World Bank's recently launched Country Climate and Development Report (CCDR) has highlighted the impacts of climate risk and suggested Nepal to take an integrated approach to water, agriculture, and forests, harness the hydropower opportunity and energy transition, manage sustainable urbanisation, and strengthen low-carbon resilient connectivity. Sangay Sherpa from The Himalayan Times caught up with World Bank Regional Vice-President for South Asia, Martin Raiser to gain his insights into the country's current economic situation and achieving Green, Resilient and Inclusive Development (GRID).

Excerpts:

Please share your observation of Nepal's economy.

Nepal's economy has recovered reasonably well from the shock of COVID-19. Growth in the last fiscal year was almost six per cent, but we have to note that the domestic demand recovered more quickly compared to some sectors of foreign exchange like tourism.

As a result, Nepal has experienced some growing external imbalances, which has led to the government tightening the monetary policy. That may lead to cooling the pace of economic growth in the months ahead but it has certainly contributed in stabilising the situation of the balance of payments. I think Nepal has done the right thing in reacting to these growing imbalances.

We are quite optimistic about Nepal's potential but there is clearly a big agenda of structural reforms to make sure that it can fully realise its potential and growth aspirations.

How has the federal system affected Nepal's comprehensive development approach?

I heard about the federal system and wanted to see it in action for myself. I asked myself if federalism has been worthy in terms of delivery of development outcomes and I think the answer is 'yes'. For example, in the health sector, decentralisation or the federal system has led to more institutional deliveries and that has lowered the risks associated with child mortality. The fact that the government is now closer to the people and more services are delivered at the local levels, leads to improved services.

Now, that doesn't mean that federalism doesn't have any challenges. There are still some overlapping responsibilities, so all three levels of government are trying to do the same thing and that leads to inefficiency. Another thing is that the local governments still rely heavily on revenues transferred to the local levels.

The gap between what they are expected and trying to do and the resources they have also led to growing fiscal imbalances.

And then, you have the additional resources at the local levels for capital expenditures etcetera that has led to an increase in fiscal deficits since the introduction of federalism. Those things need to be tackled as the government cannot run deficits forever. The government needs to give more resources to the local levels but also provide incentives to spend those resources efficiently. There are some challenges related to civil service. The basic structure has been put in place which is a great achievement but there is still too much turnover. So, I understand there is a law in the Parliament that will deal with such problems and will allow local civil services to be built up and become more stable.

These challenges are to be expected as no one can build a federal system in a year or two. It has only been five years for Nepal and if we overlook them, I think we can say that Nepal has made some very significant progress and that on the whole, this was the right decision to make, not just in terms of political and safeguarding the peace, but also in terms of service delivery.

Do you foresee any major impact on Nepal as the world seeks to transition away from fossil fuels?

Nepal has a great advantage as it has significant hydropower potential and I think 70 per cent of Nepal's total energy needs are provided by hydropower.

However, it is still dependent on the import of fossil fuels for its transportation sector, among others. Nepal is sort of dependent on better regional integration in the power sector to fully utilise its hydropower potential and if it is able to do that alongside building more capacity for water retention, it can generate more power during the dry seasons. Then it could probably make itself independent of fossil fuels relatively sooner than most of its neighbouring countries. One of the reasons the world is making a transition away from fossil fuels is because of global warming and climate change which will have an impact on water flows.

On the whole, Nepal is well positioned and it has a chance to leapfrog to a green development path because of its hydro potential but to put that into reality, a number of additional things need to come together.

What are the achievements since the Kathmandu Declaration on GRID was endorsed by the government and 16 development partners last year?

I think the most important part of this declaration is that it gives us all an orientation and a vision. Having an agenda or a vision really helps with coordination as everyone is trying to move in the same direction and all can use the same criteria to prioritise the path to GRID in Nepal. In terms of development as in the country's budget, there are limited resources. So, if you have a vision, it helps you to prioritise the limited resources to do the things that really contribute and are vital to the vision. I think we are still at the beginning in terms of progress in practical terms.

We launched the CCDR last week for Nepal which is our contribution to try and understand what GRID means and what are the key transitions and changes Nepal will need to confront and implement in order to realise the GRID vision. When we made the report, we were well aware that the best we can do is sketch the main transitions.

However, a lot of work remains to turn them into specific actions and to prioritise how much money is needed etcetera.

I think the vision is great and the coordination is very good but the implementation is just the beginning.

Can you give a brief overview about the 'policy packages' recommended in the WB's CCDR?

We specifically talk about four transitions that are highly needed.

The first transition relates to agriculture, forestry, and water resource management. Nepal being an agricultural economy has the potential to develop green and resilient agriculture and it needs to do that or else, climate change is going to negatively impact this sector. One of the things Nepal can do is improve the management of its water resources.

The second aspect is forestry management. Nepal has good examples of collective forestry management and one of the interesting examples I learnt about the collaboration between communities managing forests and the communities managing downstream agriculture resources like fisheries, among others, without the government. But in many cases the government may need to facilitate such kinds of collaboration and the integration of the way agriculture, water, and forestry work together.

The second transition is to realise the hydro potential in the country. To do that, Nepal will need to figure out sustainable financing models as it is too expensive for the government to accomplish on its own. This will depend on having good agreements related to regional power trade and the country will also have to study the implications of climate change for the availability of water itself which will determine which hydro structures are crucial for change.

The third transition is managing sustainable urbanisation. Nepal is one of the fastest growing countries in terms of urbanisations in South Asia. This is both a challenge and an opportunity. It's a real tragedy that many cities in South Asia have been allowed to grow without any planning at all.

As a result, such cities are very vulnerable to climate change, highly susceptible to air pollution and other sources of environmental damage, alongside not being productive. Nepal has a chance to be a country in South Asia that doesn't repeat those mistakes and that would mean a more inclusive and resilient pattern of growth.

The final transition is related to transport. Nepal still has some major connectivity challenges both within and in cities. As we expect motorisation to increase Nepal has two challenges at hand.

One is to build road infrastructure that are climate resilient and can contribute to economic growth. It is also crucial to design and think about different transport routes.

At the same time, Nepal has this great opportunity because of its hydropower resources to make sure that it does not use fossil fuel for its transport and shift to electric vehicles. If it works, Nepal can have much higher mobility, and connectivity at a low cost of rising carbon emissions.

All four transitions offer opportunities but also some significant policy challenges.

This was your first visit to Nepal. Do you have any key impressions and observations to share?

Nepal is a beautiful country. Although I missed the mountains as it is the monsoon season, I saw other beautiful things of Nepal. I got to see the subtropical vegetation in the valleys and the lakes that surround Pokhara. There is a lot of tourism potential here, which I think deserves to be developed.

I also enjoyed the food and think there is a lot of potential in building around an eco-tourism industry, as well as a respective supply of fresh agricultural produce, and working on trying to make Nepal's agriculture sector more productive and competitive.

I think Nepal has great opportunities in markets like India and perhaps globally too. I think Nepal is a country that deserves a bright and positive future and a nation that the World Bank will continue to support to realise this aspiration.