Thank you for the review of our book, A Review of Foreign Aid in Nepal 2003 ('Big bad donors', #210) by accomplished aid analyst Binod Bhattarai. Because of the delay in getting the book finalised, some of the data presented is dated, as Bhattarai points out. But our objective was to analyse medium-term trends over time.

While we have not included a separate chapter on the conflict, we have analysed it as one of several factors that hold implications for the implementation of the Poverty Reduction Strategy Paper (PRSP). We present the proportion of defence spending in total regular expenditure since 1974 as well as the proportion of defence spending in this year's budget, and juxtapose poor GDP growth rates since 2001 with (but not only with) the conflict.

Since the present situation requires the confinement of government and donor presence to urban areas and around district headquarters, we say that in the absence of elected people's representatives at local and national levels, it will be all the more difficult for both government and donors to implement the positive components of the PRSP. We go on to suggest that the formulation of an 'Interim Emergency Development Plan', a more strategic and flexible planning instrument than the PRSP (p74).

Bhattarai overly simplifies our analysis and presents a misleading picture. Our premise is that 'foreign aid is an inevitable component for a developing economy trying to stay afloat in a rapidly transforming globe'. We also outline Nepal's continued dependence on aid, pointing out that the Tenth Plan aims to finance 57.5 percent of total development expenditure through foreign assistance. Given the widening gap between domestic savings and national investment, the excess of government expenditure over revenue and excess of imports over exports, we find the relative significance of aid to Nepal has, indeed, increased.

We also list some of foreign aid's achievements. Within limits, it has contributed to social transformation. It has brought into discussion issues of economic and social marginalisation, supported the freedom of press and freedom of association in Nepal and helped the human rights agenda. Foreign aid has played a role in expanding transportation, energy and telecommunications. How can anyone presume to write-off all aid as bad? We do hold, however, that the benefits of aid have not been as widespread as they could have been, had Nepal's societal structure been better understood, as well as the specific ways in which aid should have been targeted to really reach the poorest people.

Our attempt has been to be critical not of aid per se but those aspects of the management and governance of aid which we see as being faulty, and which we think stand in the way of increasing the effectiveness of aid. Apart from specific recommendations addressed at the government, which we take from the Auditor General's report of 1998, we also call for 'more transparent and democratic' aid management as an overall safeguard against aid misuse.

Such decisions, we know, rest first and foremost on mutual cooperation between the government and donor community and it would be counterproductive to merely point fingers at both parties. We appreciate recent steps taken by the government in addressing the issues at hand, which include the introduction of the Foreign Aid Policy in 1999, the MTEF and the PRSP itself, which for the first time attempts to build poverty reduction activities into macroeconomic planning.

We acclaim the more in-depth poverty analysis of the PRSP, including identification of social exclusion as a core hindrance in past poverty reduction efforts. But there is still a long way to go. We caution against an overly optimistic outlook in view of past plan achievements, the current mentality of politicians, a poorly-functioning bureaucracy and the likely absence of required amounts of private investment on which PRSP outcomes heavily depend.

Poor rates of GDP growth have impeded Nepal's efforts at poverty reduction. Since the purpose of liberalisation is to speed up growth, we hope this should clarify where in the debate we are starting from. Next, we quote the government's own analysis (as it appears in the PRSP) that 'the liberal economic policies of the 1990s, though able to maintain macroeconomic stability and achieve growth in the non-agricultural sectors, especially in urban areas, was less effective in the agricultural sector and in reducing rural poverty' (p67).

We add to this our own analysis, which is that liberalisation in Nepal has not been accompanied by 'clear mechanisms whereby the poor can gain access to the market mechanism and secure its benefits'. We provide the example of the government's decision to cut agricultural subsidies in the late 1990s (a decision which, by the way, hinged on a multilateral loan conditionality), which we consider not to have been very well thought out in view of the realities of poor rural producers. In hindsight, it appears our hunch was correct since the government reinstated some proportions of the subsidies in subsequent budgets.

Finally, we acknowledge that liberalisation is here to stay. However, based on Nepal's experience so far, we caution that 'redistribution of the benefits of high growth among poor people does not occur automatically, and must be proactively initiated by the government'. Further, specific, micro-level programs targeted at poor people must accompany liberalisation processes to avoid increasing economic inequality, as is also spelled out in the PRSP.

We do state that projects and programs implemented by non-governmental organisations in focusing on basic needs such as health and income, coming in the form of grants and by definition targeted at specific groups within the community and going out of Kathmandu to villages in rural areas, in aggregate, appear to support poverty reduction objectives.

However, we also point out the need for much better coordination and the need to address the misuse of resources. We go on to recommend the establishment of a separate institution for this purpose. Later, in assessing Nepal's PRSP, we take NGO participation, which was part of broader consultation process initiated by the government during PRSP formulation for the first time ever, and equally the participation of local government, the private sector, political parties, academia, and, most importantly, poor people themselves, as something positive, in the interests of drawing up a plan that more people consider themselves to be a part of and which they will help implement when the time comes.

One of PRSP's core strategies is to implement and manage programs in coordination with local government and NGOs. We think this is a wise decision, not for any ideological but for very practical reasons, particularly in implementing the 'targeted programs' of the PRSP in remote and out-lying areas of Nepal where government capabilities are constrained.

Bhattarai could well have criticised us for not having gone into more depth on these issues, or expressed his disagreement with some of our arguments. Instead, he has implied they were not stated at all. We cannot help wondering if in his haste to write a 'politically-not-so-correct' review article, he skimmed but did not actually read through the entire book?

Laxman Acharya is with the Citizens' Poverty Watch Forum and Shizu Upadhya works for ActionAid Nepal.