Report No. 48297- NP
Nepal Country Team, World Bank Group
South Asia Region
Executive Summary
i. Nepal is a country at crossroads, an "open moment" in its history. Nepal's decade-long conflict formally ended in November 2006. In 2008, the country voted in a Constituent Assembly (CA), named a President, elected a Prime Minister, formed a coalition government, and set about the task of writing a new constitution by 2010, with a new round of elections planned for 201 1. It also abolished the monarchy and declared Nepal a federal democratic republic, vastly altering administrative and decision-making powers. Over the next two years, the country will continue to confront long-standing development challenges at a time of global economic downturn. The challenges of the transition were highlighted on May 4, 2009, with the resignation of the Prime Minister, which i s expected to result in a period of heightened political uncertainty. The former Prime Minister, however, will head a caretaker government until political realignments stabilize and a new government i s formed. The key challenges facing a new Government at this juncture are to rebuild the legitimacy of the state, sustain the peace, maintain law and order, and deliver benefits to those traditionally excluded and to society at large.
ii. Nepal is one of the poorest countries in the world, averaging GDP per capita of US$470, with adverse - though improving - social indicators. There are wide discrepancies depending on geographic location, ethnicity, caste and gender. Nevertheless, progress on social indicators in the last decade and more has been impressive: the poverty rate and gap f e l l sharply, and a number of MDG indicators improved markedly. However, inequality increased sharply. Prudent fiscal management was pursued and the economy grew moderately despite the conflict. Nepal has been able to retain much of its basic infrastructure, functioning bureaucracy and service delivery mechanisms.
iii. Significant challenges remain. A new government needs to be formed, and the law and order situation remains difficult, with continued regional, ethnic and political tensions. By 2007, remittances approached 25 percent of GDP, making Nepal vulnerable to a reversal which could fuel unrest. So far, all indicators are holding up. Nevertheless, the impact of the global crisis may hurt exports, tourist arrivals and remittances. So, even though Nepal has many strengths, the pace and severity of crisis witnessed elsewhere in the world - combined with Nepal's already fragile situation - strongly caution against complacency.
Draft National Development Strategy and the World Bank Group's response
iv. Nepal's development agenda is closely intertwined with peace building. The Maoist coalition Government produced a draft of its development strategy for the next three years. This was built upon the previous government's Three Year Interim Plan which expires in July 2010. The draft strategy contains a strong emphasis on spurring investment, job creation and growth, while reducing inequality and exclusion. Consistent with the previous plan, the draft highlights investments in power, roads, education, health, water supply and local development, and improved social protection. Agriculture, rural finance and rural institutions also play a significant role in the strategy.
v. Given the transitional nature of Nepal's current situation, with a new government to be formed, a new constitution being drafted and elections for the federal state expected in 2011, the Bank Group has prepared an Interim Strategy Note (ISN) covering FYlO and 11. This joint IDA-IFC strategy aims to leverage Bank and IFC resources and realize synergies. It builds on the areas which have shown to be robust and to modalities of implementation tailored to Nepalese traditions. Further, we are also taking on board the lessons of working in countries in post-conflict situations: to be modest and to keep it simple. The strategy will improve our project's sensitivity to the root causes of the conflict and social tensions by adopting a "peace filter". In addition, we are prepared to respond to possible effects of the global downturn and/or sustained political fragility.
vi. The overarching goal is promoting the complementary processes of pursuing peace and development. During consultations with the Government, donors and civil society, three thematic pillars emerged supporting that goal. Cutting across these pillars i s the unifying goal to help Nepal to consolidate peace, the essential underpinning of development and poverty reduction. Social inclusion runs across all of these themes as one of the foundations for the new Nepal.
vii. The three intertwined pillars of the joint IDA-IFC strategy are: (i) promoting capable state structures and systems and fostering accountable institutions which addresses the cluster of challenges in adapting and constructing the public systems, institutions and capacities needed for the new Nepal; (ii) laying the foundation for sustainable, inclusive and equitable economic growth which focuses on over-coming constraints in the productive sector in terms of job-creation, productivity, connectivity and sustainability; and (iii) enhancing equitable access to the benefits of growth, services and social inclusion which concentrates on expanding and honing social programs to increase opportunities and wellbeing, especially for the poor and excluded.