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Annual Report 2001

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Nepal

Economic performance

In FY2001, GDP growth slowed to 5.0% from 6.1% in FY2000. This was mainly attributed to weaker agriculture sector performance compared with record high growth in FY2000, sharp deceleration in manufacturing, and a continued slump in tourism. Inflation remained at 2.4% in FY2001—the lowest in more than 20 years—compared with 3.5% in FY2000. The budget deficit widened to 4.2% of GDP in FY2001 from 3.3% in FY2000 due to a rise in expenditure mainly for security, a salary increase for civil servants, and a voluntary early retirement scheme. Growth in the dollar value of merchandise exports sharply declined to 3.7% in FY2001, compared with an expansion of 42.0% in FY2000 due to a significant decline in exports of ready-made garments and woolen carpets. The dollar value of imports declined by 1.0%, following a recovery of 20.0% growth in FY2000, reflecting a sharp deceleration in manufacturing. By the end of FY2001, Nepal had about $1.0 billion in foreign exchange reserves, enough to cover around 7 months of imports. The debt service ratio was a manageable 3.9% of exports during FY2001. Nepal was affected by the global economic slowdown due to the 11 September events that worsened the trade and investment of other countries in the region. In particular, Nepal’s tourism and trade were adversely affected. In the year ending November 2001, tourist arrivals declined by 17.0%, exports by 8.0%, and imports by 3.5%.

ADB operations

Operational strategy: ADB’s operational strategy in 2001 focused on government reforms and building effective institutions as a key part of reducing poverty. In October 2001, the Government and ADB signed a partnership agreement on poverty reduction (PAPR), aimed at reducing poverty incidence from over 40.0% at present to less than 10.0% by 2017. In line with the 2001 country strategy and program update and the PAPR, operational priorities were to generate employment and increase rural incomes through broad-based, more rapid economic growth; improve basic social services to enhance human resource development; and promote good governance.

Policy dialogue: Based on the operational priorities, the policy dialogue with the Government focused on civil, corporate, and financial governance reforms, streamlining subsidies in agriculture, and power sector reforms. ADB also assisted the Government in preparing its poverty reduction strategy and the Tenth Five-Year Plan.

Loans, technical assistance, and grants: ADB approved three loans totaling $95.6 million in 2001 for teacher education, a governance reform program, and road network development. Five technical assistance grants totaling $4.0 million were approved in 2001: three advisory grants on institutional support for governance reforms, support for preparing the Tenth Five-Year Plan, and optimizing water use in Kathmandu Valley; and two for preparing projects on the second phase of rural infrastructure development and community-managed irrigation in the central and eastern basins. ADB also approved two grants amounting to $10.4 million to support poor and disadvantaged farmers through civil society organizations, funded by the Japan Fund for Poverty Reduction, and for the road network development project, funded by the United Kingdom.

Project implementation: Since joining ADB in 1966, Nepal has received 102 loans, of which 27 were active at the end of 2001. Contract awards totaled $36.3 million, bringing the cumulative figure to $1.3 billion. The contract award ratio was 11.2%, lower than the ADB-wide average of 14.8%. Disbursements during the year totaled $57.2 million, bringing cumulative disbursements to $1.3 billion. The disbursement ratio was 16.6%, lower than the ADB-wide average of 20.5%.

The Nepal Resident Mission held monthly review meetings with project directors and quarterly portfolio review meetings with the Government and World Bank. An annual country portfolio review mission was fielded in August with World Bank and Japan Bank for International Cooperation. Measures to enhance portfolio performance were formulated with the Government. Project directors and other government representatives also attended a project implementation and administration seminar in Manila, aimed at further improving overall portfolio performance in Nepal.

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