen within the ISN timeframe

High: the milestones are modest and build on areas in which the Bank Group has already engaged

Pillar One: Promoting Capable State Structures and Systems, and Fostering Accountable Institutions



Bank Group Program

with the GON on the SEZ regime> IFC’s support for the Business Advisory

Forum > Awareness workshops on corporate

governance, one each with banks and business membership organizations

> Non-lending TA for RTI (GPF)> Social Accountability and Risk Analysis

of at least one sector and Governance and Institutional Review of the Health Sector (GPF)

> Support to task teams for GAAP design and implementation (GPF and other TFs)

> Capacity building for civil society and Bank staff on introduction of social accountability (demand side) mechanisms in IDA’s program (GPF and other TFs)

> ID’s proposal to PPIAF to prepare a PPP framework

> Inclusion of some elements in possible Development Policy Credit

> Monitoring of the macro-situation, with close watch on economic vulnerabilities and engagement with GON on contingency planning in case of sharp economic downturn (AAA and non-lending TA)

> Support to prepare a Medium-term expenditure Framework (non-lending TA)

> Continued implementation of IDA’s Economic Reform TA project and Non-lending TA to improve selected government functions

> Public Expenditure Review (AAA)> Completion of joint IDA-Bank

Investment Climate Assessment (AAA)> IFC’s Investment Climate Reform Project

to improve investment climate (Advisory Services)

> Continued monitoring and assessment of Migration and Remittances (programmatic AAA)

> IFC lending of some $15-20 million per year in 1 to 2 projects

> Improved sector knowledge about


2.1 Maintaining macro-economic stability and increasing fiscal space for growth, along with implementation of reforms that improve the investment climate for private sector-led growth, employment creation and reducing the cost of doing business

2.2 Alleviating bottlenecks and


> While Nepal has performed well under the circumstances, it has lost opportunities and now faces growing expectations in the midst of an adverse global situation

> Nepal continues to rank poorly on “Doing Business”

> Job creation is weak> Among other things, labor laws

are inflexible> Strikes and other disruptions

to production are a concern

> Because of the conflict, investment—both public and private—has been low


> Inclusion of Governance and Accountability Action Plans (GAAPs) in all new IDA operations plus five of ongoing projects

> Introduction of Social Accountability (demand-side) in new operations and five ongoing projects

> Social Audits will increase from 68 percent to 80 percent non-private, grade 1 to 8 schools

> Preparation of Framework to govern Private Participation in Public Services (PPP) for GON consideration

•Medium-termexpenditureframework agreed for FY11

•ImprovedSEZLawsubmitted to the Constituent Assembly

•Public-PrivatePolicyDialogue Initiated through IFC’s ICRP

> Rehabilitation of 8,000 hectares of small-scale irrigation


and/or where we anticipate high convergence with the GON’s policies and programs

Medium: while the milestones are modest, they dependent on continued dialogue and openness to reforms and may be overtaken by events

Medium: milestones are vulnerable to

Pillar One: Promoting Capable State Structures and Systems, and Fostering Accountable Institutions

Pillar Two: Laying the Foundation for Sustainable Economic Growth



Bank Group Program Country Development Agenda

Issues and Obstacles Strategy Milestones and Outcomes for end FY111


> Productivity in the agriculture sector is poor

> The power sector is in dire straits with rotating blackouts up to 16 hours per day

> New Hydro-power are licensed but do not proceed

> Constraints to connectivity and movement of people and goods are among the root causes of conflict and low growth

> Nepal has very low density of its road system and poor access to communities to all weather roads

> This results in Nepal having high costs of trade

> Few Nepalese have access to credit

> The banking sector has regulatory and structural weaknesses; significant non-performing loans, inadequate provisions and undercapitalization

> 500,000 youths enter the labor force each year with low skills and job prospects

> Increased availability of power generation capacity by 100 MW

> At least one bank offers energy efficiency credits to private sector

> 450 km of strategic roads updated to all weather standard equivalent to an increase of 6 percent of the rural population within 20 minutes (2 km) walking

> Funding in budget sufficient for 500 km of road maintenance per year (FY10/11)

> 615 km of rural roads upgraded to all season in 20 districts

> Agreement on the framework for sector wide approach in rural roads

> Credit Bureau equipped with the necessary hardware and software to carry out its functions (IFC)

> SME lending strategy approved by three commercial banks (IFC)

> Completion of training of 1000 girls in vocational skills and life skills

overall economic conditions, social and political stability and maintenance of peace, as well as confidence of the private sector. Intimidation of bidders, poor contracting processes, and disruption of work sites and supply chains could have adverse effects on realizing planned investments. Deterioration in the fiscal situation and/or the financial sector is other risk that could affect the realization of some of the milestones in this pillar

Revitalizing Agriculture (programmatic AAA)

> IDA’s support for Agriculture Commercialization and Trade Project and ongoing and possible new Irrigation and Water Resource Mgmt Projects

> IFC’s investment in agri-business through two ongoing funds (India Agri Fund and IFC SME Ventures)

> Joint Bank-IFC workshop on PPPs> IFC’s infrastructure advisory (one

feasibility study)> AAA on removing the barriers to

expanding hydro-power (ESMAP); TA to NEA on demand-side management (ESMAP); TA for CFL distribution (ESMAP); and IDA’s support for the Power Development Project (ongoing and additional financing).

> IFC’s exploration of possible investments in green-field and expansion of existing IFC hydropower projects and opportunities to collaborate with the Bank to set up cross-border transmission lines

> IFC’s advisory services with banks on lending for energy efficiency

> IDA’s support under the ongoing Road Sector Development Project, Rural Access Improvement project (ongoing and additional financing); and new Strategic Roads project

> Completion of the study of the Construction Industry (AAA)

> Agreement on a framework for SWAps in rural roads (non-lending TA)

> IFC’s completion of its ongoing project with an airline and potential investment to enhance air transport facilities

> IDA’s strategy to address emerging towns, first with AAA, and then possible IDA financial support (programmatic AAA)

constraints in key sectors such as power, along with the promotion of investments, productivity improvements, job creation and expansion of credit







> Completion of IDA’s ongoing Telecommunications Project

> Completion of the study of Information Infrastructure for Growth (AAA/TF)

> IDA’s work under the Financial Sector TA project, the DFID TF for the Financial Sector, and an IDF for legal and judicial reforms to strengthen creditor risks, with possible inclusion under DPCs

> Continuation of IFC’s ongoing advice and technical support for the Credit Bureau; setting up of the Secured Transaction Registry; and developing SME strategies and capacities in three banks (SEDF)

> IFC to promote one investment for MSME support through investments in micro-finance institutions

> IFC to provide $10-15 million to facilitate trade finance with three Nepalese banks

> Analysis of Jobs and Skills (programmatic AAA)

> Implementation of the Adolescent Girls’ Employment Initiative (AGI-Gender Action Plan Partnership)


Pillar Three: Enhancing Equitable Access to Services and Social Inclusion

> Non-lending TA and AAA for the survey (contingent on donor co-financing)

> Poverty Assessment (AAA)

3.1 Strengthening core diagnostics and monitoring in order to have an –up-to-date insight into living standards, especially in light of the global crisis and emphasis on social inclusion

> Although Nepal has been able to track and monitor a number of social indicators, the next wave scheduled living standard survey that should have taken place in 2008 has slipped

> This is critical for the preparation of the next Poverty Reduction Strategy as the last PRSP expired in 2007

> Generally there is a need to strengthen sector level M&E system, include social accountability and enhance analysis of social exclusion

> NLSS completed Medium: the completion of the survey could be hampered by security conditions for the surveyors and therefore may not be completed on time or only partially completed



> Completion of the Evaluation of Community Managed Schools (AAA)

> Continued implementation of IDA’s Education for All and Second Higher Education projects

> Expansion of IDA’s support via new School Sector Reform Program SWAp

> Continued implementation of the Pro-Poor Targeted Secondary School Stipend program (JSDF)

> Study of Jobs and Skills (programmatic AAA)

> Health Sector SWAp> Continued implementation of the ongoing

Avian Flu project> Non-lending TA and policy dialogue on

new Health Sector Strategy (AAA)> Continued implementation of Governance

and Accountability Action Plan (GPF)

3.2 Reinforcing and extending Nepal’s ongoing efforts to reform its education system, with a view to increase access to all levels of education, with a particular emphasis on attaining universal access to primary education followed by basic education

3.3 Addressing the many remaining challenges in the health sector, building on the improvements to some health outcomes (notably the rate of skilled birth attendance, infant mortality and vaccinations), and with renewed emphasis on inclusion and equity—including decentralization, human resources, interaction of the public-private-and community sectors in the delivery of health services and governance. There would be heightened emphasis on maternal and child health and new vigor in addressing nutrition, HIV/AIDS and non-communicable diseases

> Economic hardships remain a barrier for many children to attend schools, particularly among Dalits and Janajatis

> Participation is inequitable, particularly in higher education, with 88 percent of students coming from the highest income quintile

> Access to technical education and vocational training is limited, and of very poor quality.

> Other systemic issues include inter alia timely availability of text books, teacher absenteeism, low completion rates, slow progress in hiring female and disadvantaged teachers, slow progress in measuring learning achievements

> Despite many advances, some health indicators remain stubborn—namely under five malnutrition which stands at about 40 percent

> Nepal is also off track in meeting the MDG concerning maternal health and addressing HIV/AIDS

> Data are lacking on malaria and more could be done to assess access by income quintile

> Number of community managed schools increased from 8,000 to 12,000

> Net enrollment increases from 92 percent to 94 percent (grades 1-5) and from 82 percent to 86 percent (grades 1-8) as verified through EMIS

> Establishing an accreditation system for higher education.

> 4000 students from 1st and 2nd quintile to benefit from financial aid to attend higher secondary and higher education

> 35 percent of pregnant women receive at least four antenatal visits (29 percent in 2006)

> Share of deliveries by trained health workers increased from 32 percent in 2009 to 42 percent

> Share of women with knowledge of at least one method of HIV infection in women from 56 percent in 2006 to 72 percent

> Share of under-five malnourished children from 49 percent in 2006 to 35 percent

> Contraceptive Prevalence rate for modern methods increased from 44 percent in 2006 to 48 percent

> 6000 surgeries for uterine pro-lapse per year

> Share of children under 12 months immunized with DPT3 from 79 percent in 2008 to 90 percent

Medium: while there is some risk that renewed, wide spread conflict, intimidation and/or severe economic conditions might affect achieving these outcomes, the experience during the past conflict period indicates that the programs are quite robust. There is a risk of past reforms being challenged

Medium: while there is some risk that renewed, wide spread conflict and/or severe economic conditions might affect achieving these outcomes, the experience during the past conflict period indicates that the programs are quite robust. Nevertheless, fraud and corruption remains an issue and bidding and contracting processes may be vulnerable to intimidation and collusion










3.4 Developing Nepal’s vision of a coherent and robust social safety net that goes beyond its traditional informal structures. This vision would include pensions, targeted programs and delivery of flagship safety net support such as social allowances and public works

3.5 Expanding other basic services in the rural areas, notably water supply, sanitation and off-grid electrification, using community based mechanisms for delivery and operation

> Cabinet endorsement of a Social Protection Strategy, including framework or set of principles and information base on targeting social programs for poor and vulnerable groups

> 20,000 more rural households benefiting from modern electricity through sustainable community based micro-hydro schemes

> 69,000 more rural households benefiting from community managed rural water systems and 65,000 more from sanitation systems

> 21,000 more rural families using biogas

Medium: the complexity of this task and its political economy ramifications may make reaching a political consensus on reforms difficult

High: while there is some risk that renewed, wide spread conflict and/or severe economic conditions might affect achieving these outcomes, the experience during the past conflict period indicates that the programs are quite robust

> Analysis of Nepal’s current system provision of diagnostic inputs to prepare an overall vision (programmatic AAA and DFID TF)

> Continued implementation of IDA’s ongoing Poverty Alleviation Fund II project and Emergency Food Support project with additional financing

> Some elements included in possible Development Policy Credit

> Continued implementation of IDA’s Rural Water Supply and Sanitation project

> Continued implementation of the micro-hydro components of IDA’s Power Development Project along with additional financing

> Analysis of the Social Impacts of Rural Energy (ESMAP)

> Implementation of the Nepal Biogas Support Program (Carbon Fund) and Biogas IV Program (DFID)

> Nepal’s current social safety net is fragmented and spread across a number of ministries

> The efficiency and effectiveness of targeting mechanisms are unclear

> The M&E system and evidence base are lacking

> While increasing, the access of rural communities to electricity and to improved water and sanitation systems remains low

> Moreover, the traditional approach of contractor-led construction and top-down operation has not been effective



The World BankNepal OfficeP.O. Box 798Yak and Yeti Hotel ComplexDurbar MargKathmandu, Nepal Tel.: 4226792, 4226793Fax: 4225112

Websites www.worldbank.org.np, www.bishwabank.org.np

Public Information Center1st Floor, West WingLal Durbar Convention CenterYak and Yeti Hotel Complex, Durbar Marg, Kathmandu, NEPALTel: (+9771) 4268195, 4249731, 4238545, Fax: (+9771) 4238546Email: [email protected]

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