Identifier
Created
Classification
Origin
08KATHMANDU1310
2008-12-24 07:02:00
CONFIDENTIAL
Embassy Kathmandu
Cable title:
NEPAL: IMF/WORLD BANK CONTEMPLATING BUDGET
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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
-------
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
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