National 4 (Spotlight Weekly)

"Nepal Will Continue To Grow At The Conflict Rate Of Growth"

— Dr. Sultan Hafeez Rahman

Dr. Sultan Hafeez Rahman is the Country Director, Nepal Resident Mission of the Asian Development Bank (ADB). He addressed a year-end press conference on December 17 where he spoke his mind on various issues ranging from ADB's support to Nepal in 2004; economic situation; and impact of conflict. Excerpts of his statement and replies to media queries:

On Conflict

It saddens me to be again repeating that conflict remains Nepal's biggest challenge for poverty reduction. Conflict has thrust Nepal into its worst crisis in decades. Since 1996, more than 11,000 people have been killed, thousands of rural families displaced, and infrastructure facilities worth hundreds of millions damaged. The number of killings and conflict-related deaths was highest this year. Unfortunately, there has been no progress in this heart-rending conflict. We hope that in the coming years, there will be better news in this front. Conflict continues to present a very complex development setting for the country.

Almost all our projects - to a smaller or larger degree - have been affected by the conflict. We do the assessment of the impact of the conflict on our operations every quarter. And we do this through missions that go out in the field and through the government functionaries who are implementing our project. Fortunately, till now we are able to continue our operations. By continuing, I mean that in around 60 percent of our projects we are able to continue work whereby 80 percent of the activities of that project are not affected.

On New CSP

In the year 2004, the landmark for us was the endorsement by the ADB's Board of Directors the new Country Strategy Program for Nepal (2005-2009). Of course, the strategy will be under review annually to see if it still remains contextual or not. The strategy recognizes the centrality of conflict as an impediment to Nepal's future development and, therefore, attempts to address some of its root causes. It has brought home the point that peace and political stability are crucial to achieving Nepal's strategic development objectives. As part of the preparation of the CSP, we went through a very participatory approach in which we held consultations with the entire spectrum of Nepalese society. We held consultations in all the five development regions of the country. We held consultations with local community, civil society institutions, leading experts and academics, private sector and with our development partner. We were able to strongly align the ADB's operations with the government's Tenth Plan and poverty reduction strategy. A number of thematic studies had to be conducted in the course of doing CSP including assessment of the conflict, assessment of the environment and other social sectors. We also looked at issues of gender, caste and ethnicity.

The CSP looks at the issues of inequality, gender, caste and ethnicity trying to address them in a more focused way. The approval this year of the Gender Equality and Empowerment Loan is already a signal that we are moving in that direction. Secondly, we hope to promote to better balanced development across the five development regions. In the design of our loan and assistance over the next five years, we will be much more focused on involvement of community and, therefore, in all phases of our assistance, we will adopt participatory approach. We will also be focusing more sharply on results. The proposed lending program for the CSP is about US$ 117 million on an annual basis for the next three years. Of course, this is fraught with the risks, as usual of the conflict and the performance of our portfolio, which I must tell have been weak. We are not happy with the performance of our portfolio. We hope the implementation will be strengthened next year.

The new CSP provides up to 50 percent of the total assistance that we give to Nepal to be provided as full grants. Nepal is one of the few countries eligible for such grants. In fact, apart from Nepal there is only another country in South Asia, which is also affected by conflict, eligible for such grants. This is a landmark achievement for Nepal and a strong signal that ADB is fully committed to help the country in difficult time.

On ADB's Commitment

The year 2004 also witnessed an unusually high number of visits by senior officials of the ADB. It began in January with the visit of our then director general of South Asia Regional Department Yosihiro Iwasaki. Then we had the visit by seven members of our board of directors - they collectively represented two-third of ADB's shareholders. That was an extremely important visit considering the difficult times. Nepal might easily have been missed as one of the countries to be visited in view of all sorts of advisories that were being issued. But we, in the mission, insisted that the visit should go ahead. The board of directors were more than happy to come here and see for themselves the impact of the conflict and talk to all stakeholders to see what ADB can do more or better. We also had other important visits - one by the new director general Kunio Senga in October. Nepal was the first country of the region, which he chose to visit. Our new vice president (Operations) Liqun Jin also visited Nepal in November. The unusual frequency of high-level visits to Nepal signals two things, among others. One is the ADB's continuous commitment in assisting Nepal. Secondly, it shows ADB's serious concern at the situation in Nepal.

On ADB's Projects in 2004

This year, ADB has approved five loans totaling US$ 110 million - which is significantly higher than last year. The projects include Gender Equality for Empowerment of Women Project (US$ 10 million); Decentralized Rural Infrastructure and Livelihood Project (US$ 40 million); Subregional Transport Facilitation Project (US$ 20 million); Community Managed Irrigated Agriculture Sector Project (US$ 20 million); and Skills for Employment Project (US$ 20 million). We also provided six technical assistance grants and two supplementary TA totaling US$ 2 million. Two more are yet to be approved this year. We expect the total TA provided to Nepal to be in the region of US$ 3 million this year.

On Economic Situation

Conflict really seems to be taking a toll on Nepal. If we look at Nepal's trend growth rate compared with its growth during 1991-97 when Nepal's overall GDP growth was above 5 percent; it appears that since the conflict escalated the growth has been fluctuating between a negative growth in one year (2001) to just below 4 percent (last year). Looking at the structure of Nepal's economy and looking at what has been happening to the economy for the last five years or so, we believe that there seems to be a 'conflict rate of growth' - which has a lower band of perhaps 2.5 percent and upper band of perhaps 4 percent. As long the conflict remains, we will probably see the growth fluctuating in this region.

You might ask how Nepal despite the conflict can have growth something in the order of 3 to 4 percent - which is fairly significant. There could be a number of reasons for this. But what comes to mind is that in the last 15 years structure of Nepal's economy has changed a great deal. The service sector has grown very significantly; that of agriculture has come down somewhat and that of industry sector has also come down somewhat. Service sector had contributed to most of the growth. Of course, the agriculture remains very important. On the production side, what is probably happening is that agriculture continues to perform and as long as it continues to perform, we will always have 2 percent growth even if nothing else happens. In the service sector, transportation services has increased strongly. Likewise, banking and finance sector has also remarkably increased. Although tourism has declined, it seems to have picked up in the last two years. Based on service sector and agriculture, Nepal can still grow in that range.

On Remittances

One of the major development that has taken place in the Nepali economy is the surge of remittances. We believe the total annual remittances to be in the tune of US$ 1 billion. That, on demand side, has been having strong effect on consumption and, on the production side, within the industry sector the construction sub-sector has been very buoyant due to steady remittance growth. The growth in remittances, we expect, will continue in short to medium term.

On Economic Recovery

The recovery that we have been seeing in Nepal since 2003/04, which has sustained this year and which, we believe, will sustain next year is a consumption-led recovery. The consumption-led recovery has a downside risk - if for some reasons remittances are disrupted or incomes are disrupted in a major way, then from the demand side the economy will be suppressed and will tend to slow down. Therefore, for economic recovery to be sustained in the medium to long term, one needs investment-led growth. We know that both private and public investment have dipped somewhat. Public expenditure growth, too, has tapered off.

On Growth Next Year

Looking at the macro prospects of the economy, we feel that the overall macro-economic growth is going to remain, more or less, at around 3.7 percent next year (this year the growth was recorded at 3.6 percent). The fiscal deficit is going to increase because development expenditures will also increase. The current account balance will remain surplus largely because of continued robust remittance growth. We believe that inflation will rise and may cross 5 percent (last year it was 4 percent) largely because of two factors - one is the higher oil prices and secondly because Nepal's inflation generally follows the trend in India where it is accelerating. The debt-service ratio will not change much. It has been hovering below 10 percent. It will continue to remain there. Agriculture will continue to grow at 3.7 percent (like last year). Industry sector will pick up simply because construction activities will pick up. We do not expect manufacturing activity to pick up by much. And the service sector, we feel, may decline to some extent. Last year, we saw a growth in the service sector of about 4.2 percent. Next year it could come down to 3.8 percent.

(Transcribed by SANJAYA DHAKAL)