COVER STORY (Spotlight Weekly)

Testing Times

After a gap of four years, Nepal Development Forum (NDF), originally called Nepal Aid Group, is meeting next week in Paris (April 17-19). As donors tag good governance, economic reforms and improved role of civil society in the development as pre-conditions for assistance packages, the government is yet to come up with concrete commitments to satisfy them. Despite a good timing of the meeting, how Nepal will exploit the opportunity and extract foreign assistance remains to be seen

By KESHAB POUDEL

It was 2:30 pm in April 7, 2000 when Prime Minister Girija Prasad Koirala summoned senior government officials at his sprawling office at Singhdurbar and directed them to maintain law and order, control corruption and move ahead with economic development.

Coming back to power after a brief spell of nine months with a decisive mandate to govern the country, Koirala seems to mean business this time. Prime Minister Koirala told the gathering of the senior officials that Nepalese people want law and order, economic prosperity and, corruption-free and responsive administration.

The same day, in another meeting, the soft-voiced Finance Minister Mahesh Acharya, was attending to the grievances from the representatives of donor communities. Acharya seemed to have plenty on his mind but he remained quiet except delivering a key address.

There's nothing peculiar about these two events. But they represent the willingness of the government to do business prior to the forthcoming high-profile meeting of Nepal Development Forum (NDF) in Paris.

In the five-decade-long history of foreign assistance, Nepal has never faced a situation like now. This year's NDF meeting is expected to be high-charged with assertive donors and less prepared recipient.

At a time when the country is reeling under extreme poverty, it is not in a position to fight alone nor has it done adequate homework to convince donor communities that it means business.

In this background, Nepal is facing the daunting task of having to reply to the bitter questions that are likely to surface during the NDF meeting.

Finance Minister Mahesh Acharya is categorical when making commitments in the areas of: mobilization of more domestic resources, anti-corruption drive, civil service reform, enhanced role of civil society and programs for poverty alleviation, but this could be too late and too little.

After the implementation of second round of liberalization by India, Nepal is already lagging behind in the process. Further delay may mean economic crisis.

Unlike the last meeting when Nepalese delegation returned happily with assurances from donors for one billion dollar assistance, this time the country might have to convince donors for the justification of the utility for every dollar they would like to get.

If the mood of Nepalese officials at the day-long final meeting with donor communities based in Nepal on last Friday is any indication, it shows how inadequate Nepal's preparation for the forthcoming meeting of NDF has been.

With the announcement on poverty alleviation, financial reforms and corruption, Finance Minister Acharya's specific agenda has enthused donors. Nepal's past history of implementation, however, leaves much room for worry.

The trend of shrinking revenue mobilization and contradictory policy approach on economic reforms could be some of the hitches in the NDF meeting.

The lapses in preparation is understandable as the change of Prime Minister hampered it in the early phase. As the date of meeting is less than a week away, donors cannot expect any concrete measures from the government.

"The need of the hour is clear, well-focussed and relatively simple and straight-forward action agenda specifying the priority measures the government thinks that it should and can take over the next six to twelve months," said Hans Rothenbuhler, the World Bank Country Director at the meeting.

Nepal - the first country in South Asia to introduce economic liberalization - is now lagging behind in the region. This is what donors indicated at the meeting.

"Nepal should embark upon reform programs with some symbolic measures to demonstrate that it is serious about reforms," said Sue Wardell, Representative of the UK's Department for International Development (DFID).

The comments of donors showed that the meeting will be the testing time for Nepalese delegation. The schedule of meeting is at a right time but Nepal is in a defensive position thanks to its non-committal, non-performing government in the last five years when reform process had to take the back-seat. Even one year after the formation of majority government, the situation has not been favorable.

"Nepal should first start some easier reform actions in a framework that defines short-term, medium-term and long-term reforms goal," said Richard Vokes, Resident Representative of the Asian Development Bank.

It is not easier for the country to change overnight like the developed world. Nepal just has a decade long experience of political and economic liberalization through which it has been struggling to set up functional institutions.

Experts argue that agenda prepared for the NDF meeting are vague and long and the country's strategy seems to be losing direction by linking all different issues dealing with foreign assistance.

Had the Ministry of Finance consulted with experts and opposition political parties, the situation could have been a different one. Finance Minister even did not bother to consult with the leader from main opposition party.

"We were not consulted nor anybody had sought our views to prepare Nepal's agenda for the meeting. If our party were invited, we could have definitely backed the government by giving some positive suggestions," said former Finance Minister and UML leader Bharat Mohan Adhikary.

Has Nepal got a good opportunity to explain the donor countries that it means business? "Yes. (As) This was a good chance for Nepal to exploit the meeting for its benefit," said Dr. Mohan Man Sainju, Executive Chairman of IIDS. "This year's meeting comes after the ending of five year long political instability."

Unlike previous years, Nepal will have to explain implementation sides of all the different perspectives like financial reforms, governance including civil service reforms and corruption, measuring development effectiveness and performance, the role of private sector, decentralization and the role of civil society.

As the government had made a number of commitments to the donors regarding economic reforms, good governance, civil society and administrative reform, it would be very hard for it to convince the implementation strategy.

"We are preparing some time-bound implementation strategy for the forthcoming meeting," said Prithvi Raj Ligal, vice chairman of National Planning Commission. "We will set the time frame for economic policy reform."

Critics argue that policy approach that government will follow in the NDF meeting is not clear and that it is confused on what agenda it should put forth.

From privatization to corruption control and increasing efficiency in the fiscal management and poverty alleviation strategy, the government has everything to talk about but it is yet to assure donors that the government will last full term to implement them.

Fed up with political instability of the previous parliament, donors heaved a sigh of relief when Congress secured majority in the last elections. Their happiness was short-lived when they witnessed a non-performing government for nine months and change of leadership within.

Even in a lackluster government, the congress raised the price of Liquified Petroleum Gas, kerosene, diesel and electricity tariff and removed subsidies in chemical fertilizers but many other reform measures were left untouched in first nine months.

Higher education, for instance, is still heavily subsidized and privatization policy is yet to gear up. The performance of government expenditure and revenue collection is also dismal.

In the past six months, revenue collection has declined but the regular budgetary expenditure has increased.

Measures like reforming the financial sector legislation, strengthening its inspection and supervision, privatizing state-owned commercial and development banks, enhancing competition by encouraging more investments in the banking sector, reforming accounting and auditing system are yet to take off.

The government has already announced that it will privatize the government enterprises and downsize the bureaucratic network by pruning the ministries and departments. And the employment generation program is in the offing.

The commitment of the new government led by Koirala will be tested in the next few months after witnessing how it addresses the issues raised by donors on economic reforms, good governance, decentralization, poverty alleviation and financial reform sectors.

"My priority is to maintain law and order, control corruption and reform administration," said Prime Minister Koirala at his first press conference after assuming power last month.

Says Finance Minister Acharya: "This government is in a hurry. A whole policy initiatives are in the offing, because we are looking at all kinds of support from our multilateral partners to accelerate the economic growth by reducing poverty."

For the first time in four years, Nepal, one of the poorest countries in the world, is facing donors at the Paris meeting. Despite the assurances by Acharya, Nepal is yet to keep its house in order and officials do not seem to have many arguments to defend themselves.

Donors have already warned that the aid flow could be adversely affected if government does not improve its governance and carry out economic reforms.

Had Finance Minister announced some economic reform packages with time frame for implementation, Nepal's position could have been better but the government did nothing to appease the donor community.

Nepal is yet to fulfill commitments it made during the last Paris meet in 1996 in the areas of economic reforms, poverty alleviation and civil service reforms. The process of privatization is more or less halted and other financial reforms measures are virtually non-functional.

Despite some criticisms against foreign aid, one cannot ignore its contribution to the overall development of infrastructure in the country. There may be many events of misuse of foreign assistance over the years, but it is the foreign assistance that has brought changes in infrastructure sectors' development.

Whether one accepts it or not, the foreign aid has ushered in a lot of changes in the country. When compared to the Nepal of 1950s, when Swiss development expert Tony Hagen encountered people dying on their way to fetch salt from terai walking for fifteen days. At that period, ten to twelve percent of the Nepalese population had yearly income of fifty Indian rupees (USD 4).

In the last 10 years, the GDP growth has been 4.8% on average but agriculture growth is just 2.2% which is lower than the annual growth of population (2.37%). The initiation of economic liberalization reduced the urban poverty but due to low agriculture production the situation has remained unchanged in rural areas.

The government is considering to announce some action plan against corruption. "The situation is favorable as government and donors are trying to develop new partnership for development," said Dr. Shankar Sharma, member of National Planning Commission.

The present situation, some see, is not favorable to Nepal as donors are becoming more assertive to impose their agenda. Their agenda in the area of governance, poverty alleviation, civil service reform, anti-corruption drive, strong role of civil society and protection of human rights is justified. Nepal's position in these sectors, however, is very much vulnerable as the country has failed to perform effectively even after the installation of the majority government.

Despite being the government of same party, the new leader changed most of the previous ministers. Prime Minister Girija Prasad Koirala is leading new cabinet by calling for clean administration and anti-corruption drive. New cabinet, however, does not offer room for much confidence as MPs like Bhakta Bahadur Balayar and Dr. Ram Sharan Mahat, who had performed well in the past, are absent in the cabinet.

The cabinet also failed to show concrete examples of anti-corruption measures and take some drastic steps to punish the known corrupt figures. This has not enthused donor communities.

Despite so many positive sides in macro economic performance as the annual GDP growth is at 6% and all time high foreign exchange reserves, Nepal does not have a lot of things to boast about its performance. Implementation of Value Added Tax is one of the positive steps in the field of mobilization of the domestic resources but it is still limited.

Revenue mobilization is still weak compared to the expenditure level and fiscal imbalances which are widening. Likewise, slow progress on privatization, mismanagement of public enterprises and political instability are some prominent issues on which donors may seek clarification.

"Foreign aid has to be linked with development strategies and priorities in order to achieve development goals and that aid effectiveness has to be enhanced by ensuring local ownership," said Acharya. "A development strategy that provides benefits that can be spread across all income groups including poor segments of society will have two major components - first, agriculture must be targeted to grow by at least 4-5 percent and second, private sector-led growth must be further emphasized."

One of the positive aspects for Nepal is, there is no debate over priority. Poverty reduction, improvement in governance and achieving high growth rate through economic reforms are well accepted agenda. "No matter who leads the government, objectives like these will continue to be the priorities," said former Finance Minister Dr. Ram Sharan Mahat.

"When we are demanding resources, we must say why do we need such resources and where to use them," said Keshav Prasad Acharya, an economist with Nepal Rastra Bank. "Nepal should have clear agenda for the foreign assistance. As Agriculture Perspective Plan clearly points out a long term strategy for enhancing production, the foreign aid must come to supplement it."

Although the date of meeting is approaching, Nepal's agenda is yet to be finalized as the Finance Ministry officials spent last two months welcoming two different ministers.

"The government would narrow down the agenda to give it more focus and clarity before the beginning of NDF meeting," said Finance Minister Acharya.

The meeting was postponed till April following the resignation of then Finance Minister Mahesh Acharya. The new date was fixed by another Finance Minister Dr. Ram Sharan Mahat.

The NDF meet was scheduled after the formation of majority Nepali Congress government. In the last four years, the meeting of Nepal Development Forum was postponed due to political instability.

Nepal has already prepared 93-point agenda for the meeting including economic reforms, public expenditure, privatization, poverty alleviation, agriculture, education, health care, drinking water, employment generation, gender development, rural infrastructure, natural resource management and project maintenance etc.

As the meeting of NDF is coming closer, faces of the officials at the Finance Ministry is getting gloomier as they face an uphill task to convince the donors about their implementation capabilities and extract further assistance in future.

New Government's Agenda
Setting Finances Right

Minister Acharya : Road full of thorns

The public sector disinvestment program is to be accelerated. A fresh look at the disinvestment mechanism is likely. But with just three months left in the current fiscal year, it will be easier said than done for the government to pursue its commitments.

Subsidies will be reviewed, user charges in public utilities like electricity, water and consumer goods like petroleum products will be increased. The private sector and civil society will be mobilized in the area of development.

Agriculture to be made more productive and additional employment opportunities generated in non-agricultural sector.

On the macro economic front, the various reform measures that were introduced towards the beginning of the last decade to be consolidated and a number of new essential reform measures will be implemented with a sense of urgency.

Donors' Demand

Equitable distribution of resources for poverty alleviation
Define good governance including the containment of corruption
Initiate economic reforms
Enhance the role of civil society
Demonstrate the commitment by implementing the programs

Policy Initiative For Administration

With the objective of delivering a clean, capable and corruption-free administration, all the related administrative procedures should be made transparent. Civil service has to be made more service-oriented and competent to confront with growing challenges by means of revising its perspective vision as well as a personnel policy backed by sound administrative principle. Administrative arrangements should be made for controlling corruption more professionally and effectively.

‘The Time Has Come For Reviewing Foreign Aid In Order To Improve Its Utilization’— Bharat Mohan Adhikary

Former Fiance Minister and CPN-UML leader Bharat Mohan Adhikary has had some experience in governance. Adhikary, who is a Standing Committee member of UML, believes that the concerns raised by donors are genuine. On the eve of Nepal Development Forum meeting, Adhikary spoke about Nepal's concerns. Excerpts:

How do you see the forthcoming Nepal Development Forum meeting?

The meeting is going to be held on opportune time and our party hopes that the donors will understand the problems of Nepal. They will also lend support to our struggle against poverty alleviation.

What should be the priority sector for Nepal?

Agriculture development must be the priority. Agriculture needs a boost up. It means irrigation facilities need to be expanded. Even small changes in agriculture production can have large effect on overall GDP and income as agriculture commands 40 percent of GDP. More than 90% of population live in rural areas and their economic improvement largely depends on success in agriculture. Poverty cannot be reduced without improving agriculture production. As long as agriculture production does not exceed the population growth, it is impossible to have a tangible economic change. At present average agriculture growth rate is at 2 percent whereas population growth rate is at 2.5 percent. This is the reason our economic growth has been negative. Progress in agriculture growth is necessary to achieve higher GDP growth.

What are the other sectors?

Human resources, water resources and tourism are other priority sectors. The investment in these sectors will help to achieve the goal. There is also a need to invest in the infrastructure like roads. If we invest in such sectors, the economic activities will expand. We have yet to link more than 16 district headquarters with road. Once again, agriculture is the only sector through which we can alleviate poverty.

How do you find the concerns of donors?

Some of their concerns are genuine and we have to accept their suggestions to put to better use our scarce resources to uplift the life of poor people.

How do you see the poverty alleviation?

This is one of the major problems of the country. We do need the support of donors to fight against poverty. When we talk about poverty alleviation, it should be directly related to the upliftment of the villages.

What is the opinion of your party on poverty alleviation and foreign assistance?

There is a consensus among all political paries for foreign assistance. Foreign aid is very important for the economic development. Foreign aid is necessary to fight against poverty.

What is your impression on the utilization of foreign aid?

The foreign assistance has brought many changes in the area of infrastructures but there is nothing to be satisfied with the utilization of foreign aid. The time has also come for reviewing foreign aid in order to improve its utilization. We must discourage foreign consultants in the foreign aided projects.

Has the Finance Minister consulted your party about the Paris meeting?

It is very unfortunate to say that our party was not consulted by the Finance Minister. We have some very constructive suggestions for them. At a time when all parties are supporting the Paris meet, there was no reason to neglect us. Had the Finance Minister sought our suggestions, it would have strengthened his position.

How do you see the attitude of donors?

Donors also have cooperative and constructive outlook on Nepal. At times their complaints help us to tackle problems. As long as donors take us as a partner, there is nothing to complain. I really appreciate the positive and constructive comments of donors in the areas like corruption and mismanagement of civil service.

‘Nepal's Agenda Needs To Have A Fresh Look Indicating Long-term Vision’— Mohan Man Sainju

Mohan Man Sainju, noted economist and former Vice Chairman of National Planning Commission, expresses his opinions regarding the issues concerning Nepal's preparation for the forthcoming Nepal Development Forum Meet. The Executive Chairman of Integrated Institute for Development Studies (IIDS), Sainju spoke to SPOTLIGHT about the related issues. Excerpts:

What are your observations about the forthcoming NDF and Nepal's preparations?

There are good bases for Nepal to exploit the meeting for its benefit. We passed through a phase of political instability for nearly five years. That was the reason we were not reliable and credible for donors and investors. After the elections of 1999, Nepal secured political stability through which we are in a position to assure donors that internally we are prepared for business. Second chance is that we had the opportunity to show that Nepal is entering new millennium with certain visions for better performance. In the past 15 years, our development performance was unsatisfactory. Thirdly, we also had a decade-long experience of economic liberalization. We are in a position to know the strengths and weaknesses of liberalization. We also have adequate materials like Human Development Report and South Asian Human Development Report to do our home work. In view of these three aspects, the timing for the NDF was very appropriate. When we had all situations in our favor, suddenly there seems a change in the government leadership. Even donors are in confusion about what happened in the Congress.

What should be Nepal's agenda?

Nepal's agenda needs to have a fresh look indicating visionary perspective. This does not mean isolating from globalization and privatization. We need to have a long term vision on how we are integrating the globalization and liberalization. Our programs must integrate with globalization. It gives us an opportunity to prepare 20-25 years long term vision for our development. Had I prepared the agenda, I would have include the globalization and liberalization framework in Nepalese context. Instead of relying on the foreign investors, I would offer more opportunities to Nepalese investors, industrialists and entrepreneurs. We have more than 10,000 small and medium scale industries. Due to globalization efforts, all these SMEs are on the brink of collapse. The closing down of industry is against the spirit of liberalization as it professes competitiveness among them. Our objective should be to promote indigenous capital, labor and raw materials in the overall development. This strategy is purely pro-liberalization.

I also link poverty alleviation with the objective of acceleration of economic growth. I would have developed the package growth with equity. I would have prepared a projection on how to reduce the level of poverty. Finally, I would encouraged foreign investors to enhance the capacity of water resources, tourism and infrastructure. We also need the foreign technology and investment. If we have such a long term perspective plans, donors may gain confidence. More importantly Nepal is geared towards acceleration of economic growth with equity. I would have included in the agenda the role of civil society and non governmental organizations and partnership with private sector.

How do you find the present preparation by the government?

I don't have any information about the preparation. As far as my evaluations are concerned, I am totally dissatisfied with the government. Even today, we are preparing donor driven policy. During the preparation of agenda, the government ignored the capability of Nepalese research organizations and individuals.