National The Telegraph - Weekly (Nepal)

N A T I O N A L

Professor Hari Bansh Jha, TU

Until the end of 104-years of Rana regime in Nepal in 1951, the country was virtually isolated in the world. With the diversification of political and economic relations with the rest of the world in the post-Rana regime, the country entered into a new era in which foreign aid provided resources to the national budget, apart from bridging the gap between national savings and investment.. Besides, it also met the gap between excess of imports and exports of goods and services. Foreign aid was largely invested in transport, agriculture, electricity, industry and different other social sectors.

Nepal received foreign aid both in the form of grants and loans. All the aid that the country received between 1951 and 1959 was mere grants from different friendly countries. Nepal’s first Plan (1956-57-1960-61) was totally backed by foreign aid. The inflow of foreign loan started only from 1960. In the second Plan (1962-63-1964-65), the share of foreign aid was 65%, which in the Ninth Plan (1997-2002) was found to be 59%.

In the beginning, Nepal received bilateral aid from India and the United States. China jumped into the picture of aid provider in 1956 and Russia in 1959. Subsequently, countries, including Japan, Germany, Australia, Canada, New Zealand, Switzerland, Austria, Netherlands, France, Saudi Arabia, Kuwait, Denmark, Belgium, Norway, Finland and Israel joined the team of countries providing aid to Nepal. Until 1970, the amount of multilateral aid was not so significant. With the formation of Nepal Aid Group in 1976, there was perceptible growth in the quantum of foreign grants and loan. From 1983 onwards; the multilateral aid began to overtake the bilateral aid. Multilateral aid, which constituted 54% in 1983, increased to 60% in 2002-03, peaking up to 71% in 2000. The total foreign aid received by Nepal during last five decades reached US $ 5 billion with loan components of 66% and grants 34%. Major multilateral aid donors in Nepal include the World Bank, UN agencies, ADB and INGOs.

Statistics show that the quantum of foreign aid was mere Rs. 27.32 million in 1956-57, which shot up to Rs. 557 million in 1976-77 and Rs. 14384 million in 2001-02. In the budget estimate for the year 2003-04, the foreign aid figure further stepped up to Rs. 28.3 billion, which is 68% of the development expenditure.

As per the Economic Survey 2002-03, the total foreign debt reached Rs. 222 billion till the first eight months of 2002-03. The debt increased to the present level of Rs. 222 billion from mere Rs. 20.8 billion in 1988-89 and Rs. 36.8 billion in the last year of the Panchayat regime (1989-90). As a result, the per capita foreign debt reached Rs. 9,700.

Debt service in the year 2003-04 is estimated at Rs. 17.5 billion, which is 17% of Nepal’s total budget of Rs. 102.4 billion and nearly 4% of the GDP of Rs. 446 billion in 2002-03. Increased debt servicing is a burden as it reduces the amount of resources that could have been spent on development activities. With an increase in the foreign debt and the debt service ratio, the donor pressure has been mounting, which becomes evident in the form of pressure on the government in increasing tariff for services like electricity, water and telephone.

In Nepal, foreign aid is not that effective as it is largely under-utilized. There is a lack of criteria for the selection of aid. Entertainment projects, mainly in the form of international travel, is common in donor supported projects. In most of the foreign aided projects, the interests of the poor and vulnerable groups are largely ignored leading to increased level of economic inequalities. Foreign aid has encouraged distortions in the economy by generating unrealistic and parasitic expectations. It is also responsible for creating aid dependence syndrome and corruption.

Quality of laws is often questionable as most of them are simply translated from foreign language into Nepali not showing concern for the interest of the Nepalese people. Of nearly 200 acts passed or amended, most of them are made in line with business objective rather than actual requirements.

In order to remove existing flaws in foreign aid, an effort was made in the government circulated Foreign Aid Policy 2002 to improve the status of aid utilization and at the same time ensure transparency, uniformity, accountability and predictability in decision-making process. Such aspects as limiting the role of donors to that of facilitators, channeling aid towards priority sectors and matching aid management with the overall economic reform program were also envisaged. Preference was given to grant as compared to loan considering the liabilities on the future generations.

Because of the multidimensional effects of foreign aid, it is too difficult to assess its impact. However, it cannot be overlooked that it helped improve the infrastructure facilities like the roads, airports, hospitals, educational institutions, drinking water, irrigation and electricity. However, if the per capita income is taken as indicator, Nepal does not seem to have made any major headway in development. With per capita income of US $ 250, Nepal stands on the bottom line among the least developed countries of the world. Most of the infrastructural facilities developed through foreign aid are not so much within the reach of the have-nots. Foreign aid increased the gap in economic opportunities between rich and poor and, thus, failed to address issues like equity and justice. It disempowered the state and its machinery and widened rural-urban, hill-Terai, east-west and male-female disparities. It is, therefore, high time that the concerned agencies should focus on effective implementation of foreign aid.

Professor Jha is Executive Director of Centre for Economic Studies (CES)

We are not foreign management; we are new management including some foreigners

Craig Mc Allister, CEO, Nepal Bank Ltd

We all know that fifteen guys in black suits don’t walk into an institution of this size and do the job alone. What has been accomplished over the last two years has been done by people throughout the bank and the credit goes to the entire staff.

In the three years before our management team joined, the Nepal Bank Limited lost approximately 7 billion 947 million rupees including 3.1 billion in 2058/59. The situation at NBL had deteriorated so badly that the bank was no longer producing annual reports and had not done so for three years. Accounting records were in disarray, loans were not being collected, efforts at computerization had collapsed, there was a complete absence of corporate planning and the list goes on..... and on.....

Last year you stabilized the bank and stopped the hemorrhaging. The NRs. 3.1 billion net loss was reduced by approximately 92% and our operating loss was cut-back by 90%. Accounting activity was modernized, we began to actually collect non-performing loans, and new systems were introduced to name just a few of the achievements.

In the year just concluded, I am pleased to share with you that the bank has returned to net profitability. We will report a net profit for the year just concluded of more than NRs. 700 million. More significantly, the bank has returned to sustainable operating profitability.

I would like to quote my favorite politician Winston Churchill. "This is not the end. It is not even the beginning of the end. It is, perhaps, the end of the beginning. Those words were true when Churchill spoke them some 64 years ago and for Nepal Bank they ring even more accurately today. We still have many problems in the bank that we must correct during this year. Some of the staff members of Nepal Bank have not actively participated in the successful recovery of the bank. They have been passengers, observers, obstacles to change and improvement. This must change immediately. We still have a heavy portfolio of non-performing loans that must be collected with greater urgency. Computerization is proceeding slowly but I believe we are past some initial start-up difficulties and the program will now move ahead more smoothly. If we are to grow and to solidify our return to profitability, we must increase our lending to good Customers that will repay NBL fully and on time. We need to be more responsive in our efforts to improve customer service and operational efficiency and the list goes on ....... and on ........

There are two particular issues I would like to clarify and repudiate while I have your attention. We have all seen various critical reports in the press over the last two years with regard to the foreign management team. Fine, that is the right of the press. However, and first, our team, the ICCMT, consists of two-thirds Nepali experts and one-third foreign members. To ignore the contribution of our Nepali team members, which has been very important to our success, is wrong. Our team is composed of skilled experts in a number of banking fields. We are not foreign management; we are new management including some foreigners. We are here because our predecessors failed. Second, I have read repeatedly about how the non-performing assets at NBL have grown from 38% to 62% since our team assumed leadership of the bank. The implication is that the foreign managers are shoveling cash out the door to bad borrowers. Absolutely wrong! In the 27 months between the conclusion of the KPMG diagnostic report and our arrival, considerable deterioration in the loan portfolio occurred. The growth in NPA’s at NBL is a direct result of mis-classified or unreported loans many of which were made while the foxes were still in charge of the chicken coop. All loans made by new management at NBL are performing as agreed or better. I find it very curious that people are so willing to jump to unfounded conclusions about those that are trying to clean up the mismanagement of the past and very few seemed to be concerned about the managers who actually mismanaged the bank or the willful defaulters that are continuing to benefit from that mis-management. Nevertheless, I pledge that Nepal Bank Ltd. will continue aggressive pursuit of all willful defaulters and the bad loan portfolio will be collected.

Improving productivity at NBL will help us perfect our service delivery. We need to be the low-cost provider of timely services delivered with a smile. The change we have initiated must be sustained and extended further - only then will Nepal Bank be able to reclaim the banks rightful place of leadership in the financial community of Nepal.

(Welcome remark by Craig McAllister CEO, Nepal Bank Ltd. On the Occasion of the 3rd Annual Management Conference August 7, 2004)