The World Bank Group (WBG) has been a significant partner in Nepal's development, offering financial aid, technical expertise, and fostering donor coordination. Over the past decade, WBG's partnership with Nepal has led to notable achievements, but it has also highlighted the challenges of engaging in complex governance and post-disaster contexts. A recent evaluation by the Independent Evaluation Group (IEG) of the WBG’s country programs in Nepal during fiscal years 2014-23, assesses the effectiveness of the WBG’s approach to navigating these challenges. The findings of the report offer valuable lessons for future support to Nepal and other countries with complex governance challenges. 

Focus areas, challenges, and achievements 

The WBG’s strategies in Nepal consistently prioritized job creation, support for the private sector, infrastructure development, promotion of social inclusion, and improving social services and governance. While these strategies aligned with Nepal’s development needs, the program faced challenges in disbursing funds and implementing projects. These challenges were due in large part to high turnover among, and limited capacity of, local partners, as well as difficulties in navigating complex governance and political issues associated with the country’s transition to federalism. 

Despite these challenges, the Bank increased its financing over the past decade, expanded its focus, and adapted to changing circumstances. This included fast and large responses to the 2015 earthquake and the 2020-2021 COVID-19 pandemic. These responses yielded significant successes. 

The Bank Group also achieved notable results in road construction and hydropower development, and finance and energy reforms, among others. Its achievements were particularly evident in areas free from political contention and coinciding with elite interests, or during periods of national solidarity after disasters. They were also aided when Bank Group interventions could build on the foundations of existing governmental programs.  

Yet not all Bank efforts met with similar success. Reforms in politically sensitive issues, such as federalism, civil service reform, and regulatory reforms related to jobs, competitiveness, and business enabling reforms were challenging. The WBG did not always effectively consider the country’s capacity and political economy challenges. 

Lessons for Future Engagement 

The report’s evaluation of the Bank’s approach to navigating these challenges offers several lessons for its future engagement with Nepal and other countries in similar institutional and governance contexts. 

Building capacity and coalitions for change 

The WBG actively collaborated with other donors in various development areas. For example, it was the primary actor in improving the investment climate and creating jobs. The WBG provided the most funding in these areas and had a significant influence. It was also an active and engaged partner on supporting federalism, private sector development, disaster and climate resilience, and infrastructure and skills development.  

The Bank played a critical role in aligning donor views around major issues, such as support for federalism. Heads of major donor agencies highly valued its coordination, leadership, and knowledge. 

Beyond the donor community, WBG can use its knowledge and convening power to encourage a broader range of Nepalese actors’ ownership and coalition building around reform areas. The WBG could also help sustain this ownership throughout the period of implementation. Fostering such broader coalitions for change among government counterparts, other stakeholders, and donors can help overcome several implementation and coordination challenges in programs.  

Navigating Political Economy and Institutional Challenges 

One of the most critical lessons from the World Bank's engagement in Nepal is the importance of understanding and addressing political economy challenges early on. Nepal's transition to a federal system, marked by the passage of a federal constitution in 2015, has been a politically challenging process. The Bank did not prepare a strategy to support Nepal’s transition to federalism and there was a delay between Nepal’s passage of a federal constitution in 2015 and the World Bank’s mobilization of staff and resources to support it. This affected the Bank’s support during the early years of federalism. 

Building institutions in post-conflict countries is usually slow, and it is especially challenging when there is internal opposition to reforms, or lack of political buy-in. The Bank’s Systematic Country Diagnostic (SCDs) and other studies diagnosed these challenges well. The diagnostics pointed to political and inter-ministerial rivalries, resistance to decentralizing powers from Kathmandu, reform resistance, vested interests in ministries and business groups, and weak public sector capacities. Yet Bank operations did not always fully consider and reflect these diagnostics in their design and implementation. The Bank’s program became more complex even as many projects could not absorb the funds, resolve procurement issues, or implement effectively amidst intergovernmental coordination challenges and frequent personnel changes.  

Aligning project financing with the client's capacity and prioritizing political economy issues during project selection, design, and implementation is, therefore, important. This includes improving the capacity of institutions, engaging sub-nationally, enhancing citizen engagement, and fostering greater ownership and coalition-building among Nepalese stakeholders.  

Technical support, results monitoring, and learning 

The Bank’s development policy operations (DPOs) sometimes suffered from the absence of complementary support. Nepal government policy does not allow for borrowing for technical assistance in support of policy implementation, and trust funds and partners did not cover the shortfall in implementation support. 

Technical assistance can help provide the necessary expertise, resources, and impetus to implement complex reforms and projects. For instance, reforms in the electricity and financial sector supported by DPOs benefited from complementary implementation support. These reforms achieved better results than some other DPO-supported policies that did not have such support.  

At the same time, robust and candid monitoring and reporting of results is critical for understanding what challenges projects are encountering during implementation. The Bank's systems for tracking results had some gaps as they did not always help in understanding implementation challenges. Robust monitoring and reporting offer opportunities for learning to project teams. They allow teams to get timely feedback on the challenges that projects encounter during implementation. This early feedback allows for timely adjustments to programs and early restructuring of projects, to adapt to changing circumstances and needs.  

Conclusion 

The WBG's engagement in Nepal has led to significant progress but also faced numerous challenges. The WBG was most effective when it offered flexible responses, coordinated with development partners, focused on output-based disbursements, and generated strong political buy-in for reforms. On the other hand, it was least effective on politically sensitive issues, when reforms were contested, or there was opposition to it from various interest groups. By addressing political economy issues, aligning financing with capacity, fostering donor collaboration, leveraging knowledge, supporting federalism and governance reforms, and continuing to adapt to changing circumstances, the WBG can enhance its impact and support Nepal's development more effectively.