In 2002, the World Bank agreed to increase the volume of its assistance to Nepal several fold. This decision recognised the emergence of significant reforms in banking, primary education, health care, telecommunication, anti-corruption and public expenditure management, among other areas.

A year later, the World Bank even provided budget support of some $ 70 million in the form of the first Poverty Reduction Support Credit (PRSC).

Despite the political uncertainties and the conflict, there was a measure of optimism that these reforms would address some of the fundamental constraints to Nepal's development.

In the days after the royal proclamation of 1 February, some donor representatives, human rights activists and others have argued that the World Bank should cut back its support to the government and in particular
withhold the second budget support operation (PRSC II) until significant progress was made on the political front.

hese skeptics claimed that PRSC can be seen as an endorsement of the political situation in Nepal. The World
Bank did not agree with such a stance, for it does not link its support to political developments. The Bank said it would continue to provide aid to Nepal as long as its government sticks with the reform process and is able to sustain development activities.

Seven months into the new political situation, the World Bank is deeply concerned that these two key conditions have not been met. This could lead to a sharp reduction in the Bank's assistance to Nepal. To be fair, the slowdown in the pace of reforms happened last year, when a coalition interim government took the helm. But some people expected, quite rationally, that the new government would accelerate the reform process. After all, King Gyanendra himself made it clear that the new government was committed to continuing economic reforms, accelerating poverty reduction and fighting corruption. Besides, many argued that, lacking in parliamentary legitimacy, the new government had every reason to deliver good public services and development programs, and build 'performance legitimacy.'

While some good reform initiatives that had started earlier continued to be implemented, few new reform initiatives of significance have been launched since 1 February. In fact, there are indications that there may even be pressures to reverse reform gains. Especially after the RCCC verdict on the Melamchi case, many civil servants seem fearful of making even routine decisions to sustain development activities.

The World Bank is in the process of reviewing its Country Assistance Strategy (CAS). As in the past, it strongly links the overall assistance level to the policy performance of Nepal, or its ability to use money well to further its development objectives. In the 'base case', the annual range of assistance was set at $ 120-200 million. If the reforms slip significantly, then assistance would be lowered to a 'low case' and the annual commitment level will be sharply reduced to a range of only $ 0-50 million. In the low case, there would not be any budget support.

I have had many rounds of discussions with senior HMGN leaders about pending reform actions over the last several months. Promises of imminent actions have been made time and again. But few concrete actions
have been taken. Therefore, unless the government is able to rejuvenate the reform process in the coming weeks, the World Bank will have to conclude that HMGN's priorities are elsewhere and that the effectiveness of HMGN as a promoter of development is slipping. In such a situation, the Bank would have to move the Nepal program to the low case.

What is at stake in terms of aid is big. First of all, Nepal would lose about $ 100 million or more in new assistance every year from the World Bank alone, or about six percent of HMGN's total Fiscal Year 2005/06 budget. That loss would include PRSC II ($ 70 million or more), which is the most powerful financial support the World Bank can give to HMGN's development efforts, for it disburses in one cash payment, unlike conventional projects which disburse over many years.

But the financial loss will not stop there. Recently, the IMF and the World Bank determined that Nepal is eligible for debt relief for the so-called 'Heavily Indebted Poor Countries' (HIPC). Rough calculations show that if Nepal qualifies for this benefit, it may stand to gain around $ 30 million a year in debt service reduction right now and even more in the future. To qualify for these debt relief measures, however, Nepal's reform program needs to be on track.

The bigger loss, of course, comes from the slowing down of the development process itself. The kind of reforms that have been stalled and are causing the World Bank to reconsider its stance are really designed to
improve public services to average Nepali citizens, to improve transparency and accountability, and to create a better economic environment for job creation. There may be some measures that are more difficult to implement in this highly charged political environment. But other measures should have broad public support and immediate benefits in many cases. Why they have proven so difficult to implement is a mystery.

The flipside of the 'politically neutral' position of the World Bank is that it would not continue to provide funding to this government on account of political considerations. Yes, we understand that the country faces a serious domestic challenge from the insurgents whom the government calls 'terrorists'. Some donor countries may be willing to help the government deal with this problem with more generous aid.

For the World Bank, however, that is not a justification for financial support. Our support is for development, which appears to have been relegated to the back seat. Some senior leaders of this government have said
that no country has died from the lack of aid. True. But, the issue is, what kind of life would Nepalis have in the absence of the strong commitment to reforms and development?

Ken Ohashi is the World Bank Country Director for Nepal