NEPAL: IMF/WORLD BANK CONTEMPLATING BUDGET

C O N F I D E N T I A L SECTION 01 OF 02 KATHMANDU 001310 SIPDIS E.O. 12958: DECL: 12/23/2018 TAGS: ECON EAID EFIN EINT EINV ELAB EIND NP SUBJECT: NEPAL: IMF/WORLD BANK CONTEMPLATING BUDGET ASSISTANCE Classified By: Ambassador Nancy J. Powell. Reasons 1.4 (b/d). Summary -------------- ¶1. (C) The new Maoist-led Government of Nepal (GON) made a formal request to both the International Monetary Fund (IMF) and the World Bank for budget support during the financial institutions' annual meetings in Washington in October. Neither organization will consider budget support until a new budget is passed in summer 2009. Support would be extended only after a new IMF program is in place and certain conditions are fulfilled. These include an automatic pricing mechanism for petroleum products, financial sector reforms, and the GON's demonstrated commitment to good fiscal management and macroeconomic stability. At the World Bank, labor reform and anti-corruption programs are also on the table but currently under debate. IMF Poverty Reduction and Growth Facility -------------- ¶2. (C) In 2003, the IMF put in place a poverty reduction and growth facility (PRGF) for Nepal. The 2003 PRGF ended in ¶2007. In the interim the country has been without an IMF program. IMF Resident Representative Alex Pitt stated to Emboff recently that a new program would need to be in place before the IMF would extend budget support. And before a new program would be put in place the GON would have to meet certain conditions. These conditions include establishing an automatic fuel price mechanism to shore up the bankrupt state-run Nepal Oil Corporation. The IMF also wants to see the proposed Financial Institutions Law passed and the growing speculation in the real-estate market brought under control. The GON's responsible management of the current budget is another crucial condition to any future assistance. Pitt added that the IMF would not put a program in place before the adoption of a new budget and the beginning of the next fiscal year. (Note: The Nepali fiscal year begins on July 15. End Note.) In the meantime, the IMF will monitor the GON's commitment to good fiscal management and macroeconomic stability. World Bank Support -------------- ¶3. (C) Local World Bank officials have also stated to Emboff that it will not provide budget assistance until the next fiscal year. However, the World Bank is less clear about the parameters for such assistance. Possible conditions for assistance range from fairly straightforward policy conditions, similar to the IMF's current position, to more program-focused conditions relating to improving the GON's procurement process and efforts to curb corruption, improve transparency and boost accountability, which would require considerable oversight by Bank staff. The World Bank also considers reforms in the financial sector and labor market to be critical. Like the IMF, it is watching to see how the GON manages the current budget. It is concerned that the budget leaves considerable room for growth in entitlements and wasted expenditures. Comment -------------- ¶4. (C) In the past, the provision of budget support to the Nepali Government without insistence on reforms has proven to be unproductive and stifling to real economic growth. Both the IMF and World Bank are waiting to see how the GON manages the current budget. The 2008/2009 budget as passed leaves a great deal of room for mismanagement of entitlement programs as well as for politically motivated expenditures that do not reflect sound economic policy. Reforms should be growth-oriented and measurable, but the World Bank's ability to oversee programs than can measurably improve the GON's transparency and accountability is questionable. Improved KATHMANDU 00001310 002 OF 002 security and labor reforms are absolutely critical as well. But it is uncertain what the GON can deliver and what the labor unions will demand. Given the perceived fragility of the country, donors seem reluctant to demand hard reforms, but without them economic growth and lasting peace will be hard to achieve. POWELL