World Bank may cut aid flow to Nepal

The World Bank country Chief in Kathmandu, Ken Ohashi, has in a signed article, earlier this week, said the second tranche of the Poverty Reduction Support Credit (PRSC) to Nepal from the Bank could be cut back unless there is demonstrable progress in the economic reforms programme.

Ohashi has said, on the website of Nepal Times, he has had many rounds of discussions with senior leaders in the government led by King Gyanendra about pending reform actions over the last several months. "Promises of imminent actions have been made time and again. But few concrete actions have been taken.

"Therefore, unless the government is able to rejuvenate the reform process in the coming weeks, the World Bank will have to conclude that the government's priorities are elsewhere and that the effectiveness of His Majesty's Government of Nepal as a promoter of development is slipping. In such a situation, the Bank would have to move the Nepal program to the low case,' Ohashi said in the article.

He spelt out what was at stake. Nepal could lose about $100 million or more in new assistance every year from the World Bank alone, or about six percent of the government's total Fiscal Year 2005/06 budget, Ohashi says, adding that this would include PRSC II ($70 million or more), "which is the most powerful financial support the World Bank can give to the Nepal government's development efforts, for it disburses in one cash payment, unlike conventional projects which disburse over many years".

Ohashi warned that financial loss would not stop there. "Recently, the IMF and the World Bank determined that Nepal is eligible for debt relief for the so-called 'heavily indebted poor countries'.

"Rough calculations show that if Nepal qualifies for this benefit, it may stand to gain around $ 30 million a year in debt service reduction right now and even more in the future. To qualify for these debt relief measures, however, Nepal's reform program needs to be on track," he said.

The International Crisis Group (ICG), an NGO that is dedicated to preventing conflict, in a report released on 15 September, says that while the budget announced in July 2005 was predicated on a 4.5 per cent rate of growth, growth slowed by 2 per cent in FY 2004-05.

'A poor harvest, feared by analysts following low early monsoons could push the economy towards negative growth'. The NGO says the budget deficit for 2005-06 is estimated at $ 650 million of which the Finance Ministry hopes to cover $ 480 million through foreign loans and grants. 'While around two thirds of the development budget has been financed by foreign aid in the past, only half the projected loans were realised in 2004' the NGO says.

Both Ohashi and the ICG point out that institutions like the Royal Commission for the Control of Corruption that were set up after 1 February when the King took over, effectively slow down reform. Ohashi concedes that the surcharged political atmosphere could have something to do with the slow pace of reform.

However, why measures that create a better economic environment for jobseeking should be 'so difficult to implement is a mystery'.