US embassy cable - 05KATHMANDU2723

C O N F I D E N T I A L KATHMANDU 002723 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR SA/INS, EB 
 
E.O. 12958: DECL: 12/06/2015 
TAGS: ECON, EFIN, EAID, EINV, ELAB, NP 
SUBJECT: WORLD BANK LOAN IN JEOPARDY 
 
REF: A. KATHMANDU 2555 
 
     B. 04 KATHMANDU 1878 
     C. KATHMANDU 1906 
 
Classified By: CDA Elisabeth I. Millard, reasons 1.4 (b/d) 
 
WORLD BANK LOAN IN JEOPARDY? 
---------------------------- 
 
1. (SBU) His Majesty's Government of Nepal (HMGN) has failed 
to meet four critical commitments on economic reform that it 
promised the World Bank by the end of November 2005, putting 
the status of the USD 100 million Poverty Reduction Strategy 
Credit II (PRSC II) loan in jeopardy.  The four conditions 
agreed to in a meeting between the Bank and HMGN officials in 
Washington in September were:  seize the passports of top 
loan defaulters and suspend ownership transfer of fixed 
assets of those defaulters who failed to reach amicable 
settlements with their lending banks; enforce the Governance 
Act, which would give more authority to local government 
units to carry out development work; enforce the Labor Act, 
which would give industry more power to hire and fire 
employees and make Nepal more investment friendly; and 
implement an automatic market-based pricing mechanism for 
petroleum, which would correct HMGN's losses on petroleum 
subsidies (ref A). 
 
HMGN MAY BE TAKING ACTION SOON 
------------------------------ 
 
2. (C) Rameshwor Prasad Khanal, Joint Secretary, Foreign Aid 
Division, Ministry of Finance, told EmbOff that "HMGN had no 
doubt failed to fulfill the promises it had made to the World 
Bank on economic reform measures on four critical issues, 
however, the PRSC II loan had not been suspended yet."  He 
added, "that draft legislation related to the four 
commitments are in the final stage of approval by the cabinet 
and would likely be approved as ordinances by the end of this 
week."  In contrast, Shankar Sharma, Vice-Chairman of the 
National Planning Commission, has recently confidentially 
expressed concern to some international donors about the lack 
of political will to meet the four conditions. 
 
 
WORLD BANK STILL OPTIMISTIC 
--------------------------- 
 
3. (C) Rajib Upadhya, Senior External Affairs Specialist, 
World Bank, stated that it was the Minister of Finance who 
gave the Bank the end of November deadline, and that the four 
conditions would remain in place until HMGN complied with all 
of them.  He said the Bank had rejected a past proposal from 
HMGN in which HMGN would enforce the Governance and Labor 
Acts to get half of the loan amount.  He stressed that the 
Bank was most concerned about HMGN pursuing willful 
defaulters (ref B).  Upadhya said that of the four 
conditions, the Bank was least concerned about the Labor Act. 
 He outlined that it would take the Bank three to four months 
to process the loan after all conditions had been met.  In 
the previous fiscal year, the Bank had given HMGN a February 
15 compliance deadline and then the royal takeover stalled 
all progress until the Bank's annual meetings in Washington 
in September 2005.  He commented that if HMGN's 
non-compliance continued, the most probable scenario would be 
for the Bank to give HMGN another late February deadline.  If 
HMGN met that deadline, the Bank would be able to process the 
loan by the end of the Nepali fiscal year, July 15, 2006. 
Further, he said HMGN had budgeted USD 35 million for PRSC II 
for the 2005-2006 fiscal year and that non-compliance within 
the fiscal year would leave HMGN with a budget shortfall of 
that amount. 
 
COMMENT 
------- 
 
4. (C) Post is not optimistic HMGN has the political will to 
carry out the four economic reform conditions, particularly 
dealing with willful defaulters.  Though Vice-Chairman Giri 
is no longer on the willful defaulters list (ref C), a number 
of wealthy/influential Nepali businessmen are. 
MILLARD