Forum (Spotlight Weekly)

ADB Remains Committed To Support Nepal's Development

By Dr. Richard Vokes

While 2002 did not witness the traumatic events of 2001, it has nonetheless been another very difficult year for Nepal with worsening political instability and uncertainty, the escalation of the insurgency, and a significant economic downturn. The extensive and almost daily loss of life has been the most tragic aspect of the current situation. The destruction of administrative and development infrastructure facilities is a further tragedy, disrupting livelihoods and squandering the development achievements of recent decades. In spite of nine months of emergency, the security situation remains serious. Moreover, political upheavals, including the dissolution of the Lower House of Parliament, dismissal of Prime Minister Deuba, and the postponement of the November 2002 mid-term elections, added to the uncertainty and difficulties facing the country. Finally, the termination of the tenure of the local bodies and deferral of the local elections exacerbated the problems of already poor service delivery and development administration at the local level.

All of this has had a further negative impact on the country's economy. Real GDP growth of key sectors such as tourism and trade, in particular, declined dramatically by about 10% in FY2002 due to the difficult security situation. As agriculture, the mainstay of the economy, also grew only moderately by 2.2% due to the uneven monsoon in 2001, the overall GDP declined by 0.6% in FY2002, the first time in Nepal's recent history that a negative growth has been recorded. Given the continuing political instability and the difficult security situation, the targeted economic growth rate of 4.3% in the current year (FY2003) is clearly not be achievable. Further, the fiscal crisis has deepened with low revenue collection and the pressure for increased expenditures, especially for security. The poor performance of Nepal's economy in the last two years has been largely due to the political instability and deterioration of the internal security situation. The impact of the recent global economic slowdown on Nepal's economy has been limited given the economy's resilience, to some extent, to external shocks, due to both its close economic ties with India and the continuing importance of agriculture as a share of GDP. Economic recovery, therefore, clearly depends on addressing the internal problems and, most importantly, on how quickly the security situation improves. Equally, it will be important for Nepal to deepen economic reforms to address the pressing issues of poverty, poor governance, and public service delivery, the root causes of the insurgency.

Notwithstanding the difficult political, economic and security environment, a number of important and positive developments took place in 2002. For the first time in Nepal's history, the Nepal Development Forum (NDF) was held in-country, and equally important, was actively led by the Government. The Government demonstrated strong ownership in organizing this important Forum. The Forum was built on a series of highly interactive pre-NDF consultative meetings which gave opportunity for a wide range of stakeholders, including political leaders, the media, civil society, and the private sector, to make their views known. The Government and Nepal's development partners held frank and comprehensive discussions during the NDF on the difficult challenges facing Nepal and the Government's development strategy, and underscored the need for the Government undertake decisive reform measures to address the pressing development issues.

The NDF process particularly helped to focus attention on the need to formulate a credible Tenth Plan, embodying the Government's poverty reduction strategy, as well as on a number of immediate measures to begin addressing the key issues of poor implementation of policies and programs, weak public expenditure management, and ineffective public service delivery. Although finalization of the Tenth Plan has been delayed due to the political changes, the Government and bureaucracy must be commended for the extensive effort that has gone into preparing the new plan and for the open and participatory formulation process which has been encouragingly different from that of past plans. The preparation of the Medium Term Expenditure Framework (MTEF) has provided an important mechanism for prioritization of public expenditures, leading to the elimination of some 160 low priority projects in the FY2003 Budget and the classification of all development projects in terms of priority. The NDF was followed almost immediately by the initiation of work on the Government's Immediate Action Plan, approved by the Cabinet in June 2002, which identified immediate and specific measure to enhance effectiveness of public expenditures, improve delivery of basic services such as health and education through devolution to local bodies and communities, and to promote transparency and accountability. In another important area, four important anti-corruption laws, were introduced that enabled the authorities, and particularly CIAA, to address the issue of corruption more aggressively. ADB is pleased to have helped this process through the Governance Reform Program (GRP) it is supporting. There has been additional progress under the GRP including establishment of a computerized personnel information system for the civil service, groundwork for right-sizing the civil service, including elimination of 7,500 vacant positions, and development of performance improvement plans for key ministries.

Looking forward, ADB is doing its best to continue to work with the Government and people of Nepal to help meet the country's serious development challenges, particularly given the difficult situation the country is facing. Our Country Program Confirmation Mission (CPCM) in early December 2002 reached an understanding with the Government on a proposed program for 2003 comprising five loan, including the PSMP loan carried over from 2002, for a total of $115 million as well as 9 TA projects for a total of $3.8 million. These are listed in the attachment. The proposed program will help to address some of the underlying causes of the conflict as well as the fiscal crisis. In March of next year, we will field our annual Country Programming Mission, which will outline a proposed program for the period 2004-2006. In moving forward all of these activities, we will work closely with the Government, other development partners, and stakeholders to try and identify new approaches and modalities that will enable us to remain engaged, particularly in conflict affected areas. Equally, given the serious problems the country is facing, both the Government and ADB will need to be flexible in carrying forward these new programs.

In conclusion, I should stress that ADB sympathizes with Nepal's current difficulties and, subject to the parameters set by our performance-based allocation policy, we stand ready to assist wherever our support can be effective. Despite the serious economic and political problems the country is currently facing, Nepal has the potential to overcome these and achieve recovery over the medium term. However, for this to happen, the country's political problems need to be addressed and an urgent solution found to the conflict.

(Excerpts of the statement delivered by Dr. Vokes, Country Director of ADB's Nepal Resident Mission at the Year-End press conference on December 17)