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Countries and Regions Country Partnership Strategies Document
I. Development SituationA. Recent Political and Social Developments1. The deaths of members of the royal family on 1 June 2001 left the country in a state of shock and aggravated political tensions. Prior to that, political stability seemed to have been restored with the election of a majority Government led by the Nepali Congress Party in May 1999, but an internal rift within the party led to a change in Government after only nine months. The opposition party stalemated the functioning of the Lower House of Parliament in its 2001 winter session (February-March). Frequent political infighting and protests by the opposition continue to distract the Government from focusing on critical issues such as economic reform and growth, poverty reduction, and political violence. However, the Government continues to press for change through its Priority Reform Program, which addresses the civil service, economy, corruption, the private sector’s role in the economy, decentralization, finance, agriculture, and energy. 2. Although the political violence is concentrated mostly in the mid-western and western regions, it is a serious problem and is escalating into other regions. Violence targeted at the Government also hinders delivery of basic services, and private sector activities. The Government has taken measures, including the possible use of armed police force, to control the law-and-order situation. To achieve the levels of sustained growth necessary to lift Nepal out of poverty, the country requires a concerted and sustained effort to stop violence and restore political stability. B. Economic Performance Assessment and Outlook3. Gross domestic product (GDP) grew by 6.4 percent in FY2000, compared to 4.4 percent in the previous year (economic indicators are in Appendix 1). Domestic revenue collection remained at the previous year’s level of less than 11 percent of GDP, although revenue collection increased by 21 percent. The budget deficit remained at 3.9 percent of GDP in FY2000 as a result of cutbacks in development expenditures to compensate for revenue shortfall. Broad money (M2) increased by about 22 percent in FY2000 compared with 21 percent in the previous year. Foreign grants and loans financed about 50 percent of development expenditures in FY2000, up from 46 percent in FY1999. Inflation declined to 3.5 percent in FY2000 from 11.3 percent in FY1999 as a result of the sharp decrease in food and beverage prices. The rate of inflation further declined to 2.2 percent on a point-to-point basis during the first nine months of FY2001, primarily because of the fall of agricultural prices. The current account deficit rose to 4.5 percent of GDP in FY2000, but was still below the average deficit of 8 percent during the 1990s. External debt declined to less than 48 percent of GDP, compared with nearly 51 percent of GDP in FY1999. Debt-service obligations also fell to 5.9 percent of exports because of concessional lending terms to Nepal. 4. The goal of the FY2001 budget was to reduce poverty. The budget was ambitious, with a total outlay of NRs91.6 billion ($1.3 billion), representing an increase of 51 percent over the revised estimate of NRs60.7billion ($876 million) for FY2000. The fiscal deficit increased 35.3 percent during the first nine months of FY2001 compared with the same period in FY2000 because of high growth of expenditures, and revenue collection that was lower than projected. While total Government expenditures registered comparatively high growth of 23.3 percent during the first nine months of FY2001, revenue collection grew to 17.7 percent and foreign grants showed a 20.8 percent increase over the same period in FY2000. Increased exports led to a decline in the trade deficit to 5.0 percent on a point-to-point basis during the first nine months of FY2001. Foreign exchange reserves remained sound at about $1.4 billion during the first nine months of FY2001, sufficient to cover over 11 months of imports. 5. Nepal’s medium-term economic success depends on the Government’s ability to address the country’s structural weaknesses particularly in finance, governance and institutions, aid use, and the fiscal deficit. With the majority of the country’s poor depending on agriculture for their livelihood, the Government’s continuing commitment to implement the Agriculture Perspective Plan is critical. Sustained medium-term improvement of t he trade deficit will require substantial efforts to improve the institutional and policy environment to broaden export items and destinations. To reduce the country’s dependence on foreign assistance for development expenditures, domestic resources must be continuously mobilized to reduce the fiscal deficit. The Government also must implement tax and financial sector reforms, privatize state-owned enterprises, and strengthen the capital market. C. Implications for the Country Strategy and Program Update6. The stable macroeconomic situation will facilitate implementation of the Country Strategy and Program (CSP). The Government continues to implement its Priority Reform Program on a number of fronts. However, continuous political instability distracts the Government in its efforts. A peaceful resolution of political violence would bring stability to the country and allow the Government to solve critical development problems.
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