Negotiations stall for lack of meeting preconditions

  • development policy credit
Delay in passing Bank and Financial Institution Act and anti-money laundering regulations hampers negotiations

Oct 2, 2016-Negotiations between Nepal and the World Bank (WB) on the third phase of Development Policy Credit (DPC) worth $100 million (Rs10.73 billion) were supposed to begin three months ago. But, it has yet to start, largely due to failure on the part of Nepal to fulfil two preconditions.

The DPC is the interest free credit which the WB provides to the government as budgetary support. The government can use it in the areas of need. 

Government and WB officials said that delay in passing the Bank and Financial Institution Act (Bafia) from Parliament and anti-money laundering regulation by the government has hampered the negotiations.

Nepal has already received $130 million ($30 million and $100 million respectively) in the first and second phase. 

The objective of DPC3 is to support the medium-term reform programme for the financial sector initiated by Nepal to reduce the vulnerability of the banking sector and increase its transparency, according to the WB. 

Rajiv Upadhya, senior external affairs officer at World Bank-Nepal office, 

told the Post that the delay in passing the bill on Bafia and anti-money laundering regulation has hampered the negotiation process, as they are part of the “prior actions” that Nepal is supposed to complete.

Other two conditions regarding legal reforms were endorsement of the bills on Nepal Rastra Bank Act and Deposit and Credit Guarantee Fund, which have been completed. 

Likewise, the requirement to hike paid up capital, aligning the operating hours of central bank’s banking department with the operating hours of SWIFT, implementing online transfers of funds between Nepal Rastra Bank (NRB) branches and government’s endorsement of Nepal Bank Limited’s Strategic Divestiture Plan were among the other conditions. 

As per the WB document, the WB board was originally supposed to decide on whether to provide the credit by June 2016 after completion of the negotiation.

According to Upadhya, the WB was working on to send a negotiating team with the assumption that Bafia bill would be passed after it was sent to Parliament by the Parliamentary Finance Committee in June. It was also believed that the anti-money laundering regulation would also be passed by the Cabinet at the earliest, according to him. 

The Cabinet had also formed a negotiating team, according to Narayan Dhakal, under-secretary at the Ministry of Finance. 

The WB’s DPC series began in Nepal in 2011 when a financial sector crisis nearly unfolded in Nepal amid some financial institutions landing in trouble due to large-scale embezzlement by the promoters and directors. 

Withdrawals of deposits from smaller financial institutions and severe liquidity constraints across the banking sector exposed the vulnerabilities of the financial system and required urgent intervention by the NRB. 

According to WB, Nepal asked the WB together with the International Monetary Fund to provide technical and financial assistance to contain the unfolding crisis and to provide longer-term support for institutional and regulatory changes that would contribute over time to a more robust system. 

Then two sides held dialogue prompting the WB to provide DPC worth $30 million on June 25, 2013 for the first time which was followed by the post-disaster second DPC worth $100 million on June 29, 2015.  

Published: 02-10-2016 08:16

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