Donors  encouraged by Nepal's Reform Agenda for Poverty Reduction

- Richard Vokes, ADB, Nepal

I will first briefly highlight what the Outlook says about the world economy in general, and about Asia as a whole, and then quickly move on to South Asia and Nepal. The second part of my remarks will cover the special sections of the Outlook on Corporate and Financial Governance and the Social Challenge in Asia, topics, which are highly relevant to Nepal.

The year 1999 turned out to be much better than had been expected by most analysts. World GDP growth increased to 3 percent in 1999. World trade volume increased to 4 percent in the same year compared with a downturn in 1998. World inflation declined to its lowest level in 40 years, reflecting the intensified commitment of monetary authorities to focus on price stability.

For Asia, the economic outlook changed rather dramatically in 1999. A year ago, at the time of the last Outlook launch, we had forecasted regional growth of 4.4 percent in 1999.  This was later revised to 5.7 percent. However, the actual growth rate for 1999 exceeded 6 percent, which is almost three times the growth rate for 1998. This high growth in GDP was largely due to the sharp rebound in economic activity in the five countries most affected by the financial crises, namely, Indonesia, Korea, Malaysia, Philippines, and Thailand.  For these five countries, GDP growth swung from a negative 7.7 percent in 1998 to a positive 6.6 percent in 1999.

Immediate prospects for developing Asia remain good. At 6.2 percent, growth in 2000 is expected to remain unchanged from 1999 levels. While there will be slower growth in the Newly Industrialized Economies and the People’s Republic of China, this will be offset by more rapid growth in Southeast Asia, South Asia and the Central Asian republics.

Partly because of the strength of the Indian economy, South Asia turned in a strong performance in the last two years with the GDP growth rates of 6.2 percent in 1998 and 5.5 percent in 1999.  After three successive sluggish years, the Indian industrial sector performed better in 1999.  Combined with increased exports and better performance in the agriculture sector, GDP growth in India was a robust 5.9 percent in 1999. Primarily due to improved performance in the agriculture sector, the inflation rate in the India, as well as in the rest of sub-region, dropped substantially in 1999.

Turning to Nepal, the Outlook notes that the macro-economy was stable in 1999, despite the uncertainty caused by the change in government. Real GDP growth rose to 3.3 percent, from 2.3 percent in the previous year, thanks to a better performance in the agriculture and industry sectors. However, as you are aware, inflation rose to almost 13 percent in 1999 due to the rise in food prices. The budget deficit remained at 6.1 percent in 1999.  Domestic revenue collection was substantially lower than the budgeted amount, with actual revenues amounting to about 10 percent of GDP. The shortfall in revenues was balanced by slower-than-budgeted growth in development expenditures. Nepal’s current account deficit declined dramatically in 1999 because of strong export growth and a contraction in imports, mainly related to foreign aid.

The prospects for 2000 are for significantly higher growth.  In agriculture, a favorable monsoon and wider us of fertilizer is leading to a strong recovery in production, especially of rice and vegetables.  Early indicators from the carpet and garment industries also suggest strong performance while tourism is also expected to perform quite well. As a result, GDP is expected to grow by between 5 to 6 percent.

Price performance in 2000 will also benefit from bumper harvests throughout the region.  Inflation is therefore expected to decline significantly in 2000 to around 5 percent despite the increase in kerosene, diesel and electricity prices in the second quarter of the current fiscal year.  Domestic revenue estimates in the current budget are optimistic with a projected growth rate of 14 percent. Actual revenue performance will depend on the effective implementation of the value-added tax. The fiscal deficit for 2000 is projected to reach 7 percent and to continue to rise in 2001.   On the external front, the current account deficit is expected to widen in 2000 to around 8 percent of GDP, as aid-related imports return to their previous levels.  Imports are projected to grow by 15 percent, with investment goods expanding faster than consumer goods imports.  Export growth should continue to be strong in 2000 but will slow without the grain exports of the previous year.

If the new Government can, as promised, push forward with implementation of a second round of economic reforms, then the outlook for 2001 is for continued strong growth.  Apart from the need to continue and sustain reforms in the agriculture sector, civil service reform and financial sector reform need to be at the core of the Government’s broad-based reform agenda.

I would now like to turn from the review of recent economic developments to the issue of corporate and financial sector reform in Asia, which is one of the special themes in this year’s Outlook. Although substantial progress has been made in corporate and financial sector restructuring, the unfinished agenda is large. Segments of the banking industry of the crisis-affected countries remain undercapitalized, and loan growth remains subdued. The pace of corporate sector restructuring, moreover, lags behind bank restructuring and some of the restructured corporate debt has since turned bad. Although government involvement in financial sector restructuring was inevitable, extensive guarantees given to depositors and creditors have the potential to become open-ended. To avoid such a possibility, the process of privatization of nationalized financial institutions and the disposal of non-performing assets need to be accelerated.

In the case of Nepal, which has not been affected much by the crisis, corporate and financial governance reforms are nonetheless crucial for generating pro-poor economic growth given the serious problems facing the financial sector and the weak governance in both the financial and corporate sectors.  The ADB is supporting the process of improving corporate and financial governance through a series of technical assistance projects and possibly loans. This program aims at improving information disclosure in the corporate sector through adoption of international accounting standards and practices. In the financial sector, the focus of ADB support is on improving the legal and regulatory framework and the sustainability of the non-bank financial sector, in particular the development banks and the micro-finance sector.   At the same time, the World Bank is providing support in the commercial banking reform while the IMF is supporting the Government’s efforts to improve the overall regulatory and supervision environment and strengthen the capacity of the Nepal Rastra Bank.

While corporate and financial sector reform undoubtedly represent a great challenge to the region and Nepal, an even greater challenge is the task of improving the quality of life of the millions of people who remain in poverty. According to a commonly used definition of poverty—those who live on less than US$1 a day—about 900 million people were poor in 1998. This is about twice as many poor people as in the rest of the developing world combined.

However, quality of human life cannot, and should not, be defined by dollar income alone. There are other aspects of human deprivation such as illiteracy, malnutrition, poor health, limited access to water and sanitation, vulnerability to economic shocks, and a lack of political freedom. For instance, nearly half of the population in South Asia is illiterate. In several countries in Indochina, fewer than half of all households have access to safe drinking water. Every year, 2.7 million people die of diseases related to air pollution in Asia.

Poverty is Asia’s main social challenge today and the ADB has adopted poverty reduction as its overarching development objective. The nature of this social challenge is the subject of the other special theme in this year’s Outlook.  Fundamentally, the ADB believes that promoting economic growth remains the best path to poverty reduction. But to have a large impact on the poor, growth must be inclusive. That is, growth that the poor can share in. Based on a review of historical experience, as well as the external and internal environments, the Outlook emphasizes a number of policy priorities.

First, openness and market orientation. Asian economies need to further the process of opening up their economies to enable them to exploit new economic possibilities in the international economy. However, as recent experience has demonstrated, the strategy of openness and market discipline has to be supported by prudent macroeconomic policies. Maintaining stable and manageable levels of debt, inflation, and exchange rates is crucial for creating an environment conducive to inclusive growth.

Second, human resources and physical infrastructure. Investment in human resource development, particularly education, health care and nutrition, is essential in the fight against poverty. So is investment in physical infrastructure to raise productivity of labor.

Third, improving governance. Asia’s economies need better governance to ensure more efficient and equitable public expenditure management. Good governance also leads to efficient decentralization and increased local management of public resources.

And finally, strengthening social protection. Asia needs more effective social safety nets. The recent financial crisis has dramatically highlighted the inadequacies of current arrangements.

We must also look for an increase in the flow of foreign assistance.  Assistance from the advanced to the developing world has steadily declined over the last decade.  This is unfortunate because many industrial economies are now in much better fiscal shape than at any time in recent history.

Also, much more attention should be given to providing international public goods.  The international community can greatly help to reduce global poverty by providing important international public goods.  Medical research in advanced countries, for instance, tends to neglect tropical diseases.   And agricultural research pays scant attention to tropical crops or how advances in biotechnology can be put to use to transform the farming systems of the poor in developing economies.

Turning once more to Nepal, we are very encouraged by the Government’s Reform Agenda for Poverty Reduction set out in the Government’s Country Memorandum presented at the recent Nepal Development Forum in Paris last week, along with a paper highlighting the Government’s Priority Reform Actions.  These cover all of the key elements identified above.  However, as we discussed in Paris, the second round reform agenda requires urgent actions across a wide range of areas.   While we believe there is still scope for further prioritization of the Government’s reform agenda, the effective implementation of this reform agenda will remain a major challenge not only to the Government, but also to the intended beneficiaries and wider civil society, as well as Nepal’s development partners, including the ADB.  In this regard, while the very positive outcome of the Paris meeting has raised the prospect of enhanced aid flows, as we all know, the key issue for Nepal is not so much the need for an increase in external assistance but the need to ensure that the substantial amount of aid already received is used efficiently and effectively.  In this regard, we look forward to the early completion of the Government’s Foreign Aid Policy, currently under preparation and the other measures proposed to improve aid effectiveness.   Again, this is an area in which Nepal and her development partners will need to work closely together.

Ladies and gentlemen, I hope that with these remarks, I have given you the flavor of this year’s Outlook. I will now open the floor for questions, while the press kits are being distributed. The kit contains a number of relevant chapters of the Outlook, as well as a news release from our Headquarters on India, and a news release issued by us focusing on Nepal.

(Introductory Remarks made by the author Dr. Richard Vokes, Resident Representative, Asian Development Bank at a press conference on the occasion of the launch of the Asian Development Outlook 2000, Kathmandu, 26 April 2000-chief  editor).

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