With the Nepal Development Forum (NDF) meeting continuing this week, the focus has been on the Himalayan challenges the country faces in its development journey. As nearly half of the population is still living in abject poverty, political instability, Maoist insurgency and growing corruption have posed serious challenges to the integrity and political dispensation of the country. Is good governance a panacea? Moreover, how could it be realized? A very difficult question to answer, indeed.
By BHAGIRATH YOGI
As the first-ever meeting of the Nepal Development Forum (NDF) kicked off in the Nepalese capital on Monday, both Nepalese officials and the donor community were trying their best to drive their point home in no-nonsense phrases.
“The government is working to reduce non-essential and unproductive expenditures and adhering to a strict fiscal discipline and has already initiated measures for governance reforms to strengthen the civil service, financial sector and decentralization,” said Prime Minister Sher Bahadur Deuba. “The government is going to introduce a strong, anti-corruption legislation in the upcoming session of the parliament,” he added.
Finance Minister Dr. Ram Sharan Mahat, co-chair of the meeting, admitted that the government was facing a resource crunch not only to maintain the ongoing priority programs, but also to make resources available for rebuilding infrastructure establishments and essential facilities destroyed by the terrorists, and for providing relief and rehabilitation to victims of Maoist insurgency. “Nepal requires substantial external aid to support its development efforts. More so now when security spending is growing while the development demands are also increasing,” the finance minister said.
A village houshold : Hounded by poverty
A village houshold : Hounded by poverty
Though the representatives of nearly two dozen donor countries and organizations present in the elegant meeting hall of the Birendra International Convention Center, along with observers from India, China and Russia, listened to Nepalese government leaders with keen interest and attention, they were forthright — risking even to be undiplomatic — to express their concerns. “Nepal may be imprisoned in a vicious circle of bad governance,” warned Mieko Nishimizu, Vice-President of the World Bank for South Asia region and co-chair of the meeting. Saying that Nepal is ailing due to crisis of governance, corroding economy, distorted distribution of income and threatened social justice, in her emotion-choked speech Ms. Nishimizu said Nepal now faces two manifestations of this crisis of governance: the Maoist insurgency and a grave fiscal crisis. “Nepal today stands at the crossroads of its destiny — a destiny, which lies in the hands of her people to make or break. To bring the country out of such crisis, the nation needs leadership that gives vision, and that acts and whose words and actions are consistent,” said Nishimizu.
For Nepal, development challenges at the turn of the century are enormous. As the officials present their case to the donor community in Kathmandu and Pokhara for four days (Feb. 4-7) seeking more and sustained assistance in Nepal’s development efforts, the insurmountable challenges being faced by Nepal need to be examined in a broader perspective.
Poverty Alleviation: The Overriding Challenge Poverty in Nepal is widespread with about 38 percent of the population living below the nationally defined poverty line in 1999. However, some non-governmental studies claim that up to 70 percent of the population in this Himalayan kingdom are living below the so-called line of poverty.
The United Nations has estimated that nearly half of the 23.4 million people in Nepal live on less than one US dollar a day. Nepal Living Standard Survey, 1996, conducted by the Central Bureau of Statistics, however, estimated the incidence of poverty in Nepal to be about 42 percent. Large segments of the poor are hardcore poor barely eking out subsistence living on fragile and vulnerable ecosystems and large areas of the country lack even the most basic infrastructure.
There is a wide variation in poverty incidence across various geographical regions, studies said. Poverty is much more severe in the rural areas where a close to 88 per cent of the total population resides. An estimated 44 percent of the rural households and 23 percent of the urban households lie below the poverty line. Distribution of poverty incidence across the five development regions indicates that households in the eastern and central development regions are less poor than those compared to other development regions. Further, the rural residents in the remote western part of the country are poorer than from the other rural areas.
Even after more than four decades of planned development efforts, economic and social indicators in Nepal are very low even by South Asian standards. More than 48 percent of the adult population cannot read or write; only less than half the population have access to safe drinking water; and the country has infant mortality rate of 64 per thousand — all of which are still much lower even by South Asian standards. Nepal Human Development Report (HDR) 2001, launched here last week revealed that two out of every five Nepalese continue to live in abject poverty despite an annual economic growth rate of 5 percent and significant improvement in social indicators. Prepared under the theme, “Poverty Reduction and Governance,” the report said Nepal’s human development index (HDI) at 0.466 is below all South Asian countries except Bangladesh and Bhutan. The UNDP-sponsored report identified lack of good governance, wide social and geographic disparities and erratic growth in agriculture sector, among others, as key reasons for persistent poverty in this Himalayan kingdom (See separate story).
An analysis of the relation between growth and poverty in the Asia-Pacific region revealed that 1 percent growth in GDP per capita tends to reduce poverty by about 0.83 percent (ESCAP, 1999). On the other hand, the relationship between GDP growth and the poverty line defined in terms of US$ 1 day showed that 1 percentage GDP per capita income growth will reduce the percentage of people living below poverty line by 0.3 percent in South Asia (UNDP, 2001).
Over the last one decade, Nepal’s economy has been growing at an annual average rate of less than 5 percent, which only marginally exceeds the rate of population growth of 2.27 percent. The growth rate in the agricultural sector over the same period is even smaller, about 3 percent, which has shown a very inconsistent behavior over the years, mainly due to its over-dependence on monsoon. The slower rate of agricultural growth is largely responsible for the existing higher poverty incidence and its severity in the rural areas, experts say.
Agricultural productivity in Nepal has been quite low and decreasing. Examining the data on production of the major food crops from 1985-86 to 1998-99, both production and productivity were found stagnating or only marginally increasing, except for wheat, which showed a modest gain. The low returns for the poor from agriculture is mainly due to factors such as smaller size of landholdings, lower share of good quality land, poor share of irrigated land, virtually zero access to technology and insufficient access to rural roads and formal-sector credit.
The growth of the non-agricultural sector, estimated to be the major source of growth in recent years generating 60 per cent of the GDP presently, is driven mostly by the growth of the export sector, public investment and the urban services, which grew by about 6.5 percent in the 1990s. It has helped to reduce the incidence of urban poverty, but has not been strong enough to have desirable impact on the rural poor. A host of measures is essential to strengthen and encourage more active participation of private sector in the areas including legal and regulatory framework, institutions and enforcement capacity and banking and financial governance.
During his speech at the NDF meet, Finance Minister Dr. Mahat argued that human development indicators have improved remarkably during the last decade. Infant mortality (per 1,000) and maternal mortality ratio (per 100,000) are 64 and 439 respectively. Similarly, the adult literacy rate is about 52 percent and net primary school enrolment about 71 percent.
A series of studies have shown that poor in general have less access to social services; except for access to primary schools no other services are comparable; and even in the primary schools, accessibility, enrollment rate, dropout rate, etc., are significantly worse off in rural areas. Internal efficiency of social service delivery is poor in Nepal, says an official report prepared for discussions during the pre-consultation meetings on NDF.
Dropout rates and failure rates are high in public schools. Only about 18 percent of the primary school children complete the primary cycle on time. The situation is similar in the secondary and high schools. Approximately 60 percent of primary school teachers are still untrained. School supervision system is weak and non-wage expenditure in education is extremely low. Similarly, the quality of health services at the rural health institutions is either unavailable or very poor mainly due to the absence of health personnel and medical supplies.
Public investment has played a key role in raising growth and addressing poverty incidence in most of the countries. In Nepal, public expenditure is suffering from weak prioritization, inadequate project screening and weak monitoring and supervision. Increased public expenditure in rural areas has not made much impact in reducing rural poverty.
Despite significant growth in the budget in the social sectors including health and education, the per capita expenditure in these sectors is low as compared to most of the developing countries and the investment has to be made more equitable. More than 40 percent of the education sector’s budget goes to secondary and tertiary education and almost 30 percent of the public expenditure in health is allocated in sectors other than primary health care system. Cost recovery is low and proper targeting has remained poor.
Political instability is seen as one of the major factors leading to weak governance and growing corruption. Though people in Nepal voted Nepali Congress to power with clear majority in the Parliament in 1999, the party has already given three prime ministers in as many years. The situation is such that premier Deuba flatly refused to reduce the size of his “jumbo cabinet” saying that it was his `compulsion’ to counter the on-going power struggle within the ruling party.
Since the mid-term election of November 1994 to the general election of May-June 1999, there have been six coalition governments with an average tenure of nine months. Political instability and weak public bureaucracy have promoted unaccountability thus constraining better management of the economy. Institutional capability of the administrative system has also weakened, admits the official report.
A number of programs and projects have been initiated and implemented for the disadvantaged groups of the society. However, evaluation of various targeted programs shows that more than 2/5th of the budget do not go to the targeted population. Disparity between the social indicators for the poor and disadvantaged groups and the better-off segments of the society is great. Communities belonging to minority groups and backward castes and those living in geographically disadvantaged regions fare worse than the rest of the population. Despite significant improvements in the infrastructure development, the total constructed road is only 93 km per thousand sq. km. Penetration of telephone is 11 per thousand and the population covered by electricity is only 17 percent.
Nepal adopted the policy of economic reform program in 1991 a year after the restoration of multiparty democracy. The reform measures have since covered almost all sectors of the economy including trade and investment, fiscal and monetary policies, financial and capital markets and other economic and social sectors. Policy changes, so far, have affected the non-agricultural sector positively, but the reforms did not have any positive impact on the agricultural sector.
Real GDP grew by an average rate of 4.8 percent in the 1992-2000 period as compared to 4.6 percent witnessed during the 1982-1991 period. The growth of non-agricultural sector was 6.5 percent in the 1990s compared to 5.0 percent in the 1980s. The higher growth rate was derived from the industrial, trade, tourism, transport, communication, finance and social sectors. Liberal and deregulated policies positively affected the industrial sector’s growth rate. The manufacturing sector’s growth rate increased from an average annual growth rate of 6.6% in the pre-liberalization period to almost 10 percent in the post-liberalization period, said officials.
However, on the other hand, the agricultural sector’s growth was only 2.5 percent during the 1990s compared to 4.0 percent in the 1980s. High dependence on agriculture and lower than expected growth in this sector in the 1990s adversely affected the goal of poverty reduction in the country.
Of course, there have been some positive outcomes too. Latest Interim findings of the Asian Development Bank-funded Agriculture Sector Performance Review (ASPR) said that in Nepal farmers’ per capita income increased at 2 percent (during FY 1995/96-2000/01) despite the decreased public investment in the agriculture sector. Average annual agricultural exports grew at 37 percent during FY 1995/96-2000/01 compared to average 3 percent during FY 1990/91-1994/95, contributing to narrowing the trade gap between Nepal and India. Production of milk, meat and egg grew more rapidly than the population growth, nearly meeting the target set by the Agriculture Perspective Plan. Availability and use of chemical fertilizer increased considerably through the participation of the private sector and application of chemical fertilizer by small and marginal farmers increased substantially compared with medium and large farmers.
Foreign Aid
Flow of foreign aid started in Nepal since 1951 as soon as the country ushered into a democratic era and opened its doors to the outside world. Between 1966to 1997, foreign aid to Nepal increased from US$ 23.6 million to US$ 262.3 million (with annual increment of over 9 percent on average). Over the years, the component of grant started to decline and that of loan soared. For example, in 1983/84, grant constituted over 65 percent of total foreign aid. On the other hand, the share of loan increased from nearly 35 percent in 1984 to nearly 80 percent in 1994. According to a study conducted by Keshav Acharya, an economist at the Nepal Rastra Bank, in absolute amount, Nepal’s foreign loan has gone up from 32.65 million US dollar in 1975 to 230.52 million US dollar in 1997.
Because of low revenue surplus in the country, foreign aid has remained a major source of financing development expenditure. In 1975, foreign aid supported two-fifth of the development expenditure. Now, it is estimated to be around 70 percent of the total development budget.
There has been very slow increase in Nepal over the last five decades. In 1950, per capita GNP (Gross National Product) in Nepal was US$ 87, which has rose to US$ 220 now. “Although ultimate objective of foreign aid is economic development of the country, it had hardly alleviated poverty in Nepal,” said Acharya. “Persistence of poverty is an outcome of the observation that foreign aid is not invested in projects which directly benefit the poor. Foreign aid has perpetuated economic and social dualism and, directly or indirectly, has also been increasing the gap between the rich and the poor people.”
With nearly 70 percent of its development expenditure to be financed through foreign aid, Nepal depends heavily on external assistance. As the NDF members together finance nearly 80 percent of the available foreign aid, the outcome of the present meeting would be crucial for Nepal’s development financing in future.
Economic Outlook
A latest World Bank study says that at 2.2 percent growth rate, it will take Nepal around 31 years to double its per-capita income level. Whatever growth has been achieved over the past decades, it has been concentrated primarily in the urban areas and particularly in Kathmandu valley, largely excluding 86 percent of the population who live in rural areas, the study said.
Since the last Nepal Development Forum (NDF) in April 2000, Nepal’s economic growth has slowed down and medium term prospects are somewhat bleak. Political instability continues in the country with more than half a dozen governments and nine changes in Prime Ministers in the last ten years and recent escalation of violence. The effects of global economic slowdown, post-September 11, 2001 events, growing fiscal ressures and diminishing export markets have made the situation very complex and difficult to deal with.
“It has now become urgent for Nepal to accelerate the pace of reforms to overcome the twin challenges posed by the Maoist insurgency and the state of emergency and the deteriorating economic and fiscal conditions. Restoring security, maintaining fiscal and macroeconomic stability, increasing economic prosperity and competitiveness, and improving governance and public service delivery are major agenda of reforms and are being implemented,”said the report. “The development challenge facing Nepal is formidable, but the ëtwin crises’ of the state of emergency and the fiscal difficulties have also made reform imperative.”
The Road Ahead
No doubt, Nepal is at a crossroads in its development history, as declared by the “Economic Update 2002” prepared by the World Bank on the eve of the Nepal Development Forum. With a per capita income of US$220 per annum, Nepal is the 12th poorest country in world and the poorest in South Asia.
In order to emphasize the idea of Good Governance (GG), the donor community has propounded a simple equation, in which GG = GP + GCS (where, GP stand for Good Politics and GCS stands for Good Civil Service). However, in Nepal’s case, “the donors are toying with variable GCS but what has failed us is the variable GP,” writes Madhukar SJB Rana, an eminent management expert.
Harping on good governance without understanding Nepal’s geo-political realities and complex socio-economic practices will not help the matter, say analysts. A ruthless Maoist insurgency—that has attacked on very roots of national integrity, social harmony and multiparty polity from day one —imposed on the country is going to stay here and is likely to use as fodder a huge pool of unemployed, undereducated youths. With almost all sectors of economy faring poorly, financing a costly security operation is going to be no less than a nightmare for the government. So, is Nepal heading toward becoming a “failed state”, as wished by the Maoist insurgents?
Finding a convincing answer to such a difficult question will not be easy. Four-day long parleys with the donor community will help reassure the government toward its reform agenda and development goals. But transforming Nepal — the oldest nation-state in South Asia — into a modern, tolerant and developed society is going to be no less than a Himalayan challenge. Only the people of Nepal — and a political leadership that has immense faith on its citizenship and their future — can take the country out of its present mess. Can you see even a faint light at the end of the tunnel?
Medium Term Expenditure Framework (MTEF)
Why a MTEF?
At the last Nepal Development Forum (NDF) meeting, held in Paris, in April 2000, the government made a commitment to a wide-ranging economic reform program to accelerate the development process and to reduce poverty. To date significant progress has been made in implementing the reform agenda. An important element of this agenda is improving public resource management. To this end, soon after the Paris meeting, the Government set up a Public Expenditure Review Commission which made several important recommendations on a wide range of subjects including; the role of the government, prioritization of projects, budget allocation criteria, government loans, right-sizing of bureaucracy, pensions, government organization, ways and means to control administrative overheads etc. To expedite the implementation of these recommendations, the Government subsequently established a PERC Recommendation Implementation Committee; and agreed to implement them in a phased manner within three years. The implementation of a (three year) Medium Term Expenditure Framework, as recommended by PERC is a major outcome of this commitment
To accelerate development activities and effectively address poverty reduction, the Government recently prepared an Interim Poverty Reduction Strategy Paper (I-PRSP) in, 2001. A more comprehensive poverty reduction strategy paper—Tenth Plan- is currently under preparation. The Approach Paper for the Tenth Plan endorsed by the National Development Council is presented at the meeting. Simultaneously, recognizing the problems which have plagued past plans, namely inadequate resources, lack of prioritization, over programming and the lack of emphasis on outcomes, the government has embarked on a MTEF to ensure that the outcomes envisaged in the Tenth Plan will be delivered.
These initiatives, however, have coincided with unfavorable international and domestic developments, which are adversely impacting Nepal’s capacity to vigorously pursue its development/poverty reduction agenda. The recent global recession has had its effects on Nepal’s economic growth through reduced exports and industrial activity and a downturn in tourism and services sectors. The intensification of the Maoist activities is further aggravating the economic problems. These developments have seriously eroded government revenues and created unprecedented new expenditure demands for security needs, putting severe pressure on public resource management.
Nepal is facing a serious fiscal problem. Nepal’s development paradigm and fiscal priorities have changed significantly. The foremost priority now is ensuring internal security, without which development and economic activities will come to a standstill in most parts of the country. Concurrently, the Government needs to address the underlying issues of poverty and unemployment. In this context, the pivotal need is to ensure the effective implementation of the Tenth Plan, even in a situation of eroding government fiscal capacity. Therefore, the strategy of the Government is to harness and channel the limited resources within a medium term framework to priority activities, in order to ensure that the major growth and poverty reduction outcomes envisaged in Tenth Plan could be achieved.
GOVERNMENT EFFORTS FOR POVERTY REDUCTION
Macroeconomic Stability
The economic reform process has given high importance to achieve macroeconomic stability. Fiscal deficit was brought down from an average of 7.7 percent of GDP during pre-liberalization period to 5.8 percent in 1999. The lower deficit was achieved mainly by a tight expenditure policy. Development expenditure rose significantly for the first few years after the initiation of reform program mainly due to higher revenue mobilization. In the second half of 1990s, however, fiscal balance was maintained but the growth rate of development expenditure started declining. Rate of revenue mobilization was also lower during the second half of 1990s.
The post-liberalization period saw improvements in savings and investment rates too. The average savings rate improved from 10.5 percent of the GDP in 1980s to 13.8 percent in 1990s. Liberalization of the financial and capital market acted as an impetus for the growth in savings. In addition, higher growth rates especially in non-agricultural sector contributed in improving the savings rate. Similarly, the average investment-GDP ratio increased, but the savings and investment gap also widened slightly during the post-liberalization period.
Financial Sector
Financial sector reforms have also been carried out to support trade and industrial reforms. Administered Interest rates were deregulated and joint-venture banks and finance companies were allowed to open-up. Nepal also introduced current account convertibility. The overvalued Nepalese currency was also corrected to improve export competitiveness of the trade and industrial sector.
During the 1990s, the growth rate of narrow money supply was about 15.4 percent. In some years, flow of large amount of domestic credit to the government from the banking sector became a reason for high monetary expansion; while in other years, increase in net foreign assets resulted in the higher rate of money supply. However, whatever was the reason for monetary expansion, it was under control, and that helped in maintaining internal and external stability.
However, the financial sector in Nepal is in a critical stage when viewed not only from the perspective of macroeconomic stability, but also from poverty and unemployment. The main problem of the banking system is inefficiency, which has resulted in high spread rates and increasing non-performing assets. Financial problems, which can also bring currency crisis, could result in devaluation, higher inflation, and significant loss in output. As a result, unemployment and poverty may increase. The cost of restructuring of the financial crisis could be high. Competitive and efficient financial intermediation system reduces cost of capital, leads to efficient utilization of resources, and supports sustainable growth and reduces poverty.
Trade, Investment, and Industrial Policy
The import substitution trade strategy gave way to export oriented strategy gradually through different measures. The import licensing system and quantitative restrictions were eliminated and tariff rates and structure were reduced significantly and rationalized to make the trade sector competitive. Additional measures initiated to promote international trade includes the introduction of a bonded warehouse, duty-drawback scheme, the initiation of the multi-modal facility (dry port) and an export processing zone.
Nepal’s trade reform program was complemented by a new bilateral trade-treaty signed with India in 1996. The treaty allows Nepal to export manufactured products to India free of customs duty and quantitative restrictions. The treaty has helped to increase Nepal’s exports to India significantly.
The reform measures in the real sector are primarily aimed at promoting competition and investment in the private sector. Major reform measures in this respect are: privatization of public enterprises and entry of privatesector in health and education, imports and distribution of chemical fertilizer, infrastructure development, hydropower development, and aviation services.
Similarly, in order to improve the environment for investment, the Industrial Enterprise Act (1992), the Transfer of Technology Act (1992) and their amendments were enacted in line with the open, liberal and market-oriented policy. These acts have further improved investment incentives.
These reforms have expanded trade and investment significantly. Nepal’s trade-GDP ratio, which was stagnant at 5 percent of the GDP during the late 1980s, increased to 13.5 percent in 2000. Export diversification to a certain extent, in products as well as markets have also been achieved during 1990s. Altogether 39 countries have invested Rs 71.23 billion for 649 projects since Nepal opted for liberal economic policies in the early 1990s.
Public Expenditure
Government income and expenditure policies are important for growth and equity. Apart from pursuing a fiscal policy that fulfils the overall macro objectives, the government also incurs substantial expenditures that are helpful in alleviating poverty.
Government revenue, which grew at an average annual rate of 21.6 percent during 1991-95, slowed down in the late 1990s. Revenue-GDP ratio has remained in the range of 11.2-12.0 percent between 1995 and 2000. Prudent fiscal policy has helped to reduce fiscal deficit in 1990s.
The development expenditures have stagnant over the last few years, mainly due to slower growth rate of revenues, increased current expenditures and reduced foreign assistance in real terms. On the other hand, the number of projects and programs has risen. These factors have reduced budget allocation per project significantly in real terms. In addition, institutional capacity for screening, monitoring, supervision and regulation has weakened. As a result, project completion rate has gone down.
One major question is to what extent government expenditure in Nepal has helped in alleviating poverty. This is a difficult question to answer. But evidence suggests that efficient and effective rural expenditures can significantly reduce poverty.
Expenditures on Social Sectors and Infrastructure Development
The share of public expenditure on social sectors has gone up from 22 percent in 1992 to 36 percent in 2000. It is heartening to note that the increasing social spending ratio is reflected in rising per capita spending as well – nearly 33 percent within a span of just four years. Per capita social expenditure has gone up from US $ 9.09 in 1992/93 to US $ 11.90 in 1997/98. Per capita expenditure on social priority sectors increased marginally from US $ 5.20 in 1994/95 to US $ 5.46 in 1998/99.
The private sector’s involvement in education and health sectors increased rapidly in the 1990s. The share of primary and secondary enrolment in private schools rose to 8 and 23 percent respectively in the late 1990s from almost nothing in the early years of the same decade. Similarly, the involvement of the private sector in providing health services has been increasing rapidly.
Significant progress has also been observed in the infrastructure development of the country. The total length of road reached almost 14 thousand km in 2000. Similarly, significant improvements have been made in the communication and electricity sector.
(Source: Policy Papers prepared by the government for draft discussions during the NDF pre-consultation meetings.)
DEVELOPMENT PARTNERSHIP
A Bilateral Response
Many believe that donors have contributed to “failed development” in Nepal
By INGRID OFSTAD
Norwegian ambassador in Kathmandu
The global context There is a growing global concern about the need to improve the impact of development co-operation on poverty reduction. Agreeing on common goals as well as the establishment of lasting and productive partnership are keys to attaining this. The issue can be addressed through;
— comprehensive national poverty reduction strategies, fully owned by the recipient partner
— improved development partnerships, between government, civil society, private sector, academia etc, and
— harmonised donor practices
International priorities and visions for partnership dialogue have been formulated in various UN conferences, synthesised in the OECD strategy and more flexiblity.