## _cr06443 - Section 1 ## Source details **Canonical URL:** [_cr06443 - Section 1](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06443.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06443.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06443.pdf.json) --- ### Introduction - The third Annual Progress Report (APR) of the Poverty Reduction Strategy (PRS) covers fiscal year 2004/05 and documents slow economic growth and significant delays in reform implementation due to continued political instability and conflict. - Staffs recommend a review of PRS implementation in the next APR since the PRS is in its fifth and last year; this review should: - Reflect lessons learned to date. - Assess the need for change in strategy and programs for effective poverty alleviation, including reconstruction, relief, and rehabilitation. - Serve as input into the three-year plan currently being prepared by the government. - Identify areas for additional analysis, such as debt sustainability and constraints on the level of development spending. ### Key diagnostics from the APR - Household survey results (NLSS): - Poverty incidence declined from 42 percent in 1995/96 to 31 percent in 2003/04. - Decline in poverty was higher in urban than rural areas; poverty declined in all regions except the rural Eastern hills. - Inequality increased at the upper end of the income distribution. - Staffs welcome Government of Nepal (GoN) efforts to update diagnostics based on the NLSS. ### Growth prospects and scenario - Staffs agree that growth prospects depend critically on progress toward peace and PRS implementation. - If durable peace is established and structural reforms implemented: - Nepal could rebound to 3−4 percent growth in 2006/07. - Recovery channels: gradual recovery in the nonagricultural sector and a step up in development spending, with higher aid. - Over the medium term, higher growth depends on implementation of key structural reforms: tax administration, financial and public sector reforms, and improvements in investment climate and governance. ### Progress in Implementing the Strategy #### A. Macroeconomic Performance - Growth outcomes and drivers: - During the first four years of the Tenth Plan (including estimates of 2005/06), growth is estimated to have averaged 2.9 percent, below the PRS “lower case” scenario of 4.3 percent. - Nonagricultural sector growth averaged 2.9 percent in 2002/03–2005/06; sectors most affected by conflict: trade, industry, tourism, and construction. - Agricultural sector growth averaged 2.8 percent, matching the lower case projection (2.8 percent) but below the normal case (4.1 percent). - Macroeconomic stability: - Inflation contained to single digits, anchored by the peg to the Indian rupee. - International reserves remained adequate, supported by strong remittances. - Supply disruptions in agriculture and higher oil prices noted. #### B. Fiscal Policies and Debt Sustainability - Fiscal outcomes: - Revenues broadly covered current expenditures; capital spending was limited to available foreign financing and domestic borrowing. - Revenue-to-GDP ratio rose to 13¼ percent of GDP in 2004/05. - Development spending in conflict-affected areas and aid inflows were lower than budget targets. - Result: lower than planned overall and domestically financed deficits. - Modalities and government role: - Changes to boost development spending include greater local community involvement; government role shifting from implementer to facilitator. - Staff recommendations (next APR and fiscal strategy): - Provide a more realistic assessment of fiscal prospects. - Estimate revenue yields from measures to increase domestic revenues (tighter administration, base broadening, elimination of VAT exemptions, reducing customs and excise leakages). - Discuss policy options to overcome local implementation capacity constraints and raise capital spending sustainably. - Address potential challenges to contain current spending, including contingent liabilities. - Elaborate on public debt and fiscal sustainability, including implications of contingent liabilities from ongoing structural reforms. #### C. Structural Reforms and Governance - Agriculture: - APP implementation uneven; budget allocations to agriculture and irrigation have decreased. - Discrepancies between the APP and the APP Support Program (which has focused on small farmers). - Staffs encourage GoN to align programs with APP and advance implementation; emphasize maintaining rural roads, especially under the Roads Board. - Infrastructure: - Reporting on infrastructure (other than rural) is weak. - APR reviews power sector progress but omits critical challenges such as increasing power outages; staffs encourage more extensive reporting on power and road sectors. - Financial sector: - Two large commercial banks—Nepal Bank Limited and Rastriya Banijya Bank—have recorded operating profits since 2003/04. - APR documents progress in legal and regulatory framework and improved Nepal Rastra Bank supervisory capacity. - Nonperforming loans declining but still high; APR does not cover willful defaulters. Staffs urge continued reforms and recoveries from large willful defaulters to reduce negative net worth of banks. - Public and private sector reforms: - Restructuring of state-owned enterprises made limited progress in 2004/05. - APR reports adoption of a new Labor and Employment Policy and amendments to the Labor Act, pending parliamentary confirmation; staffs recommend clarification of these policies and the Associated Act. - Public expenditure management: - Medium-Term Expenditure Framework (MTEF) now covers the whole budget; transparent prioritization criteria used. - “Business plans” completed for several sectors; Sector-Wide Approaches (SWAps) in health and education have helped protect pro-poor spending. - Staffs encourage GoN to review prioritization criteria (76 percent of projects are classified as priority one), assess impact of “pro-poor” spending on poverty outcomes, increase fiscal transparency and spending efficiency (including approval of the Procurement Act). - APR notes low aid absorption and disruptions after February 2005; staffs support emphasis on aid effectiveness via MTEF and early donor involvement in APR preparation and budget formulation. - Governance initiatives: - Successes: Personnel Management database institutionalized, pilot performance-based management system, amendments to Civil Service Act, passing of a Governance Act. - Implementation remains weak; APR indicates reduction in transfers but without specific data. - Anti-corruption: activities of the Commission for the Investigation of Abuse of Authority (CIAA) somewhat successful but limited by institutional reach; staffs encourage assessment of bottlenecks and greater public awareness and transparency. - Judicial sector: huge backlog of cases; staffs encourage judicial reform implementation and a progress report in next APR. - Local governance: - Progress significant in health and education; decentralization has slowed since 2002. - APR notes differing interpretations of decentralization across agencies; staffs encourage a clear unified vision. #### D. Social Sector Development and Targeted Programs - Education and health: - Transfer of management of schools and basic health facilities to local communities continued at a lower pace. - Weaknesses reported: poor progress in adult literacy, setbacks in several health indicators (including immunization). - Water supply and sanitation: - Progress in 2004/05 but PRS objectives unlikely to be achieved given need to rehabilitate systems. - Causes of slowdown: - Political uncertainty, resistance from some groups, security constraints, and weak monitoring. - Staff recommendations: - Press ahead with PRS reforms, confirm critical policy decisions (e.g., transfer of school management to communities), focus on implementation (stronger administrative incentives, performance management, further reduction in transfers, donor harmonization). - Next APR could document benefits of implementation modalities (e.g., transfer of management) and acknowledge private sector role in health and education delivery. - Millennium Development Goals (MDGs): - APR notes Nepal may attain all MDGs except universal primary education and combating HIV/AIDS. - Bringing women and disadvantaged populations (Dalits, Janjatis) into development mainstream is key for accelerating progress. - Staffs suggest a realistic assessment of likelihood of meeting PRS objectives to inform upcoming plan. - Targeted programs: - APR analyzes impacts on disadvantaged groups but recognizes a decrease in spending for targeted programs. - Progress with the Poverty Alleviation Fund and development of monitoring mechanisms welcomed. - Staffs encourage continued development of tools to monitor social inclusion and evaluate public expenditure impacts on various groups. ### Monitoring and Evaluation - Framework and pilot initiatives: - Progress in finalizing and launching a monitoring and evaluation framework. - Pilot expenditure tracking in education and health has yielded useful insights. - Initial work to improve the Education Management Information System. - Proposal to set up a central data warehouse welcomed as a start for enabling data availability. - Next steps and staff guidance: - Identify uses and users of the data and establish management structure to ensure timely availability and use. - Design participatory monitoring to complement other data efforts (e.g., report card for accountability); outline specific areas where qualitative/participatory data are needed and define periodicity. - Poverty drivers and diagnostics: - APR builds on Central Bureau of Statistics work identifying drivers of poverty decline: increases in migration and remittances, improved food availability, improved employment opportunities, and decline in fertility (leading to lower dependency ratio). - Staffs recommend acknowledging additional drivers: increased wages, improved connectivity, urbanization, and stagnation of agricultural incomes with a shift toward high-value crops, horticulture, and livestock rearing offsetting declines in traditional crop incomes. - Process and data quality: - APR is comprehensive but contains data and factual inconsistencies (e.g., coverage of the education sector) and missing sectoral progress indicators. - Staffs urge GoN to review the institutional process and timing of APR preparation, integrate APR preparation into annual budget process, involve all government agencies, and ensure APR lessons impact the following budget. Prepared by Staffs of the International Development Association (IDA) and the International Monetary Fund (IMF); Approved by Praful C. Patel (IDA), and Wanda Tseng and Matthew Fisher (IMF); November 30, 2006. ### Monitoring and Evaluation; Donor Coordination (Section 2) - Staffs also suggest deepening the efforts toward monitoring and evaluation, with a prioritization toward simple and well-coordinated processes. - This would help improve the coordination of donor support and streamline reporting requirements. *Source: _cr06443 - Section 1 and Section 2* ### Section 1 ### _cr06443 - Section 1 ### Introduction - The third Annual Progress Report (APR) of the Poverty Reduction Strategy (PRS) covers fiscal year 2004/05 and documents slow economic growth and significant delays in reform implementation due to continued political instability and conflict. - Staffs recommend a review of PRS implementation in the next APR since the PRS is in its fifth and last year; this review should: - Reflect lessons learned to date. - Assess the need for change in strategy and programs for effective poverty alleviation, including reconstruction, relief, and rehabilitation. - Serve as input into the three-year plan currently being prepared by the government. - Identify areas for additional analysis, such as debt sustainability and constraints on the level of development spending. ### Key diagnostics from the APR - Household survey results (NLSS): - Poverty incidence declined from 42 percent in 1995/96 to 31 percent in 2003/04. - Decline in poverty was higher in urban than rural areas; poverty declined in all regions except the rural Eastern hills. - Inequality increased at the upper end of the income distribution. - Staffs welcome Government of Nepal (GoN) efforts to update diagnostics based on the NLSS. ### Growth prospects and scenario - Staffs agree that growth prospects depend critically on progress toward peace and PRS implementation. - If durable peace is established and structural reforms implemented: - Nepal could rebound to 3−4 percent growth in 2006/07. - Recovery channels: gradual recovery in the nonagricultural sector and a step up in development spending, with higher aid. - Over the medium term, higher growth depends on implementation of key structural reforms: tax administration, financial and public sector reforms, and improvements in investment climate and governance. ### Progress in Implementing the Strategy #### A. Macroeconomic Performance - Growth outcomes and drivers: - During the first four years of the Tenth Plan (including estimates of 2005/06), growth is estimated to have averaged 2.9 percent, below the PRS “lower case” scenario of 4.3 percent. - Nonagricultural sector growth averaged 2.9 percent in 2002/03–2005/06; sectors most affected by conflict: trade, industry, tourism, and construction. - Agricultural sector growth averaged 2.8 percent, matching the lower case projection (2.8 percent) but below the normal case (4.1 percent). - Macroeconomic stability: - Inflation contained to single digits, anchored by the peg to the Indian rupee. - International reserves remained adequate, supported by strong remittances. - Supply disruptions in agriculture and higher oil prices noted. #### B. Fiscal Policies and Debt Sustainability - Fiscal outcomes: - Revenues broadly covered current expenditures; capital spending was limited to available foreign financing and domestic borrowing. - Revenue-to-GDP ratio rose to 13¼ percent of GDP in 2004/05. - Development spending in conflict-affected areas and aid inflows were lower than budget targets. - Result: lower than planned overall and domestically financed deficits. - Modalities and government role: - Changes to boost development spending include greater local community involvement; government role shifting from implementer to facilitator. - Staff recommendations (next APR and fiscal strategy): - Provide a more realistic assessment of fiscal prospects. - Estimate revenue yields from measures to increase domestic revenues (tighter administration, base broadening, elimination of VAT exemptions, reducing customs and excise leakages). - Discuss policy options to overcome local implementation capacity constraints and raise capital spending sustainably. - Address potential challenges to contain current spending, including contingent liabilities. - Elaborate on public debt and fiscal sustainability, including implications of contingent liabilities from ongoing structural reforms. #### C. Structural Reforms and Governance - Agriculture: - APP implementation uneven; budget allocations to agriculture and irrigation have decreased. - Discrepancies between the APP and the APP Support Program (which has focused on small farmers). - Staffs encourage GoN to align programs with APP and advance implementation; emphasize maintaining rural roads, especially under the Roads Board. - Infrastructure: - Reporting on infrastructure (other than rural) is weak. - APR reviews power sector progress but omits critical challenges such as increasing power outages; staffs encourage more extensive reporting on power and road sectors. - Financial sector: - Two large commercial banks—Nepal Bank Limited and Rastriya Banijya Bank—have recorded operating profits since 2003/04. - APR documents progress in legal and regulatory framework and improved Nepal Rastra Bank supervisory capacity. - Nonperforming loans declining but still high; APR does not cover willful defaulters. Staffs urge continued reforms and recoveries from large willful defaulters to reduce negative net worth of banks. - Public and private sector reforms: - Restructuring of state-owned enterprises made limited progress in 2004/05. - APR reports adoption of a new Labor and Employment Policy and amendments to the Labor Act, pending parliamentary confirmation; staffs recommend clarification of these policies and the Associated Act. - Public expenditure management: - Medium-Term Expenditure Framework (MTEF) now covers the whole budget; transparent prioritization criteria used. - “Business plans” completed for several sectors; Sector-Wide Approaches (SWAps) in health and education have helped protect pro-poor spending. - Staffs encourage GoN to review prioritization criteria (76 percent of projects are classified as priority one), assess impact of “pro-poor” spending on poverty outcomes, increase fiscal transparency and spending efficiency (including approval of the Procurement Act). - APR notes low aid absorption and disruptions after February 2005; staffs support emphasis on aid effectiveness via MTEF and early donor involvement in APR preparation and budget formulation. - Governance initiatives: - Successes: Personnel Management database institutionalized, pilot performance-based management system, amendments to Civil Service Act, passing of a Governance Act. - Implementation remains weak; APR indicates reduction in transfers but without specific data. - Anti-corruption: activities of the Commission for the Investigation of Abuse of Authority (CIAA) somewhat successful but limited by institutional reach; staffs encourage assessment of bottlenecks and greater public awareness and transparency. - Judicial sector: huge backlog of cases; staffs encourage judicial reform implementation and a progress report in next APR. - Local governance: - Progress significant in health and education; decentralization has slowed since 2002. - APR notes differing interpretations of decentralization across agencies; staffs encourage a clear unified vision. #### D. Social Sector Development and Targeted Programs - Education and health: - Transfer of management of schools and basic health facilities to local communities continued at a lower pace. - Weaknesses reported: poor progress in adult literacy, setbacks in several health indicators (including immunization). - Water supply and sanitation: - Progress in 2004/05 but PRS objectives unlikely to be achieved given need to rehabilitate systems. - Causes of slowdown: - Political uncertainty, resistance from some groups, security constraints, and weak monitoring. - Staff recommendations: - Press ahead with PRS reforms, confirm critical policy decisions (e.g., transfer of school management to communities), focus on implementation (stronger administrative incentives, performance management, further reduction in transfers, donor harmonization). - Next APR could document benefits of implementation modalities (e.g., transfer of management) and acknowledge private sector role in health and education delivery. - Millennium Development Goals (MDGs): - APR notes Nepal may attain all MDGs except universal primary education and combating HIV/AIDS. - Bringing women and disadvantaged populations (Dalits, Janjatis) into development mainstream is key for accelerating progress. - Staffs suggest a realistic assessment of likelihood of meeting PRS objectives to inform upcoming plan. - Targeted programs: - APR analyzes impacts on disadvantaged groups but recognizes a decrease in spending for targeted programs. - Progress with the Poverty Alleviation Fund and development of monitoring mechanisms welcomed. - Staffs encourage continued development of tools to monitor social inclusion and evaluate public expenditure impacts on various groups. ### Monitoring and Evaluation - Framework and pilot initiatives: - Progress in finalizing and launching a monitoring and evaluation framework. - Pilot expenditure tracking in education and health has yielded useful insights. - Initial work to improve the Education Management Information System. - Proposal to set up a central data warehouse welcomed as a start for enabling data availability. - Next steps and staff guidance: - Identify uses and users of the data and establish management structure to ensure timely availability and use. - Design participatory monitoring to complement other data efforts (e.g., report card for accountability); outline specific areas where qualitative/participatory data are needed and define periodicity. - Poverty drivers and diagnostics: - APR builds on Central Bureau of Statistics work identifying drivers of poverty decline: increases in migration and remittances, improved food availability, improved employment opportunities, and decline in fertility (leading to lower dependency ratio). - Staffs recommend acknowledging additional drivers: increased wages, improved connectivity, urbanization, and stagnation of agricultural incomes with a shift toward high-value crops, horticulture, and livestock rearing offsetting declines in traditional crop incomes. - Process and data quality: - APR is comprehensive but contains data and factual inconsistencies (e.g., coverage of the education sector) and missing sectoral progress indicators. - Staffs urge GoN to review the institutional process and timing of APR preparation, integrate APR preparation into annual budget process, involve all government agencies, and ensure APR lessons impact the following budget. *Prepared by Staffs of the International Development Association (IDA) and the International Monetary Fund (IMF); Approved by Praful C. Patel (IDA), and Wanda Tseng and Matthew Fisher (IMF); November 30, 2006.* ### Section 2 ### Section 2 ### Monitoring and Evaluation; Donor Coordination - Staffs also suggest deepening the efforts toward monitoring and evaluation, with a prioritization toward simple and well-coordinated processes. - This would help improve the coordination of donor support and streamline reporting requirements. *Source: _cr06443 - Section 2* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06443.pdf_