Financial sector Removal of entry barrier for Joint- denture banks Deregulation of interest rates Allowing private sector to establish uncial institutions Trade sector Devaluation of Nepal currency to check imports and make exports competitive Introduction of import license auction system to replace quota system Economic Reforms Before Restoration of Democracy (1985-1990) The Impact Number of banks increase from 2 to 5 Deposits increase by 160 percent Lending increase by 1 50 percent With increases in both imports and exports, total volume of international trade doubles Reforms After Restoration of Democracy (1990-2006) Market-oriented, liberal economic policy, with limited government intervention in the riveter sector Almost all sectors are opened up to foreign investment and policies are announced to lure foreign investments: Further prevarication of public enterprises Pees) Exporters allowed to retain their foreign exchange earnings Entry for private sectors’ financial institutions further liberalized ere Local Self-governance Act (ALGA) is enacted to further expedite decentralization and to share revenues between central and local governments. Government enacts the Labor Act, further strengthening labor rights, occupational safety and health Impacts of Initial Reforms (1990-2006) SAD growth rate

Despite initial gains following the restoration of democracy, Napalm’s GAP growth rate drops to an all-time low in 2001, mainly due to the escalating Moist insurgency. Growth rates Trends of foreign trade 3000 2500 $ in million 2000 1500 1000 5000 1990/91 1995/96 Export Trade Deficit 2000/01 Import 2005/06 Fiscal year During the period 1990-2006, exports reach $ 927 million, up from $ 230 million. Imports reach $ 2. 6 billion, up from $ 727 million. However, the trade deficit widens to $1. 75 billion 2006. Sq a result of economic liberalizing, 203 financial institutions come into existence y 2006, total deposits touch $4. 13 billion, and total loans and investments almost $4 billion.

Types Commercial Banks Development Banks Finance Companies Microcircuit Banks Cooperatives Nags Total 199020002006513 1827354572711 1919747798203 Source: Nepal Raster Bank Inflation level 12 10 Rates % 8 6 4 2 0 1990/91 1993/94 1996/97 2000/01 2003/04 2005/06 Fiscal Inflation gradually declines from 1990 to 2000 The escalating Moist insurgency, Inch obstructed supplies of goods and services in rural areas, causes inflation to climb after 2000 Norse’ remittances Nepal rupees in billions 0 60 50 40 30 20 10 0 1990/91 1993/94 1996/97 2000/01 2003/04 2005/06 Fiscal year Remittance income gradually grows as the backbone of the economy, and is credited Ninth preventing an economic crisis amidst unprecedented levels of violence and economic contraction in 2000. Foreign exchange reserve Nepal rupees billion 180 140 10060 20 1990/91 1993/94 1996/97 2000/01 2003/04 2005/06 Fiscal year Despite a widening trade deficit, the foreign currency reserve of the country maintains impressive growth, thanks to ever-increasing remittance income. Resistance to Economic Reform Today I. Financial Sector II. Labor Law Ill. Governance ‘V.

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Public Expenditure Synopsis of Resistances and Effects Resistance on Financial sector reforms Responsible Actors Willful bank Defaulters Immediate Impact Socioeconomic Effects Defaulters’ defy weakened Squeezed financial state, huge debt burden, services, limited corruption and rise in capacity to invest to inequality lower poverty No private investments, no Mass youth Job creation unemployment, no competition in labor market Financially & legally weak Poor service delivery, local bodies, continued no decline in poverty, dependency at center no accountability and ownership; Misuse of resources, fewer Rural development resources available for activities compromised, development no Job creation Labor law reforms Trade Unions ranch reforms Central Government; Moist Insurgency Public expenditures Central reforms rent Leading to Overall Frustration with Democracy l. Financial Sector Reform 1989: Study finds that the two largest state-owned banks of Nepal, Nepal Bank Limited (N.B.) and Restrict Banyan Bank (ROB), are short of capital, due to imprudent and risky lending decisions and weak recoveries. 1991-93: Government injects some 999: A KEMP study reveals that N.B. and ROB, which represent half of total banking assets, are financially insolvent, a huge negative net worth and on the verge of collapse. Study finds that the estimated loss, as of mid-1998, is $450 million? equivalent to around 46% of the government budget or about 8. 6% of GAP. He central bank found 53 business houses have willfully defaulted on some $350 million in loans from the two banks, and is the root cause of the financial problems of the banks. Nepal initiated massive banking reforms in 2001, with support from World Bank. Management of the banks handed over to foreign management teams to accelerate loan recovery drives. Foreign management teams were unable to recover the loans from major defaulters due to the government’s unwillingness to take timely actions. As a result, the financial condition of the banks is still fragile, with net worth at a negative $370 million. By the end of 2007, Nepal had invested some $ 92 million in making the banks financially solvent, with loans taken from the World Bank.

The total cost of reforming the two banks will touch $460 million, 70% of total development expenditure of 2006. Cost of Resistance to Financial Sector Reform Debt burden: Has increased by $18, or 6% of per-capita income Waste of resources: ere resources and energy put into saving the banks has come at the opportunity cost of raising the livelihood of the rural poor. Loss of national output: Since 2003, Nepal has lost 1% potential growth per year (roughly $460 million) due to the slow pace of reforms in financial sector. Restricted banking access: Due to their fragile financial condition, banks have been unable to provide financial services in rural areas.

Corruption: Willful defaulters use the ‘easy money to bribe politicians, bureaucrats ND even some members of civil society to protect their ‘hardened wealth. ‘ Income inequality: Accumulation of wealth by the defaulters, at the cost possible development activities in the rural areas, is one of the reasons for Napalm’s growing economic inequality. II. Labor Law Sender Male Female Employed % 73. 3 71. 7 Unemployed % 3. 1 2. 7 Economically inactive % 19. 6 25. 6 ere annual labor force growth rate of Nepal is around 2. 75%, with up to 300,000 fresh laborers entering the market each year. Napalm’s labor market is characterized by slow Job creation as compared to its rapidly growing labor force, along with a throng presence of huge unskilled labor.

Labor Law Reforms of 1992-93 1992 Labor Act acknowledges universal rights of labor, like trade unionism, collective bargaining, and social security. Labor Act mandates that any employee working in a business unit with more than 10 workers is entitled to become a ‘permanent’ worker exit legislation similar to the United States’ Chapter 7 and Chapter 1 1 . Closing large failing ventures requires government’s permission, which is a lengthy procedure. Employers are required to pay the permanent workers of the factory until its registration is legally terminated. Trade Unions Act 1993 effectively makes trade unions an arm of the political parties?unions’ activities are focused more on politics than on labor welfare.

Reasons for Further Reform genuineness use other means to remain competitive; not providing written contract to Norse; hiring foreign workers; and firing workers before they complete 240 days. A recent survey shows that only 46% of Nepal businesses abide by the existing labor legislation, due to difficulty in implementation. Labor Market Survey 2005: 52% of businessmen say they are unwilling to invest or expand their production base due to rigid labor laws. 005: Based on the survey, the country loses potential domestic private investment worth $63 million and thousands of new Jobs. 2008: World Bank’s ‘Global Survey on Doing Business 2008″ shows Nepal down 7 positions to rank 1 1 1 out of 178 economies. Ill.

Governance Reform 75 District Development Committees (DDCD) 3913 Village Development Committees (Vats) 58 Municipalities Nards: Vats-9 equal in population Municipalities can have more than 9 ere government formed after the 1992 election promulgates three separate acts for ‘alleges, municipalities and district bodies. A provision of a two-tier local governance truce with District Development Committees (DDCD) on the top tier and Municipalities and Village Development Committees (Vats) in the grass-roots tier. Local elections are first held in 1993 and again in 1998. 1995: Government authorizes local bodies to use 40% of local land revenue and arranges central grants of $4,000 per VOID per year. These are raised to $7,200 1996 and $15,000 in 2006. 999 Local Self Governance Act (ALGA) seeks to: create economically viable and development- oriented local bodies enhance the participation of all people enable local bodies to immobile local resources for local development 001 : Joint Coordination Forum for Decentralization COIF) created ere Stalled Process of Decentralization Despite the presence of good laws, the Barriers Moist Insurgency Political Barriers Financial Barriers to Decentralization Limited resources prevent most local government authorities from launching development activities on their own. Despite ALGA provisions, revenue-sharing mechanisms between the center and local governments have not been developed. ere lack of financial self-sufficiency forces local government authorities to depend upon central grants, which greatly limits their independence. The financial situation f local bodies weakens in 2000 when the central government abolishes octopi, a locally collected tax.

Moist Insurgency: Impact on Decentralization Due to the escalating Moist insurgency, local bodies have had no elected representatives since 2004. The issue of decentralization is losing attention due to the absence of elected local bodies, once the driving force pushing the issue. The government has tried to fill vacancies through appointment, but has been unsuccessful because Mastitis have forced the appointees to resign. Many buildings belonging to local authorities have been destroyed or burned down by Moist insurgents. Political Barriers to Decentralization Political parties and bureaucrats all agree on the concept of decentralization but there is an absence of political will, commitment, and real support on the matter.

Old mindset of politicians continues to regard local bodies as subordinate agents of local development, rather than autonomous units of local self-governance. Leaders at the center fear that local bodies will not remain under their control once they are strong enough to work independently. Politicians want local bodies to remain dependent, so that they can be used for political means. Overall Impact of Resistance on Governance Reform ere overall performance of financially weak local bodies has remained inadequate in rural areas. The quality of basic service delivery in the areas of primary education, health, & drinking water has shown no improvement.

Resource dependency has allowed for central intervention and imposition of development programs without any understanding of local needs. Many development programs have remained unsustainable due to weak ownership of local people. People gradually have lost their faith in elected local bodies, as they have failed to bring about change. ‘V. Public Expenditure Subsidies on Petroleum Products ere total losses for the state-owned petroleum trading company has surpassed $21 5 million since 2004 Current monthly losses in petroleum products trading stands at more than $8 million; the amount is enough to build: 14 Km of road in hilly Tare 200 primary schools each accommodating 250 students Around 500 health posts. Open border since they are cheaper in Nepal than in India.

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