As the Maoist insurgency rages on and democratic processes remain disrupted, Nepal's future looks bleak. Evidence of human suffering, including human rights abuses, is compelling. Naturally, the government's attention is focussed on these issues. The cabinet, however, would be well advised not to forget the development and reform agenda.

In the second half of the 1990s, political instability led to a marked slowdown in reforms and increasing signs of stress on the economy and society. Recognising this, HMGN made an important beginning in 2000 by announcing a Priority Action Plan that focused on improving governance and reducing poverty. Unfortunately, it proved to be ahead of its time, as the wider political establishment continued to be preoccupied with internal power struggles.

As the severity of Rastriya Banijya Bank (RBB) and Nepal Bank Limited's (NBL) financial problems became apparent in 2001, HMGN became alarmed by the prospect of a financial sector crisis and began to see this issue as the rallying point for the reform process. The initial step was to place the two ailing banks under professional external management.

With the fiscal situation rapidly worsening in 2002 (when Nepal's domestic revenue fell shorter than 'regular' expenditures for the first time in living memory), HMGN started to use this fiscal reality as a driver for public expenditure reform. At the same time, to respond to the serious challenges caused by the insurgency, HMGN began to promote aggressive decentralisation to improve public service delivery.

By 2002, these somewhat disparate initiatives were pulled together. The Medium-Term Expenditure Framework (MTEF) was introduced to rationalise the development budget. The CIAA started highly visible actions against senior civil servants and politicians on corruption charges. HMGN formulated a Foreign Aid Policy and built Nepal's Poverty Reduction Strategy (PRS) on reforms thus far initiated, using a more integrated medium-term approach.

At the core of the MTEF is maximising the benefits of public spending that is subject to a 'hard budget constraint'. In the first year, 160 low priority projects were dropped. There are three important challenges:

. integrating regular expenditures into the prioritisation process
. sharpening the focus on outputs and outcomes
. integrating donor-funded projects into a harmonised prioritisation process

A conceptual counterpart to the MTEF, the Immediate Action Plan (IAP) recognises the limited institutional capacity of HMGN to implement reforms (an institutional 'hard budget constraint'), and selects a small number of highest priority actions that HMGN must focus all its implementation energies on. The IAP has now been adopted as an annual process to collectively think through priority reforms and hold line ministries and other agencies accountable for their implementation. An increasing emphasis in the IAP is on showing results on the ground.

An important pending issue is the delineation of roles between the cabinet ministers and the civil service. The current system-in which all authorities are vested with the ministers and where the decision to devolve is individual and arbitrary-has tended to stifle the growth of a professional civil service. Another important initiative that is off track is the decentralisation process, crucial to improving accountability and public services.

At this year's Nepal Development Forum HMGN proposed a significant 'harmonisation' process which tries to incorporate all major aid decisions (ie, which projects to finance) into the annual MTEF cycle. If successfully implemented by the 2005-6 budget, this would move Nepal to the forefront of donor harmonisation internationally.

Nepal's Poverty Reduction Strategy for the first time explicitly identifies social exclusion as a fundamental development challenge. Donors have endorsed the basic robustness of the PRS, but noted that the real challenge is in implementation, especially in the context of the on-going conflict. To continue implementing the PRS in the conflict-affected areas, HMGN will have to diversify the modalities of public service delivery and even monitoring.
For Nepal to achieve faster economic growth and poverty reduction, it is absolutely necessary to resolve the conflict and restore political stability. This, however, will take time. In the meantime, what has given Nepal some credibility and earned continued donor support is the strength of the reforms.

These reforms are fundamental to building a lasting peace for Nepal. Though often overlooked, it is to the credit of a number of successive cabinets that a strong reform process has been built up since 2001. The present cabinet finds itself in a fortunate position of simply having to continue the on-going program.

A demonstrated willingness by the government to pursue the development agenda will no doubt win Nepal the support of many more friends in the international community. Any signs of wavering on the reforms front, however, could prove costly to Nepal.

Ken Ohashi is the World Bank Country director for Nepal