Finance Minister Ram Sharan Mahat on Saturday asked the World Bank (WB) not to curtail its grant to Nepal amid the global lender conveying the message to the government that it is all set to stop it in light of Nepal’s reduced debt vulnerability.
As per the latest joint debt sustainability analysis of Nepal by the WB and the International Monetary Fund (IMF), Nepal’s external debt indicators remain well below indicative sustainability threshold.
The report says that the change in risk rating from ‘moderate’ to ‘low’ would lead to a switch from a 45–55 percent mix of grants and loans, respectively, from the International Development Association (IDA), a funding branch of WB for the poorest countries, to 100 percent financing on standard IDA credit terms.
But the level of total assistance is increased by roughly 10 percent. The Asian Development Bank has already started providing 100 percent loan to Nepal since last fiscal year by discontinuing the grant.
Nepal has however been complaining that the country has been punished for timely repayment of external loans, which was possible due to the government’s failure to spend development budget.
According to the Economic Survey 2013-14, Nepal’s total external debt against
gross domestic product (GDP) is 18.4 percent, a sharp fall from 43.4 percent in
fiscal year 2003-04. Likewise, total debt against GDP is currently 30.1 percent from 59.4 percent a decade ago.
Addressing the annual meeting of the board of the governors of the WB and IMF held in Washington DC, Mahat said that while the debt stress of Nepal is reduced, “an increase in creditworthiness on our part should not be punished by a curtailment of grants.”
“Such a policy may create perverse incentives and induce ‘moral hazard’ in aid systems,” said Minister Mahat, “We believe that there has to be a clearer distinction between the needs of countries at peace and those in post-conflict transition.”
The World Bank is the largest donor of Nepal with total disbursement of $231.4 million in fiscal year 2012-13, according to the Development Cooperation Report published by the Finance Ministry.
Meanwhile, Mahat also praised WB’s growing interest in developing Nepal’s hydropower sector and explained the ‘improved’ investment climate in Nepal.
“Together with the hard work and ingenuity of the Nepali people, hydropower is perhaps our biggest source of future prosperity,” said Mahat.
“In this regard, the recently concluded Power Development Agreement (PDA) for Upper Karnali Hydropower and the Power Trading Agreement (PTA) with the government of India augur well for new investments in productive sectors.”
Mahat had also sought investment in Nepal’s hydropower sector from the World Bank and its private sector arm-International Finance Corporation (IFC), during his meeting with the WB officials alongside the annual meeting.
A press release issued by the Finance Ministry states that the WB officials praised the PTA and PDA, saying that they opened the door for hydropower development in Nepal. Finance Minister also held a meeting with Philippe Le Houérou, the World Bank’s Vice-president for South Asia.
During the meeting, Houérou assured that the WB was ready to invest in Nepal’s hydropower and other infrastructure sector.