## _cr05351 ## Source details **Canonical URL:** [_cr05351](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05351.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05351.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05351.pdf.json) --- ### Preface and national context - Review: Poverty Reduction Strategy/Tenth Plan progress report for Fiscal Year 2003/04, reviewing implementation begun in Fiscal Year 2002/03. - Context: Implementation occurred "despite the violent insurgency"; progress presented as evidence of resilience with potential to "bounce-back to higher performance levels" if ground situation improves. - Contributors: government agencies, non-governmental organisations, community organisations, settlement level user groups, development partners, and UNDP support for producing the report and institutionalising the Poverty Monitoring and Analysis System (PMAS). - Government commitment: Vice-Chairman, National Planning Commission, reaffirms commitment to PRSP roadmap and the Millennium Development Goals (MDGs). ### National situation, structural challenges and policy response - Adverse environment: - Economy contracted by 0.6 percent in 2001/02 then recovered. - Adverse effects: damage to development infrastructure; low private sector investment; slow government development spending; mergers/closures of financial, industrial and service establishments; disruption of I/NGO, community organisation, and development partner activities; frequent closures disrupting production, trade and transport; general insecurity urban and rural. - Most affected sectors: trade, industry, tourism and construction; annual tourist arrivals remained at almost one-half of roughly 500,000 tourists in 1998/99; tourism income declined by more than a quarter. - Structural/development constraints: - Low factor productivity and low resource availability. - High share of agriculture in GDP while agricultural productivity constrained by low quality fertilizers, seasonal irrigation, high dependence on monsoon, displacement by cheap imports, and lack of market access. - Low domestic savings; reliance on concessionary export agreements/quotas; declining public and private investment; weak project planning and absorptive capacity; weak financial sector/regulatory oversight; inefficient public enterprises; high dependence on foreign aid. - Policy response emphasized: - Stringent fiscal and monetary discipline. - Governance and corruption control efforts. - Targeted and quick-yielding programs in insurgency-affected areas. ### Poverty profile, NLSS comparisons, drivers of change - Poverty headcount and regional disparities: - NLSS-1995/1996 head count: 42 percent (highest at 72 percent in Far-western Hill and Mountain regions). - Tenth Plan/PRSP goals used end-2001/02 poverty estimate: about 38 percent. - NLSS 2003/04 head count: 31 percent (11 percentage point decline from 42 percent). - NLSS 2003/04 rural poverty: 35 percent; urban poverty: 10 percent (only 3% in urban areas of Kathmandu Valley). - By development region (NLSS 2003/04): Central Development Region: 27 percent; Mid-Western Development Region: 45 percent. - Consumption and income indicators (NLSS-I to NLSS-II): - Nominal per capita consumption: Rs. 6,802 -> Rs. 15,848. - Nominal per capita consumption of poorest quintile: Rs. 2,571 -> Rs. 4,913. - Share of non-farm household income: 22 percent -> 28 percent. - Households receiving remittances: 23.4 percent -> 31.9 percent. - Growth in remittances: "by more than 30 percent per year." - Real GDP growth: "about 5 percent per year between 1996 and 2001." - Agricultural growth: "about 3.9 percent"; population growth "2.1 %". - Selected NLSS-I / NLSS-II comparative indicators (preserved as presented): - Food consumption (HH reporting less than adequate): 50.9 / 31.2 - Housing: 64.1 / 40.6 - Clothing: 57.6 / 35.6 - Health care: 58.7 / 28.3 - Schooling: 45.4 / 21.4 - Total income: 72.6 / 67.0 - Adult literacy, Total (15 +): 35.6 / 48.0; Female: 19.4 / 33.8; Male: 53.5 / 64.5 - NER in primary school, Total: 57.0 / 72.4; Female: 46.0 / 66.9; Male: 67.0 / 77.9 - Children fully immunized: 36.0 / 59.4 - Access to electricity: 14.1 / 37.2 - Access to piped water: 32.8 / 43.9 - Access to toilet facility: 21.6 / 38.7 - Household access to facility within 30 minutes: Primary school 88.4 / 91.4; Health post/hospital 44.8 / 61.8; Agriculture centre 24.5 / 31.9; Commercial banks 20.7 / 27.8; Paved road 24.2 / 37.2; Motorable road 58.0 / 67.6 - Factors cited for poverty reduction: remittances, higher wages, increased urbanisation (urban population doubled between the two NLSS rounds). - Note: NLSS-II findings under further analysis for rural/urban, regional, sectoral and caste/ethnic distribution. ### PRSP / Tenth Plan objectives, pillars and targets - Original goal: reduce poverty from 38 percent in 2001/02 to 30 percent by 2006/07. - Four inter-related pillars: 1. High, sustained broad-based growth: promote non-agricultural growth, focus on agricultural growth, maintain macro stability through reforms. 2. Improve access/quality of infrastructure and social/economic services (roads, electricity, communications) targeting rural populations. 3. Social inclusion and safety nets: improve access for Dalits, Janjatis, Muslims, women; safety nets for vulnerable groups; emphasis on women’s access to education, health services and economic opportunities. 4. Good governance: downsizing government, devolving functions to local bodies, involving COs/NGOs/INGOs, encourage private investment, streamline planning and budgeting, improve resource mobilisation. - PRSP distinct features: - Recognition of local bodies and commitment to decentralization and functional devolution. - Use of logical framework; P1/P2/P3 project prioritisation and clear allocation/disbursement commitments. - Extensive M&E provisions including annual poverty monitoring and process monitoring (first time in Nepal). - Four overarching objectives reiterated: - High broad-based and sustained economic growth. - Improved access and quality of infrastructure/social/economic services in rural areas. - Greater social and economic inclusion of poor men and women including Dalit and disadvantaged Janajati groups. - Good governance to improve service delivery, efficiency, transparency and accountability. ### Trade, external sector and remittances - Export and trade performance: - Major commodity export dips: garments about 20%; pashmina about 9%; woollen carpets about 14%. - Nepal exported to 82 countries in 2003/04. - Total exports reached Rs. 55.2 billion in 2003/04 — about an 18 percent increase from Rs. 46.9 billion in 2001/2002. - Imports rose from Rs. 107.4 billion -> Rs. 132.9 billion over same period. - Selected series (annual): Export: 46,945; 50,761; 55,228; 57,051; 62,186; 68,715. Import: 107,387; 121,053; 132,910; 151,047; 172,194; 196,645. - Gross foreign exchange reserves: 105,901; 108,229; 130,201; 138,293; 151,431; 167,331. - Current account and remittances: - Current account deficit fell from 4.3 percent of GDP in 2001/02 to 2.4 in 2003/04. - Remittances (series): 47,536; 54,203; 58,588; 68,903; 78,549; 89,939. - Total foreign aid (series): 14,385; 15,885; 22,568; 32,310; 35,250; 35,420. Grant: 6,686; 11,339; 11,457; 15,351; 16,950; 17,050. Loan: 7,699; 4,546; 11,111; 16,959; 18,300; 18,370. - Total foreign exchange reserves in 2003/04: 26.2 percent of GDP; sufficient to cover 11.2 months of imports. - Foreign employment: - Census (2001) reported more than 762,000 people working abroad (most in India). - Remittances rose from about Rs. 48 billion in 2000/01 to Rs. 59 billion in 2003/04 (series reflected in source). - Number of workers heading abroad: 104,739 in 2001/02; 105,055 in 2002/03; 106,660 in 2003/04; 107,438 during first 10 months of 2004/05. ### Macroeconomic aggregates, inflation and monetary policy - CPI (1994/95 =100): 142.1; 148.9; 155; 161.7; 168.9; 176.8. - Broad money supply (M2): 223,988; 245,911; 256,987; 309,291; 351,052; 400,552. - Narrow money supply (M1): 77,156; 83,754; 93,969; 99,767; 111,340; 124,812. - Total domestic credit (current prices): 207,323; 228,444; 251,090; 274,661; 302,673; 337,484. - GDP (factor cost): 405,632; 435,531; 472,424; 511,980; 558,563; 616,120. - Agricultural GDP: 160,144; 171,104; 183,357; 197,475; 213,866; 232,472. - Non-agricultural GDP: 245,863; 265,968; 290,519; 314,505; 344,697; 383,648. - Inflation and monetary stance: - Tight monetary management contained annual inflation at around 4 percent during 2001/02–2003/04. - Exchange rate stabilized at about NRs71: US$1; real exchange rate remained at acceptable levels. - Broad money growth: doubled from 4.5 percent in 2001/02 -> 9.8 percent in 2002/03 -> 11.8 percent in 2003/04. - Domestic credit recorded about 10 percent annual growth in 2002/03 and 2003/04. - Private sector credit share maintained at 68 percent. - Government overdraft from banking sector brought down to zero; budget surplus of Rs.1.7 billion reported. ### Fiscal position, public finance and MTEF reforms - Public finance series (selected): - Expenditure series: 80,072; 84,006; 92,107; 115,289; 124,540; 131,014 (table formatting indicates series across years). - Budgetary deficit series: 22,941; 16,437; 18,423; 26,018; 28,110; 24,824. - Key ratios (percent of GDP): Government revenue: 11.93; 12.33; 12.56; 13.77; 13.57; 13.79. Total expenditure: 18.94; 18.41; 18.59; 21.48; 21.26; 20.27. Budget deficit: 5.43; 3.60; 3.72; 4.85; 4.80; 3.84. Foreign aid: 3.40; 3.48; 4.56; 6.02; 5.02; 5.48. - MTEF reforms (introduced 2002/03): - Objectives: predictability, prioritisation (P1/P2/P3), performance-based fund release, reduce fungibility, Immediate Action Plan (IAP) as annualised mandatory actions. - Deepening: unit costing, classification into current and capital, prioritisation refinement, pro-poor screening, training, and donor-aligned benchmarks. - Budget realism and performance (selected Rs billion and % achieved): - 2001/02: Budget Total expenditure 99.8; Actual 80.1; % Achieved 80.2. Regular Budget 49.3; Actual 48.6; % Achieved 98.6. Development Budget 50.5; Actual 31.5; % Achieved 62.4. Revenue Budget 60.3; Actual 50.4; % Achieved 83.6. Foreign aid Budget 30.5; Actual 14.4; % Achieved 47.2. Domestic borrowing Budget 9.0; Actual 8.0; % Achieved 88.9. - 2002/03: Budget Total expenditure 96.1; Actual 84.6; % Achieved 88.0. Regular Budget 57.4; Actual 55.0; % Achieved 95.8. Development Budget 38.7; Actual 29.0; % Achieved 74.9. Revenue Budget 57.2; Actual 56.2; % Achieved 98.2. Foreign aid Budget 27.0; Actual 15.9; % Achieved 58.9. Domestic borrowing Budget 12.0; Actual 8.9; % Achieved 74.2. - 2003/04: Budget Total expenditure 102.4; Actual 92.1; % Achieved 89.9. Regular Budget 60.5; Actual 59.3; % Achieved 98.0. Development Budget 41.9; Actual 32.8; % Achieved 78.1. Revenue Budget 62.2; Actual 62.2; % Achieved 100.0. Foreign aid Budget 28.3; Actual 22.6; % Achieved 79.9. Domestic borrowing Budget 11.8; Actual 7.3; % Achieved 61.9. - 2004/05 Est.: Total expenditure 111.7 (note: after additional budget provision in January 2005 total budget increased to 115.3 billion and revenue increased to 73.9 billion). Regular 64.5; Development 47.2; Revenue 70.3; Foreign aid 32.3; Domestic borrowing 9.1. - Project rationalisation: - Over 70 projects deleted in 2001/02; additional 203 projects dropped in 2002/03. - Development Budget (Rs.billion) 1999/00 -> 2004/05: 41.85; 48.11; 50.47; 38.68; 41.85; 47.20. - Number of projects: 681; 715; 637; 434; 443; 454. - Allocation per project (Rs. million): 61.45; 67.29; 79.73; 89.12; 94.47; 103.97. ### Sectoral programs: agriculture, roads, power, forestry, non-agriculture - Agriculture (APPSP, DADF, MOAC allocations): - DADF in 20 districts with DEF and LIF; as of May 2005 proposals funded: 140 service providers and 798 farmer groups; extension to over 36,000 farm families. - DADF beneficiary composition: 37% janjaties; 30% Dalits; 33% others; about 35% women. - MOAC had 32 P1 and 10 P2 projects in 2004/05; five P1 projects allocated Rs.2.52 billion (43 percent of development budget to sector). - Irrigation: - Net cultivated area: 2.64 million hectares; roughly 43 percent has access to irrigation. - About 465,000 hectare of land has year-round irrigation facility. - New Technology Irrigation Program (NTIP) aims to irrigate additional 10,000 ha within Tenth Plan period starting 2005. - Preliminary estimate: additional 5,175 ha irrigated using DTW and STW in 2003/04. - Roads: - Additional 540 km built in two years after PRSP implementation began. - Government transferred 300 km of roads to the DDCs in December 2004. - Roads Board received Rs.220 million from fuel levy in 2003/04; expected Rs.363 million in 2004/05 and Rs.400 million in 2005/06. - Surkhet-Jumla road: 232-km project targeted for completion by 2005/06. - Power: - Electricity available to about 40 percent of the population. - Installed hydro-generation capacity: 584 megawatts in 2001/02 (546 megawatts connected to NIPS); reached 609 megawatt in 2003/04. - Micro-hydroelectric projects added 498 kilowatts in 2003/04; expected additional 1500 kilowatts in 2004/05. - 2004/05 power sector: 13 P1, 4 P2 and 3 P3 projects with development budget of Rs.6.14 billion; five projects share 82 percent of allocation. - Pro-poor forestry: - Forest area: about 4.27 million hectares; agriculture uses 3.09 million ha. - Government transferred 8,271 ha to community user groups (compared to 4,378 ha in 2001/02). - Leasehold forestry: about 401 user groups comprising 2,719 households formed between 2002/03 and 2003/04; additional 1,210 ha leased in 2003/04. - FAO study: about 80 percent of the poor engaged in leasehold program elevated to "non-poor" category. - Non-agricultural growth: - Non-agriculture contributes about 60 percent of GDP. - Constraints: conflict, political instability, weak external/domestic demand, low development spending, slowdown in economic activities. - Reforms: liberal private sector policies, continued financial sector reform, BOOT Ordinance 2003 for private infrastructure, telecom liberalisation, NEA decentralisation, Power Development Fund (2003), semi-independent funds for service delivery (Drinking Water Fund Board, Road Maintenance Fund Board, Poverty Alleviation Fund). ### Financial sector, troubled banks and reform progress - Financial sector weaknesses and reform program (since July 2002): - Two problematic banks: Nepal Bank Limited (NBL) and Rashtriya Banijya Bank (RBB). - Initial operating losses: NBL over Rs. 2 billion; RBB over Rs. 7 billion. - Reforms aimed at making banks sound, improving central bank regulatory capacity, restructuring/privatisation. - Progress: both banks reported operating profits after reforms; mid-January 2005 recoveries: NBL about Rs.4.7 billion in cash; RBB Rs.5.2 billion. - NPA levels at the banks remain above 50 percent (of their assets) though provisioning is adequate. - Constraints: wilful defaulters using courts to frustrate debt recovery; delays in modernisation and computerisation due to procurement and training issues. - Reform measures and outcomes (BOX 7 highlights): - Workforce rationalisation, financial disclosure, credit appraisal improvements, VRS implementation (two phases), new accounting standards, improved audit timeliness. - Net worth of NBL and RBB improved through write-backs and stock sales but remains negative. - Debt recovery remains major stumbling block. ### PRGF, PRSC and multilateral support; public debt management - PRGF/PRSC access: - PRGF access: credit equivalent to US$ 73.9 million; first tranche US$10.6 million drawn in November 2003. - PRSC: US$ 75 million soft loan from IDA. - PRGF program elements: sound macroeconomic management, expenditure prioritisation/efficiency, structural reform, improved governance. - Public debt management: - Strengthening public debt mobilisation with AsDB assistance. - CS-DRMS 2000+ installed at MOF, FCGO and NRB; staff trained and macro modelling framework prepared for continuous debt sustainability analysis. ### Decentralisation, public expenditure decentralisation and community control - Decentralisation progress: - Devolution of management of primary education, health posts, rural roads, agriculture and livestock extension services, and postal services since 2001/02. - District Periodic Plans prepared in 52 districts; central allocations aligned with DPP priorities. - Sectoral and block grants to local bodies raised by 25 percent in 2004/05 vs 2003/04. - Capacity training included about 578 VDC secretaries up to mid-July 2004. - Community control of expenditure: - Prior to PRS: communities controlled less than 1.5 percent of total expenditure. - 2003/04: community control increased to 4 percent of total budget. - 2004/05 allocation raised to 6 percent of total budget. - Since 2003/04, community-controlled spending surpassed block grant spending by local bodies. - Evidence: community-owned programs more resilient to insurgency disruptions. ### Social inclusion, targeted programs and performance - Social inclusion status: - Women have lower outcomes than males across indicators; Tenth Plan includes legislation to correct discriminatory laws. - NFDIN established 2002; National Dalit Commission (executive order 2002). - National scholarships for Dalits since Ninth Plan; 65 income and skill projects for Dalits. - LSGA provisions for nomination of Janajati and Dalit representatives. - Assessment: "much more needs to be done" to eliminate discrimination and mainstream Dalit and Janajati groups. - Targeted programs and safety nets: - About 32 targeted programs addressing social inclusion, poverty reduction, participation, service delivery, gender balance and equity. - Policy initiatives include poverty mapping, district-poverty-index based grants, social mobilization, PAF support to NGO/CBO activities, monitoring mechanisms, overseas employment assistance, education incentives for girls, legal reforms, affirmative action in public services. - Shift from welfare-oriented to social mobilization modalities (group formation, savings, skill development). - Safety-net examples: allowances to widows above age 60, senior citizens above age 75, old-age homes. - Budgetary allocations and performance: - "There has been a 79 percent increase in terms of allocation to targeted programs, up from Rs1.67 billion in 2000/01 Rs. 2.97 billion in 2003/04." - Average ratio of total expenditures to total allocations for targeted programs: around 74 percent. - Selected targeted program budget examples (Rs million, Allocation / Actual / % Achieved): - Rehabilitation of bonded-labour: 2002/03 Allocation 15.0 Actual 14.6 % 97.3; 2003/04 Allocation 10.0 Actual 9.8 % 98.0. - Women development: 2002/03 Allocation 264.4 Actual 100.2 % 37.9; 2003/04 Allocation 212.0 Actual 121.8 % 57.5. - Food for education: 2002/03 Allocation 498.3 Actual 318.4 % 63.9; 2003/04 Allocation 575.4 Actual 395.0 % 68.6. - Poverty Alleviation Fund: 2002/03 Allocation 170.2 Actual 58.1 % 34.1; 2003/04 Allocation 400.0 Actual 213.9 % 53.5. - Total targeted expenditure: 2002/03 Allocation 1762.9 Actual 1309.2 % 83.2; 2003/04 Allocation 2405.5 Actual 1777.7 % 73.9. - Assessment: If social inclusion pillar is only the 32 targeted programs, allocation was 7.12 percent of development budget in 2003/04 (Table 7.2: High growth 41.76%; Social sectors and rural infrastructure 38.95%; Targeted programs 7.12%; Good governance 12.18%). - Weaknesses of targeted programs: - Scattered implementation; weak M&E; poor replication of effective programs; poor targeting and inability to exclude the "not-poor"; service delivery weaknesses. - Rehabilitation and land distribution: - Rehabilitation of Freed Bonded Labour and Career Development Program implemented in Dang, Banke, Bardiya, Kailali and Kanchanpur. - In 2000 about 18,400 bonded labourers in those districts. - About 11,613 ha of land has been distributed to landless families at rate of 0.17 ha per household. ### Governance, civil service reform, corruption control and decentralisation constraints - Civil service reforms: - PRSP rightsizing: reduce/eliminate 7,500 positions by 2003; 7,000 reductions done in 2002/03. - Measures: M&E and computer training, periodic remuneration increases, reward/punishment mechanisms, computerisation of Personnel Information System, governance road map and governance reform units, draft Governance Act and Civil Service Act amendments, draft procurement law. - Challenges: fair representation of women and Janajatis; clarifying minister-secretary accountability. - Corruption control measures: - Judicial Commission for Property Investigation instituted April 2002. - CIAA judicial actions and preventive activities; National Vigilance Centre established late 2002. - Mandatory public auditing for project-level misuse control. - CIAA activity indicators (selected): - Complaints received: 2001/02 — 2,000; 2002/03 — 3,687; 2003/04 — 3,732. - Cases filed/registered: 2001/02 — 611; 2002/03 — 479; 2003/04 — 8. - Cases adjudicated: 2001/02 — 55; 2002/03 — 12; 2003/04 — 9. - Full convictions: 2001/02 — 43; 2002/03 — 1; 2003/04 — 20. ### Conflict, implementation adaptations and scenarios - Insurgency impact: - Insurgency expanded from early 1996 and intensified after PRSP implementation began; major obstacle to generating and maintaining high growth for poverty reduction. - PRSP recognises equitable development as contributing to long-term conflict resolution; implementation depends on peace and security. - Possible scenarios for PRSP outcomes: - Continued violence with government efforts to restore peace could cause difficulties and delay outcomes addressing historical inequalities. - Enhanced efforts to maintain security could create climate conducive to PRSP implementation, revitalising development programs and leading to long-term peace and economic wellbeing. - Continued violence may require special mechanisms for delivering basic services and higher investment to ensure security of stakeholders. - Adaptations in implementation modalities: - Increased reliance on community-centred approaches (communities, NGOs, CBOs) delivering services participatorily. - Emphasis on bottom-up planning, beneficiary participation, labour-intensive and environment-friendly techniques. - Specific programs/funds: Integrated Security and Development Program (ISDP); Poverty Alleviation Fund (PAF) — by December 2004 PAF had approved 54 projects in 168 VDCs of six districts; Immediate Relief Fund (IRF). ### Poverty monitoring architecture, PMAS, PMIS and RBM - Monitoring architecture and schedule: - Continuous monitoring section at NPC established for policy refinement, progress monitoring and accountability. - Major mechanisms: PMAS, HMIS, EMIS, periodic national surveys. - Planned survey schedule (HMG/N statement): NLSS and NDHS once every 2.5 years; HMIS and EMIS annual; Public Expenditure Tracking Survey annual. (Note: later statement indicated decision to rely primarily on NLSS and NDHS at five-year intervals.) - PMAS objectives and components: - Coordinate, consolidate, harmonise and analyse data from existing poverty monitoring systems; communicate results to refine policy. - Emphasis on implementation (input/output) monitoring, outcome/well-being monitoring, impact assessment, poverty MIS, communication/advocacy. - Inputs: administrative records, management information systems, national accounts, price data. - Implementation monitoring tools: - Refined mid-term budget review, completed PET surveys (health, education, works and transport), EMIS and HMIS annual reports, performance-based budget release capturing progress in P1 programs. - Outcome monitoring and impact assessment: - Outcome monitoring tracks well-being changes and regional/socioeconomic group performance. - Impact assessment example: 2003/04 Siraha district survey — productivity growth higher for sugarcane, potato and livestock; EPI coverage, child nutrition and CPR encouraging; poor outcomes for ARI, diarrhoea and kala-azar control; schooling patterns and reasons for dropout highlighted. - Participatory monitoring and PMIS: - Institutionalise participatory monitoring (citizens' report cards, social audits, budget reviews, parliamentary reviews). - PMIS as central repository linking major databases; interim step expand Nepal Info (CD-ROM by CBS). - Nepal Info 2 released end-2004 contains information on 73 PRSP indicators and 94 other prioritised indicators. - Results-based Management (RBM): - RBM elements: strategic planning (PRSP/Tenth Plan), annual budgeting via MTEF, PMAS, Immediate Action Plan, Sector Business Plans. - RBM emphasises transparency, participation, beneficiary participation, clear accountabilities, and links between planning, resource allocation and results. ### Resource needs, financing projections and aid harmonisation - Resource needs: - Estimate (normalcy assumption): government would need Rs.84 billion in foreign financing to meet targeted expenditures during remaining two years of Tenth Plan; actual levels may be lower due to absorptive/spending constraints. - Foreign financing increased slightly in 2003/04 to about Rs22 billion. - Based on estimates: development spending could be around Rs.40 billion in 2005/06 and Rs45 billion in 2006/07. - Projected expenditures and financing (Table 11.1, Rs. billion): - Projected total expenditure: 2005/06 133.5; 2006/07 153.8; Total 287.3. - Regular: 68.5; 72.5; 141. - Development (Capital): 65; 81.3; 146.3. - Projected sources of financing: Revenue 85.5; 99.6; 185.1. Domestic Borrowing 9.5; 9; 18.5. Foreign Financing 38.5; 45.2; 83.7. - Aid harmonisation and institutional arrangements: - Foreign Aid Policy (2002): government sets development vision and priorities; development partners to fit in using PRSP and MTEF. - NDF 2004 endorsed National Action Plan for Harmonisation (two-year rolling plan). - Harmonzation proposed at three levels: overall program, individual program, and financial modality. - Strengths: operational PRS, MTEF and IAP; government coordination mechanisms (MDAC, NDAC, sectoral working groups); MTEF coverage broadened; business plans being finalised for aid-integration. ### Conclusions: achievements, risks and strategic priorities - Mid-period assessment: - Achievements "generally satisfactory" given violent conflict; "Nepal's macro level indicators remain stable"; HMG/N committed to sustaining stability. - Human Development Report 2004 calls for "continue bolder reforms and development measures." - Sustainability risks and imperative of peace: - Gains "are not self-sustaining" and require concerted efforts and restoration of peace and security. - Continued conflict risks greater damage to infrastructure and delayed recovery. - Long-term conflict resolution and inclusive service delivery: - Long-term resolution depends on government's ability to deliver unhindered services and ensure inclusive development. - Emphasis on devolving tasks to local bodies and community organisations and broad stakeholder participation. - Devolution and funding: - Absence of elected local bodies impeded mobilisation and participation; devolution reforms expected to change service delivery permanently. - Urgent priorities: restoring environment conducive to participation, predictable flow of funds and strong monitoring of expenditures. - Role of donors: - Donors should "step back and let government take fuller charge" and support through cost-effective modalities, including aid harmonisation. - Expected outcomes and caveats: - If devolution, predictable financing and strong expenditure monitoring are implemented, measures can bring Nepal closer to PRSP and MDG objectives. - Attainment depends on overcoming unanticipated obstacles while conflict remains unresolved. *Source: _cr05351 — Assessment of the Implementation of the Tenth Plan (PRSP), SECOND PROGRESS REPORT.* ### PREFACEvi ### PREFACEvi ### Preface summary - The document is the Poverty Reduction Strategy/ Tenth Plan progress report for Fiscal Year 2003/04, reviewing implementation that began in Fiscal Year 2002/03. - Progress is described as occurring "despite the violent insurgency" and is presented as evidence of resilience and potential to "bounce-back to higher performance levels" if the ground situation improves. - Achievements are attributed to government agencies, non-governmental organisations, community organisations, settlement level user groups, development partners, and UNDP support for producing the report and institutionalising the Poverty Monitoring and Analysis System (PMAS). - The Vice-Chairman, National Planning Commission, reaffirms government commitment to the PRSP roadmap and the Millennium Development Goals (MDGs) as strategies to attain development objectives. ### National situation and macro context - Implementation began in an "extremely adverse political and economic environment" with an escalating insurgency and political instability; the economy contracted by 0.6 percent in 2001/02 but subsequently recovered. - Adverse effects on development during the review period included: - Damage of development infrastructure. - Low private sector investment. - Slow government spending on development. - Mergers and closures of financial, industrial and service establishments. - Disruption of I/NGO, community organisation, and development partner activities. - Disruption of production, trade and transport by frequent closures. - General insecurity in both urban and rural areas. - Most affected sectors: trade, industry, tourism and construction. Annual tourist arrivals remained at almost one-half of the roughly 500,000 tourists in 1998/99; tourism income declined by more than a quarter. - Structural and development challenges listed: - Low factor productivity compared to other South Asian countries and low resource availability. - High contribution of agriculture to GDP while agricultural productivity is constrained by low quality fertilizers, seasonal irrigation, high dependence on the monsoon, displacement by cheap imports, lack of market access (rural roads), and subsistence-oriented production. - Low domestic savings. - High reliance on exports depending on concessionary agreements and quotas. - Declining public and private sector investments. - Weak project planning and management and low absorptive capacity. - Weak financial sector and regulatory oversight. - Inefficient public enterprises. - High dependence on foreign aid. - Policy response noted: stringent fiscal and monetary discipline, efforts on governance and corruption control, and implementation of targeted and quick-yielding programs in insurgency-affected areas to maintain growth levels. ### Poverty profile and NLSS comparisons - NLSS-1995/1996 reported poverty incidence (head count) of 42 percent; highest at 72 percent in the Far-western Hill and Mountain regions. - Tenth Plan/PRSP goals set using end-2001/02 poverty estimate of about 38 percent. - NLSS 2003/04 reported poverty incidence of 31 percent, an 11 percentage point decline from 42 percent. - Rural-urban disparities (NLSS 2003/04): - Rural poverty: 35 percent. - Urban poverty: 10 percent (only 3% in urban areas of Kathmandu Valley). - By development region (NLSS 2003/04): - Central Development Region: 27 percent (lowest). - Mid-Western Development Region: 45 percent (highest). - Drivers of improved living standards between NLSS-I and NLSS-II: - Nominal per capita consumption: Rs. 6,802 in 1995/96 to Rs. 15,848 in 2003/04. - Nominal per capita consumption of poorest quintile: Rs. 2,571 to Rs. 4,913. - Share of non-farm household income: 22 percent in 1995/96 to 28 percent in 2003/04. - Households receiving remittances: 23.4 percent in 1995/96 to 31.9 percent in 2003/04. - Growth in remittances: "by more than 30 percent per year." - Real GDP growth: "about 5 percent per year between 1996 and 2001." - Agricultural growth: "about 3.9 percent" during the review period; population growth "2.1 %". - Selected NLSS-INLSS-II comparative indicators (percent or levels preserved as presented): - Percentage of HH reporting less than adequate — Food consumption: 50.9 / 31.2 - Housing: 64.1 / 40.6 - Clothing: 57.6 / 35.6 - Health care: 58.7 / 28.3 - Schooling: 45.4 / 21.4 - Total income: 72.6 / 67.0 - Adult literacy, Total (15 +): 35.6 / 48.0 - Female: 19.4 / 33.8 - Male: 53.5 / 64.5 - NER in primary school, Total: 57.0 / 72.4 - Female: 46.0 / 66.9 - Male: 67.0 / 77.9 - Children fully immunized: 36.0 / 59.4 - Access to electricity: 14.1 / 37.2 - Access to piped water: 32.8 / 43.9 - Access to toilet facility: 21.6 / 38.7 - Household access to facility within 30 minutes: - Primary school: 88.4 / 91.4 - Health post/hospital: 44.8 / 61.8 - Agriculture centre: 24.5 / 31.9 - Commercial banks: 20.7 / 27.8 - Paved road: 24.2 / 37.2 - Motorable road: 58.0 / 67.6 - The report notes that NLSS-II findings are under further analysis to understand rural/urban, regional, sectoral and caste/ethnic distribution of poverty. Factors cited for poverty reduction include remittances, higher wages, and increased urbanisation (urban population doubled between the two NLSS rounds). ### The PRSP / Tenth Plan: objectives, pillars, and targets - Original PRSP/Tenth Plan goal: reduce poverty from 38 percent in 2001/02 to 30 percent by 2006/07. - The Plan is founded on an inter-related, four-pillar development strategy: 1. Achieve high and sustained broad-based growth by promoting faster non-agricultural growth through investment-friendly policies and focusing on agricultural growth to raise income, employment and food security in rural areas; maintain macroeconomic stability via structural and policy reforms. 2. Improve access to and quality of infrastructure, and social and economic services (roads, electricity, communications) for growth and service delivery to rural populations. 3. Improve access across sectors and programs for socially excluded groups (Dalits, Janjatis, Muslims, women) and provide safety nets for vulnerable groups (children, senior citizens, widows, those displaced by conflict); emphasis on women's role and ensuring access to education, health services and economic opportunities. 4. Create a simple, transparent, responsive and accountable government by downsizing government, devolving functions to local bodies, involving COs/NGOs/INGOs, encouraging private sector investment, streamlining planning and budgeting, and improving resource mobilisation. - PRSP distinct features highlighted (Box 1): - Recognition of local bodies, community organisations and NGOs and commitment to decentralization and functional devolution. - Use of modern planning tools and the logical framework to define institutional tasks and responsibilities. - Clearly defined priorities: P1, P2 & P3 projects with clear allocation/disbursement commitments. - Extensive M&E provisions including annual poverty monitoring and, for the first time in Nepal, process monitoring. - Four overarching PRSP objectives listed: - High broad-based and sustained economic growth. - Improvement in access and quality of infrastructure, social and economic services in rural areas. - Greater social and economic inclusion of poor men and women from all groups including Dalit and disadvantaged Janajati groups through mainstream and targeted programs. - Good governance to improve service delivery, efficiency, transparency and accountability. ### Organisation of the report - The report is divided into 12 sections covering: - Sections I and II: overview of poverty and linkages with MDGs. - Section III: key macroeconomic indicators and achievements. - Section IV: public expenditure management and realignment for PRSP goals. - Sections V–VII: sectoral achievements and crosscutting themes (gender, social exclusion, environment, decentralization, participation, mobilization of CBOs and private sector). - Section VIII: institutional reforms and governance improvements. - Section IX: strategies in conflict-affected areas. - Section X: progress tracking systems. - Section XI: resource needs and aid harmonisation. - Section XII: conclusions. *Source: PREFACEvi — ASSESSMENT OF THE IMPLEMENTATION OF THE TENTH PLAN (PRSP).* ### BOX 3:PRSP pillars ### BOX 3:PRSP pillars ### PRSP AND THE MILLENNIUM DEVELOPMENT GOALS (MDGS) - Nepal endorsed the Millennium Declaration in September 2000 and has committed to work towards achieving the MDGs by 2015. - The MDGs set quantitative poverty reduction targets and specific goals in health, education, gender equality, the environment and other aspects of Human Development, measured in terms of outcome and impact indicators. - Several studies suggest that the linkages between public expenditure and sectoral outcomes remain weak and need to be enhanced through economically sound pro-poor policies backed by strong accountable institutions to implement the programs. - The MDGs may not be attained by Nepal unless the on-going efforts are sustained and implemented through the 12th Plan period or for two more periodic plans. - Most MDG-related indicators are incorporated in the PRSP and some specific targets are compatible with the Millennium Development Goals. - Early in the Tenth Plan there were doubts about whether Nepal would be able to attain the MDGs by 2015 in almost every category except the drinking water sector. - Women, Dalits and disadvantaged Janajatis account for a majority of those currently not reached by social services; bringing these groups into the development mainstream is key to attaining the MDGs. - Example: In primary education, girls from Dalit and disadvantaged Janajati households make up most of the out-of-school children; these groups must be brought into the system if the education MDG is to be attained. - Based on available data: - Progress on the net enrolment ratio and people with access to safe drinking water is encouraging, even though there have been reports about deterioration in service quality. - NLSS-II results show significant improvements in the poverty head count overall, but poverty levels in some population groups—rural Hill Janajatis and pockets in the Hill and Mountain regions—appear to have increased. - Achieving the poverty reduction goal requires: - Restoring economic growth at least to levels attained during the second half of the 1990s, and - Reducing income inequality. - There are possibilities of attaining some other goals and targets, including those related to child health and primary education. - Net Enrolment Rate (NER) at the primary level may remain slightly short of the MDG target; achieving completion of the primary cycle target remains a distant possibility. - Meeting the NER goal requires increased efforts to target children from very poor families, Dalits, disadvantaged Janajati groups and girls. - Narrowing the gender gap is of utmost importance because attainment of many goals depends on the third MDG goal. - Progress made in the 1990s towards attaining MDGs remains threatened by the conflict; restoring peace and allowing the economy to function at levels seen during the second half of the 1990s are prerequisites for attaining the universal goals. - Effective poverty reduction requires continuous economic growth, possible through technological advancement and capital accumulation, including human and social capital. - The MDGs are integral to poverty reduction goals and investing for achieving the MDGs is part of overall capital accumulation and empowerment. - Healthier, better educated workers and improved water, sanitation and infrastructures can help raise output per capita. - Political uncertainty and conflict have affected service delivery and hampered efforts toward building social capital. - Overcoming difficulties from the general environment can be possible by devising and implementing non-conventional approaches for service delivery and direct income transfers—an approach HMG/N has adopted. - After 2001/02 Nepal devolved five tasks to local bodies and communities: primary education, management of health posts, maintenance of rural roads, agriculture and livestock extension services, and postal services, and plans to devolve more functions. - Devolution began with transfer of management responsibility of primary schools, sub-health posts and agriculture and livestock extension services. - Government is transferring responsibility for building local infrastructures (small irrigation schemes, rural drinking water systems and rural roads) to local bodies and community organisations. - HMG/N will continue to rely on rapid devolution of functions to local bodies and communities and implement programs through participation to ensure continuity of activities aimed at attaining the MDGs. - Since underdevelopment continues to feed the conflict and development cannot wait until the violence is over, the government has shifted its approach to include working directly with communities, in addition to forming partnerships with local institutions. ### TABLE 2.1: TARGETS AND PERFORMANCE ON SELECTED MDG INDICATORS (AS REPORTED) - Note: The 10th Plan has two scenarios: normal case (peace) and lower case (continued conflict). @ refers to 2001/02. * Adult literacy rate has been revised from 49.2% as mentioned in the 10th Plan to 44 percent by MOES. ** estimated from linear trend. - Selected indicators, base periods, targets and progress (as presented): - Infant mortality rate per 1000 births: - Base (1990/95): 107 - 10th Plan (2001/02): 64.2 - MDG target (2006/07): 45 - Progress target (Normal case 2015): 27 - Progress target (Lower case 2015): 66.4.2 (table entry preserved as in source) - Under 5 mortality per 1000 births: - Base (1990/95): 197 - 10th Plan (2001/02): 91.2 - MDG target (2006/07): 72 - Progress target (Normal case 2015): 54 - Progress target (Lower case 2015): 49.1.2 (table entry preserved as in source) - Maternal mortality ratio per 100,000 live births: - Base (1990/95): 539 - 10th Plan (2001/02): 415 - MDG target (2006/07): 300 - Progress target (Normal case 2015): 315 - Progress target (Lower case 2015): 145NA 250 (table entry preserved as in source) - Literacy rate 15+ yrs (%): - Base (1990/95): 44* - 10th Plan (2001/02): 63 - MDG target (2006/07): 61 - Progress target (Normal case 2015): 100 - Progress target (Lower case 2015): 048.2 (table entry preserved as in source) - Female literacy rate 15+ yrs (%): - Base (1990/95): 35.6 - 10th Plan (2001/02): 55 - MDG target (2006/07): 31 - Progress target (Normal case 2015): 100 - Progress target (Lower case 2015): 34.7 (table entry preserved as in source) - Net enrolment in primary school (%): - Base (1990/95): 64 - 10th Plan (2001/02): 80.4 - MDG target (2006/07): 90 - Progress target (Normal case 2015): 100 - Progress target (Lower case 2015): 84.2 (table entry preserved as in source) - Access to safe drinking water facility (%): - Base (1990/95): 71.6 - 10th Plan (2001/02): 85 - MDG target (2006/07): 83 - Progress target (Normal case 2015): 100 - Progress target (Lower case 2015): 73.0 (table entry preserved as in source) - Children under 5 malnourished (%): - Base (1990/95): 57** - 10th Plan (2001/02): 48.3 - MDG target (2006/07): 28 - Head count poverty (%): - Base (1990/95): 42 - 10th Plan (2001/02): 38 - MDG target (2006/07): 30 - Progress target (Normal case 2015): 21 - Progress target (Lower case 2015): 30.8 - Sources cited for table: The 10th Plan, NFHS 1996, NDHS 2001, NLSS II 2004, MDG Progress Report 2002, and reporting of the MOES. ### RECENT INITIATIVES ON THE MDGS - Most indicators and targets of the MDGs are included in the Tenth Plan. - Government is undertaking a needs assessment exercise and preparing the second MDG progress report to ensure focused realization of the goals. - The MDG needs assessment exercise encompasses five sectors: - primary education, - child and maternal mortality, - communicable diseases, - drinking water and sanitation, and - rural roads and electrification. - The needs assessment is expected to help identify interventions and estimate resources necessary for meeting the MDGs. - The MDG progress report will assess performance regarding all the MDGs and the policy environment, and recommend policy options needed for achieving the goals. *Source: _cr05351 - BOX 3:PRSP pillars* ### 04. The phasing out of quotas in the U.S. and the inability to develop new ### 04. The phasing out of quotas in the U.S. and the inability to develop new markets could further lower readymade garment exports in 2004/05 ### Exports and trade performance - Export of all major commodities dipped: about 20% for garments, about 9% for pashmina, 14% for woollen carpets. - Nepal exported goods and services to 82 countries in 2003/04. - Total exports reached Rs. 55.2 billion in 2003/04 — an increase by about 18 percent, from Rs. 46.9 billion in 2001/2002. - Imports rose from Rs.107.4 billion to Rs.132.9 billion during the same period. - Selected trade figures (annual series shown in the source): - Export: 46,945; 50,761; 55,228; 57,051; 62,186; 68,715 - Import: 107,387; 121,053; 132,910; 151,047; 172,194; 196,645 - Balance of payments (-deficit): -3,343; 4,364; 16,001; 17,378; 17,725; 18,257 - Gross foreign exchange reserves: 105,901; 108,229; 130,201; 138,293; 151,431; 167,331 ### Current account, remittances, and external position - The current account deficit fell from 4.3 percent of GDP in 2001/02 to 2.4 in 2003/04. - Remittances rose sharply: 47,536; 54,203; 58,588; 68,903; 78,549; 89,939 (annual series in source). - Total foreign aid: 14,385; 15,885; 22,568; 32,310; 35,250; 35,420 - Grant: 6,686; 11,339; 11,457; 15,351; 16,950; 17,050 - Loan: 7,699; 4,546; 11,111; 16,959; 18,300; 18,370 - The total foreign exchange reserve in 2003/04 was 26.2 percent of GDP, sufficient to cover 11.2 months of imports. ### Macroeconomic aggregates and prices - CPI (1994/95 =100): 142.1; 148.9; 155; 161.7; 168.9; 176.8 - Broad money supply (M2): 223,988; 245,911; 256,987; 309,291; 351,052; 400,552 - Narrow money supply (M1): 77,156; 83,754; 93,969; 99,767; 111,340; 124,812 - Total domestic credit (at current prices): 207,323; 228,444; 251,090; 274,661; 302,673; 337,484 - GDP (at factor cost): 405,632; 435,531; 472,424; 511,980; 558,563; 616,120 - Agricultural GDP: 160,144; 171,104; 183,357; 197,475; 213,866; 232,472 - Non-agricultural GDP: 245,863; 265,968; 290,519; 314,505; 344,697; 383,648 - GDP (at market prices): 422,676; 456,201; 495,336; 536,627; 585,870; 646,411 ### Fiscal position and public finance indicators - Government revenue (series): 50,445; 56,230; 62,227; 73,920; 80,891; 40 (table text formatting indicates series across years). - Total expenditure (series): 80,072; 84,006; 92,107; 115,289; 124,540; 131,014 - Budgetary deficit (series): 22,941; 16,437; 18,423; 26,018; 28,110; 24,824 - Revenue surplus: 1,855; 12,572; 9,257; 8,62; 16,115 (series as in table). - Key ratios (percent of GDP) shown in the source: - Government revenue: 11.93; 12.33; 12.56; 13.77; 13.57; 13.79 - Total expenditure: 18.94; 18.41; 18.59; 21.48; 21.26; 20.27 - Budget deficit: 5.43; 3.60; 3.72; 4.85; 4.80; 3.84 - Foreign aid: 3.40; 3.48; 4.56; 6.02; 5.02; 5.48 ### Inflation, monetary policy and exchange rate - The period 2001/02–2003/04 saw tight monetary management that contained annual inflation at around 4 percent. - Exchange rate vis-à-vis the US dollar decelerated during the review period and stabilized at about NRs71: US$1; the real exchange rate remained at acceptable levels. - Broad money growth: doubled from 4.5 percent in 2001/02 to 9.8 percent in 2002/03, and increased to 11.8 percent in 2003/04. - Domestic credit recorded about 10 percent annual growth in 2002/03 and 2003/04. - Share of private sector credit was maintained at 68 percent of the total. - Government overdraft from the banking sector was brought down to zero and there was a budget surplus of Rs.1.7 billion. ### Foreign employment and remittance dynamics - Census (2001) reported more than 762,000 people working abroad, most in India. - Remittances rose from about Rs. 48 billion in 2000/01 to Rs. 59 billion in 2003/04 (series reflected in source). - Number of workers heading abroad: 104,739 in 2001/02; 105,055 in 2002/03; 106,660 in 2003/04; 107,438 during the first 10 months of 2004/05. - During 2003/04–2004/05, 1,338 women began jobs abroad, mainly in Hong Kong and Israel. - Table of Nepalese workers (excluding India; * As of April 2005) — selected country counts from the source: - Malaysia: 52,926; 43,812; 45,760; 52,125 - Qatar: 19,895; 26,880; 24,128; 32,418 - Saudi Arabia: 21,094; 17,990; 16,875; 10,335 - U.A.E.: 8,411; 12,650; 12,760; 9,331 - Total: 104,739; 105,055; 106,660; 107,438 - (Women): (N.A.); (N.A.); (892); (446) ### PRGF, PRSC and multilateral support - A full-fledged PRSP made Nepal eligible for the Poverty Reduction and Growth Facility (PRGF) and Poverty Reduction Support Credit (PRSC). - Nepal entered agreements for the PRGF and the PRSC in November 2003. - PRGF access: credit equivalent to US$ 73.9 million; first tranche US$10.6 million drawn in November 2003. - Under the PRSC, Nepal obtained US$ 75 million as soft loan from the IDA. - Main elements of the PRGF-supported program: sound macroeconomic management, better expenditure prioritisation and enhanced efficiency, structural reform in major economic sectors, and improved governance. - PRGF benchmarks include adjustment in prices of government-controlled products, fiscal and financial adjustments, and implementation of financial sector reforms. - PRSC I (US$ 75 million) supported reforms to create fiscal space, improve investment climate, scale up service delivery (devolution of management authority of primary schools and health posts), promote social inclusion, and strengthen governance, anti-corruption and accountability institutions. ### Public debt management - HMG/N began strengthening public debt mobilisation with assistance from the Asian Development Bank (AsDB). - Computer software (CS-DRMS 2000+) installed at MOF, FCGO and NRB for public debt recording and reporting. - Staff trained in software use and a macro modelling framework prepared for continuous debt sustainability analysis. ### Public expenditure management and MTEF reforms - Low outcome of public expenditure in improving service delivery, governance and accountability has been a long-standing concern; government pursued public expenditure reform. - Medium Term Expenditure Framework (MTEF) introduced in 2002/03 (initially in five sectors, later expanded to entire development budget). - MTEF and related reforms implemented to: - ensure predictability by prioritising activities and fully funding priority activities (P1), - change fund release system so priority activities receive one third of the budget at the beginning of the year, while others received one-sixth, - base further fund releases on performance to ensure accountability, - bar line ministry secretaries from making fund transfers in budget lines to reduce fungibility, - implement an Immediate Action Plan (IAP) as an annualised list of mandatory actions. - MTEF deepening included unit costing in several sectors, classification of budget into current and capital expenditure, refinement of prioritisation criteria, alignment of resource allocations with outcomes, training of officials, and screening new projects with a pro-poor bias. - MTEF classified development budget/expenditure into: - Priority (further classified P1, P2, P3 and N priority-wise) - Strategy (classified into five heads: n01 - High, sustainable and broad-based annual growth rate; n02 - Social sector and infrastructure development; n03 - Social inclusion/ targeted programs; n04 - Good governance; n07 - General administration) - Reforms measured against benchmarks agreed with the NPC helped maintain fiscal discipline despite rising security expenditures and increased pro-poor spending, and supported donor confidence (two SWAPs and budget support). *Source: Various Reports of NPC, MOF and NRB (as presented in the chapter content).* ### BOX 4:MTEF classifications ### BOX 4:MTEF classifications ### MTEF and fiscal performance - Public expenditure reforms helped maintain aggregate fiscal discipline. - In the mid-1990s: - Domestic borrowing averaged 1.8 percent of GDP. - Foreign financing mobilized was equivalent to 5.1 percent of GDP. - Development spending was maintained at 9.1 percent of GDP. - Total expenditure was 18% of GDP. - Revenue base was 11% of GDP. - Regular expenditure was limited to nine percent of GDP. - During 2001/02-2003/04 (conflict escalation period): - Total expenditure was maintained close to 19 percent of GDP. - Tax collection efforts increased revenue by 1.8 percent of GDP. - Revenue and financing developments: - Revenue as percentage of GDP increased to 13 percent. - Concessional foreign financing rose from 3.4 percent of GDP in 2001/02 to 3.7 percent in 2003/04; projected to grow to six percent in 2004/05. - Domestic borrowing declined from 3.6 percent of GDP in 2001/02 to 1.5 percent in 2004. - HMG/N aims to reduce domestic borrowing from 1.7 percent in 2004/2005 to 0.7 percent in 2006/07 by increasing revenue to cover the fiscal gap. ### Budget realism and performance - Deviation of total expenditure from allocation declined from 20 percent in 2002 to 11 percent in 2004. - Budget realism aided by: - Elimination of several hundred marginal projects. - Anchoring budget formulation to fund availability. - Legislation of the overdraft limit. - Key budgetary figures (Rs in billion): - 2001/02: - Budget Total expenditure 99.8; Actual 80.1; % Achieved 80.2 - Regular: Budget 49.3; Actual 48.6; % Achieved 98.6 - Development: Budget 50.5; Actual 31.5; % Achieved 62.4 - Revenue: Budget 60.3; Actual 50.4; % Achieved 83.6 - Foreign aid: Budget 30.5; Actual 14.4; % Achieved 47.2 - Domestic borrowing: Budget 9.0; Actual 8.0; % Achieved 88.9 - 2002/03: - Budget Total expenditure 96.1; Actual 84.6; % Achieved 88.0 - Regular: Budget 57.4; Actual 55.0; % Achieved 95.8 - Development: Budget 38.7; Actual 29.0; % Achieved 74.9 - Revenue: Budget 57.2; Actual 56.2; % Achieved 98.2 - Foreign aid: Budget 27.0; Actual 15.9; % Achieved 58.9 - Domestic borrowing: Budget 12.0; Actual 8.9; % Achieved 74.2 - 2003/04: - Budget Total expenditure 102.4; Actual 92.1; % Achieved 89.9 - Regular: Budget 60.5; Actual 59.3; % Achieved 98.0 - Development: Budget 41.9; Actual 32.8; % Achieved 78.1 - Revenue: Budget 62.2; Actual 62.2; % Achieved 100.0 - Foreign aid: Budget 28.3; Actual 22.6; % Achieved 79.9 - Domestic borrowing: Budget 11.8; Actual 7.3; % Achieved 61.9 - 2004/05 Est.: - Total expenditure 111.7 (note: as per additional budget provision made in January 2005, the total budget increased to 115.3 billion and revenue increased to 73.9 billion) - Regular 64.5; Development 47.2; Revenue 70.3; Foreign aid 32.3; Domestic borrowing 9.1 ### Assessment of Tenth Plan (PRSP) — project portfolio and budgeting orientation - Reclassification from 'regular'/'development' to 'recurrent'/'capital' enhanced transparency and costing, but budget formulation remains input-driven and not outcome-oriented. - Implementation shortfalls arise from: - Gaps in realization of committed donor funds. - Underperformance of activities due to normal delays or the insurgency. - Low capital formation can constrain future growth. - Project rationalization: - Over 70 projects deleted in 2001/02 (PERC recommendation). - An additional 203 projects dropped following PRS implementation in 2002/03. - Project counts and allocations: - Development Budget (Rs.billion) by fiscal year: - 1999/00: 41.85 - 2000/01: 48.11 - 2001/02: 50.47 - 2002/03: 38.68 - 2003/04: 41.85 - 2004/05: 47.20 - Number of projects: - 1999/00: 681 - 2000/01: 715 - 2001/02: 637 - 2002/03: 434 - 2003/04: 443 - 2004/05: 454 - Allocation per project (Rs. million): - 1999/00: 61.45 - 2000/01: 67.29 - 2001/02: 79.73 - 2002/03: 89.12 - 2003/04: 94.47 - 2004/05: 103.97 - Rationalization nearly doubled per project budget allocation and supported an increase in development expenditure in 2004/05. ### Inter-sectoral allocation and priorities - Social sector share of actual development expenditure: - 2000/01: about 37 percent (implicit from trend) - 2001/02: 36.62 percent - 2002/03: 41.98 percent - 2003/04: 42.01 percent - 2004/05: 47.42 percent - Within social sectors (percentage share of development expenditure): - Education grew from 8.11 to 13.26 (FY99/00 to FY04/05) - Health grew from 6.70 to 9.56 (FY99/00 to FY04/05) - Drinking water grew from 7.63 to 7.56 (FY99/00 to FY04/05) - Local development remained around 13.03 to 13.01 (FY99/00 to FY04/05) - Government actions and observations: - Shift toward decentralization and beneficiary involvement in social sector project implementation to increase participation and inclusiveness. - Increased allocations in education and health resulted from two Sector-wide Approach programs. - Government plans to reduce economic sector spending to create space for private investors and focus on social sector investment. - Much reduction in economic sector spending (except communication) resulted from: - Completion of large projects like the Kali Gandaki. - Slow implementation of others like Middle Marshyangdi Hydroelectric Project and the Melamchi Drinking Water Project. - Need to design programs with linkages to sectoral and PRS goals to improve funding levels. - Allocation by priority classification in the MTEF (2001/02 to 2004/05) — percent shares: - Development Budget (P1, P2, P3) and Regular budget (P1, P2, P3): - 2001/02 Allocation: 58.7, 34.3, 7.0 | Regular Allocation: 93.8, 3.5, 2.7 - 2001/02 Actual: 55.3, 38.6, 6.1 | Regular Actual: 94.7, 3.1, 2.2 - 2002/03 Allocation: 71.0, 25.5, 3.4 | Regular Allocation: 91.8, 5.2, 3.0 - 2002/03 Actual: 68.6, 27.6, 3.8 | Regular Actual: 94.1, 4.9, 1.0 - 2003/04 Allocation: 75.8, 20.5, 3.7 | Regular Allocation: 90.3, 5.5, 4.2 - 2003/04 Actual: 77.6, 18.4, 4.0 | Regular Actual: 93.1, 5.5, 1.4 - 2004/05 Allocation: 76.0, 21.3, 2.7 | Regular Allocation: 92.5, 5.1, 2.4 - Trend (%) Allocation (2001/02 to 2004/05): 5.7, -4.4, -1.3, -0.5, 0.5, 0.0 - Trend (%) Actual (2001/02 to 2003/04): 11.2, -10.1, -1.1, -0.8, 1.2, -0.4 ### Decentralised public expenditure and community control - Budget allocated to districts nearly doubled; emphasis on capital spending in districts higher than central level projects. - Fiscal decentralisation measures underway as first steps toward improved rural living standards via beneficiary participation, accountability, and transparency. - Community control of expenditure: - Prior to PRS: communities controlled less than 1.5 percent of total expenditure. - 2003/04: community control increased to 4 percent of total budget. - 2004/05 allocation raised to 6 percent of total budget. - Since 2003/04, money controlled and spent by communities surpassed block grant spending by local bodies. - Evidence suggests truly community-owned and managed programs are more resilient to insurgency disruptions and more likely to continue activities. ### Accelerating agricultural growth (selected program outcomes) - PRSP and Tenth Plan emphasize modernization, productivity enhancement, food security, agribusiness promotion, and farmer empowerment built on the Agriculture Perspective Plan (APP), 1995. - APP output priorities: cereal production in the Tarai; fruits, high value crops including NTFPs, and livestock in Hills and Mountain regions. - Key inputs targeted: research and extension, improved fertilizer supply, year-round irrigation, rural agricultural roads, rural electrification. - As of May 2005 under the DADF: - Proposals funded: 140 service providers and 798 farmer groups. - Projects provide extension services to over 36,000 farm families in the program districts. - DEF projects: cattle-raising, goat-raising, piggery, seasonal and off-season vegetable production, orchard establishment, bee keeping, veterinary services, and market development. - LIF projects: mainly goat raising and vegetable production combined with small irrigation (treadle pump, sprinklers, etc.). - Beneficiary composition of DADF projects: 37% janjaties, 30% Dalits, 33% others. - About 35% of DADF beneficiaries are women. - Early experiences indicate DADF modality can be responsive, productive and efficient to deliver agriculture extension services. *Source: _cr05351 - BOX 4:MTEF classifications* ### BOX 5:APPSP update ### BOX 5:APPSP update ### APPSP and the District Agricultural Development Fund (DADF) - A new institutional approach, the District Agricultural Development Fund (DADF), has been initiated in 20 districts under the DFID-supported Agriculture Perspective Plan Support Program (APPSP). - Districts for APPSP were selected using the poverty and deprivation index as basis. - DADF has two fund sub-components: District Extension Fund (DEF) and Local Initiatives Fund (LIF). - An APP Implementation Plan is being prepared under the guidance of the NPC. - Goal: reorient the agricultural sector to create more responsive, productive and efficient services for the rural poor. - Several reforms still required to fulfil WTO and SAFTA membership commitments. ### Agriculture sector projects and budget allocation (MOAC 2004/05) - MOAC had 32 P1 and 10 P2 projects in 2004/05. - Five P1 projects (Agriculture/Livestock Extension Program, APP Monitoring, APPSP, Crop Diversification Project and Small Irrigation Special Program) have been allocated Rs.2.52 billion, or 43 percent of the development budget allocated to the sector. - Main activities in the agriculture sector: - Mobilization of the private sector and NGOs as partner service providers on a contract basis - Monitoring, quality control and regulation of inputs supplied by the private sector - Transfer of subsidies in the form of grants on goods and services of public nature - Transfer of extension services to local bodies and veterinary services to the private sector - Conversion of agricultural farms/stations into resource centres - Promotion of cooperative and contract farming - Development of market centres - Integration of irrigation and micro-irrigation with agricultural intensification for mainstreaming women and disadvantaged groups ### Irrigation - Irrigation is identified as a key input for increasing agricultural productivity. - Roughly 43 percent of Nepal’s net cultivated area of 2.64 million hectares has access to irrigation, largely “flooding systems” that provide only seasonal irrigation and benefit mainly large farmers. - About 465,000 hectare of land has year-round irrigation facility. - Major objectives: - develop new infrastructures capable of providing controlled year-round irrigation - attain sustainable management of existing Farmer Managed Irrigation Systems - support non-conventional irrigation methods to enable the poor to benefit - New irrigation policy (since 2003) seeks to empower Water Users’ Associations (WUAs) and involve local bodies in development and management of small and medium operations. - Department of Irrigation (DOI) aims to have a “Business Plan” ready for implementation in 2005/06. - Groundwater irrigation setback after withdrawal of subsidies early in PRSP implementation. - Community Groundwater Irrigation Support Program (CGISP) expected to promote shallow tube well irrigation in Tarai. - Preliminary estimates: additional 5,175 ha of land was irrigated using DTW and STW in 2003/04. - Irrigation sector in 2004/05: 17 P1, 14 P2 and 1 P3 projects and development budget of about Rs.2.2 billion. - Five projects (Operation and Maintenance of existing AMIS, Bagmati Irrigation Project, Praganna Irrigation Project, CGISP and Babai Irrigation Project) shared nearly 56 percent of the budget. - New Technology Irrigation Program (NTIP) established to promote non-conventional micro-irrigation technologies. - NTIP aims at facilitating irrigation of an additional 10,000 ha of land within the Tenth Plan period, starting in 2005. - Small Irrigation and Marketing Initiatives (SIMI) project (2003) by Winrock International, IDE, SAPPROS and CEAPRED: - SIMI aims at providing integrated agricultural services with irrigation as entry-point to about 27,000 households in 7 districts of the West and Mid-western Development Regions. ### Roads for development - PRSP road sub-sector objective: develop and manage a cost effective transport network to support socio-economic development. - Growth targets: expand road network to improve access between rural areas and market centres, and enhance management of existing assets (including maintenance). - An additional 540 km of roads were built in two years after PRSP implementation began. - In December 2004 the government transferred 300 km of roads to the DDCs. - Maintenance: - An autonomous Roads Board and Road Fund established to provide stable funding for road maintenance from user fees. - In 2003/04, the Board received Rs.220 million from fuel levy; expected to grow to Rs.363 million in 2004/05 and to Rs.400 million in 2005/06. - Provisions to ensure sufficient budget allocations for maintenance of the Strategic Road Network (SRN). - Expansion of strategic roads: - PRSP aims to complete road construction to connect 10 district headquarters not connected with the national network; progress slowed in conflict-affected districts. - In 2003/04, 140 kilometres of additional rural roads were built, in addition to rural roads initiated and built by local communities. - Private sector participation: - Ordinance enacted to facilitate Build-Own-Operate-Transfer (BOOT) contracts. - Government strengthening BOOT cell to assess construction risks and conduct studies on geological and traffic conditions, regulatory framework and security situation. - Institutional reforms: - Reforms in Department of Roads (DOR) include updating policies and design standards, establishing modern IT-based financial and data management systems, and working on a road map for institutional transformation. - Plan to devise a performance-based incentive system within the DOR. - Road-building during the conflict: - Conflict increased operational risks for expanding road construction in remote areas. - Government building Surkhet-Jumla road targeted to be completed by 2005/06; intended to link Karnali Zone with the rest of Nepal. - Surkhet-Jumla road: 232-km, divided into sections with user groups responsible for building different sections; community involvement helped address implementation problems. ### Power sector (access and projects) - Electricity available to about 40 percent of the population. - Nepal's installed hydro-generation capacity: - 584 megawatts in 2001/02 (546 megawatts connected to the Nepal Integrated Power System (NIPS); remainder non-grid based including private-sector promoted micro projects contributing about 7.5 MW). - Hydro-generation capacity reached 609 megawatt in 2003/04. - Census (2001) reported 39.4 percent households use electricity as a source of lighting. - HMG/N long-term vision (1997-2017) incorporates a pro-poor approach to expand efficient power generation and distribution in rural areas. - Power sector in 2004/05: 13 P1, 4 P2 and 3 P3 projects with a development budget allocation of Rs.6.14 billion. - Five projects (Middle Marshyangdi, Reinforcement and Distribution System Improvement, Community and other Rural Electrification, Kaligandaki A and Kailali-Kanchanpur Rural Electrification) share 82 percent of the allocation. - Micro-hydroelectric projects added 498 kilowatts in 2003/04; expected increase by another 1500 kilowatts in 2004/05. ### Pro-poor forestry - Nepal has about 4.27 million hectares of land under forest, compared to 3.09 million ha used for agriculture. - PRSP focus: promote community and leasehold forestry programs. - Government transferred 8,271 ha of forest area to community user groups (compared to 4,378 ha in 2001/02). - Leasehold forestry program: - About 401 user groups comprising 2,719 poor and disadvantaged households were formed between 2002/03 and 2003/04. - In 2003/04 households were leased additional 1,210 ha of degraded forest land. - FAO study: about 80 percent of the poor engaged in the program have elevated their status to the "non-poor" category. - Other pro-poor forestry activities: - Promotion of herbs and other Non Timber Forest Products (NTFPs) - Soil conservation in Churia range - Bio-diversity and watershed conservation - Forestry sector in FY 2004/05: 16 P1, 12 P2 and 6 P3 projects; total development budget allocation of Rs.0.7 billion. ### Non-agricultural growth: policy and reforms - Non-agriculture sector contributes about 60 percent of GDP; growth here is important for meeting PRSP targets. - Tenth Plan emphasizes a liberal, transparent private sector policy, market-driven economy, and continued financial sector reform. - Activities in non-agriculture mostly private-sector led; public sector still dominates key areas: electricity, telecom, drinking water and, to an extent, the financial sector. - Constraints on non-agricultural growth: conflict, political instability, weak external and domestic demand, low development spending, slowdown of economic activities. ### Public sector reforms and private participation - Dismantling public monopolies and introducing competition: - Joint-venture private operator allowed to provide basic telephone services in Kathmandu. - Another private operator to provide telecom services in 534 VDCs in the Eastern Development Region. - Nepal Telecommunications Corporation converted into Nepal Telecom, a public company, in April 2004. - A private operator licensed to provide mobile telephone services. - Power sector: policy to promote private investment for small and medium scale power projects; Power Development Fund established in 2003. - NEA decentralising electricity sales and distribution; communities and cooperatives allowed to distribute power in rural areas. - Inland Container Depot at Birgunj: Nepal-India joint venture company hired to manage; new policy to allow private sector to import and sell petroleum products. - BOOT Ordinance 2003 provides basis for private involvement in infrastructure building. - Government working on handing over Kathmandu operations of the Nepal Water Supply Corporation to a private operator. - Devolution: tasks and functions devolved to local bodies and community organizations since 2002/03. - Establishment of semi-independent funds to 'contract out' service delivery: Drinking Water Fund Board, Road Maintenance Fund Board and the Poverty Alleviation Fund. ### Public enterprises reform - Government prepared list of companies to be leased, liquidated or converted into public limited companies under performance contracts. - Major privatisations/completions: - Sale of shares of the Butwal Power Company - Leasing of the Bhaktapur Brick Factory - Liquidations: Handicrafts Emporium, Nepal Coal, Hetauda Textiles, Nepal Transport Corporation and Birgunj Sugar Mill - Nepal Telecommunication Corporation converted into Nepal Telecom (public limited company) - Evaluation of assets and liabilities of Royal Nepal Airlines Corporation (RNAC) underway as first step toward conversion into a company. - Management improvements through performance contracts for public enterprises including two large cement factories at Udaypur and Hetauda. ### Financial sector reforms and troubled banks - Financial sector described as very weak and lacking competitiveness; dominated by two government-owned and semi-owned commercial banks that account for almost one-half of the total transaction volume. - Two problematic banks: Nepal Bank Limited (NBL) and Rashtriya Banijya Bank (RBB). - Financial sector reform program implemented since July 2002 to: - Make the two problematic banks financially sound through improved accounting and auditing standards and loan recovery - Strengthen monitoring and regulatory capacity of the central bank and the legislative and institutional framework - Eventually restructure and privatise the banks - Restructure Nepal Industrial Development Corporation and Agriculture Development Bank - International consultants hired to manage the two banks during transition. - Initial conditions when reforms started: - NBL had operating losses of over Rs. 2 billion - RBB had operating losses of over Rs. 7 billion - Progress: - Both banks have reported operating profits after reforms. - In mid-January 2005, NBL had recovered about Rs.4.7 billion in cash and the RBB, Rs.5.2 billion. - NPA levels at the banks remain above 50 percent (of their assets) even though the provisioning is adequate. - Challenges: - Delaying tactics by large wilful defaulters using the court system to frustrate debt recovery remain a very serious concern and threaten the reform program. - Business and revenue growth, improved operating efficiency, better interest collection on loans, lower interest payments on deposits and significant reduction in overhead costs contributed to improved profitability. *Source: BOX 5:APPSP update (Assessment of the Implementation of the Tenth Plan (PRSP), SECOND PROGRESS REPORT).* ### BOX 7:Banking on NBL and RBB reforms ### BOX 7:Banking on NBL and RBB reforms ### Reform measures and new framework - Rationalising the workforce, financial disclosure, credit appraisal mechanisms, improved revenue and cost controls. - A new legislative framework grants greater independence to the central bank and empowers it to better perform its regulatory functions. - The central bank has introduced new accounting standards in the financial sector. - Implementation of two phases of the Voluntary Retirement Scheme (VRS) in 2003/04. ### Outcomes and key indicators - Write-back of provisions that were not required after collection of some fully provided debts. - In the case of NBL, sales of its stock at the Standard Chartered Bank Nepal. - These actions have improved the net worth of the two banks, which, however, is still negative. - Staff efficiency levels have improved but were short of the target set for 2003/04. - The first VRS phase was very successful and the second one less so. - Modernisation (computerisation) of the banks proceeded more slowly than anticipated due to unanticipated delays in procurement of computers and time taken to run trials of new software. - Data validation and inadequacy of staff training were major barriers to fully computerising the operations. - Improved financial disclosure: bank audits are now completed within six months (compared to several years in the past) and provisional accounts are published within a month. ### Implementation challenges and constraints - Net worth of NBL and RBB remains negative despite improvements from write-backs and stock sales. - Delays in procurement of computers and time-consuming software trials slowed modernisation. - Data validation shortcomings and inadequate staff training hindered full computerisation. - Staff rationalisation achieved mixed results: strong first VRS phase, weaker second phase. - Debt recovery has remained the major stumbling block to faster reform progress. ### Government actions to accelerate reforms - The government has initiated steps to help the banks with debt recovery to facilitate faster reform implementation. - Strengthening central bank independence and regulatory empowerment to support ongoing reforms. - Continued emphasis on improved financial disclosure and modernisation of bank operations. *Source: BOX 7 text from the provided PDF content.* ### SECTION VII ### SECTION VII ### Social inclusion and disadvantaged groups - Women have lower outcomes than their male counterparts on almost all indicators of poverty. Efforts under the Tenth Plan include legislation to correct laws that discriminate against women. - Dalits and Janajatis: - National Foundation for Development of Indigenous Nationalities (NFDIN) established by law in 2002; implements special programs (e.g., Chepang Development Program) and special scholarship programs for disadvantaged Janajati groups; advocates for Janajati needs in national policies and programs. - National Dalit Commission established under an executive order in 2002. - Since the Ninth Plan, national scholarships have been provided exclusively to Dalit students for study from primary to higher levels. - A total of 65 income and skill oriented projects are being implemented for the welfare of Dalit households. - LSGA provisions for nomination of Janajati and Dalit representatives in local bodies. - Assessment: “much more needs to be done to eliminate economic and social discrimination against Dalits, and to bring both Dalit and Janajati groups into the development mainstream.” - Remote areas: - Most of the poor live in remote areas and are difficult to reach even by targeted programs; these areas have greater insurgency influence. - HMG/N implemented some infrastructure projects in parts of the Mid- and Far-western Development Regions; NLSS II reported poverty reduction in these regions. ### Targeted programs and safety nets - About 32 targeted programs are under implementation, designed to address social inclusion, poverty reduction, participation, service delivery, gender balance and equity, focusing on women, Dalits, disadvantaged Janajati groups and those below the poverty line. - Policy initiatives to improve program performance, efficiency and targeting: - Basing sector activities on poverty mapping - Developing framework for addressing problems of deprived communities/regions - Increasing grants to local bodies on the basis of district poverty index - Strengthening social mobilization - Using PAF to support NGO/CBO activities to supplement targeted programs - Designing special mechanisms for monitoring output/input indicators for targeted groups - Assisting overseas employment - Providing special incentives to girls in education - Eliminating legal discrimination - Introducing affirmative action in public services - Implementation modality shift: from welfare-oriented approach to social mobilization (group formation, saving mobilization, skill development, small infrastructure). - Safety-net initiatives include special allowances to widows above the age of 60 years, senior citizens above age 75 and setting up old-age homes. - HMG/N conducted coaching classes to promote representation of women, Dalits and Janajatis in the civil service. - Broad categories of programs: - Geographical and sectoral targeted programs (infrastructure and local development) - Group-based targeted programs: - provision of subsidy - capability development through improvements in HDI - income generating opportunities - food for work program - skill oriented training - subject-focused programs based on comparative advantage - programs aimed at increasing access of the poor to productive resources ### Budgetary allocations and program performance (selected figures) - Ministry shares and budget: - MOWCSW implements about 26 percent of targeted programs; its share in the total budget is a little over 6 percent. - MOES has about 17 percent of the targeted programs but commands about a third of the budget. - Allocation changes: - “There has been a 79 percent increase in terms of allocation to targeted programs, up from Rs1.67 billion in 2000/01 Rs. 2.97 billion in 2003/04.” - Average ratio of total expenditures to total allocations for all targeted programs: around 74 percent. - Rehabilitation and land distribution: - Rehabilitation of Freed Bonded Labour and Career Development Program implemented in Dang, Banke, Bardiya, Kailali and Kanchanpur. - In 2000 there were about 18,400 bonded labourers in those districts. - About 11,613 ha of land has been distributed to landless families at the rate of 0.17 ha per household. - Selected table highlights (Table 7.1: Budget allocation for selected Targeted Programs, Rs million) - Rehabilitation of bonded-labour: 2002/03 Allocation 15.0 Actual 14.6 % 97.3; 2003/04 Allocation 10.0 Actual 9.8 % 98.0 - Women development: 2002/03 Allocation 264.4 Actual 100.2 % 37.9; 2003/04 Allocation 212.0 Actual 121.8 % 57.5 - Women's income generation (Jagriti): 2002/03 Allocation 50.0 Actual 47.0 % 94.0; 2003/04 Allocation 50.0 Actual 43.4 % 86.8 - Leasehold forestry: 2002/03 Allocation 50.0 Actual 49.1 % 98.2; 2003/04 Allocation 55.4 Actual 52.8 % 95.3 - Food for education: 2002/03 Allocation 498.3 Actual 318.4 % 63.9; 2003/04 Allocation 575.4 Actual 395.0 % 68.6 - Women education: 2002/03 Allocation 180.5 Actual 176.0 % 97.5; 2003/04 Allocation 158.1 Actual 139.5 % 88.2 - National scholarship: 2002/03 Allocation 81.7 Actual 71.1 % 87.0; 2003/04 Allocation 81.7 Actual 81.7 % 100.0 - Ethnic group development: 2002/03 Allocation 24.8 Actual 13.2 % 53.2; 2003/04 Allocation 29.8 Actual 29.8 % 100.0 - Deprived group development: 2002/03 Allocation 11.3 Actual 11.2 % 99.1; 2003/04 Allocation 29.8 Actual 11.3 % 37.9 - Western Tarai poverty reduction: 2002/03 Allocation 121.1 Actual 94.2 % 77.8; 2003/04 Allocation 98.4 Actual 75.1 % 76.3 - Western Hill poverty reduction: 2002/03 Allocation 36.0 Actual 8.4 % 23.3; 2003/04 Allocation 60.0 Actual 44.0 % 73.3 - Remote area development: 2002/03 Allocation 70.8 Actual 69.8 % 98.6; 2003/04 Allocation 167.9 Actual 122.8 % 73.1 - Poverty Alleviation Fund: 2002/03 Allocation 170.2 Actual 58.1 % 34.1; 2003/04 Allocation 400.0 Actual 213.9 % 53.5 - Selected targeted expenditure: 2002/03 Allocation 1574.1 Actual 1031.3 % 65.9; 2003/04 Allocation 1928.5 Actual 1340.9 % 69.5 - Total targeted expenditure: 2002/03 Allocation 1762.9 Actual 1309.2 % 83.2; 2003/04 Allocation 2405.5 Actual 1777.7 % 73.9 - Total development expenditure: 2002/03 Allocation 38679.7 Actual 29030.0 % 75.1; 2003/04 Allocation 41845.0 Actual 32810.0 % 78.4 - Ratio of targeted to development expenditure: 2002/03 4.6 4.5; 2003/04 5.7 5.4 ### Monitoring and evaluation - A separate mechanism for monitoring targeted programs is being finalised at the NPC; initially piloted in Free Text Book and National Scholarship Program. - Box 11 feedback on Free Textbook and National Scholarship programs includes: - Mismatch between academic year and fiscal year delays flow of authority and funds. - Annual budget allocation for free textbook program has declined by almost a quarter in recent years despite growing primary school numbers. - Frequent changes in allocation modality hamper smooth book distribution. - Coupon system of distribution was more effective for timely delivery of complete set of textbooks. - Bill repayment system is self-targeting; better-off households do not seek reimbursement. - Textbooks are not available for purchase throughout the year because of monopoly in production and distribution. - Scholarship targeting mechanism is good but has errors of exclusion (not all disadvantaged castes of the Tarai included), allocation for scholarships is increasing but still inadequate; amount is low given price increases. ### Beyond targeted programs — mainstreaming inclusion - 2003/04 development expenditure by PRSP pillars (Table 7.2, Amount Rs ‘000 and % of total): - High, sustained and broad-based economic growth: 17,472,450 — 41.76% - Social sectors and rural infrastructure development: 16,297,136 — 38.95% - Targeted programs: 2,979,150 — 7.12% - Good governance: 5,096,264 — 12.18% - Total: 41,845,000 — 100% - Assessment: If the social inclusion and targeted programs pillar is understood to mean the 32 targeted programs, only a little over seven percent of the development budget was allocated to that area in 2003/04. - Strategy: PRSP’s social inclusion pillar seeks structural changes so mainstream programs recognize and address barriers to access and build mechanisms/incentives to overcome barriers during implementation. ### Evaluation of targeted programs — weaknesses identified - Joint World Bank and IMF staff assessment recommended further elaboration of pro-poor rural strategies to ensure social inclusion through changes in public service delivery. - Aggregate contribution of targeted programs to poverty reduction falls short of expectations due to: - Scattered implementation - Weak monitoring and evaluation - Non-replication of effective programs - Poor targeting and inability to exclude the “not-poor” - Weaknesses in service delivery ### Civil service reforms - PRSP rightsizing objective: reduce/eliminate 7,500 positions by 2003; 7,000 reductions were done in 2002/03. - Measures undertaken: - Training on M&E and computer use for bureaucracy adapting to decentralization - Raising remuneration periodically and establishing reward and punishment mechanisms (civil service salaries and benefits remain the lowest in South Asia) - Computerisation of Personnel Information System (PIS) - Preparation of a governance road map and establishment of governance reform units in key ministries - Re-organisation of some HMG/N agencies into autonomous organisations - Draft Governance Act and amendment of Civil Service Act under finalisation - Internet-based Personnel Information System being extended beyond MOGA - Draft new law for procurement - Remaining challenges: fair representation of women and Janajatis; clarifying roles and accountability between Ministers and government secretaries; making secretaries responsible for managing government employees. ### Decentralization - Constraints: absence of elected authorities in Parliament and at local levels during review period. - Progress and initiatives: - District Periodic Plans (DPP) prepared in 52 districts; central allocations aligned with DPP priorities. - 54 districts prepared Citizen’s Charters; 11 began publishing notices on job opportunities. - Sectoral and block grants to local bodies raised by 25 percent in 2004/05 compared to 2003/04. - Capacity enhancement training included about 578 VDC secretaries up to mid-July 2004. - Management Information Systems, Geographical Information Systems and accounting systems set up at 60 DDC offices. - Local bodies’ public expenditure (2002/03–2004/05) grew nearly 33 percent in allocation/expenditure compared to a 15 percent increase in central level activities. - Conflicting laws: ten laws were submitted for amendment in 2003/04 (Local Administration Act 1971; Film (Production, Show and Distribution) Act 1969; Sports Development Act 1991; Consumer Protection Act 1997; Statistics Act 1958; Construction Business Act 1998; Environment Protection Act 1996; Animal Health and Livestock Services Act 1998; Animal Slaughtering House Act 1998; Disaster (Relief) Act 1982). - Transfer of management of primary schools and health posts to local communities; draft human resources development plan and proposals for Local Service Commissions under discussion. ### Corruption control - Measures implemented: - Judicial Commission for Property Investigation instituted in April 2002 to investigate assets of politicians and officials in public office after 1990. - Commission for the Investigation of Abuse of Authority (CIAA) initiated judicial action against officials suspected of disproportionate wealth. - National Vigilance Centre (NVC) established under the Office of the Prime Minister in late 2002. - Mandatory public auditing instituted for project-level misuse control. - CIAA preventive activities include publication of materials and interaction programs. - CIAA activities and outcomes (Table 8.1): - Number of complaints received: 2001/02 — 2,000; 2002/03 — 3,687; 2003/04 — 3,732 - Number of cases filed/registered: 2001/02 — 611; 2002/03 — 479; 2003/04 — 8 - Number of cases adjudicated: 2001/02 — 55; 2002/03 — 12; 2003/04 — 9 - Number of full convictions: 2001/02 — 43; 2002/03 — 1; 2003/04 — 20 - Number of partial convictions: 2001/02 — 4; 2002/03 — -; 2003/04 — - ### Conflict and the development response - The insurgency, beginning in early 1996 and expanding by 2001 to almost every district, intensified after PRSP implementation began and remains a major obstacle to generating and maintaining high growth needed for poverty reduction. - PRSP recognizes that equitable development and equal sharing of benefits can contribute to long-term conflict resolution and lasting peace, but implementation depends on peace and security. - Possible scenarios for PRSP outcomes: - Continued violence and government efforts to restore peace and security could cause difficulties in PRSP implementation, delaying outcomes aimed at addressing historical inequalities. - Enhanced efforts to maintain security could create a climate conducive to PRSP implementation, revitalising and speeding up development programs leading to long-term peace, stability, and economic wellbeing. - Need for special mechanisms to cope with continued violence to continue delivery of basic services; this scenario may demand higher investment towards ensuring security of stakeholders working to reduce poverty and restore peace. - Government peace efforts: negotiations twice (August-November 2001 and January-August 2003) did not yield desired results; development activities remained difficult due to violence. - Adaptations in implementation modalities: - Increased reliance on community-centred approaches with communities, NGOs and CBOs delivering services participatorily. - Programs emphasise bottom-up planning, beneficiary participation, labour-intensive and environment-friendly techniques; community ownership and implementation assisted by government agencies, NGOs and CBOs. - Specific programs and funds: - Integrated Security and Development Program (ISDP) provides a security umbrella for development where service delivery was disrupted by violence. - Poverty Alleviation Fund (PAF) focuses on large-scale, community-owned and driven interventions addressing exclusion and deprivation; by December 2004 PAF had approved 54 projects in 168 VDCs of six districts. - Immediate Relief Fund (IRF) instituted to address humanitarian needs should conflict continue or escalate. _Italic: Source — _cr05351 - SECTION VII_ (SECOND PROGRESS REPORT) — extracted content provided in the input._ ### SECTION X ### SECTION X ### Poverty monitoring architecture and schedule - HMG/N has instituted a separate continuous monitoring section at the NPC to: facilitate policy refinement, monitor progress, and ensure accountability through timely analyses and information dissemination. - Major poverty monitoring mechanisms: - Poverty Monitoring and Analysis System (PMAS) - Health Management Information System (HMIS) - Education Management Information System (EMIS) - Periodic national surveys - Planned survey schedule (as stated by HMG/N): - National Living Standard Surveys and the Nepal Demographic and Health Survey, once every 2.5 years - Health Management Information System and the Education Management Information System, annual - Public Expenditure Tracking Survey, annual ### Poverty Monitoring and Analysis System (PMAS): objectives and scope - Main objective: coordinate, consolidate, harmonize and analyse data from existing poverty monitoring systems and communicate results to continuously refine the policy process. - PMAS stresses on: - Implementation (or input/output) monitoring - Outcome or well-being monitoring - Impact assessment - Poverty management information system - Communication/advocacy - PMAS incorporates inputs from different ministries, intermediate indicators from administrative records, management information systems at ministries, national accounts, and price data from the central bank. ### Implementation monitoring - Relies on input and output indicators and intermediate process indicators. - Aims: - a) monitor budget allocations of all priority programs and policies; - b) monitor process/activity indicators of the policies and programs; - c) monitor the level of achievement of outputs of main PRS policies and programs. - Systems and tools cited: - Refined mid-term budget review process - Completed Public Expenditure Tracking (PET) surveys in health, education, and works and transport sectors - EMIS and HMIS annual reports providing facility-level data - Performance-based budget release system capturing progress in all Priority-1 programs ### Outcome monitoring - Tracks changes in overall well-being or impacts over time; focuses on impact indicators rather than attributing outcomes to specific programs. - Objectives: - assess overall performance with respect to living conditions; - assess relative performance of different geographical regions, districts, VDCs and socio-economic groups; - facilitate analysis of causes and changes in the poverty situation. - Survey strategy tension in the text: - Earlier schedule: NLSS and NDHS once every 2.5 years (see Planned survey schedule above). - Later statement: HMG/N decided to streamline household surveys and rely primarily on the NLSS and NDHS conducted at the interval of five years. - PMAS uses survey data plus administrative/intermediate indicators for well-being monitoring. ### Impact assessment - Objectives: - to assess the effect of a specific policy, program/project on poverty or some other well-being outcome; - to assess the efficiency of different policies/programs in achieving a given well-being outcome (i.e., could other policies or programs have improved well-being at lower cost?). - 2003/04 impact assessment survey conducted in Siraha district — highlights (Box 12): - Growth in productivity was higher for sugarcane, potato and livestock products. - Public agencies had a monopoly in extension services whereas the input market was dominated by the private sector. - Encouraging achievement in EPI coverage, nutritional status of children, and CPR rate, but poor outcomes for ARI, diarrhoea and kala-azar control. - Among children of the survey settlements, 58% were going to public schools, 14% to private schools and the rest were not attending school. - More than two-fifths of highly food insecure (food sufficiency up to three months) families were not sending children to school. - "Economic problem" was the main reason for school dropout. - Access to education, health services and drinking water had improved. - Targeting Dalits was more effective in the education sector but the magnitude of support was small. - Low participation of beneficiaries in development programs; participation of Dalits and religious groups was found higher in drinking water projects. ### Participatory monitoring - HMG/N will institutionalise participatory monitoring as part of PMAS to ensure greater accountability and facilitate quick corrective interventions. - Participatory monitoring tools include citizens' report cards, social audits, budget reviews by civil society groups, and parliamentary reviews. - HMG/N is developing a participatory poverty monitoring mechanism using appropriate tools to take into account the voice of the people. ### Poverty Management Information System (PMIS) and Nepal Info - PMIS: intended as a central repository linking all major databases relevant to poverty monitoring with objectives to: - provide instant access to relevant, correct information on poverty; - make existing information coherent, compatible and consistent; - serve as a flexible and evolving mechanism for data storage and analysis; - ensure data access while continuously generating information through greater control and monitoring functions. - Interim step: expand and disseminate Nepal Info (CD-ROM maintained by CBS) before developing a complex integrated PMIS. - Nepal Info is a database tool featuring social development indicators to monitor PRSP, MDGs and other parameters. - Nepal Info database is updated annually with information on MDGs for global and local level monitoring systems; additional PRSP indicators and prioritised indicators are added/updated annually by the Nepal Info Technical Committee. - Nepal Info 2 was released at the end of 2004 and contains information on 73 PRSP indicators and 94 other prioritised indicators. - Training package development underway to train key personnel of line ministries and civil society in the use of data. ### Monitoring mechanism for targeted programs - Purpose: determine (i) whether the budget spent on targeted programs/projects reaches final service delivery institutions, and (ii) whether outputs and services reach disadvantaged areas/groups, including women and Dalits. - Piloted in two districts for free textbook distribution program and national scholarship program; mechanism is being finalised. ### District Poverty Monitoring and Analysis System (DPMAS) - DPMAS drafted in 2003; shared with stakeholders in 2004. - Regional workshops were held with district-level stakeholders across all 75 districts. - DPMAS was refined based on stakeholder comments. ### Results-based Management (RBM) - HMG/N has adopted RBM as a monitoring approach to improve development effectiveness; RBM shifts attention from inputs and activities to results and impacts. - Main RBM elements (Box 13): - strategic planning and prioritization in the PRSP/Tenth Plan - annual budgeting based on the medium-term expenditure framework (MTEF) - the Poverty Monitoring and Analysis System (PMAS) - the Immediate Action Plan (identifies priority activities for implementation) - Sector Business Plans (being developed to make priorities, formulate objectives, specify resource needs, identify targets, set timeframes, and define risks) - RBM emphasises transparency, participation, beneficiary participation, clear accountabilities in a decentralized framework, and links between planning, resource allocation and results. - RBM will be further refined and integrated at sectoral and local levels. ### Resource needs for the remaining Tenth Plan and financing projections - Reasons for additional resources: - To plug investment gaps of the past years of PRS implementation and attain the levels envisaged by the Tenth Plan by 2006/07, and to raise investments related to attaining the MDGs - To rebuild/repair infrastructures damaged during the conflict - To fund new, quick-yielding projects/programs that could contribute to conflict-resolution - Assessment summary: - Estimate (based on assumption of normalcy) suggests government would need Rs.84 billion in foreign financing to meet targeted expenditures during the remaining two years of the Tenth Plan; actual levels may be lower because development financing depends on the ability to spend. - Foreign financing increased slightly in 2003/04 to reach about Rs22 billion; need may be slightly higher in 2005/06 assuming improvement in ground situation. - Based on estimates of foreign financing, development spending could be around Rs.40 billion in 2005/06 and Rs45 billion in 2006/07. - Availability of quick financing when needed is critical. - Table 11.1: Projected expenditures and financing for 2005/06-2006/07 (Rs. billion) - Expenditure/source 2005/06 2006/07 Total - Projected total expenditure 133.5 153.8 287.3 - Regular 68.5 72.5 141 - Development (Capital) 65 81.3 146.3 - Projected sources of financing 133.5 153.8 287.3 - Revenue 85.5 99.6 185.1 - Domestic Borrowing 9.5 9 18.5 - Foreign Financing 38.5 45.2 83.7 ### Aid harmonization and institutional arrangements - Historical context: early foreign aid influenced by global political priorities; over time donors designed programs bypassing government institutions, leading to a "donor business" model. - Foreign Aid Policy (2002): government should set development vision, framework and priorities; development partners to fit into arrangement using PRSP and MTEF as reference; policy was presented and endorsed at Nepal Development Forum (NDF) 2002. - Aid integration process proposed at NDF 2004; donors endorsed logic for integration and harmonisation. Implementation has begun but effective integration may be delayed due to program nature, allocation impacts, and donors’ preparation time for modality shifts. - Benefits of harmonisation: resource predictability, program-wide support rather than project-specific investments, focused investment framework (PRSP), lower transaction costs, better alignment with national priorities. - Rome Declaration on Harmonization (February, 2003) motivated the move due to: - high transaction costs from many donor-funded projects with differing procedures and reporting requirements; - lack of country ownership and leadership, making development donor-driven. - NDF 2004 proposed harmonization at three levels: - Overall program level: aligning aid with HMG’s priorities - Individual program level: aligning aid with HMG’s sectoral policies - Financial modality level: aligning aid with HMG’s financing system - NDF 2004 endorsed the National Action Plan for Harmonisation (a two-year rolling plan reviewed annually) to serve as a road map, including guidelines to steer sectoral actions. - Strengths noted: - Nepal has a fully operational PRS, MTEF and Immediate Action Plan—unique in South Asia. - Annual budget aligned with the PRS; IAP provides basis for implementing and monitoring annual reforms. - Government coordination mechanisms: Ministerial Development Action Committee (MDAC), National Development Action Committee (NDAC), and development partners’ sectoral working groups. - MTEF coverage broadened to the entire budget; in 2004/05 Nepal began classifying spending as recurrent and capital expenditures. - Government finalising business plans of selected sectors for aid-integration and expects development partners to fit into the framework, especially after completion of business plans. - Conclusion: Slow MDG progress calls for scaling-up actions; conflict complicates traditional service-delivery mechanisms and raises the need for continuous donor support and effective aid harmonization to attain PRSP and MDG objectives. *Source: SECTION X, Assessment of the Implementation of the Tenth Plan (PRSP).* ### Conclusions ### Conclusions ### Mid-period achievements and macro stability - The mid-period achievements of the PRSP/Tenth Plan are "generally satisfactory, given the difficult development environment resulting from the violent conflict, which escalated at around the same time that PRSP implementation began." - "Nepal's macro level indicators remain stable" and "HMG/N remains fully committed to take all measures that would be necessary to sustain the stability." - The Human Development Report 2004 has called on Nepal to "continue bolder reforms and development measures." ### Sustainability risks and the imperative of peace - "The gains made in PRSP implementation so far are not self-sustaining and would therefore need concerted efforts to prevent reversal." - "A prerequisite for being able to do so is restoration of peace and security." - "The government has no option but to ensure continuity to development because the inequalities in Nepalese society will continue to grow as long as they are left unaddressed." - "Continued conflict can also result in greater damages on development infrastructures and delay further the recovery process." ### Long-term conflict resolution and inclusive service delivery - "The possibility of long-term conflict resolution and establishment of lasting peace lies in the ability of the government to deliver unhindered services and ensure inclusive development." - Key means: devolve "more and more tasks and functions to local bodies and community organizations" and "encourage the widest possible participation of stakeholders during implementation." - The recommended approach: "empowering people by putting them in charge of their development, with government, donors and other agencies playing a supportive role." ### Devolution, local participation, and service delivery - "The absence of elected local bodies has impeded the mobilisation of people and their participation in development resulting in a slowdown in local level service delivery." - "The situation is expected to change over time and the policy reforms, including devolution efforts now underway are expected to change—for ever—the manner in which services have traditionally been delivered." - Urgent priorities: "Restoring an environment conducive to enhanced participation by stakeholders at all levels," especially to support devolution of management functions to communities for: - "greater efficiencies in rural education, health care, agriculture and livestock extension services and for building rural infrastructures." - These efforts require "predictable flow of funds and strong monitoring of expenditures." ### Role of donors and aid modalities - "The government acknowledges that there is a gap between what is planned and what actually takes place on the ground, resulting from the transitional contingencies." - Recommendation for donor behaviour: "The donors, therefore, need step back and let government take fuller charge of development and support its efforts through more cost-effective modalities, of which moving towards aid harmonisation is one." ### Expected outcomes and caveats - If devolution, predictable financing, and strong expenditure monitoring are implemented, "These measures can take Nepal closer towards attaining the objectives of the PRSP, and the longer-term Millennium Development Goals." - Caveat: attainment depends on overcoming "unanticipated obstacles that may have to be overcome in the process as long as the conflict remains unresolved." *Conclusions (SECTION XII) — Assessment of the Implementation of the Tenth Plan (PRSP), Second Progress Report* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05351.pdf_