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Nepal - Delivering Assistance in a Challenging Environment

Nepal - Delivering Assistance in a Challenging Environment

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1.

Macroeconomic Stability and Growth Outlook

56. ADB contributed to Nepal’s macroeconomic stability by continuing its assistance over
the evaluation period, during which the country was in conflict and political transition. Net
resource transfer to the country improved, which helped to a certain extent to keep the fiscal
balance under control, with a budget deficit equal to 3% of GDP. GDP growth has been
maintained, though at a low average of 3.8% over 2004–2008; inflation has remained stable
below 8%;33

and foreign exchange reserves are healthy, worth approximately 6 months of
imports as of FY2008. With the return of higher economic growth at 5.6% in 2008, arising
largely from the improved security situation (which helped project implementation, and the
expanded services sector) and favorable weather for agriculture, the GDP growth outlook for the
next 2 years is modest (3.0%–3.5%).34

This will depend upon continued peace and political
stability, improved security, prudent government spending, supervision and regulation
enforcement in the banking sector, tighter monetary policy, and efficient exchange rate
management. However, progress on structural reforms has been held back by the fragile
political environment. Trade imbalances with India and the rest of the world continue. ADB
assistance has been inadequate for leveraging to achieve structural reforms; reduce
vulnerabilities in the financial system reflected in negative real interest rates, property price
increases, and high credit growth; and more effectively supervise financial institutions. On the

31

ADB. 2007. Special Evaluation Study on the Resident Mission Policy and Related Operations: Delivering Services
to Clients.
Manila.

32

MOPAN. 2006. The Annual MOPAN Survey 2006: Donor Perceptions of Multilateral Partnerships at Country Level.
MOPAN is a network of like-minded donor countries that began in 2003 to jointly survey the partnership behavior of
multilateral organizations at country level. Current members are Austria, Canada, Denmark, Finland, Netherlands,
Norway, Sweden, Switzerland, and United Kingdom.

33

International Monetary Fund. 2008. Nepal Article IV Consultation. Washington, DC (June). ADB's Asian
Development Outlook 2009
shows the year to year inflation being 14.3% for 2009 and 8% for 2010.

34

ADB. 2009. Asian Development Outlook, Manila. Available: www.adb.org/nrm.

18

macroeconomic front is the urgent need to address huge trade deficits with India35

and the rest

of the world by improving the policy and regulatory environment for investment and trade.

2.

Inclusive Development

57. ADB’s assistance for promoting the objective of inclusive social development comprised
20.3% of ADB’s operations in 2004–2008. This has provided momentum to (i) reduce non-
income poverty with improved access to and quality of education in general and vocational
education in particular, (ii) improve access to clean drinking water, and (iii) increase economic
and social benefits for women. Women and the disadvantaged have worked on rural
infrastructure projects, particularly environmentally friendly ones.36

58. Recent successes in the education sector can be attributed to the adoption of a SWAp in
implementing the EFA Program in 2005–2009, in which ADB is participating jointly with eight
development partners. ADB has assisted in primary, secondary, and technical education; its
interventions have provided teacher training, vocational training, physical infrastructure
development, rehabilitation of secondary schools, and construction of hostels. The net
enrollment rate in primary education increased from 72.4% in 2004 to 86.6% in 2006, with 91%
of households having access to a primary school and the gender-related development index
increasing from 0.3 in 1995 to 0.5 in 2005 (Appendix 3). School facilities have been
continuously upgraded since 2002. The EFA Program and the Secondary Education Support
Project saw the provision of scholarships and school grants increase from 150,000 in 2002 to
more than 700,000 in 2007. The percentage of trained teachers increased almost threefold over
the same period. Despite the appreciable efforts to enhance basic education, the PRSP target
enrollment in primary school was not attained, and the Government still faces many difficulties
in providing access to quality education at all levels.

59. The CSP 2005–2009 aims to help the Government address gender, ethnic, and caste
discrimination by (i) encouraging inclusive public policies; (ii) mainstreaming antidiscrimination
measures in ADB-supported initiatives in rural development, education, and civil service reform;
(iii) building institutional capacity to foster inclusion and promote gender equality; and (iv)
providing targeted interventions to empower poor women. Specific mechanisms were developed
to enable the participation of women and the poor in projects that might otherwise have
excluded them. ADB's gender projects database indicates that all of the loans and 9 of the 12
grants to Nepal during the CAPE period addressed gender concerns.37

ADB-supported projects

with a gender action plan increased from 25% in 2002 to 50% in 2008.38

The Special Evaluation

Study on Poverty Reduction Technical Assistance Trust Funds39

found that the five TA projects
financed by the Poverty Reduction Cooperation Fund in Nepal provided targeted assistance and
showed equally strong design focus on women and excluded groups.

35

The approach paper for the TYIP envisaged a review of the exchange rate for the Indian currency, with a view to
adopting a more realistic exchange rate system, and measures for ensuring the safe inflow and management of
foreign remittances. ADB had an opportunity to help the Government in this regard. See National Planning
Commission. 2007. Three-Year Interim Plan, Approach Paper. Kathmandu (July).

36

ADB addressed disparity by ensuring that wages for women were equal to those of men for work of equal value.

37

ADB's gender projects database covers only those projects funded by ADF or ordinary capital resources. A project
addressing gender concerns may be classified under the following categories: (i) gender and development as a
theme, (ii) effective gender mainstreaming, and (iii) some gender benefits.

38

Loans and grants with gender and development as a theme or categorized under effective gender mainstreaming
usually have a gender action plan.

39

ADB. 2008. Asian Development Bank’s Poverty Reduction Technical Assistance Trust Funds: Poverty Reduction
Cooperation Fund and Cooperation Fund in Support of the Formulation and Implementation of National Poverty
Reduction Strategies.
Manila.

19

60. Nepal is the only DMC that borrowed for a project focused exclusively on gender.40
Through program lending and policy dialogue, ADB was able to assist the Government in the
formulation of several landmark legislative acts and policies, such as the amendment of the Civil
Service Act 2007 and enactment of the Gender Equality Act 2006, which repealed many
discriminatory laws against women. The number of female primary school teachers increased
from 21.4% in 2002 to 30.6% in 2007, and the percentage of female parliamentarians in the
Interim Parliament rose from 5.9% in 2001 to 17.3% in 2006. ADB assistance likewise helped
institutionalize gender awareness in sector agencies. Given the progress of ADB assistance in
Nepal with regard to gender and development, the potential impact of ADB support in this area
is high and may yield long-term benefits for women and other excluded groups. A more detailed
discussion of gender and development is in Appendix 9. This appendix also discusses ADB's
assistance to other thematic areas.

3.

Governance and Capacity Development

61. Corruption remains a key governance challenge despite the enactment of numerous
laws and the establishment of anti-corruption agencies since 2002.41

The World Bank Institute

reported that corruption in Nepal has worsened since 1996,42

and Transparency International
gave Nepal a score of 2.5 (countries scoring less than 3 are classified as "corruption rampant").
There are widespread complaints of corruption in public service due to poor accountability and
transparency. According to ADB's Central Operations Services Office (COSO), the procurement
environment is deteriorating.

62. The CAPE survey revealed that 44.2% of respondents felt that ADB’s contribution to
improving governance was just moderate, though 13.7% found it to be significant or substantial.
During the CAPE period, loans and grants to the LEMPP sector, of which governance is a part,
accounted for 19.3% of the total. This sector is a close third to the second biggest recipient,
which is the transport and communications sector at 19.8%. Even with regard to technical
assistance grants to Nepal, the LEMPP sector got the biggest share of financing at 21.9%,
followed by water supply, sanitation, and waste management at 21.3%. Given the relative
importance of the sector in stakeholders’ perception, there seems to be further room for
improvement in ADB’s assistance. Governance continues to be an important area, as a weak
regulatory framework was identified by 37.9% of survey respondents as the second-biggest
development constraint.

63. Between 2004 and 2008, 13.2% of ADB’s assistance to Nepal in terms of value targeted
institutional capacity development and focused on three interlinked areas: (i) sector capacity; (ii)
crosscutting capacity such as countrywide decentralization, financial management,
procurement, planning functions for monitoring results, and accountability capacities; and (iii)
local government capacity. Though this approach to capacity development has had significant
success, it falls short of the strategic approach to capacity development based on country
ownership and leadership as emphasized in ADB’s Medium-Term Framework 200743

and the

40

ADB. 2004. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the
Kingdom of Nepal for the Gender Equality and Empowerment of Women Project
. Manila (Loan 2143[SF], for $10
million, approved on 16 December).

41

ADB. 2008. Country Partnership Strategy Midterm Review: Nepal 2005–2009. Manila.

42

The Worldwide Governance Indicators project reports aggregate and individual governance indicators for 212
countries and territories over the period 1996–2007, for six dimensions of governance, (i) Voice and Accountability,
(ii) Political Stability and Absence of Violence, (iii) Government Effectiveness, (iv) Regulatory Quality, (v) Rule of
Law, and (vi) Control of Corruption. Available: http://info.worldbank.org/governance/wgi/index.asp/.

43

ADB. 2006. Medium Term Strategy II. Manila.

20

Action Plan for Integrating Capacity Development into Country Programs and Operations.44

The
Government’s limited ability to formulate and implement development programs and projects
has been a major obstacle to sustainable development. Larger donors have recently shown
more confidence in the Government by aligning their budget formulation processes and
monitoring and reporting systems with the Government’s, particularly in the SWAps to education
and health. Experience with these approaches demonstrates that the Government has the
capability to extend SWAps to capacity strengthening in other sectors, particularly in improving
service delivery to the poor and the effectiveness of development lending.

64. The perception survey found 64.2% of respondents believed that ADB’s assistance to
Nepal made either a "significant" (36.8%) or a "substantial" (27.4%) contribution to
strengthening sector and/or country policy and strategy planning capacity. However, 47.4%
found that ADB’s contribution to the strengthening of organizational capacity in government
agencies toward delivering services was only "moderate." This may be partly related to 41.1%
of the survey respondents’ perception that project and TA personnel and/or consultants were
only "partly effective," though 41.4% deemed them "effective" and 3.2% "highly effective."

4.

Millennium Development Goals and Poverty Reduction

65. Steady improvements in human development indicators have been made as more
attention was paid to poor and excluded members of society. Nepal is likely to meet some of its
Millennium Development Goals (MDGs) for 2015. Access to education has improved
significantly, particularly for primary and secondary schools; life expectancy and adult literacy
rates have increased; and infant mortality has fallen. The participation of women and
disadvantaged groups in the civil service, vocational training, and secondary education has
increased. However, large differences remain between urban and rural poverty rates, as urban
poverty fell from 21.5 to 9.5% between 1996 and 2004, while the decline in rural poverty from
43.3 to 34.6% over the same period was much less impressive (Appendix 3).45

66. ADB contributed to improving access to safe drinking water and sanitation in both urban
and rural areas by supporting the installation of water supply systems. In urban areas, 92% of
the target has been realized, with systems in two large municipalities benefiting 105,000 people
and in 21 small towns benefiting 540,000. These projects have helped to improve the quality of
life and related health indicators. Promoting social and economic inclusion for women and the
disadvantaged by removing social, legal, economic, and other constraints was an important part
of the Tenth Plan and PRSP. ADB intervention emphasized increasing the participation of
women and excluded groups in all ADB-assisted projects and the representation of women and
disadvantaged groups in civil service and political positions. Apart from this, very little progress
has been made in other dimensions of the MDGs. ADB's assistance so far has contributed to
MDG achievement only modestly.

5.

Investment Climate and Private Sector Development

67. Despite the Government's intention, reflected in the last two development plans, for the
private sector to lead growth and become increasingly involved in infrastructure development
and service delivery, both on its own and in partnership with central and local governments,

44

ADB. 2007. Integrating Capacity Development into Country Programs and Operations: Medium-Term Framework
and Action Plan.
Manila.

45

There are no poverty data for years after FY2004. Data on progress in achieving MDGs are also unavailable for
more recent years.

21

results have been disappointing. With the political tensions and conflict for over the 10 years to
2006, there has been no clear vision for the private sector, and the Government has taken few
initiatives to enhance its economic role. Private sector activity is constrained by the lack of
clarity on property rights, frequent strikes and labor issues, poor infrastructure, and regulatory
and administrative inefficiencies.

68. In the early 1990s, ADB assistance46

to Nepal for private sector development focused on
providing direct financing to private sector ventures in industry and services. ADB's private
sector operations have not had any projects since 1997 for lack of an enabling environment,
private sponsors, or market opportunity. More recently, ADB private sector development
assistance to Nepal through advisory TA focused on developing an enabling environment for
the private sector in energy, transport, urban, water supply, and finance. For example, TA47

to
improve financial market regulation and corporate governance helped to improve the setting for
private sector development by restoring the health and soundness of the financial system.
However, there is at present little evidence of effectiveness in ongoing TA48

that aims to assist

the Government in improving the management and long-term financial sustainability of NEA.

69. More recently, as an integral part of its development framework for the power sector,
ADB provided assistance through TA49

to help the Government formulate an investor-friendly
policy with enforceable regulations to build the capacity of the Government to design and
appraise private sector providers. There have been very few public-private partnerships (PPPs)
in Nepal, mainly because of regulatory, institutional, and legal constraints, so TA is designed to
help the Government address some of these issues and reform the sector. The West Seti
Hydropower Project,50

on the other hand, aims to assist the Government in developing Nepal’s
large hydropower resources in an environmentally sustainable and socially responsible manner
through PPP, with ADB financing the Government’s equity participation in the project from its
public sector window and assisting the preparation of a combination of equity, loan, and
guarantees through its private sector window. ADB’s contribution to private sector development
in Nepal has been quite "modest" because of the challenging implementation environment.
However, ADB will continue to focus on creating an enabling environment for private sector
development in Nepal, particularly in energy and transport.

6.

Environment Sustainability

70. ADB recognizes that environmental sustainability is a prerequisite for economic growth
and poverty reduction in Asia and the Pacific. The CSP promotes mainstreaming environmental
sustainability and social safeguard measures in ADB-supported development activities in Nepal,
rather than merely providing standalone programs and projects for this thematic area. This

46

ADB provided assistance to Nepal’s private sector through nonsovereign loans and equity investments approved
from 1989 to 1996 amounting to $58.6 million. No other approvals were noted during the CAPE period.

47

ADB. 2000. Technical Assistance to the Kingdom of Nepal for Strengthening Corporate and Financial Governance
(Technical Assistance Cluster)
. Manila (TA 3580-NEP, for $3.3 million, approved on 14 December). The TA was
completed on 31 December 2006 and financially closed on 25 July 2007. The TA cluster was attached to ADB.
2000. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Kingdom
of Nepal for Corporate and Financial Governance Project
. Manila ([Loan 1811-NEP[SF], for $7.3 million, approved
on 14 December).

48

ADB. 2004. Technical Assistance to the Kingdom of Nepal for Restructuring of Nepal Electricity Authority. Manila
(TA 4492-NEP, for $400,000, approved on 18 December).

49

ADB. 2007. Technical Assistance to Nepal for Promoting Private Sector Participation in the Power Sector. Manila
(TA 4997-NEP, for $600,000, approved on 30 December).

50

ADB. 2007. Technical Assistance to Nepal for West Seti Hydroelectric. Manila (TA 4985-NEP, for $300,000,
approved on 5 November).

22

includes (i) the National Resettlement Policy Framework, which was drafted under ADB TA51
and is expected to address issues on land acquisition, compensation, and resettlement related
to the implementation of development projects in Nepal; (ii) programs52

related to managing the
environment and climate change; (iii) environmental components included under various
infrastructure projects in different sectors; and (iv) integrating environmental and social
safeguard measures into several projects and programs that were approved during the CAPE
period. Safeguard policies are adopted in programs and projects in education, agriculture, and
urban development.

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