March 25, 2005

Hard pressed by the reaction of the international donors, the government is pressing the accelerator for reforms to win their support

By SANJAYA DHAKAL

Taken aback by the decision of not only the bilateral but also the multilateral donors to withhold the financial assistance and aid to Nepal, the government appears to ‘demonstrate’ its commitments towards speedier reforms in order to win back their support.

Pinched by the decision of the World Bank to not proceed with the second tranche of budgetary support under the Poverty Reduction Strategy Credit (PRSC II) of US$ 70 million and also shaken by the news reports that the International Monetary Fund (IMF), too, could stall the third slice of Poverty Reduction and Growth Facility (PRGF) arrangement, the government appears compelled to change strategies to accelerate reforms.

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The change in tactics seems to have been adopted especially because of stated reasons by the World Bank for not processing the credit. "The agreed reforms have not been completed and there is not rime to process the PRSC II in fiscal year 2005 now," stated a release from the Bank. The WB has reiterated that its continued assistance would depend on demonstrated commitment and capacity to implement reforms. The WB board also expressed concern about the security situation in Nepal and the government's ability to implement projects. The board also raised concerns about the government's ability to continue implementing difficult reforms in the absence of representative mechanism to build broad-based consensus. 

Likewise, in November 2003, the IMF had approved of a US$ 72 million PRGF arrangement for Nepal, subject to the government implementing the reforms and policies agreed upon.

Consequently, the government has taken first tentative steps to ‘demonstrate’ its commitment to agreed reforms. Last week, the Nepal Rastra Bank (NRB) warned the commercial banks and financial institutions not to have any transaction with black-listed willful defaulters. Otherwise, the central bank has warned, such institutions would have to pay hefty fines. According to new guideline, if any financial institution gives loan to such persons/firms, they will be made to pay the fine of same amount (that they have given as loan). The financial sector reforms could not proceed thanks to huge amount of Non Performing Assets in two big commercial banks Nepal Bank Limited and Rastriya Banijya Bank. According to the central bank, NPA accounts for whopping 29 percent (Rs 40 billion) of total loan investment of commercial banks in the country.

That apart, the government has also formed a high level committee headed by Dr. Shankar Sharma, vice chairman of the National Planning Commission (NPC), to recommend action against the willful defaulters of bank loans. The committee will look into the legal and other aspects while making its recommendations. It will submit its report within three weeks.

In addition to these steps, the government has also set up a high-level Financial Sector Reforms Committee headed by Dr. Shankar Prasad Sharma to accelerate reforms.

Last week, the cabinet also changed Agriculture Development Bank, Nepal (ADB-N) into a limited company called Agriculture Development Company Limited (ADCL) as per its ongoing reforms program. The company will now have work in line with private commercial banks abiding by the NRB guidelines.

Likewise, the government is also looking into giving a fillip to the efforts towards privatizing some of the ailing industries. It is also to reach into contract agreement with the management of the Royal Drugs Limited, among others, to enhance its weakening financial position.

As these efforts suggest, the government seems bent on carrying on reforms to convince the donors. But how far these steps will be able to convince them remains to be seen.