Nepal - Nepal Country Overview 2012

Overview

Nepal, with a population of 27 million and a per capita income of less than US$650, is passing through a momentous and prolonged political transition following a 10-year violent conflict that ended in 2006. This transition entails multiple interrelated processes: maintaining peace through the integration of armies; rehabilitation, truth and reconciliation; power sharing between the major parties; and developing a new Constitution. The Constitution is supposed to lead to a major restructuring of Nepal into a federal state while the imminent completion of the peace process is expected to resolve the integration/rehabilitation of former Maoist combatants. A decision to hand over the command of Maoist cantonments, including weapons and other logistics, to the Nepal Army in April prompted renewed optimism. While uncertainties continue, the development has rebuilt trust among political parties as they try to come to a consensus on the new constitution by the deadline of midnight of May 27, 2012. There is emerging optimism that the country may be at the brink of a potential breakthrough.

Political instability has been the defining feature of the Nepali state during the last two decades. Nepal has had 20 governments since the introduction of democracy in 1990. The country is still emerging from the conflict with some aftershocks. In the past five years, Nepalis have witnessed the signing of a peace agreement between the former Maoist rebels and the state, a new Interim Constitution, the election of a Constituent Assembly (CA), the abolition of monarchy and declaration of a federal republic, five governments, and the rise of strong ethnic identity movements. The political compact around the new constitution that endorses the devolution of power, social and political inclusion, democratic elections, and political accountability represents an opportunity in this transition. The new constitution is supposed to lead to a major restructuring of the state as Nepal will adopt federalism as a fundamental principle of governance. Elections both at national and local levels are planned after the constitution is promulgated.

The conflict and the prolonged transition to peace and stability have contributed to a progressive erosion of the effectiveness of some state institutions. For instance, poor law and order is a growing concern, particularly in certain geographic areas. Also, the conflict raised awareness that the Nepali state had been associated with exclusionary political, social, and economic institutions that did not reflect the country’s diversity. This has led to the rise of identity politics with an increasing demand for state recognition and greater accommodation of diverse social, cultural, and ethnic identities.

Nevertheless, Nepal has made impressive progress on several social indicators:

· The proportion of poor people has declined substantially in recent years. The percentage of people living below the international poverty line (people earning less than US$1.25 per day) has halved in only seven years. At this measure of poverty the percentage of poor people declined from 53.1 percent in 2003/2004 to 24.8 percent in 2010/2011. With a higher poverty line of US$2 dollars per-capita per day, poverty declined by one quarter to 57.3 percent.

· Net Primary Enrollment in schools has increased from 81 percent in 2002 to 94.5 percent in 2010. Gender and social parity have been achieved in primary education. The Gender Parity Index for secondary school net enrollment has also increased from 0.87 (2007) to 0.98 (2010).

· The Maternal Mortality Rate declined from 538 in 1996 to 380 per 100,000 live births, earning Nepal the MDG Millennium Award in 2010. The Infant Mortality Rate dropped from 79 in 1996 to 39 in 2010. At least one-third of deliveries are now in the presence of trained health workers. Full immunization coverage rose from 43 percent in 1996 to 87 percent in 2011.

· Gender disparities in political participation are decreasing both in elected and administrative government. Women now make up over 30 percent of the representatives in parliament. Implementation of an inclusion policy of women in the civil service shows positive trends.

Nepal’s economic growth continues to be adversely affected by the political uncertainty. Nevertheless, real GDP growth is estimated to increase to almost 5 percent for 2011/2012. This is a considerable improvement from the 3.5 percent GDP growth in 2010/2011 and would be the second highest growth rate in the post-conflict era. Sources of growth include agriculture, construction, financial and other services. The contribution of growth by consumption fueled by remittances has declined since 2010/2011. While remittance growth slowed to 11 percent (in Nepali Rupee terms) in 2010/2011 it has since increased to 37 percent. Remittances are estimated to be equivalent to 25-30 percent of GDP. Inflation has been reduced to a three-year low to 7 percent.

Despite political uncertainties, Nepal maintained a policy of prudent fiscal management. International reserves rose to a record high covering 7 months of goods and services imports; and commercial banks have adequate liquidity. The rapid expansion of expenditures (22 percent of GDP estimate for 2011/2012) has been supported by a strong revenue performance (about 15 percent of GDP) and the availability of foreign aid (2.5 percent) and domestic borrowing (2.5 percent). But expenditure quality remains an issue.

Current Challenges

· Nepal is among the poorest countries in the world and currently ranks 157 out of 187 countries on the Human Development Index. However, as mentioned previously, the proportion of poor people was halved in only seven years. At the same time, inequality also improved and the country overall GINI coefficient (based on expenditure) declined from 41 to 35 between 2003/2004 and 2010/2011.

· Poor reliability and access to power are the most serious infrastructure bottlenecks to growth. Increasing access to electricity in a timely and cost-effective manner is one of the most significant development challenges facing Nepal today. Efforts to reduce the 16 hour load shedding gap during the dry season have been unsuccessful. Ironically, Nepal has one of the largest untapped hydropower resources in the world – an estimated 83,000 MW of hydropower potential. Its neighbors, China and India, are among the fastest growing economies in the world and India is hungry for Nepal’s potential energy.

· Poor physical connectivity has been another major challenge to Nepal’s development efforts. Its road density is one of the lowest in South Asia. Over one-third of the people in the hills are more than four hours away from an all-weather road. In addition, 15 out of 75 district headquarters are yet to be connected by a road. The quality of the road network is also poor – 60 percent of the road network, including most rural roads, cannot provide all-weather connectivity. Maintenance is seriously neglected.

· In the five years to 2009, net Foreign Direct Investment (FDI) in Nepal averaged only 0.1 percent of GDP as compared to an average of 1.9 percent for low-income developing countries. Investments in Nepal are constrained by a challenging regulatory and legal framework for foreign investment, poor governance and accounting practices, weakness in the domestic banking sector together with lack of a swap market for the Nepali Rupee, poor implementation of property rights, and heightened political uncertainty. In addition, the country’s logistical limitations, absence of supporting infrastructure and the relatively smaller size of projects constrain investments, especially in the manufacturing sector.

· Given that productive agriculture is a crucial element of inclusive growth, enhancing the efficiency of irrigation systems will continue to be critical to increase agricultural productivity, incomes, and rural livelihoods.

· Increasing access to secondary school education (grades 9-12) remains a major challenge as evidenced by the disturbingly low net enrollment rate of 24 percent at this level. More than half of primary level students do not enter secondary schools, and only one-half of them complete secondary schooling. In addition, fewer girls than boys join secondary schools and, among those who do join, fewer complete the 10th grade.

· While there has been substantial progress on health indicators, malnutrition remains very high. About 47 percent of children under-five are stunted, 15 percent wasted and 36 percent underweight. Although there has been a declining trend for these rates over the past 5 years, they remain alarmingly high.

· Nepal is highly susceptible to climate change risks and ranks 11th in the world in terms of vulnerability to earthquakes. Climate change is expected to intensify Nepal’s already pronounced climate variability and increase the frequency of climate extremes such as droughts and floods.

Preoccupation with the prolonged political transition has overshadowed economic issues. As a result, inadequate attention has been given to issues of reforms that could improve the investment climate, stimulate growth and create more private sector jobs. The political space to introduce difficult reform measures is limited economic growth and increased private investment also remain dependent upon a political settlement that promotes greater law and order. The political transition is further affected by frequent staffing changes and lack of continuity of officials, which affect implementation of development programs.

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 demonstrated great viability even during the height of the conflict. Where a supportive framework has been created for communities to undertake such activities, there have been impressive development successes.

Connecting Nepal’s Rural Poor

Nepal's rugged terrain prevents people from moving with ease. Nepal’s road network and quality are among the lowest in South Asia. The nearest all-season road is least a two hour walk away for 1 in every 3 Nepalis. The headquarters of 6 of Nepal’s 75 districts are yet to be connected by road. Overall, some 60 percent of the road network and most rural roads are inoperable during the rainy season. 17 districts still need to upgrade their roads to all weather conditions.

Improving these inoperable roads to an all-weather standard and implementing a system of regular maintenance is essential for Nepal’s economic growth and social welfare. To help address these problems, the World Bank agreed in 2005 to help Nepal improve rural roads to provide greater access to markets, schools, and health clinics. The Rural Access Improvement and Decentralization Project (RAIDP), active in 20 districts, has so far focused on remote, rural, and hilly areas of the country.

To date the project has contributed to:

• A 37 percent increase in motorized and 33 percent in non-motorized trips on completed roads;

• A 60 percent reduction in travel time on completed roads;

• A 97 percent increase in motorized traffic and 76 percent increase for non-motorized traffic on project roads;

• A 95 percent increase in the number of people in participating hill districts that live within a 4 hour walk of an all-season road;

• A 100 percent increase in the number of people in participating Terai districts that live within a 2 hours walk of an all-season road.

Key to the project’s success is the active role played by the local communities. For example, Village Road Coordinating Committees were established to monitor the quality of road works and also to identify other community infrastructure needs. As part of this project villages receive support to develop small community infrastructure, including construction of markets and community trails and roads. Communities contribute at least 20 percent either in cash or local labor and materials. In most cases, this is covered through contribution of labor and local materials.

In December 2009, the World Bank committed additional funds to help Nepal expand RAIDP to 10 more districts, including those in the Tarai plains. The project upgrades a further 550 kilometers of existing dry-season rural roads to all-season standard.

In Nepal, the World Bank Group includes the International Development Association (IDA), the concessionary lending arm and the International Finance Corporation (IFC), the private sector arm. Two more World Bank Group organizations, the Multilateral Investment Guarantee Agency (MIGA) and the World Bank Institute (WBI), also provide investment insurance and capacity building services respectively.

Given the transitional nature of Nepal’s current situation – with a new constitution being drafted and elections to follow – the World Bank Group has prepared an Interim Strategy Note covering Fiscal Years 2012 and 2013. It proposes development programs that are consistent with the Government of Nepal’s Three Year Plan.

Nepal has been selected as a pilot country to implement an enhanced joint strategy to leverage IDA and IFC resources and realize synergies. The strategy reflects considerable continuity, building on programs with successful track records that are adapted to local conditions. It also emphasizes greater selectivity, focusing on areas considered vital to Nepal’s development and complementing programs supported by other development partners.

Supporting the Government of Nepal’s overarching goal to build a peaceful, prosperous and just Nepal, the strategy is organized around three ‘pillars’ that emerged during consultations within the Bank Group and with the Government, donor partners and key stakeholders.

The first pillar intends to enhance connectivity and productivity for growth. The second focuses on reducing vulnerabilities and improving resilience. The third pillar concentrates on promoting access to better quality services. Governance, accountability, gender equality and social inclusion are themes that run across all three pillars.

Within each of these pillars, the strategy identifies specific areas where the Bank Group can make a difference. For IDA, these include roads, food security and livelihood vulnerability, education, health, urban services, and disaster management. For IFC, these include improving access to finance and investment climate, trade facilitation, lending to Small and Medium Enterprises and trade finance facilities for local banks. IDA and IFC expect to work together on power development, agriculture and climate change.

Over the next two years (FY12-FY13) Nepal can potentially benefit from an allocation of about US$400 million from IDA, subject to performance and economic management. These funds could finance four to five new operations per year. IFC can potentially commit US$25-30 million on average annually, depending on the availability of viable investments and improvements in the business climate.

The World Bank Group is also engaged in analytical and knowledge dissemination exercises. It provides regular economic updates and advises the Nepalese authorities on key economic policies. It also works with partners and the Government on analyzing poverty trends in Nepal. For example, with support from DFID and Denmark, the Bank worked closely with the Central Bureau of Statistics to complete the latest Living Standards Survey (NLSS 3), to provide core data on poverty trends and access to services. Strong IFC/private sector engagement in the creation of the Nepal Business Forum is facilitating public-private sector dialogue and pragmatic problem-solving. Other areas of attention have included analysis of migration and remittances trends, medium-term public expenditure management, assessment of the investment climate, financial sector risk management, and implementation of the Right to Information and food security and nutrition challenges. In addition, teams have disseminated information on international experience on specialized topics (such as fiscal decentralization and civil service transition) at the request of Constituent Assembly committees and other Government bodies.

Other areas of analytic focus include water resource management, where the Bank team is working with the Water and Energy Commission Secretariat to establish a geo-referenced water resources information system, develop river basin models, build capacity within the GON for river basin modeling, and support the formation of a Trans-boundary Waters Cell. A recently completed Ganges Strategic Basin Assessment built a knowledge base and promoted an open, evidence-based dialogue on the shared opportunities and risks of cooperative management of the Ganges River Basin. An assessment of incentives, governance, and resource mobilization arrangements for forestry in Nepal was completed in 2010/2011. Other on-going IDA/IFC work is laying the foundation for carbon-based trading and financial support from the Pilot Program for Climate Resilience and other climate investment funds. Joint work on disaster management (in collaboration with the UN, ADB, Red Cross and others) is expected to lay the basis for future program support from the Global Fund for Disaster Risk Reduction. In partnership with the Government and other donors, the Bank continues to provide advice on ways to improve existing social protection systems and on the design of a national social protection framework.

In addition to nationally focused investment projects, the World Bank Group is actively supporting Nepal’s participation in regional and multilateral global initiatives. The Regional Wildlife Program, Strengthening Regional Cooperation for Wildlife Protection in Asia, is assisting participating governments to build capacity, institutions and incentives to collaborate in tackling illegal wildlife trade and other conservation threats to habitats in border areas. The Nepal-India Electricity Transmission and Trade Project enables power trade through imports into Nepal as needed, and eventually, export of surplus power to India. In the non-lending areas, IDA is channeling support to Nepal from the regional programs like the South Asia Water Initiative (SAWI) and the South Asia Food and Nutrition Security Initiative (SAFANSI). IFC is enhancing regional integration through investment activities, such as trade finance facilities for local banks and advisory activities, such as investment climate strengthening and trade facilitation. Nepal is also part of IFC’s SME Venture Fund global initiative which focuses on eight high-risk IDA countries. In addition, IDA and IFC plan to collaborate on two new tentative programs, IDA’s North Eastern Region Trade and Transport Facilitation Program (NER T&T) and IFCs planned South Asia Regional Trade and Integration (SARTI) program. Trade facilitation work by IFC includes assisting governments to build efficient trade logistics systems and services through targeted reforms aimed at reducing the time and cost for the private sector to import and export. IFC’s trade logistics reform work relies on a strong private sector partnership approach to identify issues and validate results.

At the global level, Nepal is the only country in the world that has been selected to participate in two Climate Investment Fund (CIF) Pilot Programs – the Scaling Up Renewable Energy Program (SREP) and the Pilot Program for Climate Resilience (PPCR). Both these CIF programs involve joint design and implementation by the Asian Development Bank (ADB), IDA, and IFC, as well as collaboration with other donors (such as DFID, Denmark, the United States) to ensure complementarity with local programs.

As of March 2012, the IDA portfolio stands at 16 projects with a net commitment of approximately US$ 1.24 billion and cumulative disbursements of US$553.3 million (about 44.4 percent of net commitments). The Trust Fund (TF) portfolio consists of 63 active TFs (Bank and Recipient executed), with a total commitment amount of US$186.43 million, out of which US$49.80 million has been disbursed (i.e. about 27 percent of the net commitments). New IDA commitments approved in 2010/11 totaled US$355 million (of which IDA Grants represented US$131.34 million, and IDA Credits amounted to US$223.66 million). In 2011/2012, IDA has so far approved the US$43 million Modernization of Rani Jamara Kularia Irrigation Project with more expected to the be approved before the end of the fiscal year.