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Since arriving in Nepal back in July, David Sislen has been overseeing the World Bank's Office in Nepal as the bank's country director for Nepal, Maldives and Sri Lanka. Sangay Sherpa from The Himalayan Times caught up with Sislen to gain his insights into the country's current economic situation and ongoing developments. EXCERPTS:
Can you provide an overview of Nepal's current economic situation, the main factors contributing to growth and key challenges?
The World Bank is constantly monitoring the economy and looking at the numbers. We projected a 5.1 percent growth rate for the year and are now adjusting those numbers based on the updated data with the government. The growth projection is a little bit lower in between 3.9 and 4.2 percent.
The National Statistics Office had reported a 2.9 per cent growth rate for the first quarter driven by agriculture and continued hydropower development, exports and revenue collection. Meanwhile both the financial and construction sectors have seen a decline which is also combined by an uptick in inflation that dampens domestic demand. The country aso needs to ensure the tourist sector remains vibrant, and is not just focused on the number of arrivals but making sure tourists spend extended periods of time here. In the hydropower sector, there is this umbrella agreement with India to export 10,000 MW energy and we all wanna see those multiple projects that are in the pipeline which are being developed come into fruition. Nepal is blessed with a natural combination of both gravity and water and turning that into electrons and making sure that the country can benefit from the export of clean renewable energy. Also while the people of Nepal have made significant improvement in their livelihoods over a long period, growth remains sluggish and it has not been associated with private sector dynamism and the creation of jobs but on the back of the export of manpower and reliance on remittance-driven economy. So the great challenge for the country moving forward in the World Bank's view is to really build an economy that is creating jobs at home for Nepalis. This reliance on effectively exporting Nepali people to work abroad in the Gulf, in the US, in Europe, is not something that the country can count on in the long term. Recently, the government approved five ordinances at the cabinet level and are now in Parliament to address some of these challenges around the business environment and private sector job creation which is critical for the country moving forward. The government's commitment to making Nepal open for business and for investment is something that the authorities will really need to continue to do.
The tourism and IT sector are the ones where a lot of additional work and investment is needed and investment to make Nepal really competitive in those spaces.
In addition, delivering on infrastructure, investment and productive investment is one of the most important things that Nepal can do to actually boost growth rate which has remained affected due to decreasing capital spending. The low capital budget execution is macro critical and affects the overall growth and dynamism of the economy to grow, and create jobs.
We are also concerned about the slow execution of projects financed by the World Bank. It doesn't make sense to be borrowing money from the World Bank or other development agencies and not spending it to get the development results. That is something we are very conscious of and very much trying to work with the government on addressing those challenges.
How is the WB assessing the effectiveness of its support to Nepal and integrating issues like climate change, gender equality, social inclusion, and human capital development into its initiatives?
The current portfolio of the World Bank comprises 19 projects with a net commitment of about $1.9 billion across infrastructure, human development, health and education, environmental management among others. At present, we are working on five operations for delivery this year. One includes supporting the government's ambitious digital plans to make digital development a central piece of how the government operates, combining irrigation and agriculture development to take advantage of some of the opportunities the country has in terms of boosting production. The World Bank is also doubling down on its commitment to building roads and bridges which is much needed for Nepal. The bank has been a long partner of the government in the energy sector but for the first time will be supporting critical investment in energy distribution space which has been the missing piece of the puzzle in ensuring all Nepalis have access to reliable energy. The transformation of the energy sector over the past decades is another achievement that the country should be proud of and we are very happy to work on it.
But when you touch on this issue of effectiveness, that is another really big challenge. Making sure that the government can actually spend the money that it has and deliver development results is one of the biggest challenges that we have in our portfolio.
Last year, the government executed about 58% of its own capital budget which is a lower than expected performance. And in our case, we have an even lower percentage of disbursements. So the effectiveness of the programs and making sure that they really are delivering on development results is actually our number one priority. What's more important, to us than putting more money into Nepal is making sure that when we do make a commitment, that money gets spent effectively, efficiently, and quickly which has been one of the biggest challenges that we face in the country.
Although Nepal's debt distress is low, debt servicing cost reached record levels in FY 24. What is your take on its impact on the economy and what steps is the WB taking to assist Nepal in managing its debt sustainability in the face of such challenges?
The WB is concerned about debt sustainability and the increasing levels of public debt globally. In Nepal's case, public debt is relatively low but the cost of servicing is increasing with interest rates going up. We need to ask the question of what Nepal needs to do? The country needs to invest in infrastructure and pay for them by borrowing, taxation or collecting user fees. Right now, revenue generation remains very low which is a critical challenge around domestic resources mobilisation.
The government has been shifting towards domestic borrowing and while that comes with some advantages around the currency which you are borrowing, it's been more expensive in the short term than the long term concessional financing from institutions like the World Bank.
How much you pay for debt is really important but making sure you are borrowing for the right thing and getting the right kind of investment and infrastructures delivered is equally important. It doesn't matter if you borrow at a low interest rate for a piece of infrastructure that doesn't work or never gets finished etcetera.
The World Bank being Nepal's development partner want to ensure that development projects are efficient, effective, right sized, right technology and deliver on the development results they were designed for is much a part of the puzzle and the story as what the interest rates and terms of the loans are.
Nepal received a sovereign country rating of BB-. How can it be improved?
The unfolding of Nepal's sovereign credit rating was a remarkable success which has led financial markets to turn to Nepal. The first thing to improve is around ensuring policy certainty. Investors want policy certainty above all these and I think that's really important. The new upcoming package of reforms revolving around the business environment currently in discussion at the Parliament is also a great thing which is an indication to the world, financial markets and investors looking at Nepal that policy makers are more open to a business friendly economy. Also, maintaining macroeconomic stability will be crucial to make sure that the central bank operates independently and is doing the work it needs to in terms of regulating the financial sector and ensuring that the government continues to make good investment decisions on top of getting that capital budget executed and things done is a critical piece of the pie.
The real problem Nepal is struggling with is actually in delivering development results through the investments made. If you compare to other countries in the region, infrastructure development in South Asia has been remarkable in the past decade but Nepal is lagging behind and making sure that remains a priority is important.
Nepal is more and more an urban country and has competitive challenges. Hydropower, tourism and IT are some major sectors that the country can capitalise on but it needs to do a lot of things including developing connective infrastructure and necessary policy reforms.
With the county set to graduate from LDC in the coming year, How can Nepal ensure continued growth while avoiding the risks associated with the loss of LDC-specific benefits?
The loss of LDC status is to be celebrated rather than lament it to begin with. This is, again, a reflection of a country which has continued to grow.
There are likely to be some impacts in terms of trade regime and preferential trade access, but I think that in terms of access to concessional financing, for example, from the World Bank, is not linked to the LDC status of the country. So Nepal will still remain an IDA-eligible country. As you know, the World Bank has two windows for providing financial assistance and they remain part of IDA and their borrowers for years into the future that transitions to an lBRD or middle-income status country and will continue to have access to long-term concessional development financing. We are very grateful to Nepal for the support that it gave to the bank in the IDA 21 fundraising process. Building the infrastructure, business environment, maintaining policy stability, and macroeconomic stability, are the most important things to weather this transition. Now, on the trade front, where we're not directly involved in discussions on trade, that's clearly going to be a piece of the puzzle too, and
I think there's a lot of developments going on internationally, in geopolitics right now around trade. Nepal is well positioned between two giants of neighbors, and really taking advantage of that and building continued trade relationships with its neighbors and beyond is just a critical piece of that story of moving into middle-income countries.
Can you share with us the results of the IDA 21 replenishment meetings held last year and the key areas where this support will be crucial in addressing the country's challenges in the coming years?
The total IDA21 replenishment was just around $100 billion and that's a combination of the contributions plus the financial engineering that are associated with it and the access to markets that IDA has and was an incredible success. It really reflects the confidence that our shareholders and the donors to IDA have in the World Bank. We are just in the process of finalizing our Country Partnership Framework (CPF) program that will be presented and discussed at our board in May on how Nepal will benefit from that.
We are in a longer term, around a six-year development strategy and that will really highlight two critical challenges which is to create an economic model that produces growth and jobs in Nepal for the Nepalese people. So the challenges around growth and jobs is the first critical development challenge highlighted in the CPF, and the second is around resilience to natural disasters and earthquakes, climate events, etctrea. Nepal is one of the most exposed countries in the world to natural disasters, and we are making that the centerpiece of our program. So you'll be looking at an IDA program over the next six years that focuses on those two broad development challenges, and within that, tries to address a range of issues While the total IDA amount dedicated for Nepal is not finalised, the CPF will bridge IDA 21 and IDA 22, and we'll be looking at a program that is around the same size or bigger than, that that we've had over the last few years
Please share your impressions of the country and its people?
I came on July 1 and the reception has just been fantastic in Nepal. The kindness and the warmth that I have been received with is really a testament I think sincerely to the deep relationship between the bank as an institution and the country of Nepal and its people. I have been so grateful for the openness and warmth and the honesty and directness with how the government has engaged with the bank on development issues across the board.
We are seen and act not just as the financiers who build and pay for stuff but as a partner on complex deep development issues and helping policymakers think through what the challenges for the country are and how to deal with them.
Sadly I have not been able to visit too much outside the valley but very much hope to do so in the coming months by visiting project sites and learning about the country and what we're doing here as well. It's not the easiest country to travel in due to the fact that connectivity infrastructure is a big challenge for the country and we are very proud to be involved in it as well.
Nepal is a wonderful place to live, and how fortunate I think we are from the World Bank again to be in a privileged place where we can work with the authorities.
