The World Bank has approved a credit of US $ 16 million in support of Financial Sector Assistance Project giving a go ahead to Nepal’s efforts to reform the ailing banking sector, the World Bank Kathmandu office said.

The current credit of US $ 16 million from the International Development Association (IDA), the concessionary lending arm of the World Bank Group, is part of a financing plan totaling US$30.1 million.

The Department for International Development (DFID) of the United Kingdom will finance US$10  million. His Majesty’s Government will fund US $4.1 million.

Discussing the progress report of the Bank’s Country Assistance Strategy (CAS) for Nepal Thursday, the World Bank Board of Executive Directors in Washington agreed that availability of resources would be parallel to Nepal’s performance on reforms.

The CAS progress report has reviewed development in Nepal since the Bank Group last formulated a Country Assistance Strategy in late 1998. The 1998 CAS highlighted poor governance as the central problem facing Nepal’s development.

Slow progress in addressing this fundamental challenge resulted in a sharp decline in the Bank’s lending to Nepal, the WB press statement read. Progress in the implementation of a wide range of reforms over the past 12 months could earn Nepal a significant increase in the availability of WB  resources for the country’s development.

“In 1998, the World Bank made it clear that promises of reform were no longer sufficient,” said Ken Ohashi, the WB Country Director for Nepal. “Experience has taught us that until reforms are actually implemented, it is very difficult to be sure that reforms will happen. So the Bank decided that  it should judge reform by action, not by promises.”

Applying the same principle, the report has viewed that reform efforts in Nepal have accelerated over the last 12 months and concludes that the Bank Group’s lending programme for Nepal would now be upgraded from the “low case: (US $ 0-50 million annually in new lending) to the “base case”  (about US $ 100million or more annually, depending on sustained progress on reforms).

The report states that Nepal continues to face a serious security challenge, political turmoil and significant difficulties in implementing its development agenda. Nonetheless, the report notes that amidst all the turbulence, a wide range of reforms have been under implementation.

“It is obvious that there are serious security concerns and political uncertainty,” said Ohashi, adding  “but when one looks past them, one sees an impressive record of reforms sustained by successive governments over the last year or so.”

The report says notable progress has been made in developing the country’s Poverty Reduction Strategy (PRS) concurrently with the Tenth Five-Year Plan and in implementing reforms in the financial sector, the fight against corruption, public expenditures, infrastructure regulatory environment and with the development and implementation of the Immediate Action Plan (IAP).

The IAP – announced by His Majesty’s Government of Nepal in June 2002 – aims at effective management of public resources, prioritization of development programmes, enhancement of accountability and more effective delivery of public services. The report notes that the IAP is being implemented with an uncommon vigor and seriousness.

A new Country Assistance Strategy (CAS) will be developed next year in alignment with Nepal’s Poverty Reduction Strategy. Until then the Bank Group’s assistance will be guided by continued emphasis on greater decentralization to bring more resources to grassroots levels, reforms at the central level of government, linking overall lending levels to progress in improving government effectiveness and donor coordination.

The report places greater emphasis on results, facilitation of change, donor coordination and partnership building. The financial sector Technical Assistance Credit approved by the Board Thursday is envisaged as the first in a sequence of support for Nepal’s overall financial sector reform programme, aimed at creating a prudently operated and commercially viable banking system that is overseen by a modern, effective and technically competent central bank.

At this stage, according to the WB, the programme will focus on three broad objectives over a four-year period. These are helping to restructure and re-engineer Nepal Rastra Bank so that it can perform its key central banking functions more effectively; initiating commercial banking reform in the

two large ailing commercial banks that dominate the sector (Rastriya Banijya Bank and Nepal Bank Ltd.) and better financial news reporting and better training for staff in the financial institutions.

Bad banking practices hurt the poor the most, said Simon Bell, the Bank’s Team Leader for the project. He said, “while the approach this project is taking may appear highly technical, in fact, it strikes at the heart of poor governance highlighted in the CAS. These funds belong to poor, hard working depositors.”

“When banks make too many of these bad loans, the government would be expected to bail these banks out. A cash strapped government can do so only by forcing the poor to pay more taxes. The poor not only lose their savings, but on top of that are forced to pay for the rich and powerful who  stole their money in the place.”