World Bank, ADB may stop credit to Nepal

Nepal-based representatives of the Asian Development Bank (ADB), the World Bank and the International Monetary Fund (IMF) were likely to tell King Gyanendra some time this month that they would suspend further credit to Nepal until there was evidence of good governance, Washington-based sources in these lending agencies said.

The lending agencies have taken a dim view of the harsh punishment handed out to former Prime Minister Sher Bahadur Deuba and former minister Prakash Mansingh by the Royal Commission for Corruption Control (RCCC ) in the Melamchi Water Supply Project case.

In a recent judgment, the RCCC had sentenced Deuba to five and a half years in prison and imposed a heavy fine for alleged corruption.

India has pointed out that the ADB, which is a major financier of the project, has publicly clarified after thorough investigations that it did not find any evidence of collusion or other corrupt fraudulent practices among those involved in the bidding process for the contract.

The World Bank, in its Country Assistance Strategy (CAS) in 2003 had spelt out that while the Nepal government's efforts to reform the economy had to be supported, one of the greatest risks to the World Bank was the worsening of the political situation and rise in insurgency that would lead to greater spending by the government on security-related expenditure.

This could short circuit the World Bank's strategy to reduce poverty in a country where, as the Bank pointed out in its report in 2003, 60 to 70 per cent of the population in some parts of Nepal""western Nepal particularly ""live on an income of less than $1 a day.

The change in the lending agencies' stand was reflected in part in March 2005 when the IMF postponed the third tranche of aid soon after the February 1 assumption of power by the king suspending democratic rights and civil liberties.

The latest move could cause Nepal's economy to move a step closer to crisis. This, these lending agencies believe, might force the King to restore some semblance of civil society in the Himalayan kingdom.

In June, the World Bank approved a $3 million grant to Nepal to help the country finance the technical assistance needs of its comprehensive reform agenda.

But the feeling in the World Bank now is that until grassroots reform is undertaken by the government, and structures created to check corruption, there is little hope of addressing poverty and infrastructure development.

The World Bank is currently financing eight projects in Nepal with a total commitment of around $340 million. A $70 million poverty reduction support credit was approved in 2003.