World Bank Director Warns of Aid Reduction to Nepal

The aid precipice

Unless the government is able to rejuvenate the reform process the
World Bank will have to move the Nepal program to the ‘low case’

In 2002, the World Bank agreed to increase the volume of its
assistance to Nepal several fold. This decision recognised the
emergence of significant reforms in banking, primary education, health
care, telecommunication, anti-corruption and public expenditure
management, among other areas.

A year later, the World Bank even provided budget support of some $ 70
million in the form of the first Poverty Reduction Support Credit

Despite the political uncertainties and the conflict, there was a
measure of optimism that these reforms would address some of the
fundamental constraints to Nepal’s development.

In the days after the royal proclamation of 1 February, some donor
representatives, human rights activists and others have argued that
the World Bank should cut back its support to the government and in
withhold the second budget support operation (PRSC II) until
significant progress was made on the political front.

These skeptics claimed that PRSC can be seen as an endorsement of the
political situation in Nepal. The World Bank did not agree with such a
stance, for it does not link its support to political developments.
The Bank said it would continue to provide aid to Nepal as long as its
government sticks with the reform process and is able to sustain
development activities.

Seven months into the new political situation, the World Bank is
deeply concerned that these two key conditions have not been met. This
could lead to a sharp reduction in the Bank’s assistance to Nepal. To
be fair, the slowdown in the pace of reforms happened last year, when
a coalition interim government took the helm. But some people
expected, quite rationally, that the new government would accelerate
the reform process. After all, King Gyanendra himself made it clear
that the new government was committed to continuing economic reforms,
accelerating poverty reduction and fighting corruption. Besides, many
argued that, lacking in parliamentary legitimacy, the new government
had every reason to deliver good public services and development
programs, and build ‘performance legitimacy.’

While some good reform initiatives that had started earlier continued
to be implemented, few new reform initiatives of significance have
been launched since 1 February. In fact, there are indications that
there may even be pressures to reverse reform gains. Especially after
the RCCC verdict on the Melamchi case, many civil servants seem
fearful of making even routine decisions to sustain development

The World Bank is in the process of reviewing its Country Assistance
Strategy (CAS). As in the past, it strongly links the overall
assistance level to the policy performance of Nepal, or its ability to
use money well to further its development objectives. In the ‘base
case’, the annual range of assistance was set at $ 120-200 million. If
the reforms slip significantly, then assistance would be lowered to a
‘low case’ and the annual commitment level will be sharply reduced to
a range of only $ 0-50 million. In the low case, there would not be
any budget support.

I have had many rounds of discussions with senior HMGN leaders about
pending reform actions over the last several months. Promises of
imminent actions have been made time and again. But few concrete
have been taken. Therefore, unless the government is able to
rejuvenate the reform process in the coming weeks, the World Bank will
have to conclude that HMGN’s priorities are elsewhere and that the
effectiveness of HMGN as a promoter of development is slipping. In
such a situation, the Bank would have to move the Nepal program to the
low case.

What is at stake in terms of aid is big. First of all, Nepal would
lose about $ 100 million or more in new assistance every year from the
World Bank alone, or about six percent of HMGN’s total Fiscal Year
2005/06 budget. That loss would include PRSC II ($ 70 million or
more), which is the most powerful financial support the World Bank can
give to HMGN’s development efforts, for it disburses in one cash
payment, unlike conventional projects which disburse over many years.

But the financial loss will not stop there. Recently, the IMF and the
World Bank determined that Nepal is eligible for debt relief for the
so-called ‘Heavily Indebted Poor Countries’ (HIPC). Rough calculations
show that if Nepal qualifies for this benefit, it may stand to gain
around $ 30 million a year in debt service reduction right now and
even more in the future. To qualify for these debt relief measures,
however, Nepal’s reform program needs to be on track.

The bigger loss, of course, comes from the slowing down of the
development process itself. The kind of reforms that have been stalled
and are causing the World Bank to reconsider its stance are really
designed to
improve public services to average Nepali citizens, to improve
transparency and accountability, and to create a better economic
environment for job creation. There may be some measures that are more
difficult to implement in this highly charged political environment.
But other measures should have broad public support and immediate
benefits in many cases. Why they have proven so difficult to implement
is a mystery.

The flipside of the ‘politically neutral’ position of the World Bank
is that it would not continue to provide funding to this government on
account of political considerations. Yes, we understand that the
country faces a serious domestic challenge from the insurgents whom
the government calls ‘terrorists’. Some donor countries may be willing
to help the government deal with this problem with more generous aid.

For the World Bank, however, that is not a justification for financial
support. Our support is for development, which appears to have been
relegated to the back seat. Some senior leaders of this government
have said
that no country has died from the lack of aid. True. But, the issue
is, what kind of life would Nepalis have in the absence of the strong
commitment to reforms and development?

(Ken Ohashi is the World Bank Country Director for Nepal)