Nepal Country Overview 2008

Overview | Current Challenges | The World Bank Group in Nepal | Current Lending

Nepal has made encouraging progress since it started to modernize its public administration and infrastructure over 50 years ago:

• Net Primary Enrollment in schools has increased from 81 percent in 2002 to 87 percent in 2006. Completion Rate rose from 60 percent in 2002 to 68 percent in 2006.
• The Maternal Mortality Rate halved from 538 in 1996 to 281 in 2006.  The Infant Mortality Rate dropped from 79 in 1996 to 48 in 2006.
• The coverage of potable water rose from 71 percent in 2002 to 77 percent in 2006.

The political transition in April 2006 has opened a new chapter in the history of Nepal.  The signing of a comprehensive peace agreement between the Government of Nepal (GON) and the Communist Party of Nepal-Maoists (CPN-M) in November lays out a roadmap to a lasting peace and the construction of a new governance structure. Constituent Assembly (CA) elections were peacefully held on April 10, 2008, after two postponements during 2007.

Expected growth rate for FY 2007/08 is below planned target, 3 to 4 percent compared to planned target of 5 percent. This growth outlook is a vast improvement compared to the poor growth of 2.5 percent in FY 06/07 given election related disturbances, frequent blockades and strikes which virtually stopped movement of goods and people in most parts of the country, high inflation, labor unrest, shortage of power and long lines for petroleum products. Responding to the liberalizing reforms of the 1980s and the 1990s, GDP growth averaged around 5% during the 1990s. Since 2001, the intensification of the conflict and a loss of momentum in exports have forced the economy on a lower growth path. 

Nepal’s performance in reform implementation in recent years has been mixed.  With the growing global focus on the Millennium Development Goals (including halving the proportion of people living on less than one dollar a day and reducing child mortality rates by two-thirds) Nepal needs to accelerate economic growth to reduce poverty.  While in some areas, the reforms have taken deep root and have led to further reforms, on other fronts there has been limited progress.

Current Challenges

With Gross National Income Per Capita of US$320 (2006), Nepal remains the poorest country in South Asia and ranks as the twelfth poorest country in the world: 

• Life expectancy at birth has increased, but at 63 years, it is still lower than its neighboring South Asian countries. Infant mortality rates are among the highest in the region.
• Due to high maternal mortality, life expectancy for women is lower than for men.
• Gender disparities are also common when it comes to literacy. Only 26% of Nepal's women are literate, compared to 62% of men
• Population growth has led to fragmented land holdings and depletion of forest products upon which much of the rural population depends for its livelihood.
• Nepal's population of 28 million is growing at 2% per year, and the ratio of population to arable and is one of the highest in the world. 

Over the last decade Nepal has made considerable progress toward reducing poverty, with the headcount poverty rate falling dramatically—from 42 percent to 31 percent—between FY95/96 and FY03/04.  Declining from 22 percent to 10 percent, the incidence of poverty in urban areas has more than halved, while poverty in rural areas has also declined notably (from 43 percent to 35 percent), although it remains higher than in urban areas.  Poverty rates have also declined across all of Nepal’s development regions and ecological belts.

To sustain poverty reduction, Nepal faces the dual challenges of accelerating domestic growth and sharing this growth more broadly across the population. Policies to achieve these ends will help all citizens of Nepal—including groups that have been traditionally excluded—but such policies will not be sufficient to improve the well-being of disadvantaged groups.  Building human and social capital of excluded groups is the single-most important way to bring prosperity to them.  In addition to increasing quality of education and improving the pro-poor impact of patterns of health spending that will benefit all Nepalese, various targeted policies that are also needed to build human capital of disadvantaged groups and help reduce social exclusion.

The decade-long conflict is a stark reminder of two important realities in Nepal.  First, the state has been gravely short on legitimacy.  The sustained armed insurgency is the most obvious proof of this.  Second, that a group of citizens took up arms and found a significant base of support indicates that some segments of the population felt profoundly excluded from the established system.  The grievances were political and social, as well as economic.  Moving forward, Nepal is trying to address two central issues: state building and inclusion. 

In meeting these challenges, Nepal is not without some significant assets. The evidence is compelling that the strength behind development in Nepal is highly concentrated at the community level.  Success stories abound, from forestry user groups and women’s groups, to community-based programs in rural drinking water, rural roads, micro-hydropower generation, community management of schools and the Poverty Alleviation Fund (PAF).  Many of the truly community-owned efforts have shown great viability even in conflict-affected areas.  Where a supportive framework has been created for communities to undertake such activities, there have been impressive development successes. 

Meanwhile, without taking adequate steps to ensure that Nepal is becoming more inclusive socially, politically and economically, the underlying tensions will not be resolved.  As a consensus on the development agenda emerges, it is likely that the focus on public investments for the remoter areas and the under-served will increase and the inclusion agenda will gain broader support—both themes that are prominent within the current Three Year Interim Plan.

The Government’s Three Year Interim Plan commits to continue the poverty reduction goals as per the first PRSP (2002/03–06/07). As such, inclusive and broad-based growth, effective governance and service-delivery, and social sector development remain as its priorities. In addition, it lays special emphasis on relief, reconstruction and reintegration, and increased investment in physical infrastructure to provide pro-poor employment. The Plan hopes to attain an annual average economic growth rate of 5.5% and reduce the poverty headcount to 24% (from 31%). A few other important targets of this Plan are to: increase the HDI to 0.570 (from 0.534), reduce MMR to 250 (from 281), increase access to drinking water to 85% of the population (from 77%), increase the literacy rate to 60% (from 52%), and connect all 75 district headquarters to the national road network. The Plan envisages a total 3-year budget of Rs. 511 billion (USD 7.9 billion) of which 27.5% is expected to be financed through foreign sources. The foreign financing component during the PRSP was 20.6%.

The World Bank Group in Nepal

Poverty reduction is the main objective underlying the World Bank's activities in Nepal. The World Bank assists Nepal in its development with funds and analytical and advisory work.

Over the last several years, the Bank’s lending operations have been closely linked to macro-level, as well as sector-level, reforms, which are now tied together coherently in Nepal’s Poverty Reduction Strategy and subsequent Three Year Interim Plan. Thus, the viability of the ongoing and prospective assistance depends on the continued commitment of the government to the development vision and reform agenda.

The Bank’s method of operation is not to implement "World Bank projects" but to provide financing and advice for projects which are owned and supported by the Nepali people, and which are a logical part of a comprehensive and efficient overall development agenda. As such, the Bank’s Interim Strategy Note (ISN) for Nepal, 2007, builds upon Nepal’s own strategy to reduce poverty.

Economic growth is a powerful engine of poverty reduction. To stimulate broad-based economic growth, the World Bank’s assistance focuses on removing some of the bottlenecks to growth, such as the excessive role of the state and lack of adequate infrastructure. The Bank’s assistance over the last few years has focused on strengthening the quality of public expenditure, the soundness of the financial system, and the investment climate.

In infrastructure, the World Bank is supporting projects that help promote demand-driven irrigation schemes managed by local water user groups and water supply schemes which reduce the time women spend collecting water . A Road Sector Development Program was approved in FY08 to help upgrade and maintain roads in the poorest and most remote areas of the country, reducing time and cost for moving goods and bringing people closer to schools and health centers.  A Bank-financed project is increasing access to electricity for the population in rural areas, while promoting the development of Nepal’s hydropower potential in a sustainable and environmentally sound manner, and encouraging private participation to improve efficiency in the power sector. In the financial sector, World Bank-financed projects are helping improve the supervisory functions of the central bank and stem the losses at the two of the largest public sector banks.

To accelerate human development, the Bank’s assistance to Nepal has focused on improving the quality of education and health care. Standards of education and health directly influence the quality of life and labor productivity of the people. With funding and technical assistance from the World Bank, Nepal is moving toward decentralized management of education and improving the quality of education. The Community School Support Project and the Education for All Program, for which additional financing was approved by the Bank in FY08, are assisting Nepal in improving quality and reach of education.

The Bank is also providing funding and advice to the government on its long-term health strategy and program, with a shift toward a sector-wide approach, as well as the devolution of sub-health posts to local communities. Additional financing was approved in FY08 for the Health Sector Program which intends to expand access to, and increase the use of, essential health care services, especially by underserved populations in Nepal.

To help Nepal achieve its goals of social inclusion, the Bank is working with the government and other development partners on strengthening the policy dialogue, reaching out to marginalized groups, which are often overlooked by existing institutions. Specifically, community-based projects, such as the Rural Water and Sanitation Project and the Poverty Alleviation Fund (see box 2) have started to focus on issues of inclusion more vigorously.  Additional financing was approved for both in FY08.

The Bank’s strategy has focused on protecting the past reform gains and helping the government prepare for the important post-conflict work.  In FY08 the Bank approved an Emergency Peace Support Project to help the Government of Nepal fulfill commitments made under the Comprehensive Peace Agreement   As part of the peace process, the Seven Party Alliance government has authorized payments of approx.  US$ 1,500 each to the families of the war deceased.  It has also authorized payment of approx. US$ 50 per month to approximately 19,600 verified Maoists in cantonments, including arrears on these payments that have built up over the past.  In addition, the project will also help the Government pilot reintegration initiatives.

The Bank would continue to enter into new commitments for a number of projects, many built on robust community engagement and others strengthening the foundations for faster growth.  Strong dialogue, backed by analytical work carried out with not just the government but also a broad range of stakeholders, will continue, especially on the issues of inclusion, state building and growth.  As opportunities emerge—whether related to implementation of the peace process, implementation of reforms, or implementation of the post-conflict program—and there is movement towards the positive end of the scenario spectrum, additional Bank assistance could be provided, including budget support.  Such opportunities will provide important entries into building state capacity and donor harmonization. In addition to inclusion, the Bank’s strategy will also focus on assisting Nepal to accelerate growth and create employment.  Should the situation worsen, the Bank’s support would need to become more selective, but would continue to assist community-based initiatives that have proven fairly resilient even in conflict.

Current Lending

The World Bank Group's operations in Nepal began in 1969 with a credit for a telecommunications project from the International Development Association (IDA), the World Bank's concessionary lending affiliate. Active credits and grants total US$850 million as of June 2008.

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