NEPAL DEVELOPMENT UPDATE Investing in People to Close the Human Capital Gap June 6, 2019 Standard Disclaimer: This volume is a product of the staff of the The World Bank does not guarantee the International Bank for Reconstruction and accuracy of the data included in this work. Development/The World Bank. The findings, The boundaries colors, denominations, and interpretations, and conclusions expressed in other information shown on any map in this this paper do not necessarily reflect the view of work do not imply any judgement on the part the Executive Directors of The World Bank or of The World Bank concerning the legal status the governments they represent. of any territory or the endorsement or acceptance of such boundries. Copyright Statement: The material in this publication is copyrighted. 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For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470 http://www.copyright.com/ Photo Credits: Cover Photo © Rajendra Malla/World Bank All other photos in report © Narendra Shrestha/World Bank Acknowledgments The Nepal Development Update is produced twice Kathryn Andrews; Mohan Aryal; Jyoti Pandey; a year to report on key economic developments Anastasiya Denisova; Phillippe Leite; Soyesh over the preceding months, placing them in a Lakhey contributed to the Special Focus section longer-term and global perspective; and to examine under the guidance of Cristian Aedo, Gail (in the Special Focus section) topics of particular Richardson, and Stefano Paternostro. Christian policy significance. The Update is intended for a Eigen-Zucchi and Sabin Shresthra provided wide audience including policy makers, business extremely useful comments. Oversight in preparing leaders, the community of analysts and the report was provided by Mona Prasad under professionals engaged in economic debate, and the the overall guidance of Manuela Francisco, Faris general public. Hadad-Zervos, and Idah Pswarayi-Riddihough. Richa Bhattarai managed media relations and This Update was produced by the World Bank dissemination. Diane Stamm edited the document. Macroeconomics Trade and Investment (MTI) Sunita Kumari Yadav managed the publication team for Nepal consisting of Kene Ezemenari and process. Nayan Krishna Joshi. Tekabe Belay, Aline Coudouel, Shwetlena Sabarwal; Manav Bhattarai; Kari L. The cut-off date for data included in this report Hurt; Jasmine Rajbhandary; Zelalem Debebe; was May 15, 2019. i Abbreviations BFI Banks and Financial Institutions CAD Current Account Deficit CBS Central Bureau of Statistics CCD Credit to Core Capital Plus Deposit DOC Department of Customs DoFE Department of Foreign Employment DRM Disaster Risk Management ECD Early Childhood Development ECED Early Childhood Education and Development EPI Expanded Program on Immunization FCGO Financial Comptroller General Office FDI Foreign Direct Investment GDP Gross Domestic Product GoN Government of Nepal HCI Human Capital Index IRC Interest Rate Corridor MOAD Ministry of Agriculture and Livestock Development BMTEF Medium-Term Expenditure Framework MTI Macroeconomics Trade and Investment MW Megawatt NDU Nepal Development Update NEPSE Nepal Stock Exchange NRB Nepal Rastra Bank, the central bank of Nepal NTIS Nepal Trade Integration Strategy PPE Pre-Primary Education SEZ Special Economic Zone SLF Standing Liquidity Facility y/y year-on-year ii Table of Contents Acknowledgments.............................................................................................i Abbreviations....................................................................................................ii Executive Summary...........................................................................................1 A. Recent Economic Developments................................................................17 B. Outlook, Risks and Challenges...................................................................29 C. Special Focus – Investing in People to Close the Human Capital Gap for Higher and Sustained Inclusive Growth....................................................33 C.1. Measuring Nepal’s Human Development Outcomes – the Human Capital Index.......36 C.2. Nepal’s human capital index ranks relatively well against that of other countries.........39 C.3. For Nepal to realize its full human capital potential, renewed efforts are needed along three fronts: reducing inequity, improving service quality, and minimizing vulnerabilities........................................................................................................................42 References........................................................................................................68 List of Tables: Table ES1 : Priority interventions to invest in people and scale-up human capital investments......................................................................................................14 Table 1 : Macroeconomic Projections of Selected Key Indicators................................31 Table 2 : Top 10 causes of death for adults age 15 to 49, by gender..............................40 Table 3 : Top 10 risk factors contributing to the cause of death of adults age 15 to 49, by gender.........................................................................................................40 Table 4 : Health outcomes and access to health services by caste................................46 Table 5 : Average government social sector spending by region, 2012–16.....................50 Table 6 : Key labor market indicators by age and gender..............................................53 Table 7 : Priority interventions to invest in people and scale-up human capital investments......................................................................................................65 List of Figures: Figure 1. Private investment is estimated to pick up in FY2019 while public investment contracts, and......................................................................................................18 Figure 2. … new post-earthquake housing reconstruction is tapering off........................18 Figure 3. Agriculture and services drove growth…...........................................................18 Figure 4. …as production of paddy, maize, and wheat crops reached historic highs......18 Figure 5. Inflation was kept low due to low food prices....................................................19 Figure 6. …and closely follows India’s inflation...............................................................19 Figure 7. Money supply growth picked up as private sector credit growth increased…..19 Figure 8. …and government deposits shrank....................................................................19 Figure 9. Credit growth remains high…...........................................................................20 Figure 10. … and deposit growth also increased................................................................20 Figure 11. Credit continued to be directed to working capital, overdraft, and real estate activities..............................................................................................................20 Figure 12. Exposure to the real estate sector continues to increase....................................20 Figure 13. The CCD ratio exceeded its regulatory limit in December 2018 for the first time since April 2012...........................................................................................22 Figure 14. …contributing to higher deposit and lending rates...........................................22 Figure 15. The inter-bank rate remained within the IRC corridor only in February and March 2019..........................................................................................................23 Figure 16. The NEPSE reached a three-year low................................................................23 Figure 17. Exports growth has recovered............................................................................24 Figure 18. …as exports to India and China increased........................................................24 Figure 19. Industrial and consumer goods drove export growth........................................24 Figure 20. …while, the growth rate of imports declined....................................................24 Figure 21. The growth of imports from India, China, and other countries contracted.....25 Figure 22. The import of industrial goods and transport equipment also contracted.......25 Figure 23. …and total oil imports increased.......................................................................25 Figure 24. Migrant outflows continue to decline................................................................26 Figure 25. …but remittances remain well above the five-year monthly average................26 Figure 26. The current account deficit widened as the trade deficit remains high............26 Figure 27. …but foreign exchange reserves remain comfortable ......................................26 Figure 28. Government revenue picked up due to significant growth in value addedtax, income tax, excise, and custom duties..............................................27 Figure 29. Government expenditure declined driven with contraction in capital expenditure contracted.......................................................................................27 Figure 30. Underspending of capital expenditure continues at the federal level...............28 Figure 31. ...and also at the provincial level.........................................................................28 Figure 32. Efforts are needed across sectors to scale-up quality investments in human capital.................................................................................................................34 Figure 33. Circumstances of birth can determine investments in a child’s education......35 Figure 34. Composition of indicators that make up Nepal’s Human Capital Index.........38 Figure 35. Nepal’s child and adult survival rates compare favorably with some middle- income countries................................................................................................39 Figure 36. The fraction of non-stunted children is low or, conversely, the stunting rate is high at 36 percent................................................................................................41 Figure 37. Stunting rates are decreasing over time..............................................................41 Figure 38. Nepal’s expected years of schooling is higher than the South Asia regional average................................................................................................................41 Figure 39. …but performance worsens with learning-adjusted years based on harmonized learning outcomes..........................................................................42 Figure 40. The gender gap for schooling, survival, and stunting is generally low in Nepal..................................................................................................................44 Figure 41. Institutional delivery and stunting rates in Nepal are lowest for the poorest households..........................................................................................................45 Figure 42. Pupil-teacher ratio by region, 2015/2016............................................................46 Figure 43. Stunting prevalence............................................................................................47 Figure 44. Poverty rate.........................................................................................................47 Figure 45. Adult literacy rates..............................................................................................47 Figure 46. General government health expenditure as a percentage of current health expenditure.........................................................................................................48 Figure 47. Government domestic spending on social sectors (percent of GDP)...............50 Figure 48. Key Interventions for the Early Years at Different Stages of development.......56 Figure 49. Social registries serve multiple programs and sectors in the world...................61 Figure 50. Nepal is vulnerable to shocks that can erase years of progress made in human development.......................................................................................................62 Figure 51. Adaptive social protection protects against destitution after a shock occurs....63 Figure 52. Percentage of households’ total health and medical expenditures as a share of non-food household consumption expenditures using different thresholds: Nepal (NLSS 2010/2011).....................................................................................63 List of Boxes: Box 1 : The HCI measures the human capital a child born today can expect to attain by age 18………………………….................................................................................37 Investing in People to Close the Human Capital Gap Nepal Development Update ............................................................................................................................................................................................................................................................................................................................................................ Executive Summary ............................................................................................................................................................................................................................................................................................................................................................ Recent Economic Developments Gross domestic product (GDP) growth in Inflation, which typically mirrors the trend in Nepal is estimated at 7.1 percent in FY2019, India, has remained subdued throughout FY2019 driven mainly by the service and agriculture due to low food prices and stood at 4.2 percent in sectors. The service sector is likely to grow by 7.5 March 2019. Growth in the money supply percent due to a boost in the retail, hotel, and exceeded the monetary policy target of 18 percent, restaurant subsectors, driven by an uptick in tourist driven largely by private sector credit which grew arrivals and remittance-fueled private consumption. by 22.5 percent (y/y) in March 2019. Most of the Agriculture is estimated to grow by 5 percent in credit is directed to working capital, overdraft, and FY2019, well above its 30-year average of 3.1 real estate, which together account for almost 80 percent, due to good monsoons, increased percent of total credit. Early in FY2019, Nepal commercialization, availability of fertilizers and Rastra Bank adopted macroprudential measures seeds, and improved irrigation facilities. Industrial that helped reduce lending to the real estate sector growth is also likely to be strong at 8.1 percent, and on overdraft facilities. Deposits grew by more well above its 30-year average of 5 percent, mainly than 20 percent in March 2019 but lagged credit due to improved power availability from increased growth. The growth in deposits was driven by the electricity generation. Private investment and provision allowing local governments to deposit consumption are likely to be the main contributors 50 percent of their fiscal transfers in local to growth on the demand side. However, public commercial banks. It was also supported by higher investment is projected to contract due to a individual deposits, underpinned by remittance slowdown in post-earthquake reconstruction and inflows. The higher levels of credit relative to delays in national pride projects like Melamchi deposits caused the credit to core capital plus water supply and Upper Tamakoshi hydroelectric. deposit ratio to breach the 80 percent regulatory limit in December 2018, for the first time since Average inflation remained low, despite an 2012. increase in the money supply by 18.7 percent. June 2019 World Bank Group 1 Investing in People to Close the Human Capital Gap Nepal Development Update Imports growth decelerated, but the trade typically picks up in the last quarter of the year, deficit remained high because of high imports the fiscal deficit is likely to remain lower than last relative to persistently low exports. The growth year at 3.4 percent of GDP in FY2019. in imports decelerated during FY2019 but remained high at 18 percent (y/y). Imports were Outlook primarily driven by industrial goods, oil, and GDP growth is projected to average 6.5 percent transport equipment, which were needed to over the medium term, driven by services and support the growth in the industrial and service underpinned by a steady inflow of remittances. sectors. In contrast, exports grew by only 7.5 New international job markets for Nepalese percent (y/y) in the first eight months of FY2019, migrants are opening up, while migrants are led by food and beverages and industrial supplies. increasingly using formal channels to remit money. The current account was supported by higher The continued inflow of remittances will support remittances which grew by 14.4 percent (y/y) in domestic trade and private consumption. In the first eight months of FY2019. This was addition, high tourist arrivals expected under the primarily because of increased use of formal Visit Nepal 2020 program, the completion of the channels to remit money, a depreciation of the second international airport, and the construction Nepalese rupee, and outmigration to destinations of big hotels will also support the service sector. like Japan and the Republic of Korea, where wages Assuming normal monsoons, agricultural growth is are higher. Foreign exchange reserves fell to expected to average 4.4 percent over the forecast US$9.6 billion in March 2019 as the higher external period supported by programs to promote deficit was partly financed by drawing down improved inputs, storage facilities, irrigation, and international reserves. However, reserves remain agribusiness value chains. In addition, recent comfortable at 7.9 months of imports. structural reforms will provide an impetus to private investment. The signing of the protocol to Continued underspending of the budget implement the Transit and Transport Agreement coupled with reforms to raise revenues are with China will enable Nepal to use China’s seaports likely to result in a lower fiscal deficit in and improve regional connectivity and transit. FY2019, compared with the previous year. Newly enacted laws including the Foreign Consolidated government revenues grew by 17.5 Investment and Technology Transfer Act, the percent (y/y) in the first eight months of FY2019. Public-Private Partnership and Investment Act, and This growth was led by tax revenues, especially, the the Special Economic Zone Act will help ease value-added tax (VAT), and customs, income, and restrictions on foreign investment and reduce excise taxes. The recent reforms by the government transaction costs. In addition, 13 Special Economic to increase tax revenues by removing VAT Zones are being constructed in various parts of exemptions, raising taxes on luxury items and the country. These efforts will further support high-earning households, and higher excise on growth. tobacco and vehicles supported growth in tax collection. In contrast, consolidated expenditures The trade deficit is expected to decline as increased marginally by 0.3 percent (y/y) in the imports growth slows and exports begin to first eight months of FY2019, and was primarily pick up. As the one-time spending on federalism- driven by recurrent spending. The limited number related infrastructure and post-earthquake of staff at the provincial and local levels along reconstruction taper down, the growth in imports with constraints on capacity led to weak execution will slow. A continued shift to investment-led of the budget at the subnational levels. The growth will bring with it some demand for related execution of the capital budget by the central imports that will translate to the trade deficit. Some government was also low because of a tapering off increase in exports, particularly of hydroelectricity, of reconstruction spending and further delays in is anticipated in the next few years that would help national pride projects. Although capital spending contain the trade deficit, and reduce the current June 2019 World Bank Group 2 Investing in People to Close the Human Capital Gap Nepal Development Update account deficit. Broader growth in overall exports and growth. Remittance inflows have supported will happen only in the longer term as structural household consumption, helping to reduce poverty. reforms start yielding results. Remittances as a It has also helped the economy to earn foreign share of GDP are expected to stabilize at 27 exchange for imports. The lower outflow of percent over the medium term. By FY2021, the migrants may continue and conditions in migrant- current account deficit is expected to moderate to receiving countries could deteriorate, with 5.5 percent of GDP, and international reserves are increasing geopolitical tensions in the Gulf region likely to cover around five months of imports. The and uncertain oil prices. These trends could put external gap will be financed primarily by long-term pressure on remittance inflows, especially if new borrowing and a drawdown of foreign exchange markets attract only a limited number of laborers reserves. There are negligible portfolio investments from Nepal. Lower credit to the economy that in the country, and despite some expected increase leads to lower growth would also reduce exports. in foreign direct investment, it will continue to This points to the need to reduce the heavy remain low. reliance on remittances as a source of foreign exchange and savings. Greater focus is needed on The fiscal deficit is projected to average incentivizing and diversifying exports. around 4 percent of GDP, over the medium term. Recent underspending has helped reduce Risks from climate-related natural disasters the fiscal deficit. In subsequent years, as the are also high and may impact Nepal’s growth provincial and local governments become fully trajectory, requiring early action to ensure that functional, the fiscal deficit is projected to increase, sources of growth are climate resilient to the rising to 5.1 percent of GDP in FY2021. The extent possible. Erratic monsoons can lead to government has set up a commission to review climate-related disasters such as drought, floods, and suggest measures to improve spending and landslides that undermine agricultural efficiency. Reforms to broaden the tax base will production, negatively impact infrastructure, and help increase revenues to 30 percent of GDP by reverse gains in poverty reduction. The Global FY2021. Non-tax revenues are also expected to Climate Risk Index ranks Nepal as the 11th most increase because of royalties from new hydropower affected country in the world in the last 20 years. projects. At the subnational levels, efforts are The vulnerability to climate change is further underway to establish the legal and institutional reinforced by the country’s first tornado that hit framework to support enhanced own-tax revenue two Terai districts in March 2019 and resulted in a collection. The fiscal deficit is likely to persist as loss of US$4.6 million worth of crops and livestock. the government proceeds with key reforms to To mitigate these risks, the implementation of the implement fiscal federalism and ease constraints to 2017 Disaster Risk Reduction and Management investment and finance. Public debt is projected to Act will be crucial at all three levels of government. increase to 32.7 percent of GDP by FY2021. Despite the increase, Nepal continues to remain at The implementation of federalism is expected low risk of debt distress. Debt sustainability stress to improve service delivery in the medium to tests show a vulnerability to growth shocks and longer term, but capacity challenges persist natural disasters and underscore the importance and need to be addressed immediately. These of implementing sound macroeconomic policies challenges could manifest themselves through the and structural reforms. under-execution of the provincial and local budgets, which could impact service delivery. Therefore, Risks and Challenges efforts are needed on two fronts: (a) the move of A sudden reduction in remittance inflows civil servants to the provincial and local level under could lower deposits, limiting the availability the Civil Servants Adjustment Ordinance, and (b) of loanable funds in the economy. This could capacity building of these staff. affect private investment and imports, consumption June 2019 World Bank Group 3 Investing in People to Close the Human Capital Gap Nepal Development Update Finally, an acceleration of and greater and movement up the value chain. Inability to consistency and coordination in reform scale-up production affected firm competitiveness. implementation, particularly those reforms Human capital also affects growth indirectly that boost investment in physical and human through its effect on the productivity of capital, capital, will be necessary to sustain growth. technological change, and innovation. Thus, Nepal needs infrastructure investments of around investments in both the future and current 10 to 15 percent of GDP annually for the next workforce, combined with policies to increase labor 10 years. To boost investments, the government productivity and encourage labor force participation, organized the Nepal Investment Summit in March matter for higher, sustained, and inclusive growth. 2019, which resulted in investment proposals worth about US$17.5 billion from both domestic Now is an opportune time for Nepal to and foreign investors. The success of these scale-up its investments in human capital investments will depend on the timely before the demographic dividend window implementation of investment-related legislations closes. According to the World Bank’s 2015/16 that meet good practices. It is equally important to Global Monitoring Report,1 Nepal is an early ensure the availability of skilled labor to meet the dividend country, defined to include countries needs of the private sector, complement where total fertility is below four births per woman. investments in infrastructure, and facilitate When a country finds itself with a working-age innovation. The Special Focus section of this population or labor force that is growing faster edition of the Nepal Development Update outlines than the population that depends on it (such as the key issues and reforms, to support scaled up children and the aged), it creates a window for investments in people and lay the foundation for higher economic growth because the economy increasing human capital and labor productivity. can potentially employ more people, savings grow and become a financing source for economic Special Focus – Investing in People to growth, and lower fertility rates result in healthier Close the Human Capital Gap for Higher women. When there are fewer economic pressures and Sustained Inclusive Growth and more resources to invest in children, GDP per capita increases due to a decreasing dependency Investing in people and building human rate. For the demographic transition to be capital are critical if Nepal is to accelerate its accompanied by significant improvements in per growth and rapidly reduce poverty. Human capita GDP, it is therefore essential to scale-up capital investments raise individual earnings investments in human capital to raise the potential, which in turn contributes to aggregate productivity of future generations and existing economic growth. For instance, one additional cohorts of youths and adults. year of schooling in Nepal can raise an individual’s earnings by 8 to 10 percent. Undernutrition reduces A child born in Nepal today will be only 49 learning potential and productivity and can reduce percent as productive when she grows up as GDP by as much as 11 percent. Investing in she could be if she enjoyed complete psychosocial stimulation during a child’s early years education and full health. This is based on the can raise his or her adult income by up to 25 estimate of Nepal’s Human Capital Index, percent. School deworming can have a large and developed by the World Bank’s Human Capital sustained impact on labor market outcomes in Project. Nepal’s GDP can be compared under two adulthood. Increases in life expectancy are scenarios, one in which the current status quo positively correlated with economic growth. continues and another in which a child gets full education and health. Under the scenario in which Investing in people is also critical for a child gets full education and health, Nepal’s GDP increasing Nepal’s competitiveness. Firms note could be as much as two times larger than the GDP that the lack of skills aligned to the needs of the under the status quo scenario. Achieving the full private sector is a key constraint to firm growth June 2019 World Bank Group 4 Investing in People to Close the Human Capital Gap Nepal Development Update education and health scenario will require a capital investment. Addressing these inequities is significant reduction in stunting beyond past critical to boosting human capital outcomes in progress that led to a reduction of stunting from Nepal and reducing the confounding effect of 57 percent in 2001 to 36 percent in 2016. At 36 disparities from different sources that often overlap percent, the stunting rate remains a public health and work together to keep households from concern. Similarly, significant improvements would realizing their full potential. These disparities are be needed for schooling outcomes. A child who observed almost systematically for all dimensions starts school at age four can expect to complete of the Human Capital Index and broader labor 11.7 years of school by her 18th birthday. However, market outcomes. Improved human capital if what children actually learn is factored in, outcomes will also require better quality of expected years of schooling drops from 11.7 years service and access to services (which often to 6.9 years. This means that, on average, around depends as well on the socioeconomic status of 4.8 years of schooling are lost due to poor quality. beneficiaries). Finally, measures to minimize the vulnerability to shocks are critical to ensure Attention to labor market effects, particularly acquired gains in human capital are sustained and for youth and women, will be an important further built upon. Given these three key factors, catalyst of investment in human capital. Labor to realize its full human capital potential Nepal will market outcomes and earnings can affect human have to address the following priorities. capital investment decisions, which in turn affect skills, productivity, and earnings. Increased Priority number 1: Reduce inequity across investments in the human capital of youth and gender, social, income, and geographic women is important given Nepal’s recent history groups and the interplay between poor labor market Gender parity has been achieved at the conditions, the prospects for youth, and social secondary education level and below (with unrest. Unemployment is highest among young male and female expected years of schooling people, who account for 48 percent of the labor at 11.5 years and 11.9 years, respectively), but force but make up 69 percent of those has not translated to labor force outcomes. The unemployed. Among all age groups, women’s differences in labor force outcomes between males labor force participation (on average 26 percent) is and females can lead to gender-based differences much lower than men’s participation rate in the ability to build on and further develop skills, (54 percent). Also, the share of young women who which impacts earnings, which in turn influence neither work nor study has increased in rural areas. investments in human capital. For every 100 men Cross-country surveys suggest that only 41 percent in the working-age population, there are 125 of working Nepalese youth are satisfied with their women. Yet, for every 100 employed men there employment status. This contrasts with youth in are only 59 employed women. Gender disparities Bangladesh, Cambodia, and Vietnam (where over also exist among the unemployed, and women earn 80 percent are satisfied). on average 70 percent of what men earn. Many of For Nepal to realize its full human capital these differences are driven by prevailing social potential, renewed efforts are needed to norms. But part of the reason could also be due reduce inequity, improve service quality, and to the gender disparities that emerge at the tertiary education levels in the fields of science and minimize vulnerabilities technology. There could also be gender differences Inequity, or disparity across social, income, linked to the quality in services for males and and geographic dimensions, limits access to females. Policies and programs have enabled quality services and increases the vulnerability women to participate more in decision making, to shocks that can erode years of human with greater access to assets and resources. But 1 World Bank 2016b. June 2019 World Bank Group 5 Investing in People to Close the Human Capital Gap Nepal Development Update women continue to experience greater vulnerability them in the formula used to estimate needs and and risks to certain aspects of their human allocate resources and in strengthening the capacity development outcomes. of the poorest areas to manage and deliver quality services. Income and social disparities are correlated with human capital outcomes. For example, To address the challenge of inequity in access more than 86 percent of children aged three to to services and resulting outcomes, it will be five in the richest quintile achieve composite early necessary to (i) eliminate barriers linked to low childhood development milestones, while only income and social status that lead to exclusion of about 60 percent of children in the poorest the poor and vulnerable, and (ii) increase the quintile do. Girls and children from disadvantaged availability of services in poorer or underserved groups have disproportionately low access to areas. schooling and high repetition and dropout rates, indicating systematic and limited exposure to (i) Eliminate barriers for the poor in enabling learning conditions. This is particularly accessing human capital services problematic because the returns to targeted early Income is an essential determinant of investment are highest for disadvantaged children. consumption and living conditions. In addition, Decomposition analysis has revealed that by 2016, addressing the income constraints of the poor wealth explained 72 percent of the differences in can also represent barriers to accessing stunting (up from 61 percent in 1996), while services. This is a particular challenge in the health mother’s health accounted for 12 percent of the and education sectors. In FY2015/16, households’ disparities. Similarly, stunting rates among the poor out-of-pocket payments represented the main are about 2.9 times higher than the rate among the source of funding for the country’s health system, rich. Disparities are also observed along social at 55 percent of all health care spending. This is lines; for example, Dalit children have almost high relative to that of countries like Thailand double the rate of mortality (63 percent) as the (12 percent), Vietnam (43 percent), and Sri Lanka national average (49 percent). The above inequities (38 percent), which exhibit better health outcomes. can have adverse effects on labor market outcomes, In education, low access to quality means that there which in turn lead to unequal access to social and is a need to focus on the demand side or human capital. Personal networks are an essential interventions that incentivize the poor, vulnerable, element for youth and adults who seek employment and excluded to increase their access and use of and the quality of these networks are often linked services. to levels of income or social status. Demand-side programs have been effective in Geographic disparities are also correlated with reducing inequalities in access to education human capital outcomes. For example, stunting and health in Nepal. Per child financing and rates are high in Province 6 (55 percent) and low scholarship programs such as the scholarship in Provinces 3 and 4 (29 percent). These patterns program for students from poor and are also correlated with regional differences in underdeveloped communities played a crucial role malnutrition and food insecurity, and in educational in helping bring children from marginalized groups attainment. Important variations in poverty across to schools. According to the 2014 public geographic areas explain part of the geographic expenditure tracking survey, stipends have been disparity in human capital outcomes. Remoteness, given to about 98 percent of Dalit students.2 density, and accessibility are also factors that can Such interventions have also been effective in explain some of the regional differences. The tertiary education. Similarly, in health, programs recent adoption of federalism could exacerbate such as AamaSurakshyaKaryakram (ASK) were regional disparities, unless care is taken to address instrumental in expanding access to maternal 2 World Bank 2014. June 2019 World Bank Group 6 Investing in People to Close the Human Capital Gap Nepal Development Update health services, by providing care for women to Equally important to raising human capital deliver in health institutions and paying service outcomes are interventions to raise labor providers for the services rendered. productivity and employability, particularly for today’s youth, who will become tomorrow’s In addition, social protection programs can be income-earning adults and parents. It is used to address income barriers and incentivize essential to ensure that investments in human households to invest more in human capital capital support the development of skills that and related services. Such programs are increase employability and respond to the needs implemented in over 150 countries and have of the private sector. Furthermore, when parents demonstrated their impact on nutrition, health, and youth today see the returns in terms of education, empowerment, labor market outcomes, earnings, it reinforces the value of investing in and productivity. They typically combine some health and education for young children. Equally form of transfers with information or incentives to important to quality job creation is ensuring there promote behavioral changes, such as feeding or is increased knowledge of and access to these jobs. hygiene practices, early childhood stimulation, It is also essential to improve productivity in investments in education, changes in employment, sectors where the poor are focused (such as and investments in productive assets. In Nepal, a agriculture), to ensure the energy and knowledge national-level policy would help to achieve broader of returnee migrants are harnessed and invested poverty reduction and human capital development in employment-generating growth. It requires (or health and education) goals; clarify the roles of adequate and complementary investments in both the three level of government in the design and physical and human capital since both are necessary delivery of programs; outline institutional complements for increasing productivity. mechanisms to ensure coordination; and provide guidance for standards linked to improved (ii) Increase availability of services in poor coordination, delivery systems, and responsiveness or underserved areas to shocks. The policy or strategy could build on Increasing the availability of services for poor the National Social Protection Framework draft and underserved areas needs investments to prepared by the National Planning Commission expand the supply of those services. Estimates and would require further engagement with various of overall average spending across the 753 localities line ministries and subnational governments. and 7 provinces suggest that more local resources and their efficient use are critical to improve A social registry would contribute to improving outcomes and reduce regional disparities. In the targeting of programs to those most in FY2018, fiscal transfers amounting to 8.3 percent need and to coordinating interventions. A of GDP were made to both local governments social registry could be used by programs to and provinces. Given the estimated historical identify poor and vulnerable households and spending levels for education, health, social connect them to multiple programs. Nepal has protection, and nutrition (a combined estimate of been working on establishing a database of poor 7.5 percent of GDP), clearly the current levels of households, though this has yet to be linked to transfers are insufficient to meet local needs. With benefits or programs. A social registry could help federalism, it will also be important to assess local direct vulnerable households to specific needs and costs for service delivery and to use this interventions – grants, cash transfers, public works to adjust the basis for fiscal transfers to provinces programs, scholarships, and various health schemes and localities. It will be important to refine the including health insurance aimed at protecting the basis for fiscal transfers to be more effectively poor and vulnerable, as well as economic inclusion aligned to needs, local costs, and capacity; develop programs. A social registry would also help connect the revenue capacity of local governments; and households with employment and income-earning ensure local governments are efficiently applying opportunities. June 2019 World Bank Group 7 Investing in People to Close the Human Capital Gap Nepal Development Update the resources received to improve the quality of Improved learning also requires better service delivery, including the effective targeting of alignment of teachers and student assessment resources to the poor and vulnerable. For instance, systems with the goal of learning for all. The a recent study shows that head teachers and prevailing institutional structure gives school teachers are worried that scholarships targeted at administrators little leverage over centrally hired poor and marginalized families may be particularly teachers, and the accountability of the school vulnerable under federalism.3 system to households has been low.7 There are no effective accountability mechanisms in the system Priority number 2: Improve the quality of that focus adequately on teaching-learning education, health, nutrition, labor, and processes in the classrooms. This results often in social protection services from early classroom instruction that occurs at a level that childhood to adulthood most students cannot follow. Finally, improved data can help identify which schools need more Improved quality and relevance of education resources, which teachers need more training, and requires more investments in early childhood which students need more instruction. Nepal has education, and early grade reading. As noted, taken positive steps toward better measurement of an average of around 4.8 years of schooling up to learning. To this end, several rounds of the the secondary level is lost due to poor quality. National Assessment of Student Achievement Among young children, literacy and numeracy are (NASA) have been completed. However, there is severely lagging. Fewer than 20 percent of children limited use of these data in guiding policy or in grades 3, 5, and, 8 can master competencies in practice. For instance, learning data can be useful problem solving and reasoning.4 Even more in helping policy makers decide which schools concerning, 19 percent of third graders could not need additional resources and which teachers need read a single word of Nepali, while less than 13 additional training. Similarly, these data can help percent were able to read with fluency and teachers see which areas of instruction and which comprehension. This is a huge problem since the students need greater attention. Currently, even ability to read by age 10 lays the foundation for though learning data are being produced, they future learning.5 Deficits in foundational skills are could be much better used to improve policy and primarily driven by two factors. First, children are practice. One way to ensure this is to devote often not ready for school. Robust early childhood resources (including effort) to timely distribution education and development (ECED) helps of understandable results to key stakeholders. children acquire key foundational cognitive skills that will launch them on higher learning trajectories, Improving the quality of health services needs making them more adaptable, resilient, and investment to ensure availability of essential productive. Currently, about 16 percent of and priority drugs, adequate training of health four-year-old children do not have access to, or have workers, and proper facilities and equipment. not been enrolled in, ECED/pre-primary Quality of health services is largely constrained by education.6 Second, teachers are not trained to the availability of critical inputs such as essential teach to the level of the child and/or provide drugs and adequately trained health workers. For additional support to those lagging behind. example, the National Health Facility survey found Programs that address these issues can help that only 3 percent of the health facilities providing improve both learning outcomes and expected outpatient care for children have all the infection years of schooling in Nepal. prevention items needed to control infection among sick children. Only 55 percent of health 3 Mohan et al., forthcoming. 4 Ministry of Education, “Nepal National Assessment of Student Achievement,” various years. 5 World Bank 2017. 6 Ministry of Education, Flash Reports, various years. 7 Ajwad 2007. June 2019 World Bank Group 8 Investing in People to Close the Human Capital Gap Nepal Development Update facilities have proper expanded program on including disasters or shocks, would also contribute immunization (EPI) guidelines, 20 percent of staff to increasing their impacts and efficiency. Finally, is trained in EPI, 3 percent have a needle destroyer, most programs would have greater impacts on and less than 8 percent have all the training and investments in human capital if the income equipment needed for EPI services. Moreover, support they provided was accompanied with there is a shortage of qualified workers, worker information, incentives, or nudges to adopt absenteeism, stock-outs of essential drugs, and behaviors that promote greater investments in the limited physical infrastructure (such as health nutrition, health, and education of children, and in facility buildings with water and electricity and the productive and earning capacity of adults. equipment). These supply-side factors are exacerbated by the high out-of-pocket costs that Quality labor market interventions are also further limit the quality of services most essential to ensure human capital investments households can access. effectively support inclusive growth. Currently, such interventions are relatively limited in Nepal, Addressing malnutrition requires improving especially for the poor and vulnerable. Improving people’s behavior toward adopting good the situation of youths and adults, especially nutrition practices and improving the quality adolescent girls and women, will require addressing of nutrition services. Currently, only 42 percent the challenge of low-productivity employment of women age 15 to 45 with a child born in the (which is an area where efforts both on labor past five years took iron tables for at least 180 supply and demand sides are needed) through days.8 Only 36 percent of children 6 to 23 months comprehensive programs. In addition to translating met the criteria of a minimum acceptable diet. The increased human capital into growth, these policies National Micronutrient Status Survey 2016 also will also motivate households to invest in the shows that multiple micronutrient supplementation human capital of their children by showing that besides iron/folic acid is needed to combat anemia. there are potentially large returns to this investment. As per the survey, anemia in pregnant women is high at 27 percent. The same survey shows that To raise the quality of service, it is necessary zinc deficiency in children 6 to 59 months is as high to (i) invest early in human capital and early as 21 percent, and only 7 percent of these children childhood development, adopting a multisectoral with diarrhea had received zinc supplements. approach, (ii) ensure the availability of essential drugs and adequately trained health workers; The quality of social protection services needs (iii) invest in the human capital and skills of the to be improved to support higher investments existing generations of youths and adults; in human capital. Despite significant spending, (iv) adopt transparent performance management access to social protection is uneven. Also, despite measures to incentivize service providers, and covering around 35 percent of the population, (v) strengthen coordination across government social assistance schemes are not targeted explicitly and programs and ensure policy continuity. toward the monetarily poor. Instead, they rely on targeting based on ethnic and social categories. The (i) Invest early in nutrition and early benefits provided by some programs are also too childhood development, adopting a small to effectively remove the income barrier most multisectoral approach of the poor face when trying to access services. A multisectoral approach to early childhood Improved targeting could promote greater development has been demonstrated to be efficiency in reaching the poor and also help release most effective in enabling children to reach more resources for the poor. The flexibility of their full potential. This includes interventions programs to respond to changing circumstances, not only from health and education but also from 8 National Demographic Health Survey 2016. June 2019 World Bank Group 9 Investing in People to Close the Human Capital Gap Nepal Development Update sectors such as agriculture, and water and sanitation, A cross-sectoral and coordinated approach which also impact health, nutrition, and educational could include integrating nutrition services attainment. Income levels and stability, living with other early childhood interventions at the conditions, consumption patterns, and protection local government levels to maximize from the impact of shocks are also essential to administrative efficiency and create a protective development in the first years of life. Also, family environment for children to achieve their fullest planning interventions help reduce unwanted potential. For the integration and improved pregnancies and optimize age at first pregnancy services delivery across human capital dimensions, and reduce the risk of children being born small. a national identification system is essential. Its two Quality reproductive health services to mothers instruments – the civil identification system and including micronutrient supplementation have also the national population registry – ensure been proven to reduce the risk of low-birth-weight individuals are uniquely identified in the system. and small-for-gestational-age children. It is essential Interoperability between the identification to expand cost-effective interventions, specifically, systems and program information systems coverage of adequate intake of iron/folic acid to (health, education, Social Security Allowances, pregnant women. It also calls for supplementation health insurance, scholarships, and so forth) can of other micronutrients to mothers, given the then foster integration and boost efficiency. evidence that anemia is not only due to iron-deficiency. The government should ensure (ii) Invest in the supply of health services effective coverage of counseling of pregnant Invest to improve the availability of essential women and mothers of infant and young children drugs and trained health workers. Ensuring for good infant and young child feeding and availability of the supply of essential drugs and hygiene practices. trained health workers is key to improving the quality of health services. Evidence shows that The evidence also shows that a rapid increase even when households have access to health in household assets and income, and increased services, use of services do not always translate to educational attainment, particularly maternal improved outcomes mainly due to poor-quality education, help improve nutrition outcomes. health services. For instance, access to institutional Impressive improvements in access to health care delivery failed to improve maternal mortality services including prenatal, neonatal, and postnatal because of weak capacity of health facilities to care through rapid expansion of health extension manage complications. workers as well as financial support, have helped reduce stunting. Improved sanitation, particularly a (iii) Invest in the human capital and skills of reduction in open defecation, has also helped reduce existing generations of youths and adults undernutrition. Finally, social protection programs, While investments in future generations have such as the child grant (one of the five Social proved to be the most beneficial, attention Security Allowances, provided to all children under should also be paid to increasing the human five in selected districts and to all Dalit children capital of existing generations with skills under five elsewhere) can contribute to reducing deficits. Programs that promote increased malnutrition by promoting good feeding practices productivity among youths and adults come in and protecting the income of the poor. To ensure various shapes, but those that are most effective at high-quality nutrition services, it will be important helping the poor and vulnerable improve their to adopt an integrated approach to service delivery conditions typically combine a series of areas to that improves coordination across agencies to address the multiple barriers faced in labor markets. support well-rounded diets including improved Packages typically combine some of the following: infant and young child feeding practices. technical skills training, basic literacy, on-the-job June 2019 World Bank Group 10 Investing in People to Close the Human Capital Gap Nepal Development Update experience, development of agency and There is extensive global experience on a wide self-efficacy (socio-emotional skills), preparation variety of health provider payment systems of business plans, coaching for microentrepreneurs that incentivize providers. In addition to or self-employed, grants or loans, and access to payment systems that reward performance, the financial services. local government can adopt a social accountability system to manage the performance of providers. The newly announced Prime Minister’s Local governments that are responsible for the Employment program is establishing provision of basic health services are better Employment Service Centers in every local positioned to hold health service providers government and boosting the employability accountable. Local governments are more likely to of youths. These Employment Service Centers be responsive to the demand of the community. have the potential to address inequities in access This can be done through drawing on the to information related to employment experience of social accountability systems that opportunities. Partnerships with the private sector were piloted in the health sector, to improve to both identify skills areas that are needed and accountability of health service providers. Linked provide the skills training both directly and to this is the need to ensure there are sufficient on-the-job need to be explored. With a large and well-equipped facilities, and this will require number of youths entering the labor market every having adequate levels of resources that are year, it is also essential that the private sector efficiently deployed. generates new and better jobs. Government policies can be used to incentivize the private (v) Strengthen coordination across the sector to develop labor-intensive jobs. government and programs and ensure policy continuity (iv) Adopt transparent performance management measures to incentivize Promote coordination within the government service providers and among different levels of government. Promote strong coordination within the federal Transparent performance management and government and among the federal and local incentives could be used to improve the governments and with development partners for response of service providers at the facility effective investment in human capital. Such and local government levels. For example, coordination will ensure complementarity of performance-based awards (to teachers, schools, investments, enable synergies among the various or local governments) could be linked to interventions exploited, and most importantly, student learning and time-on-task. The allow for convergence of interventions in Government of Nepal, through its School Sector geographic areas and beneficiaries. Ethiopia is one Development Program, is initiating processes example where the coordination within the and systems to track time teachers spend government and between government and teaching and improve existing policies around development partners around the government-led teacher deployment. The school grants social protection program harnessed synergies. management system could be significantly The program brought more than 10 development improved by basing grant allocations on a robust partners to establish a unified stream of technical funding formula, introducing a performance- assistance in support of the program’s based component, and building a system to verify implementation. The program is credited with compliance on funds eligibility and use. Similarly, lifting more than 1.4 million people out of poverty. health providers could be paid based on improving access to or quality of services either at the Ensure policy continuity over successive individual provider level or the health facility level. governments. Improving human capital outcomes June 2019 World Bank Group 11 Investing in People to Close the Human Capital Gap Nepal Development Update requires sustained investments over a long period by programs. Efficiency and effectiveness could of time, a time horizon usually not well aligned with be improved by improving targeting across the political cycle. Often countries’ efforts fail to programs that aim at supporting the poor, by produce the desired human capital outcomes establishing a social registry containing because of a lack of sustained effort over the information on households, and used by all social political cycle. Key to sustaining efforts over programs focused on the poor to identify their successive governments is to build a national beneficiaries. A shared social registry would ensure consensus on key national human capital priorities. improved targeting, more efficient delivery of services, and greater coordination. Interoperability Harness the devolution of many basic service between the identification systems and program delivery functions to local-level governments information systems (health, education, Social to strengthen the coordination of programs Security Allowances, health insurance, scholarships, and delivery systems. For most human and so forth) can then foster integration and boost development outcomes – nutrition, education, efficiency. health, skills, and employment, among others – multisectoral interventions are the most effective. Priority number 3: Promote households’ These combine elements focused on the supply and services’ resilience to shocks side, ensuring services are available and at the quality required, with elements focused on the For a large proportion of the population, demand side, ensuring households have the exposure to shocks can erase years of gains in resources and incentives to use the services. They human capital investment. Covariate shocks, also combine complementary interventions, which which affect numerous households simultaneously, together can effectively move the needle for key may be natural (drought, floods, earthquakes, outcomes. The fact that many basic services will landslides, fires), economic (price increases, a be managed locally provides an opportunity to decline in remittances), or political. These shocks break sectoral silos and integrate interventions. In can have long-term effects on human capital, social protection, the government could assess the especially for children, through their effects on possibility of increased coordination across nutrition, education, and assets. Almost half the multiple programs and the opportunity to set households in Nepal reported experiencing a objectives for programs that go beyond income shock in FY2014/15 and FY2015/16, and about support and include targets in terms of promoting 30 percent reported two or more shocks during the the use of health or education services or adopting same period. Shocks affect poorer households particular behaviors (such as good hygiene, or more than richer households, thereby reinforcing good cooking or feeding practices, which are inequalities. essential to nutrition outcomes). For example, one such approach could be to establish national and The lack of poverty focus of Nepal’s existing local health assemblies, to coordinate decision social protection programs is compounded by making and service delivery. the inflexibility of services in times of disasters. The 2015 earthquake and the recent Finally, develop well-coordinated and integrated floods have demonstrated that while the government delivery systems to improve impact and was able to mobilize significant external aid, the efficiency. For the integration and improved existing programs could not be mobilized to services delivery across human capital dimensions, provide disaster relief. International experience has a national identification system is essential. It shown that regular, adequate, and well targeted comprises the national identification system and social protection programs can help build the civil registration system, which ensure community and household resilience to shocks, and individuals have a unique and robust identity that adaptive social protection programs can provide ensures their uniqueness and their authentication timely and efficient assistance to protect the well-being of households when shocks occur. The June 2019 World Bank Group 12 Investing in People to Close the Human Capital Gap Nepal Development Update “adaptive” approach to social protection requires management and social protection at all three integration with disaster risk management and levels of government. climate change adaptation strategies. (ii) Ensure facilities and infrastructure are When societies face disasters, fragility, or resilient to shocks conflict, education and health are often the Building resilience in school and health systems areas that suffer most. This in turn prevents involves ensuring facilities are resilient to shocks, entire generations from achieving their potential. putting in place measures to ensure continuous To prevent this, it is important to put in place provision of services, ensuring disaster-resilient measures that ensure continuous provision of materials are used in construction, developing educational opportunities and health services as disaster management plans, securing safe early as possible during a crisis. One way to do this environments, and building the capacity of health is to ensure school and health facility construction workers, school teachers, and local educational is done with disaster-resilient materials. This is officers. especially important for Nepal, which is vulnerable to earthquakes and climate change. (i) Establish adaptive social protection programming as part of the disaster risk management strategy Recent institutional developments position the government to efficiently use social protection as one of its instruments to respond to shocks and disasters. The 2017 Disaster Risk Reduction and Management Act includes a provision to target response to vulnerable groups. It also provides for the establishment of a National Disaster Risk Reduction Management Authority to coordinate all disaster management actions. In addition, the Ministry of Home Affairs is now responsible for administering the largest social protection program (the Social Security Allowances Program), on top of its ongoing responsibility for planning and implementing all disaster-risk-management-related activities. This provides a unique window of opportunity to establish “adaptive” social protection programs as an integral part of the government’s disaster risk management strategy. This would require activities that: (a) establish mechanisms to use a social registry for the identification of households vulnerable to shocks that would need temporary support when shocks occur, (b) implement adaptive programs that build resilience and that can be scaled up for rapid response, (c) develop financing mechanisms to ensure timely response, and (d) establish institutional links between disaster risk June 2019 World Bank Group 13 Investing in People to Close the Human Capital Gap Nepal Development Update Improving Table Competitiveness ES1: Priority and interventions to Integration with and invest in people Global Markets scale-up human capital investments Reform Areas Selected Key Recommendations and Priority Interventions Priority Number 1: Reduce inequity across gender, social, income, and geographic groups Eliminate barriers for the poor • Across all services design programs that incentivize investments in human in accessing human capital capital (education and skills, health, nutrition) by households, while reducing services out-of-pocket costs for the poor • Health. Increase public financing to ensure the availability of a standardized and basic health care service package • Reorient the current health insurance system to provide effective coverage of the poor and other vulnerable groups, starting with a systematic means of defining and identifying the poor and vulnerable, in coordination with the social protection system • Social protection. Design or expand social protection programs that incentivize investments in education, health, nutrition for poor households while reducing their out-of-pocket costs • Link design to information or incentives that promote behavioral changes that improve access to services and human capital outcomes • Establish a social registry that includes information on poor households, so that beneficiaries can be effectively identified and targeted Increase the availability of Support local government capacity to address geographic disparities services in poor and • Increase resources allocated to the local level to ensure sufficient and underserved geographic areas well-equipped facilities for provision of basic health, education, nutrition, labor, and social protection services by local governments • Assess local needs and revenue capacity to refine the basis for fiscal transfers • Provide capacity support to local governments to improve planning, budgeting, implementation, and monitoring of programs • Support local governments to develop own-revenue capacity • Define and establish a minimum standard of social protection Priority number 2: Improve the quality of education, health, nutrition, labor, and social protection services from early childhood to adulthood Invest early in human capital ECD/Education and early childhood • Increase the quality and coverage of early childhood education (ECD) development, adopting a • Build capacity of local governments to monitor the quality of early ECD programs multisectoral approach • Expand early reading programs that help ensure all children can read by age 10 • Evaluate the child grant to strengthen household incentives for investing in human capital. Nutrition • Scale-up cost-effective essential nutrition interventions including iron/folic acid intake for pregnant women and promote the same for non-pregnant women/adolescent girls • Consider prenatal supplementation of other micronutrients for pregnant women and mothers of infant and young children • Increase counseling of pregnant women and mothers of infant and young children for good infant and young child feeding and hygiene practices • Integrate nutrition services with other interventions of early childhood development at the local government levels • Generate evidence of and scale-up effective nutrition-sensitive interventions June 2019 World Bank Group 14 Investing in People to Close the Human Capital Gap Nepal Development Update Invest in the systems Health necessary to deliver quality • Develop a national- and local-level Health Assembly as a means of coordination health services across different levels of the health system and to resolve problems • Invest in systems needed by all tiers of government for service delivery and informed decision making such as quality assurance systems for supplying drugs, qualification systems for public and private education and training, logistics management and information systems and framework agreements for centralized procurement for local purchasing • Develop testing and dissemination of tools for providing and measuring service quality such as simple decision charts, checklists, and citizen accountability and redressal mechanisms • Promote innovations to address shortages and motivate performance, particularly in harder-to-reach areas, such as strengthening community health workers, telemedicine, drone deliveries, and performance bonuses. Invest in the human capital Labor market programs and skills of existing • Strengthen programs that address the multiple constraints faced by the poor generations of youths and and vulnerable in labor markets, especially for youths and women, including skills training, basic literacy, on-the-job experience, development of adults socio-emotional skills, business development, coaching for the self-employed, grants or loans, and/or access to financial services • Implement the Prime Minister’s employment program, which is establishing an Employment Service Center in every local government and boosting youth employability Adopt transparent Education performance management • Update curriculums and develop an exam system that develops conceptual measures to incentivize understanding and cognitive skills, instead of rote learning • Implement a performance-based approach that links teacher rewards to service providers student learning • Adopt performance-based approaches at the school facility and local government levels, to promote quality and equity improvements through the School Sector Development Plan • Strengthen the formula for the school grants management system by introducing a performance-based component, and building a system to verify compliance on funds eligibility and utilization • Implement capacity building and conditional grants to local governments tied to open data or information on conditional grants released to local governments and schools, to strengthen accountability. Health • Draw on past experience with social accountability systems piloted in Nepal’s health sector to improve the accountability of health service providers • Clarify services to be provided where and service standards of the facility • Help subnational governments align with agreed national priorities with development of dashboards and monitoring tools for delivery of specified services • Scale-up and improve performance-based contracting of national hospitals using block grants received as a potential model for Provinces. June 2019 World Bank Group 15 Investing in People to Close the Human Capital Gap Nepal Development Update Strengthen administrative efficiency in health, education, nutrition, and social protection • Build local capacity to plan, budget, and implement in the key sectors • Strength administrative and other data to improve monitoring and evaluation to inform the design of performance-based incentive mechanisms. Strengthen coordination Across all services across government and • Use conditional grants to strengthen national standards and ensure consistency programs and ensure policy across regions • Develop simple monitoring tools to assess progress and provide feedback to continuity implementation • Build a national consensus on key national human capital priorities to ensure policy continuity over successive governments Social Protection • Develop a national identification system comprising the national population registry and the civil registry system, to ensure individuals can be uniquely identified • Ensure interoperability between the national identification systems and program information systems (health, education, social security, health insurance, scholarships, etc.) • Develop a social registry to be used by programs in identifying the poor and vulnerable • Increase coordination across programs and set objectives that go beyond income support to include targets to promote use of health or education services or particular behaviors • Establish a social registry to be used by all programs to improve targeting. • Develop a national social protection strategy, building on the National Social Protection Framework, that clarifies the roles of the three levels of government. Priority Number 3: Promote households’ and services’ resilience to shocks Establish adaptive social Social protection protection programming as • Establish mechanisms for using the social registry to identify vulnerable part of the disaster risk households that need temporary support when shocks occur • Build adaptive programs that can be scaled up for rapid response management strategy • Develop financing mechanisms to ensure a timely response • Establish institutional links between disaster risk management and social protection at all three levels of governments. • Invest in disease surveillance and disaster preparedness in case of mass casualty events. Ensure facilities and Health, education, social protection infrastructure are resilient to • Ensure disaster-resilient materials are used in constructing service facilities shocks • Adopt measures to ensure continuous provision of education, health and social protection services and labor market interventions, as early as possible during a crisis • Build resilience by developing disaster management plans, securing safe environments, and building the capacity of health workers, school teachers, local educational officers, local social protection staff, and all local government workers. June 2019 World Bank Group 16 Investing in People to Close the Human Capital Gap Nepal Development Update ............................................................................................................................................................................................................................................................................................................................................................ A. Recent Economic Developments ............................................................................................................................................................................................................................................................................................................................................................ Real Sector Real gross domestic product (GDP) is supply of electricity9 and political stability. Public estimated to grow by 7.1 percent in FY2019, investment, however, contracted, reducing growth driven mainly by the service and agriculture by 0.5 percentage points, as post-earthquake sectors. This will be the third year in a row that housing reconstruction slowed10 (Figure 2) and the country has grown by more than 6 percent. national pride projects like Melamchi water supply Output expansion in the current year was driven and Upper Tamakoshi hydroelectric got delayed. by good monsoons, a surge in private sector investment, and increased consumption fueled by On the supply side, growth was driven by the remittances. service sector (a 3.9-percentage-point contribution to GDP growth) and the On the demand side, private investment and agriculture sector (a 1.6-percentage-point consumption were the main drivers of growth contribution) (Figure 3). The service sector grew (Figure 1). Both contributed 4.9 percentage points by 7.5 percent (y/y) in FY2019, boosted by higher each to overall GDP growth in FY2019. Private remittance inflows and an uptick in tourist arrivals. consumption grew on the back of higher Remittance inflows supported the expansion of remittances (discussed below), while private retail trade (10.9 percent, y/y) and real estate investment expanded because of the regular (6.1 percent, y/y) whereas higher tourist arrivals 9 The 22 megawatts from the Bagmati Hydropower project have been added to the national grid, and the 60 megawatts from the Upper Trishuli 3A will be added in FY2019. 10 There has also been a growing concern that post-earthquake housing reconstruction is contributing to the increase in household debt as households increasingly borrow from informal sources (family, relatives, neighbors, and cooperatives) at high interest rates to construct their houses. Increased household borrowing from informal sources is due to insufficient government housing grants (NPR 300,000) and the inability of households to borrow from formal sources (banks and financial institutions) (see United Nations [2018] for details). In addition, there is a significant variation in the cost of housing reconstruction across earthquake-affected districts. This is why even after four years, only around 23.8 percent of earthquake survivors in the Kathmandu Valley have completed reconstruction works compared with 63.1 percent for all the other 11 earthquake-affected districts. June 2019 World Bank Group 17 Investing in People to Close the Human Capital Gap Nepal Development Update boosted the transport (5.9 percent, y/y) and hotels facilities helped raise production of rice paddy and restaurant (8.3 percent, y/y) subsectors. The by 8.9 percent to the historic high of 5.6 million agriculture sector expanded by 5 percent (y/y) tons in FY2019 (Figure 4). In addition, maize in FY2019, well above its 30-year average of 3.1 and wheat production picked up by 3.5 percent percent. Good monsoons together with and 4.5 percent, respectively. These three crops increased commercialization of agriculture, the together constitute more than 30 percent of availability of fertilizers and seeds, and irrigation agricultural GDP. Figure 1. Private investment is estimated to pick up Figure 2. … new post-earthquake housing in FY2019 while public investment contracts, as reconstruction is tapering off. Sources: CBS and World Bank staff calculations Sources: MoUD and World Bank staff calculations. Note: Figures for FY2019 are preliminary estimates. Figure 3. Agriculture and services drove growth… Figure 4. …as production of paddy, maize, and wheat crops reached historic highs. Sources: Central Bureau of Statistics and World Bank staff Source: MoAD and World Bank staff calculations. calculations. Inflation Low food prices helped keep inflation in Owing to higher housing and utility prices, check throughout FY2019 (Figure 5). In the nonfood price inflation averaged 5.8 percent (y/y), first eight months of FY2019, inflation averaged and contributed to more than one-third of 4.1 percent (y/y). This rate was lower than the headline inflation. Food price inflation remained revised monetary policy target of 5.5 percent. low at 2 percent (y/y), on average, over the first June 2019 World Bank Group 18 Investing in People to Close the Human Capital Gap Nepal Development Update eight months of FY2019, as a result of strong the peg to the Indian rupee has helped keep growth in agriculture. These trends coupled with inflation subdued in FY2019 (Figure 6). Figure 5. Inflation was kept low due to low food Figure 6. …and closely follows India’s inflation prices… Sources: NRB and World Bank staff calculations. Sources: NRB, Ministry of Statistics and Program Implementation of India, and World Bank staff calculations. Monetary Policy and the Financial Sector Money supply (M2) growth was slightly above growth, contributing 18.3 percentage points. Net the FY2019 monetary policy target (Figure 7). claims on the government contributed another M2 grew by 18.7 percent (y/y) in March 2019 and 5.5 percentage points as government deposits remained above the FY2019 target of 18 percent. declined (Figure 8). Private sector credit was the key driver of M2 Figure 7. Money supply growth picked up as Figure 8. …and government deposits shrank private sector credit growth increased… Sources: NRB and World Bank staff calculations. Sources: NRB and World Bank staff calculations. Private sector credit growth remained high in estate (including residential), which together FY2019. It reduced marginally to 22.5 percent account for almost 80 percent of the total credit (y/y) in March 2019, after peaking at 25.2 percent of banks and financial institutions (BFIs, Figure 11). in October 2018 (Figure 9). Most of the credit is While credit growth remains high, the slowdown directed to working capital, overdraft, and real from October last year is driven largely by lower June 2019 World Bank Group 19 Investing in People to Close the Human Capital Gap Nepal Development Update contribution to growth of lending to agriculture and tourism) to meet the FY2019 monetary policy (8.3 percent), services (7.1 percent) and households requirement of extending at least 25 percent of (consumption loans11, 45.8 percent). This was total credit to these sectors. In addition, the because of the adoption of macroprudential Commercial Agriculture and Livestock Credit measures by the Nepal Rastra Bank (NRB). Program of the Government of Nepal has also Nevertheless, more lending continues to be contributed to the surge in agricultural growth. channeled to priority sectors12 (agriculture, energy, Figure 9. Credit growth remains high… Figure 10. … and deposit growth also increased Sources: NRB and World Bank staff calculations. Sources: NRB and World Bank staff calculations. Figure 11. Credit continued to be directed to Figure 12. Exposure to the real estate sector working capital, overdraft, and real estate activities continues to increase Sources: NRB and World Bank staff calculations. Sources: NRB and World Bank staff calculations. 11 The “Others” sector (Figure 9) accounts for 17.3 percent of total credit in March 2019 and includes personal consumption related to hire purchase and others. The NRB does not disaggregate the “others” sector. 12 According to a directive issued by the NRB on March 21, 2019, BFIs that failed to meet the minimum requirements of 25 percent will be penalized on the deficit amount by applying the maximum lending rate of that institution. June 2019 World Bank Group 20 Investing in People to Close the Human Capital Gap Nepal Development Update To reduce lending to the real estate sector and (Figure 14). To reduce interest rates, in October on overdraft facilities, the NRB adopted 2018, the Nepal Bankers’ Association, the umbrella macroprudential measures in July 2018. The organization of all commercial banks in Nepal, maximum limit for overdrafts was set to NPR made an informal gentlemen’s agreement to cap 5 million, from the previous level of NPR 7.5 interest rates on fixed deposits at 10 percent for million, which brought down the share of institutional depositors and 10.5 percent for overdrafts in total credit to 16.3 percent in March individuals14, and cap interest rates on savings at 2019 (compared with 17.7 percent in April 2018). 7 percent and call deposits15 at 5 to 7 percent. The NRB also reduced the loan-to-value threshold This was done to enable banks to charge lower from 50 percent to 40 percent for real estate loans interest rates on loans. The cap on individual fixed and from 60 percent to 50 percent for residential deposits however did not hold. The agreement was loans disbursed in the Kathmandu Valley. As a broken by banks that were newly entering the result, the share of BFI credit to real estate market in Nepal to help them attract depositors, (including residential) decreased from 15.4 percent especially from the established banks. in December 2016 to 13.3 percent in March 2019, both below the regulatory requirement of 25 Higher deposit rates led to higher lending percent. Despite these macroprudential actions, rates, despite measures introduced by NRB to as of March 2019, nearly 64 percent of the loans keep interest rates in check. These included the were backed by real estate collateral, which is a following: First, NRB issued a directive requiring source of vulnerability for the financial sector, commercial banks to bring the interest rate spread should there be a real-estate bubble (Figure 11). from the existing 5 percent to 4.75 percent by To mitigate this risk, close monitoring of housing mid-April 2019 and to 4.5 percent by mid-July prices will be needed which requires developing a 2019. Second, commercial banks were required to real-estate property price index. The FY2019 exclude the return on assets (0.75 percent) in monetary policy made provisions for a survey to calculating the base rate16. Despite these corrective construct a real-estate (housing) price index but steps, industrialists (especially of the eastern region progress has been slow. in Nepal) started protesting and demanding that interest rates on commercial loans be reduced to Deposits grew by more than 20 percent in 9 percent. The NRB introduced further changes March 2019 but lagged credit growth through their FY2019 mid-term review of (Figure 10). The growth in deposits was driven by monetary policy to reduce the interest rate spread. the provision allowing local governments to These include: (i) revising the calculation of deposit 50 percent of their fiscal transfers in local interest rate spreads to include pure loans and commercial banks. It was also supported by higher exclude investments made on government individual deposits, underpinned by remittance securities; (ii) fixing the maximum interest rate on inflows.13 loans disbursed under the general refinancing facility at 8 percent (from the previous 9 percent) Commercial banks kept deposit rates high to and loans for the export refinancing facility at 3 attract more funds. During FY2019, the average percent (from the previous 4.5 percent); and deposit rate remained above 6.3 percent and (iii) fixing the premium on the base rate for loans peaked at 6.7 percent in January and February 2019 disbursed to priority sectors. 13 To attract individual deposits, some BFIs have been offering prizes including gold and silver coins on deposits, accepting fixed deposits with a maturity of less than three months, and allowing depositors to withdraw fixed deposits before maturity. The NRB issued two circulars, one on May 9, 2019, and one on May 12, 2019, barring banks and financial institutions from engaging in such activities. 14 https://thehimalayantimes.com/business/bankers-to-bring-down-deposit-rate/ 15 As per the NRB, the interest rate on call deposits cannot be greater than the interest rate on savings deposits. 16 Under the new provision, the base rate is calculated as follows: cost of fund + mandatory cash reserve ratio + statutory liquidity ratio + operating cost. Commercial banks are not allowed to lend below the base rate. June 2019 World Bank Group 21 Investing in People to Close the Human Capital Gap Nepal Development Update The higher levels of credit relative to deposits subsidies) from credit when computing the CCD caused the credit to core capital plus deposit ratio; and (ii) allowing BFIs to include loans (CCD) ratio to breach the 80 percent obtained through the interbank window as regulatory limit in December 2018, for the first deposits when calculating the CCD ratio. Although time since 2012 (Figure 13). In response, the BFIs with CCD ratios that exceed the 80 percent NRB took measures to release more loanable regulatory limit are penalized on the excess loan funds. These include (i) allowing BFIs to deduct amount at the bank rate (6.5 percent), BFIs still concessional loans17 (that were floated under the have an incentive to breach the limit if their central bank’s working procedures on interest lending rates exceed the bank rate. Figure 13. The CCD ratio exceeded its regulatory Figure 14. …contributing to higher deposit and limit in December 2018 for the first time since lending rates April 2012... Sources: NRB and World Bank staff calculations. Sources: NRB and World Bank staff calculations. Monetary policy remained accommodative to FY2019) and this has put pressure on the support the government’s growth targets. For exchange rate peg. most transactions (68 percent during the first eight months of FY2019), the interbank rate was below Financial inclusion in Nepal has improved the lower bound of the interest rate corridor significantly but remains below the regional (IRC), indicating that the open market operations level. According to the World Bank Global of the NRB were not able to “mop up” excess Financial Index database, the percent of Nepalese liquidity from the market. The interbank interest adults (more than 15 years old) with a bank rate remained within the IRC only during February account increased from 25 percent to 45 percent and March 2019 (Figure 15). This accommodative between 2011 and 2017. However, this is still lower monetary policy has increased the interest rate gap than the average of 70 percent for the South Asia with India (where the interbank rate was mostly region. The World Bank Global Financial Index above 6.0 percent in the first eight months of database also shows that 35 percent of Nepalese 17 The concessional loans are provided to the following loan categories as per the budget of FY2019: loans to youth with higher education to start their own business; project loans for returnee migrants; project loans for women; business loans to the Dalit community; education loans to economically deprived, marginalized, and targeted communities for pursuing higher studies and for technical and vocational education; loans for the construction of private housing of earthquake victims; and commercial agriculture and livestock loans. 18 The IRC was introduced in the monetary policy of FY2017. The upper and lower bounds of the IRC are defined by the standing liquidity facility (SLF) rate and the two-week deposit collection rate. Initially, the SLF was fixed at 7 percent, while the deposit collection rate was set to a weighted average interbank rate of the market prior to two working days minus 10 basis points. The monetary policy of FY2018, however, set the deposit collection rate to 3 percent while keeping the SLF at the previous rate of 7 percent. June 2019 World Bank Group 22 Investing in People to Close the Human Capital Gap Nepal Development Update adults without a bank account in 2017 attributed simplification of the paperwork required for the distance to financial institutions as the primary opening new bank accounts. In particular, reason for not having an account. The NRB has individuals who are likely to have financial been focusing on reducing distance barriers by transactions under NPR 100,000 per year are not encouraging the BFIs to open branches in rural required to fill in the know-your-customer form areas. As a result, BFIs now have branches in when opening a new account. In addition, BFIs 713 out of the 753 local governments. In April are required to deposit NPR 100 as an incentive 2019, the NRB introduced more measures to for new customers. expand financial inclusion. This included a Figure 15. The interbank rate remained within the Figure 16. The NEPSE reached a three-year low IRC corridor only in February and March 2019 Sources: NRB and World Bank staff calculations. Sources: NRB, NEPSE, and World Bank staff calculations. Stock Market Despite strong growth, the Nepal Stock also undertook measures to stem the decline in the Exchange (NEPSE) index contracted by 18.3 NEPSE which included the following: (i) increasing percent in February 2019 to a three-year low. the loan-to-value ratio to 65 percent from 50 The index fell to 1,155 points in March 2019 percent (valuation being done as the lower of (Figure 16) on account of: (i) ongoing glitches in either the average 180 days price or the prevailing the newly introduced online system which has market price of the stock); (ii) reducing the weight hampered trading to some degree; (ii) diversion of assigned to the risk for such a loan to 100 percent funds to fixed deposits because of higher returns from 150 percent; (iii) increasing the loan ceiling, on them; and (iii) the decline in overdrafts. In as a share of core capital, to 40 percent from 25 addition, in April 2019, the government introduced percent; and (iv) provision of margin loans through a policy requiring all investors in the secondary stockbrokers. However, secondary market investors market to have a permanent account number which did not respond favorably to these measures. could lower the lending against shares.19 The NRB 19 Effective April 14, 2019, the NEPSE made a permanent account number compulsory for traders conducting daily transactions above NPR 500,000 but optional for those conducting daily transaction below NPR 500,000. The requirement has created disincentives for traders with daily transactions above NPR 500,000 due to their concerns about transparency in reporting income and the implications for taxes they may have to pay. June 2019 World Bank Group 23 Investing in People to Close the Human Capital Gap Nepal Development Update External Sector The growth in exports recovered during measures in FY2019: a cash incentive scheme for FY2019, driven by industrial supplies and exporters; measures to improve the quality of food and beverages (Figures 17 and 19). The products identified in the Nepal Trade Integration average growth in exports during the first eight Strategy (NTIS), and lower non-tariff barriers months of FY2019 was 7.5 percent (y/y) with with many countries including India. However, increased sales to India and China (Figure 18). these efforts have not had much impact as labor Industrial supplies, and food and beverages costs have increased making the NTIS listed constitute more than three-fourths of total goods like footwear expensive relative to similar exports. While exports of food and beverages goods from China. In addition, production have recovered since the trade blockade in 2015, volumes are low in Nepal and promotional industrial goods exports have not. To incentivize activities on NTIS listed goods are limited. exports, the government introduced the following Figure 17. Exports growth have recovered…. Figure 18. …as exports to India and China increased Sources: NRB, DoC, and World Bank staff calculations. Sources: NRB, DoC, and World Bank staff calculations. Figure 19. Industrial supplies and food and Figure 20. However, the growth rate of imports beverages drove export growth declined Sources: DoC and World Bank staff calculations. Sources: NRB, DoC, and World Bank staff calculations. June 2019 World Bank Group 24 Investing in People to Close the Human Capital Gap Nepal Development Update The growth rate of imports declined in FY2019 Figure 21. The growth of imports from India, but remained strong (Figure 20). During the first China, and other countries contracted eight months of FY2019, the average growth of imports was 18 percent (y/y), which was lower than the 24 percent seen in FY2018. Nearly 78 percent of the imports are from India, and China (Figure 21). There was a deceleration in the growth of imports of industrial goods and oil products as reconstruction efforts tapered off and public investments were delayed (Figures 22 and 23). However, imports of transport equipment grew by 57 percent (y/y) in the first eight months of FY2019 and were driven by the purchase of two Airbuses by Nepal Airlines Corporation, to Sources: NRB, DoC, and World Bank staff calculations cater to international tourists traveling to Nepal. Figure 22. The growth of import of industrial Figure 23. Total oil imports growth also declined goods slowed but that of transport equipment marginally increased Sources: DoC and World Bank staff calculations. Sources: DoC and World Bank staff calculations. Despite the lower outflow of migrant workers, resume outmigration to Malaysia, the Government remittance growth remained strong in FY2019. of Nepal has not lifted the ban, as some agencies During the first eight months of FY2019, an continue to overcharge. To provide increased average of 18,915 Nepalese workers per month employment opportunities at home, the departed for employment opportunities abroad government introduced the Commercial (Figure 24). This is the lowest monthly average Agriculture and Livestock Credit Program which outflow of migrant workers since October 2009. provides subsidized loans (at 5 percent interest Among the many reasons for this decline is the rate) to its citizens. Despite the decline in the ban imposed by the Nepalese government on number of outmigrants, remittances grew by 14.4 migration to Malaysia, which is the top destination percent during the first eight months of FY2019. for Nepalese migrants. The ban was imposed This was because of increased use of formal because outsourcing agencies were overcharging channels to remit money, a depreciation of the Malaysia-bound workers for visa processing and Nepalese rupee and outmigration to destinations health and security screening. Although a like Japan and South Korea where wages are higher memorandum of understanding was signed (Figure 25). between the two countries in October 2018 to June 2019 World Bank Group 25 Investing in People to Close the Human Capital Gap Nepal Development Update Figure 24. Migrant outflows continue to decline… Figure 25. …but remittances remain well above the five-year monthly average Sources: DoFE and World Bank staff calculations. Sources: NRB and World Bank staff calculations. Although remittances were higher, the current trade deficit. Foreign exchange reserves fell to account deficit remained elevated because of US$9.6 billion in March 2019 as the higher a persistent trade deficit. The current account external deficit was partly financed by drawing deficit increased to US$1.7 billion in the first eight down international reserves. However, reserves months of FY2019, up from US$1.5 billion in the remain comfortable and cover 7.9 months of corresponding period of FY2018. The increase in imports (Figure 27). remittances was insufficient to cover the large Figure 26. The current account deficit widened as Figure 27. …but foreign exchange reserves the trade deficit remains high... remain comfortable Sources: NRB and World Bank staff calculations. Sources: NRB and World Bank staff calculations. Fiscal Sector Nepal recently transitioned to a federal and water and sanitation) has been assigned to the structure. Under the 2015 Constitution, Nepal local governments. Since most of revenue raising transitioned to a federal structure with the creation powers are still with the central government, the of 7 provinces and 753 local governments, in provincial and local governments rely on fiscal addition to the central government. Under this transfers from the center. In addition, local new arrangement, the provision of basic services governments and provinces also receive revenues (including education, health, local transportation, in line with the provisions outlined in the June 2019 World Bank Group 26 Investing in People to Close the Human Capital Gap Nepal Development Update Intergovernmental Fiscal Arrangement Act 2017. FY2019. This growth was led by tax revenues, Tax revenues are now shared among the central, especially, VAT, customs, income and excise taxes, provincial, and local governments in the ratio of all of which grew by more than 20 percent 70:15:15 while royalties are shared in the ratio of (Figure 28). Various tax enhancement measures 50:25:25. Taxes on property, and rental income, were implemented this year which included: and vehicle registration fees are collected and (i) rationalization of VAT related refunds and retained by local governments. FY2018 was the exemptions, (ii) wider tax base for property taxes, first year of making fiscal transfers and during (iii) an increased tax on tobacco and vehicles FY2019, local governments established their (iv) revision of import reference prices based on Consolidated Funds as mandated in the Local market signals, and (v) higher taxes on luxury items Government Operations Act and adopted their and high-earning households. In addition, the local budget legislation governing the growth in total nontax revenues was led by 13 implementation of their budget. percent service charges levied on telecommunication services such as internet and voice call. However, Under the new federal arrangements, own-revenue generation at the local and provincial consolidated government revenues grew by levels is likely to face constraints in the short to 17.5 percent (y/y) in the first eight months of medium term from limited capacity. Figure 28. Government revenue picked up due to Figure 29. Government expenditure declined significant growth in value added, income, and driven by the contraction in capital expenditure excise taxes, and in custom duties Sources: NRB and World Bank staff calculations. Sources: FCGO and World Bank staff calculations. The growth in consolidated expenditures was contrast, contracted in the first eight months of however negligible as capital spending by the FY2019 as reconstruction efforts tapered off and central government remained weak and national pride projects were delayed further. The subnational governments were unable to capital spending of provincial and local governments spend much because of capacity constraints was also low. and lack of staff. Consolidated spending increased marginally by 0.3 percent (y/y) in the The underspending of the budget in the first eight months of FY2019 (Figure 29). provinces has been large. In the first eight Recurrent expenditure grew by 1.3 percent (y/y) as months of FY2019, only 7.1 percent of the capital delays in the devolution of staff to provincial and budget, 16 percent of the recurrent budget, and local levels remained constrained. In addition, the 10.8 percent of the total budget of provincial implementation capacity at the subnational levels governments was spent (Figure 31). This was is also limited, which impacted overall spending at primarily because of a lack of staff in the the subnational levels. Capital expenditure, in Provinces. In terms of spending, Province 3 had June 2019 World Bank Group 27 Investing in People to Close the Human Capital Gap Nepal Development Update the highest recurrent spending; and 5, had the the provincial and local levels has also exacerbated highest capital spending (as a share of the budget). the situation. In the first eight months of FY2019, Provincial governments have recently adopted only 28.8 percent of the capital budget was spent, measures to strengthen the Medium Term 48.3 percent of the recurrent budget was spent, Expenditure Framework as well as public investment, and 43 percent of the total budget was spent public-private partnerships, and procurement. These (Figure 30). Although underspending was expected measures are likely to help improve spending to improve with the timely presentation of the efficiency over the medium term. However, there budget and political stability, this has not been the will be an ongoing need for capacity building. case. In contrast, presenting an overambitious budget that is revised down during the midterm As in previous years, capital spending is likely review has become the new norm. For example, to pick up in the last quarter of the fiscal year. the Ministry of Finance in its FY2019 midterm Procurement processes and the tendency to delay budget has revised its expenditure estimate to initiating contracts to the latter part of the fiscal 91.7 percent of the original FY2019 budget. year, have led to underspending over the years. In addition, limited progress in transferring staff to Figure 30. Underspending of capital expenditure Figure 31…and at the provincial level continues at the federal level… Sources: FCGO and World Bank staff calculations. Sources: FCGO and World Bank staff calculations. With strong revenue performance and a percent. This calls for comprehensive efforts marginal increase in spending, the fiscal aimed at building capacity at the provincial and deficit is likely to narrow in FY2019. Although local levels to help achieve efficiency and capital spending typically picks up in the last effectiveness in spending and to raise higher local quarter of the year, the fiscal deficit is likely to revenues. remain lower than last year and is estimated at 3.4 June 2019 World Bank Group 28 Investing in People to Close the Human Capital Gap Nepal Development Update ............................................................................................................................................................................................................................................................................................................................................................ B. Outlook, Risks and Challenges ............................................................................................................................................................................................................................................................................................................................................................ Outlook GDP growth is projected to average 6.5 percent On the demand side, growth will continue to over the medium term. On the supply side, be driven by private investment and growth will be driven by services, underpinned by consumption. Private consumption will be steady remittance inflows as new international job supported by remittance inflows. The gradual markets open (for example, Japan), and existing transition from a consumption to an investment- markets resume (especially in Malaysia and South based growth model will continue in the long Korea, Qatar, Saudi Arabia). In addition, high term20 with an emphasis on engaging the private tourist arrivals expected under the Visit Nepal sector and raising the low levels of foreign direct 2020 program, the completion of the second investment.21 The establishment of the Nepal international airport, and the construction of big Infrastructure Bank in March 2019,22 signing of hotels will also support the service sector. the Protocol on Implementing Agreement on Assuming a normal monsoon with no climate- Transit and Transport with China on April 28, related disasters such as drought, floods, and 2019, and the enactment of three key laws in 2019 landslides, agricultural growth is projected to (the Foreign Investment and Technology Transfer average 4.4 percent over the forecast period, Act, the Public-Private Partnership and Investment supported by programs to promote improved Act, and the Special Economic Zone Act [First inputs, storage facilities, irrigation, and Amendment]) are first steps in this regard. The agribusiness value chains. infrastructure bank, mostly privately held, will help finance large and critical infrastructure projects. 20 National pride projects like Melamchi water supply and Upper Tamakoshi hydroelectric are expected to be completed by FY2020, while Pokhara International Airport is expected to be completed by FY2021. 21 One example is the cement industry Huasin Cement Narayani that is expected to be constructed by January 2020 and has the investments amounting to NPR 15 billion. The government has prioritized cement as one of the major exportable goods in its policies and programs for FY2020. 22 Nepal Infrastructure Bank came into operation in March 2019. June 2019 World Bank Group 29 Investing in People to Close the Human Capital Gap Nepal Development Update The Transit and Transport Agreement will allow stable agricultural production, regular supply of Nepal to use four Chinese seaports (Tianjin, electricity, and low inflation in India will help Shenzhen, Lianyungang, and Zhanjiang) and three subdue inflationary pressures. land ports (Lanzhou, Lhasa, and Shigatse) for third-country imports and six dedicated transit The current account deficit, which grew in points (between Nepal and China) for exports. At FY2018, is expected to narrow over the present, the trade between Nepal and China occurs medium term. Most of the growth in the through only two Nepalese entry points external deficit in FY2018 was driven by strong -Rasuwagadhi and Tatopani. The Foreign import demand (from federalism related costs, Investment and Technology Transfer Act provides reconstruction post-earthquake, and general a one-stop service23 and equal treatment of foreign construction) and higher oil prices. However, investors. Equal treatment allows foreign investors Nepal continues to have adequate reserves and its to avail themselves of benefits received by external debt is low. Over the medium term, as the domestic investors such as tax concessions and one-time spending on federalism related other incentives. The Public-Private Partnership infrastructure and post-earthquake reconstruction and Investment Act allows the Investment Board taper down, the growth in imports will slow. of Nepal to approve and provide full support to Investments are likely to remain high and keep the the implementation of any investment that is more current account in deficit. Electricity exports could than NPR 6 billion or a hydropower project of pick up in the near term as Nepal is expected to over 200 -megawatt capacity. This will help reduce double its electricity production by FY2020.24 This transaction costs for large investors. The Special will also help reduce the import bill and expand Economic Zone Act (First Amendment) allows industrial capacity through the regular supply of industries within the special economic zones (SEZ) electricity25. Broader growth in overall exports will to sell their entire production in the domestic happen in the longer term as structural reforms market in the first year and export 60 percent of start yielding results. Remittances as a share of their production from the second year onward. GDP are expected to stabilize at 27 percent over This contrasts with the earlier provision which the medium-term as new international job markets required mandatory exports of 75 percent from open up and remittances from formal channels the first year. At present there is only one special increase. By FY2021, the current account deficit is economic zone in Bhairahawa but 13 more are expected to moderate to 5.5 percent of GDP and being constructed. international reserves are likely to cover around 5 months of imports. The external gap will be Inflation is expected to pick up slightly but financed primarily by long term borrowing and a will remain below 5 percent during the drawdown of international reserves. There are forecast period. With growth forecasted to negligible portfolio investments in the country and remain above 6 percent over the medium-term, despite some expected increase in foreign direct inflation is likely to increase from the current level. investment, it will continue to remain low. However, continued underspending of the budget, 23 In line with the Industrial Enterprises Act 2016, the government established a one-stop service center through the official gazette on April 29, 2019. The center has started providing one-stop facility, for both domestic and foreign investors with capital between NPR100 million to NPR 5 billion from May 15, 2019. 24 The completion of the 456-megawatt capacity Upper Tamakoshi hydropower project in December 2019 will generate surplus energy in the wet season which will be exported to India under the energy banking mechanism. 25 The completion of the cross-border Nepal-India oil pipeline project by the end of FY2019 is also expected to save the import cost of petroleum products by more than NPR 2 billion besides ensuring the regular supply of these products to Nepal. June 2019 World Bank Group 30 Investing in People to Close the Human Capital Gap Nepal Development Update Table 1. Macroeconomic Projections of Selected Key Indicators 2016 2017 2018 2019e 2020f 2021f Real GDP growth, at constant market prices 0.6 8.2 6.7 7.1 6.4 6.5 Private Consumption -0.7 2.6 2.5 6.5 5.2 4.8 Government Consumption -0.4 10.5 13.4 8.3 11.8 13.8 Gross Fixed Capital Investment -12.3 44.3 18.1 14.3 16.3 14.4 Exports, Goods and Services -13.7 11.3 7.8 7.9 11.0 11.0 Import, Goods and Services 2.8 27.2 19.0 17.9 11.5 10.7 Real GDP growth, at constant factor prices 0.2 7.7 6.3 6.8 6.4 6.5 Agriculture 0.2 5.2 2.8 5.0 4.4 4.5 Industry -6.4 12.4 9.6 8.1 8.0 8.8 Services 2.3 8.1 7.6 7.5 7.2 7.0 Inflation (Consumer Price Index) 9.9 4.4 4.2 5.0 4.7 5.0 Current Account Balance (% of GDP) 6.2 -0.4 -8.1 -8.0 -6.6 -5.5 Fiscal Balance (% of GDP) 1.4 -3.1 -5.7 -3.4 -3.6 -5.1 Debt (% of GDP) 27.9 26.3 30.3 30.0 31.1 32.7 Primary Balance (% of GDP) 1.8 -2.7 -4.9 -2.4 -2.8 -4.3 Source: MoF, NRB, and CBS for history and estimates. World Bank staff for forecasts. Notes: e = estimate, f = forecast. Inflation, current account balance, fiscal balance, debt, and primary balance are forecasts for 2019 The fiscal deficit is projected to average 4 productivity-led growth and improved spending percent of GDP over the next few years. The efficiency. challenges related to the transition to federalism have resulted in lower-than-budgeted spending in Risks and Challenges FY2019. As a result, the fiscal deficit is estimated A sudden reduction in remittance inflows to decline to 3.4 percent of GDP. In the subsequent could lower deposits, limiting the availability years, as the provincial and local governments of loanable funds in the economy. This could become fully functional, the fiscal deficit is projected affect private investment and imports, to increase, rising to 5.1 percent of GDP in FY2021. consumption and growth. Remittance inflows The government has set up a commission to review have supported household consumption, helping and suggest measures to improve spending to reduce poverty. It has also helped the economy efficiency. In addition, reforms to broaden the tax to earn foreign exchange for imports. The lower outflow of migrants may continue and conditions base will help increase revenues to 30 percent of in migrant-receiving countries could deteriorate, GDP by FY2021. Non-tax revenues are also expected with increasing geopolitical tensions in the Gulf to increase because of royalties from new region and uncertain oil prices. These trends could hydropower projects. At the subnational levels, put pressure on remittance inflows, especially if efforts are being focused on establishing the legal new markets attract only a limited number of and institutional framework to support enhanced laborers from Nepal. Lower credit to the economy own-tax revenue collection. The fiscal deficit will that leads to lower growth would also reduce be financed by a mix of domestic and international exports. This points to the need to reduce the borrowing. Therefore, a further rise in total public heavy reliance on remittances as a source of foreign debt is projected, to 32.7 percent of GDP by exchange and savings. Greater focus is needed on incentivizing and diversifying exports. FY2021. Despite the increase, Nepal continues to remain at low risk of debt distress. Debt sustainability Risks from climate-related natural disasters stress tests show a vulnerability to growth shocks are high. Erratic monsoons could lead to and natural disasters and underscore the importance climate-related disasters such as drought, floods, of implementing sound macroeconomic policies and landslides that undermine agricultural including structural reforms in support of production which could negatively impact infrastructure, June 2019 World Bank Group 31 Investing in People to Close the Human Capital Gap Nepal Development Update and reverse gains in poverty reduction. The Global in investment commitments worth about US$ 17.5 Climate Risk Index ranks Nepal as the 1th-most- billion from both domestic and foreign investors. affected country in the world in the last 20 years The realization of these investments will depend and the 4th most affected country in the world in upon the timely implementation of investment- 2017. The vulnerability to climate change is further related legislation that meets international standards. reinforced by the country’s first tornado that hit It is equally important to ensure adequate levels of two Terai districts (Bara and Parsa) in March 2019 skilled labor to meet the needs of the private and resulted in a loss of US$ 4.6 million worth of sector, complement investments in infrastructure crops and livestock. The implementation of the and facilitate innovation. The Special Focus of 2017 Disaster Risk Reduction and Management this edition of the Nepal Development Update Act will help mitigate some of these risks. The act outlines the key issues and reforms, to support governs coordination and management of all scaled up investments in people and lay the activities pertaining to disaster management, disaster foundation for increasing human capital and labor risk reduction, disaster recuperation and disaster productivity. response as well as monitoring and mitigation measures on climate change and global warming. Follow-on legislation and policy guidelines have been adopted at the local level to incorporate disaster risk management in local government development plans, which also define the procedures for responding to disasters. The upcoming Catastrophe-Deferred Drawdown Option (CAT-DDO) operation supports further reforms to help reduce risks from natural disasters. The implementation of federalism is expected to improve service delivery, but capacity challenges persist. These challenges have manifested in the underexecution of budgets, especially at the provincial and local levels, and this poses a risk to service delivery. Capacity challenges have impeded the functioning of subnational governments in other areas too. As an example, the Medium-Term Expenditure Framework, which serves as a bridge between the annual budget and the periodic plan, existed in only one province as of March 2019. This is primarily because staff lack skills to forecast revenue and expenditure. The Integrated Public Financial Management Reform Program, supported by the World Bank, is providing technical support to the government and also helping to build capacity in public financial management areas. Finally, there is a risk that growth will slow down if Nepal is unable to increase investments in physical and human capital and adopt institutional reforms required to raise productivity. Nepal needs infrastructure investments of around 10 to 15 percent of GDP annually for the next 10 years. To boost investments, the government organized the Nepal Investment Summit in March 2019 which resulted June 2019 World Bank Group 32 Investing in People to Close the Human Capital Gap Nepal Development Update ............................................................................................................................................................................................................................................................................................................................................................ C. Special Focus – Investing in People to Close the Human Capital Gap for Higher and Sustained Inclusive Growth ............................................................................................................................................................................................................................................................................................................................................................ Investing in people and building human Undernutrition reduces learning potential and capital26 are critical if Nepal is to accelerate its productivity and can reduce GDP by as much as growth and rapidly reduce poverty. The 11 percent. Investing in psychosocial stimulation empirical evidence27 indicates that higher levels of during a child’s early years can raise his or her adult human capital directly affect productivity, because income by up to 25 percent.28 School deworming individuals who benefit from good nutrition and can have a large and sustained impact on labor healthy lives can more effectively benefit from market outcomes in adulthood.29 Increases in life education and develop greater cognitive, technical, expectancy are positively correlated with economic and life skills, which make them more productive growth.30 workers. Policies related to education, adult learning, job training, health, social protection, Investing in people is also critical for early childhood development, and other areas increasing Nepal’s competitiveness. Firm influencing an individual’s productivity affects interviews conducted for the World Bank’s human capital accumulation and, in turn, growth. publication “Creating Markets in Nepal – Country Human capital investments raise individual Private Sector Diagnostic”31 noted that the lack of earnings potential. For instance, one additional skills aligned to the needs of the private sector is a year of schooling in Nepal raises an individual’s key constraint to firm growth and movement up earnings by 8 to 10 percent. Globally, the returns the value chain. Inability to scale-up production to education are even higher in countries such as affects firm competitiveness. Human capital also Rwanda (22 percent), South Africa (19 percent), affects growth indirectly through its effect on Ethiopia (19 percent), and Burundi (17 percent). technological change and innovation and through 26 Human capital is a broad concept encompassing “education, training, medical care, and other additions to knowledge and health” (Becker 1992, p.43). It may also refer to proper development of neural connections in the brain (Romer 2015). 27 Flabbi and Gatti 2018. 28 Gertler et al. 2014. 29 Gertler et al. 2014. 30 Acemoglu and Johnson 2007. Note there is no correlation, however, with GDP per capita. [pdf] 31 World Bank 2018. June 2019 World Bank Group 33 Investing in People to Close the Human Capital Gap Nepal Development Update its effect on the productivity of capital. Thus, dependency rate. For the demographic transition investments in both the future and current to be accompanied by significant improvements in workforce, combined with policies to increase per capita GDP, it is therefore essential to scale-up labor productivity and encourage labor force investments in human capital to raise the participation, matter for higher, sustained, and productivity of future generations and existing inclusive growth. cohorts of youths and adults. Now is an opportune time for Nepal to Nepal has the potential to double its GDP per scale-up its investments in human capital capita in the long term if it can achieve the before the demographic dividend window benchmarks of complete education and full closes. According to the World Bank’s 2015/16 health. The World Bank Human Capital Index Global Monitoring Report,32 Nepal is an early estimates that a child born in Nepal today will be demographic dividend country, defined to include only 49 percent as productive when she grows up countries where total fertility is below four births as she could be if she enjoyed complete education per woman. When a country finds itself with a and full health. Nepal’s GDP can be compared working-age population or labor force that is under two scenarios, one in which the current growing faster than the population that depends status quo continues, and another in which a child on it (such as children and the aged), it creates a gets full education and health. Under the latter window for higher economic growth because the scenario, Nepal’s GDP could be as much as two economy can potentially employ more people, times larger than the GDP under the status quo savings grow and become a financing source for scenario.33 Although the assumptions imposed to economic growth, and lower fertility rates result in get to this calculation are very strong (see Box 1, healthier women. When there are fewer economic below), the point is that Nepal is missing a huge pressures and more resources to invest in children, potential for growth if it fails to invest in its people. GDP per capita increases due to a decreasing Figure 32. Efforts are needed across sectors to scale-up quality investments in human capital REDUCE POVERTY AND INEQUALITY INCREASE COMPETITIVENESS ALL INDIVIDUALS REACH THEIR FULL POTENTIAL (With the physical, social and emotional capacities for them to learn, earn, innovate and compete) Coverage and quality of essential Household behaviors and practices Exposure to risk factors services • Health and family planning • Natural disasters • Nutrition • Caring practices • Conflict and displacement • Social protection • Hygiene practices • Environment and climate • Education • Diet • Pathogens • Energy • Gender • Economic shocks • Water and sanitation • Social-cultural practices • Poverty • Transport DELIVERING ON THE ESSENTIAL INTERVENTIONS ABOVE REQUIRES EFFORTS ACROSS SECTORS Water Social Response to Agriculture Health and Education Infrastructure protection Shocks Sanitation Source: Authors, drawing from World Bank. 2019, “Africa Human Capital Plan”. World Bank. Washington, D.C. and World Bank. 2016. Snapshot: Investing in the early years for growth and productivity (English). Washington, D.C. : World Bank Group. 32 World Bank 2016b. 33 Kraay 2018. June 2019 World Bank Group 34 Investing in People to Close the Human Capital Gap Nepal Development Update The empirical evidence shows that a progress in human capital. Access to quality high-impact and cost-effective approach to services is affected by a variety of factors. For building human capital is to invest early in example, a child’s gender, location, and parental life. Investments should ensure children are born income and education determine whether a child healthy and are well-nourished throughout is well-nourished, has clean water to drink, starts childhood, receive stimulation and learning and finishes primary school on time, and is opportunities, and are protected from stresses that protected from shocks. Figure 33 illustrates these could affect their productivity well into adulthood. challenges for Goma, a girl born in rural Kalikot As Figure 32 shows, efforts are needed across to poor and illiterate parents from the Dalit sectors to ensure children have access to the community, and Avidit, a Kathmandu boy born to resources and services that will help them develop wealthy, educated parents. Goma has less than a their human capital and reach their fullest potential. 40 percent chance of finishing primary school on These include a broad range of sectors – from time, while Avidit has almost a 95 percent chance water and sanitation to education, from agriculture of doing so. Social, economic, and geographic to health and nutrition, and from labor market barriers form mutually reinforcing and interventions to social protection. This Special compounding factors that can trap particular Focus section, however, concentrates exclusively groups in poverty and low human capital on a subset of these, namely health, education, conditions. Public policy can help level the field nutrition, labor markets, and social protection. and facilitate inclusion in the acquisition and use of human capital. This is essential, not only for Three key challenges could hold back efforts taking advantage of opportunities for growth and to scale-up human capital: inequity in access poverty reduction, but also for addressing to services, poor quality of service, and vulnerability and fragility. vulnerabilities to shocks that can erode Figure 33. Circumstances of birth can determine investments in a child’s education 120 100 95 96 95 100 Goma is a girl, born in rural Kalikot. Her parents 85 84 are illiterate, belong to the Dalit community and 80 80 70 are in the bottom 20 percent of Nepal’s wealth 69 distribution. 60 53 47 48 48 44 39 Champa is also a girl born into a household 40 36 31 otherwise very similar to Goma’s. But, Champa’s 20 parents are from a village in Siraha. 9 6 6 5 0 Avidit is a boy born to an upper caste household Started Finished Fully Not Clean Adequate Electricity primary on primary on immunized stunted water sanitation in urban Kathmandu. Both his parents have a time time university education and come from affluent Avidit Goma Champa backgrounds. Source: World Bank 2016a. June 2019 World Bank Group 35 Investing in People to Close the Human Capital Gap Nepal Development Update Federalism provides opportunities and information and services, to provide incentives for challenges for addressing inequities, the use of education, health, and other services.35 improving service quality, and reducing vulnerabilities. Nepal’s transition to a federal C.1. Measuring Nepal’s Human system raises opportunities as well as risks. Risks Development Outcomes – the Human to the disruption of services during the transition Capital Index are likely to be compounded by persistent The Human Capital Index (HCI) is a challenges stemming from spatial/regional composite of three components that together disparities in access, quality, and sustainability of provide a proxy for the productivity of a future human development services. As in many other worker (Box 1). The HCI quantifies the countries in the region, remote, rural, mountainous, contribution of nutrition, health, and education to and other hard-to-reach communities often end the productivity of the next generation of workers. up with limited availability of quality staffing, The index can help assess how much income a harder conditions given the limited access to country is foregoing because of human capital infrastructure, roads, electricity, and the limited gaps, and how fast it can turn losses into gains by supply of other resources required for effective acting now. It quantifies the contribution of service delivery (drugs, textbooks, and so forth). human capital to the productivity of the next Geographic inequities may be exacerbated by the generation of workers. One limitation of the HCI varying conditions of service delivery and local is that it does not value education, nutrition, and capacity. The transition can also increase the risk health as an end in themselves or as a right. of service delivery disruptions, given the capacity Instead, the value is linked to their contribution to challenges of local governments34 including future income or labor earnings. Also, focusing on varying abilities to absorb and institutionalize the the indicator may lead to the tendency to overfocus devolved responsibilities for delivering basic solely on its subcomponents, to the detriment of services. other equally important inputs to human development or indicators of human capital. The The shift to a federal system reflects a strong HCI, therefore, provides a composite indicator on desire by the government to promote greater key elements that constitute human capital and social inclusion. And the transition provides an provides a single indicator to assess the opportunity to address some of these weaknesses, performance of a country. Nepal’s performance especially for the poor and vulnerable, through can be compared with similar countries as well as fiscal rules, capacity building, representation and with the frontier of complete education and full voice, incentives, and better targeting of health to see the potential for improvement. As interventions to address equity concerns. It also mentioned, a child born today in Nepal will be allows opportunities to systematically integrate only 49 percent as productive when she grows up services at the local level across health, education, as she could be if she enjoyed complete education and social protection, that were previously and full health. Globally, 56 percent of all children provided by different ministries. As such, born today will grow up to be, at best, 50 percent government interventions can work both on the as productive as they could be, and 92 percent will supply and the demand sides, combining improved grow up to be, at best, 75 percent as productive as services with income support and the provision of they could be. 34 Local-level governments are the 753 rural municipalities, urban municipalities, sub-metropolitan, and metropolitan authorities. 35 Raju and Rajbhandary 2018. June 2019 World Bank Group 36 Investing in People to Close the Human Capital Gap Nepal Development Update Box 1. The HCI measures the human capital a child born today can expect to attain by age 18 The Human Capital Index (HCI) is estimated based on the assumption that current conditions prevail into the future. For example, expected future education depends on the year of schooling a child is likely to get given prevailing enrollment rates. Similarly, expected future health status depends on current health conditions. It conveys the productivity of the next generation of workers compared to a benchmark of complete education and full health. The index currently includes three components that are closely linked with Sustainable Development Goal targets for health, education, and nutrition. This is represented in terms of: Survival – Will children born today survive to school age? School – How much school will they complete and how much will they learn? Health – Will they leave school in good health, ready for further learning and/or work? Source: World Bank Human Capital Project. Note: ASR = Adult Survival Rate. In terms of components of the HCI, Nepal 15 percent. These countries include El Salvador, does worse than its peers in stunting and Haiti, Honduras, the Kyrgyz Republic, Lebanon, quality of educaton (Figure 34). Structural peers Tajikistan, and Zimbabwe. In general, Nepal are largely agrarian and landlocked, with a population performs close to its peers; however, data presented between 5 million and 50 million and gross national in the rest of this section show that improved income per capita between $600 and $1,400, in human capital outcomes will require more attention US dollars. These include Afghanistan, Burkina to inequality, and quality of and access to services. Faso, the Kyrgyrz Republic, Mali, Tajikistan, Uganda, Section C.2 provides an overview of the composite and Zimbabwe. Remittance-dependent peers have indicators of the HCI and benchmarks these with a population between 5 million and 50 million, results achieved by comparator countries. with remittances as a share of GDP that exceed June 2019 World Bank Group 37 Investing in People to Close the Human Capital Gap Nepal Development Update Figure 34. Composition of indicators that make up Nepal’s Human Capital Index Source: World Bank Human Capital Project. Note: ASR = Adult Survival Rate. June 2019 World Bank Group 38 Investing in People to Close the Human Capital Gap Nepal Development Update C.2. Nepal’s human capital index ranks in 2011 to 21 deaths per 1,000 live births in 2016.37 relatively well against that of other There are vulnerabilities though. Causes of death countries under age five stem largely from complications at birth, which also reflects the underlying health of Child and Adult Survival Rates the mother. Respiratory and other infections also have remained the top reasons for death over the Child and adult survival rates in Nepal last several years.38 These factors contribute to compare favorably with that of other countries Nepal’s 97 percent survival rate for children up to in the same income group (Figure 35). There age five. These rates are similar to what is observed has been a large decline in child mortality in Nepal in Bangladesh (97 percent), Rwanda (96 percent), in recent years, with under-five mortality decreasing and Cambodia (97 percent). In contrast, a child from 54 deaths per 1,000 live births in 2011 to 39 born in Sri Lanka (99 percent), Malaysia (99 percent), deaths per 1,000 live births in 2016.36 Similarly, Thailand (99 percent), and Vietnam (98 percent) neonatal deaths – within the first 28 days of life has a higher chance of survival up to age five. – have declined from 33 deaths per 1,000 live births Figure 35. Nepal’s child and adult survival rates compare favorably with some middle-income countries Source: World Bank Human Capital Project. Adult survival compares favorably with other slightly higher income levels. A starting point for countries of similar income, but understanding understanding how to improve adult mortality is to the main causes of death reveals areas for look at the main causes of mortality, which differ improvement. For a Nepalese child born in 2017, by gender and age group, and then to look at the life expectancy is 73.3 years for girls and 68.7 years underlying risk factors that need to be addressed. for boys, and this has been increasing appreciably For the age group 15 to 49, which is the most in recent years. As shown in Figure 35, Nepal productive in terms of labor market contributions compares well in terms of the expectation that a and the reproductive age of women, transport 15-year-old alive today will reach age 60 (adult injuries or road traffic accidents are the leading survival rate). Figure 35 also shows that measurable cause of death for men. Female-related cancers are improvement is possible, but not automatic, at even the leading cause of death for women (Table 2). 36 Nepal Demographic and Health Survey data as reported by the Nepal Ministry of Health and Population Health Sector Progress Report (Ministry of Health and Population 2018). 37 Nepal Demographic and Health Survey data as reported by the Nepal Ministry of Health and Population Health Sector Progress Report (Ministry of Health and Population 2018). 38 Institute for Health Metrics and Evaluation – Burden of Disease. June 2019 World Bank Group 39 Investing in People to Close the Human Capital Gap Nepal Development Update While there have been improvements in recent but it is also more similar between men and women years, maternal mortality is still a leading cause of with cardiovascular disease and cancers as leading death for young women. After age 50 (not shown), causes. the mortality rate starts to increase significantly, Table 2 : Top 10 causes of death for adults age 15 to 49, by gender Males Females 1. Transport injuries 1. Cancers 2. Cardiovascular diseases 2. Cardiovascular diseases 3. Digestive diseases 3. Maternal and neonatal disorders 4. HIV/AIDS and sexually transmitted diseases 4. Respiratory infections and tuberculosis 5. Self-harm and violence 5. Self-harm and violence 6. Unintentional injuries 6. Transport injuries 7. Cancers 7. Digestive diseases 8. Respiratory infections and tuberculosis 8. Chronic respiratory problems 9. Gastrointestinal infections 9. Diabetes and kidney diseases 10. Diabetes and kidney diseases 10. Gastrointestinal infections Source: Institute for Health Metrics and Evaluation. Physical, behavioral, and environmental risk population in Nepal include behavioral changes to factors contribute to the causes of death, and diet and use of alcohol and tobacco. They also these also differ by gender. To improve health include environmental factors such as air pollution outcomes, it is necessary to cure or manage the and access to safe water and sanitation. At the top disease or injury; however, more importantly and of the list for risk factors that must be addressed most cost-effectively, it is necessary to reduce the is safety to reduce transport injuries in men and factors that caused the disease or injury in the first improvement in the nutritional status of women place. As shown in Table 3, the key risk factors of childbearing age. contributing to the causes of death in the working-age Table 3 : Top 10 risk factors contributing to the cause of death of adults age 15 to 49, by gender Males Females 1. Occupational risks 1. Child and maternal nutrition 2. Dietary risks 2. Occupational risks 3. Alcohol use 3. Dietary risks 4. High systolic blood pressure 4. Air pollution 5. High LDL cholesterol 5. High body mass index 6. Air pollution 6. High fasting plasma glucose 7. High body mass index 7. Unsafe sex 8. Unsafe sex 8. Alcohol use 9. Tobacco 9. Unsafe water, sanitation, and handwashing 10. High fasting plasma glucose 10. Impaired kidney function Source: Institute for Health Metrics and Evaluation. June 2019 World Bank Group 40 Investing in People to Close the Human Capital Gap Nepal Development Update Stunting among children under age five Figure 36. The fraction of non-stunted children is low or, conversely, the stunting rate is high at 36 Nepal’s stunting rate of 36 percent is high percent compared to international benchmarks (Figure 36). Nepal performs better than some other South Asian countries like Pakistan (45 percent) and Afghanistan (41 percent), but is behind Sri Lanka (17 percent) and Bhutan (21 percent). Stunting rates for Nepal are also high compared to Thailand or Mongolia, for example, each of which has a stunting rate of 11 percent. Although Nepal has made remarkable progress in reducing stunting from 57 percent in 2001 to 36 percent in 2016, the current rate is still high and is a public health concern (Figure 37). Source: World Bank Human Capital Project. Anemia continues to be a significant problem for children and women. In 2016, 53 percent of children Figure 37. Stunting rates are decreasing over time and 41 percent of women were anemic. About 17 percent of women aged 15 to 49 were undernourished, Percentage of children under age 5 as defined by a body mass index (BMI) of less than who are malnourished 18.5. At the same time, a growing problem for Nepalese women is overweight; 22 percent of women were overweight or obese according to the 2016 Nepal Demographic and Health Survey, up from 9 percent in 2006. Malnutrition, resulting from a low-quality diet that lacks diversity, poor caring practices, education, and utilization of health services, is a key cause of stunting. Early childbearing (below age 18) is also a contributing factor. Expected Years of School and Source: Ministry of Health 2017. Nepal Demographic and Learning-Adjusted Years of School Health Survey 2016. In Nepal, a child who starts school at age four Figure 38. Nepal’s expected years of schooling is can expect to complete 11.7 years of school by higher than the South Asia regional average… her 18th birthday, which is higher than the South Asia regional average (Figure 38). The expected years of schooling is 11 in Bangladesh 10.2 in India. The only country in South Asia with stronger performance in expected years of schooling is Sri Lanka, with 13. Globally, the top performers in this dimension have 14 expected years of schooling. Nepal is performing better than most other countries like Rwanda (6.6 years), Zambia (9.2 years), Bangladesh (11 years), and India (10.2 years), but not as well as Mongolia (13.6 years), Sri Lanka (13 years), Vietnam (12.3 years), and Thailand (12.4 years). Source: World Bank Human Capital Project, 2018. June 2019 World Bank Group 41 Investing in People to Close the Human Capital Gap Nepal Development Update However, Nepal’s performance worsens when Figure 39. …but performance worsens with one accounts for quality measured by learning learning-adjusted years based on harmonized learning outcomes -adjusted years of schooling, or globally benchmarked harmonized learning outcomes (Figure 39). This measure provides a more accurate picture of the human capital generated through education, as it accounts for not just the quantity of schooling but also the quality. Factoring in what children actually learn, expected years of schooling drops from 11.7 years to 6.9 years. This means that on average, around 4.8 years of schooling are lost due to poor quality. Nepal’s learning-adjusted years of schooling, at 6.9 years, is at par with Cambodia (6.9 years) and Myanmar (6.7 years), but is Source: World Bank Human Capital Project, 2018. significantly lower than in Vietnam (10.2 years), Malaysia (9.1 years), Thailand (8.6 years), and C.3. For Nepal to realize its full human Mongolia (9.4 years). capital potential, renewed efforts are needed to reduce inequity, improve Nepal has been successful getting children service quality, and minimize vulnerabilities into school but needs to ensure that schooling translates into learning. The gap between Overall, the performance summarized above expected years of schooling and learning-adjusted masks important differences across social, years of schooling underscores the need to improve economic, and geographic dimensions. quality. In Nepal’s public schools, acquisition of key Addressing these differences will be critical to foundational skills, like literacy, language proficiency, further boost human capital outcomes in Nepal and numeracy, are compromised. Several rounds of and reduce the confounding effect of disparities the National Assessment of Student Achievement from different sources that often overlap and work data from 2011 to 2014 show that in grades 3, 5, together to prevent households from realizing their and, 8 fewer than 20 percent of students can master full potential. In-depth analysis41 shows that both competencies in problem-solving and reasoning. household characteristics (education of parents, Almost 40 percent of students repeat grade 1.39 wealth, ethnicity, and so forth) and supply factors This also leads to dropping out. According to the matter for human development outcomes. These Nepal Living Standard Survey 2010, the reason disparities are observed almost systematically for most frequently cited by primary-school-aged all dimensions of human capital. Improvements children (ages 5 to 10) for dropping out of school will require reducing inequity by focusing on the is poor academic progress.40 Addressing the challenges poor, the vulnerable, excluded groups, or particular around learning outcomes will help lay the regions and localities. It will also require addressing foundation for broader skills development and issues of quality of service delivery, which needs increase labor productivity. to be improved for all services. Finally, measures 39 Ajwad 2007. 40 World Bank 2013. 41 World Bank 2016a. June 2019 World Bank Group 42 Investing in People to Close the Human Capital Gap Nepal Development Update to reduce vulnerability to shocks are critical to both men and women. Gender parity in education ensure gains made in human capital are sustained has been attained for children at the basic grade and further developed. levels (grades 1–8) and at the secondary education level (for males, expected years of schooling are Given the above priorities, to realize its full 11.5 and for females, 11.9 years), but is yet to be human capital potential Nepal will have to achieved for younger children (where gender parity (a) reduce inequity across gender, social status, stands at 0.89 for early childhood education and income, and geographic groups; (b) improve the pre-primary). quality of human capital services (in education, health, nutrition, social protection, and labor The progress in gender parity of the HCI market programs) from early childhood to indicators (particularly those linked to education) adulthood, with a focus on a multisectoral approach, has not translated to gender parity in labor improved coordination, capacity support, and force participation. Differences in outcomes increased accountability of service providers; and between males and females in terms of labor (c) promote resilience to shocks for households outcomes can lead to gender-based differences in and services. These priority areas and related the ability to build on and further develop skills. interventions are discussed below. This impacts earnings, which in turn influences investments in human capital. For every 100 males Priority number 1: Reduce inequity across in the working-age population there are 125 gender, social status, income, and geographic females. Yet, for every 100 employed males there groups are only 59 employed females. Gender disparities also exist among the unemployed, and women earn Gender parity has been achieved for some on average 70 percent of what men earn. Part of indicators but not for others, and women the reason could be due to the gender disparities continue to experience lower outcomes. that emerge at the tertiary education levels in the Decomposing the HCI components by gender fields of science and technology, and it could be reveals parity (in terms of survival, stunting, and that it takes until the postsecondary education level schooling) (Figure 40). For example, in Nepal, the for the effects of disparities linked to early childhood adult survival rate is 87 percent for females and and pre-primary to emerge. The differences in 83 percent for males. The 4-percentage-point outcomes are also likely driven by social norms difference is smaller than that observed among its regarding the roles men and women can play in structural or remittance-dependent peers, where society. Overall, while policies and programs have women have a stronger advantage over men in enabled women to participate more in decision terms of survival (a 6-percentage-point difference making and have greater access to assets and on average). This suggests there could be more resources, women continue to experience greater improvements for women to bring the gender vulnerability and risks to certain aspects of their difference closer to that of Nepal’s peers. However, human development outcomes.42 the adult survival rates for Nepalese men is significantly lower than that for higher-income countries (where it exceeds 90 percent). This highlights the need to improve survival rates for 42 Asian Development Bank CPS 2013–2017. June 2019 World Bank Group 43 Investing in People to Close the Human Capital Gap Nepal Development Update Figure 40. The gender gap for schooling, survival, and stunting is generally low in Nepal Source: World Bank Human Capital Project, 2018. In addition to gender, income disparities are a Girls and children from economically disadvantaged major factor that limit access to quality groups have disproportionately low access to education, nutrition, and health services. While schooling and high repetition and dropout rates, more than 86 percent of children aged three to indicating systematic and limited exposure to five in the richest quintile achieve composite early enabling learning conditions. This is particularly childhood development milestones, only about problematic because the returns to targeted early 60 percent of children in the poorest quintile do. investment are highest for disadvantaged children. June 2019 World Bank Group 44 Investing in People to Close the Human Capital Gap Nepal Development Update Stunting is disproportionately concentrated in Finally, data on health service utilization show poorer households (Figure 41).43 Stunting is utilization is much lower among poorer groups. relatively high among children from the lowest Figure 41 shows disparities in institutional delivery wealth quintile (49 percent) compared with the (a key determinant of maternal mortality) and highest wealth quintile (17 percent). Decomposition stunting rates. Nationally, 57 percent of women analysis has revealed that by 2016, wealth explained give birth at health institutions. This average figure 72 percent of the differences in stunting (up from masks the huge disparities between high- and 61 percent in 1996), while mother’s health (measured low-income households: almost 90 percent of by her body mass index [BMI]) accounted for women in the richest quintile have institutional 12 percent of the disparities. deliveries, but only about one-third of the poorest do so. Figure 41. Institutional delivery are lowest and stunting rates in Nepal are highest for the poorest households Source: Nepal Demographic and Health Survey. Disparities are also evident across social incidence by caste and ethnicity, which is highest classes and groups. Table 4 shows, for instance, among the hill and Terai Dalits: 43.6 percent of that children from the Dalit community have the hill Dalits and 38.2 percent of the Terai Dalits significantly higher rates of child mortality, lower are poor compared to the national average of rates of immunization, and higher stunting than 25.5 percent.44 those in other groups. This mirrors the poverty 43 Angdembe et al. 2019. 44 Asian Development Bank CPS 2013–2017. June 2019 World Bank Group 45 Investing in People to Close the Human Capital Gap Nepal Development Update Table 4 : Health outcomes and access to health services by caste Caste Groups Child Neonatal Children Children Fully Institutional Anemic Mortality Mortality Stunted Immunized Delivery Rate Women Brahmin/Chhetri 39 23 35 87.3 68.4 36.5 Dalit 63 43 40 73.2 45.4 38.4 Janajati 42 24 32 82.9 57.9 39.7 Muslim 47 25 38 68.1 51.6 51.8 Newar 33 9 27 88.7 74.6 26.4 Other Terai castes 51 27 42 64.3 48.1 55.6 Source: Institute for Health Metrics and Evaluation. There are important geographic disparities in Figure 42. Pupil-teacher ratio by region, 2015/2016 education, especially at higher levels. For example, the net enrollment rate at the secondary level is significantly higher in Kathmandu Valley (49 percent) than other regions, especially Terai (27 percent). Pupil-teacher ratios (Figure 42) are significantly higher in the Terai region than other regions, and Province 2 still lags behind other provinces (with primary enrollment rates ranging from 93 to 98 percent), both for girls (84 percent primary enrollment) and boys (86 percent primary enrollment). In addition, several rounds of the National Assessment of Student Achievement data from 2011 to 2014 reveal inequality in learning outcomes across districts (in addition to differences by socioeconomic status, ethnicity, and language spoken).45 Geographic disparities in health and nutrition are important and tend to be correlated with poverty (Figures 43, 44, 45). The relatively poor performance of Provinces 1 and 2 is well documented. Source: Flash Reports, various years. While Province 3 has the highest concentration of public and private services, it still performed less Provinces 3 and 4 (29 percent). These trends are well in terms of rates of women giving birth at partly explained by the regional variations in facilities and children who are fully immunized, as poverty. A higher percentage of children are well as in proxies for quality such as postpartum malnourished because they come from severely mothers receiving vitamin A and children treated food-insecure households (46 percent stunted, with oral rehydration and salts and zinc for diarrhea. and 35 percent underweight) compared with Nutritional outcomes also vary by geographic children from food-secure households (29 percent region, wealth, and education status. Stunting rates stunted and 22 percent underweight).46 are high in Province 6 (55 percent) and low in 45 World Bank 2016a. 46 Ministry of Health 2017. June 2019 World Bank Group 46 Investing in People to Close the Human Capital Gap Nepal Development Update Geographic variations in stunting, poverty, and literacy are highly correlated Figure 43. Stunting prevalence Figure 44. Poverty rate Consumption Poverty (2010/11) Source: Nepal Demographic and Health Survey 2016. Source: World Bank Staff Calculation using Nepal Living Standard Survey 2010/11 Figure 45. Adult literacy rates Source: Nepal Demographic Health Survey 2016. Inequities linked to gender, social status, help from relatives and friends – at least 57 percent income, and geography can also have adverse of those looking for work did so by contacting effects on labor market outcomes, which in relatives and friends. This is followed by applications turn lead to unequal access to social and to prospective employers and checking at factories human capital. For example, social status and other work sites (20 percent). Only a negligible determines the types of personal networks share used public or private employment services individuals can access. In the context of or job advertisements.47 Among youth, most found low-performing labor markets, personal networks employment by either joining their family’s are an essential element for youth and adults who income-generating activity or asking friends or seek employment. The quality of family and friend family for assistance. networks that workers can tap into to look for employment, or their family’s position in terms of Priority interventions for promoting equity in having an income-generating activity, are essential access to services to labor market success. This is also critical for To address the challenge of inequity in access labor migrants, who mostly find employment to services and resulting outcomes, it will be through informal personal networks. The most necessary to (a) eliminate barriers linked to low common job search method in Nepal is seeking income, gender, and social status that lead to 47 Central Bureau of Statistics 2019. June 2019 World Bank Group 47 Investing in People to Close the Human Capital Gap Nepal Development Update exclusion of the poor and vulnerable; and (b) Figure 46. General government health expenditure increase the availability of services in poorer and/ as a percentage of current health expenditure or underserved areas. (a) Eliminate barriers linked to low income, gender, and social status that lead to exclusion of the poor and vulnerable As noted, gender, income, and social disparities can interact to undermine investments in human capital. Removing barriers for the poor and vulnerable therefore requires interventions that identify and target these groups, in order to address the particular constraints that keep them from Sources: National Health Accounts 2012/13 to 2015/16. accessing services. Income plays a central role in defining households’ well-being and their ability to Social protection programs, including safety invest in human capital. Income also affects nets and insurance, can play an essential role households’ ability to decide to use services (a in promoting the take-up of services by the demand-side factor). For both reasons, it will be poor and vulnerable. Fundamentally, social important to incorporate income support protection programs provide income support, programs. which allows households to adopt healthy food consumption patterns; have decent living Income barriers arise from high out-of-pocket conditions; and have some protection from shocks payments, which are most constraining for the and stress. In addition, social protection programs poor. In 2015/16, general government health can be designed to address the gender- and expenditure from all sources represented 27 percent income-related barriers to accessing services by of total health expenditure, 22 percent of current supporting the incomes of the poor and vulnerable, health expenditure, and 1.8 percent of GDP. to ensure their income is regular and by ensuring Households’ out-of-pocket payments represented the poor and vulnerable have access to services and the main source of funding for the country’s health are not constrained by their ability to pay out of system, at 55 percent of all spending for health pocket. Safety nets can also help defray the cost of care. Indeed, the government’s share has been access (for example, transport costs to get to decreasing over the past decade (Figure 46). Nepal’s services, out-of-pocket costs for services, foregone out-of-pocket health spending (as a share of total income if individuals need to miss work to get their health spending) is high relative to, for example, benefits, and so forth). Safety nets can also help the Thailand (12 percent), Vietnam (43 percent), and poor and vulnerable invest in productive strategies Sri Lanka (38 percent), which exhibit better health that can help them lift themselves out of the outcomes. This points to the need to increase public poverty trap. There is strong evidence from around spending in health to the level comparable to the world on the impact of safety nets on human Nepal’s peers. More generally, as discussed, capital investments. socioeconomic status is a key factor in determining human capital indicators. In education, in addition To increase the impact of social protection to lack of services and to quality of services, there programs on human capital, a significant is a need to focus on the demand side, to identify transformation is needed to explicitly link interventions that support and provide incentives programs to human capital and to focus on the to the poor, vulnerable, and those excluded from poor and vulnerable. This would require ensuring access to services. Also as discussed earlier, programs are designed to effectively reach the poor, removing income barriers is critical to improving vulnerable, and excluded, and are designed to nutrition outcomes. encourage and support investments in human June 2019 World Bank Group 48 Investing in People to Close the Human Capital Gap Nepal Development Update capital. Effective programs, implemented in over (particularly women) can improve their 150 countries, typically combine transfers with productivity and employability. This means both information or incentives to promote behavioral improving productivity in sectors where the poor changes (including those linked to gender), and and women are concentrated (such as in agriculture), address some of the constraints to service ensuring the energy and knowledge of returnee utilization. As further developed below, a social migrants are harnessed, and investing in employment- registry could be used to identify poor and vulnerable generating growth. Critical to the investment is households and link them to multiple programs. ensuring adequate and complementary investment A social registry could help direct vulnerable in both physical and human capital since both are households to specific interventions – grants, cash necessary complements to increasing productivity. transfers, public works programs, scholarships, and Employment-generating growth is particularly various health schemes including health insurance important for today’s youth who will become aimed at protecting the poor and vulnerable, as tomorrow’s income-earning adults and parents. It well as economic inclusion programs. This would also helps to highlight the value of investing in also help in the efficient allocation of resources to health and education (when parents and youth those most in need. today see the returns in terms of earnings). Equally important to quality job creation is ensuring there An essential step could be the development of is increased knowledge and access to these jobs, a national social protection strategy or policy. through preparing potential employees by investing Recent legislation on delivering constitutional in health and education services. These investments rights for the social protection of certain groups will support the poor and vulnerable in fully has provided a legal foundation to provide services realizing their productive potential while helping to to targeted groups. However, the law remains build human capital. It is also important to help narrow in its focus on cash transfers and lacks youth and adult members develop income- clarity on the broader poverty reduction or human generating activities that can sustain their families development goals it aims to achieve for the and further investments in human and physical targeted groups. A strategy would provide a capital. coherent and integrated vision to achieve these outcomes. A national-level policy would help (b) Increase the availability of services in poorer establish social protection as integral to achieving and underserved areas broader poverty reduction and human capital development goals, clarify the roles of the three Addressing geographic differences in access level of governments in the design and delivery of to services will require attention to improved programs, outline institutional mechanisms to resource allocation and use. In the long term, ensure coordination, provide guidance to develop the process of decentralization could be an standards, improve coordination and delivery effective means to address the geographic differences systems, and improve shock-responsiveness. The to access and could be used to improve targeting. policy/strategy could build on the National Social This will require both improvements in the Protection Framework draft prepared by the allocation of resources, and a focus on underserved National Planning Commission, and engagement areas. Table 6 shows regional average spending with line ministries and subnational governments. (during 2012–16) for health, education, and social protection,48 while Figure 47 presents trends in public Addressing the income constraints of the poor spending for nutrition, education, social protection, and vulnerable also requires ensuring individuals and health. 48 The sample used to calculate the averages exhibits a large degree of variation over time and sector. June 2019 World Bank Group 49 Investing in People to Close the Human Capital Gap Nepal Development Update Table 5. Average government social sector Figure 47. Government domestic spending on spending by region, 2012–16 social sectors (percent of GDP) Percent of GDP Health Education Social Protection Nepal* 1.17 4.44 1.70 South Asia 1.70 3.50 1.00 Global Average 3.50 4.60 1.60 East Asia and Pacific 3.80 4.70 1.20 Europe and Central 5.20 5.00 2.10 Asia Latin America and 3.40 5.00 1.50 Caribbean East and North 3.00 4.20 1.10 Africa North America 9.50 5.50 Sub-Saharan Africa 1.80 4.20 1.40 Sources: World Health Organization Global Health Expenditure Database; UNESCO Institute for Statistics; International Monetary Fund; The Atlas of Social Protection Indicators of Resilience and Equity (ASPIRE). Data are average over 2012–16, except for Nepal. Note: *Health spending is current; education and social protection include current and capital spending. Data on social protection exclude expenditure on pensions (3.8 percent with pensions for FY2016/17). Data are for 2016 only. In Figure 47, pensions add on average 1 to 2 percentage points of GDP to total social protection spending and averages 1.6 percent of GDP during the years shown. Nepal appears to be on the lower side of health for upper middle-income countries. Yet, Nepal’s spending. Table 5 indicates that Nepal spends close spending on education is not far off from to the average (both in terms of overall and regional countries in Central Asia and Europe and East Asia. spending) for education and social protection. Spending on social protection programs has In social protection, spending levels are at par increased significantly in recent years, from 1.5 with or above levels observed in other regions. percent of GDP in FY2002/03 to an estimated 3.5 However, the impact of the programs is hampered percent in FY2017/18 and FY2018/19 (though the by the lack of poverty-targeting and by the lack of largest share of this expenditure goes to public inclusion of behavioral change or accompanying sector pensions.49 In 2016/17, public financing in measures in most programs. Current financing is nutrition was estimated to represent 0.56 percent insufficient to fulfill the mandates and rights of GDP and US$4.8 per capita.50 Some preliminary established in the constitution. data reflecting the trends in public spending for nutrition, education, and health are shown in The above aggregate estimates of spending suggest Figure 47. that more local resources and efficient use of resources will be critical to improve outcomes and In the case of education, spending levels reduce regional disparities. With federalism, it will appear to be higher than the South Asia average be important to assess local needs and costs for but also inefficient, highlighting the importance service delivery and to use this to adjust the basis of quality. For example, Nepal’s outcomes for for some of the fiscal transfers to provinces and learning-adjusted years of schooling, based on localities. In FY2018, fiscal transfers amounting to harmonized test scores are significantly below that 8.3 percent of GDP were made to both local and 49 The World Bank estimates that social protection expenditure, without pensions, ranged between 1.3 and 1.9 percent of GDP during 2016–19. 50 World Bank Calculation based on GDP/Population/ Nutrition Public Expenditure Review preliminary findings. June 2019 World Bank Group 50 Investing in People to Close the Human Capital Gap Nepal Development Update provincial governments. Given the estimated The quality of education services is evident historical spending levels for education, health, from the low learning achievements at all levels social protection, and nutrition (estimated 7.5 of education (kindergarten to tertiary) and is percent of GDP), it is clear that the current levels one of the foremost challenges in the education of transfers will not be sufficient to meet local sector. Concerns about the quality and relevance needs. It will be equally important to develop the of education become even more pronounced in a revenue capacity of local governments, and to global economic backdrop, where demand for ensure they are more efficiently applying the advanced skills and innovation is continuously resources received to improve the quality of service increasing. Among young children, literacy and delivery and reduce inequities. numeracy are severely lagging. Fewer than 20 percent of children in grades 3, 5, and, 8 can master Federalism provides an opportunity to address competencies in problem-solving and reasoning.,51 52 geographic disparities by promoting This is driven mainly by three factors. First, children improvements in the allocation of resources to are often not ready for school. Robust early better target the poorest areas and those with childhood education and development (ECED) deficits in services. As noted, it will be important helps children acquire key foundational cognitive to assess local needs and costs for service delivery skills53 and helps launch children on higher learning and to use this to adjust the basis for some of the trajectories,54 making them more adaptable, resilient, fiscal transfers to provinces and localities. A review and productive. The gross enrollment ratio for of the budget allocation formula for conditional ECED/pre-primary education (PPE) has increased grants from the perspective of equity of outcomes from 12 percent in 1999 to 84 percent in 2017. could be a step toward improved resource allocation Still, about 16 percent of four-year-old children do across local and provincial governments. It will be not have access to, or have not been enrolled in, important to refine the basis for fiscal transfers to ECED/PPE. be more effectively aligned to needs, local costs, and capacity; develop the revenue capacity of local Education quality is also impacted by weak governments; and ensure local governments are accountability and incentives in the system. efficiently applying the resources received to improve The prevailing institutional structure gives school the quality of service delivery, including the effective administrators little leverage over centrally hired targeting of resources to the poor and vulnerable. teachers, and there is weak accountability of the For those functions that remain under the school system to households.55 Government responsibility of the central government (as is the teachers are sometimes perceived as unresponsive case for social protection, which is a concurrent to parents and students and indifferent toward the function across the three levels of government), an quality of their teaching.56 There are no effective essential step toward ensuring equity would be for accountability mechanisms in the system that focus the federal government to ensure a minimum level adequately on teaching-learning processes in the of social protection services to all, to which local classroom. A specific way this challenge manifests governments could add as required. is that very often classroom instruction happens at a level that most students cannot follow. Teachers Priority number 2: Improve the quality of do not have either the time, skills, or motivation to human capital services (in education, health, address different learning needs, or the pedagogical nutrition, labor, and social protection) from tools to identify learning levels and then to calibrate early childhood to adulthood their teaching accordingly. 51 Ajwad 2007. 52 World Bank 2013. 53 Camilli et al. 2010; Nores and Barnett 2010. 54 World Bank 2018. 55 World Bank 2007. 56 Chen 2012. June 2019 World Bank Group 51 Investing in People to Close the Human Capital Gap Nepal Development Update Improved learning also requires better needed for EPI services. Moreover, there is a alignment of teachers and student assessment shortage of qualified workers, worker absenteeism, systems with the goal of learning for all. The stock-outs of essential drugs, and limited physical prevailing institutional structure gives school infrastructure (such as health facility buildings with administrators little leverage over centrally hired water and electricity, and equipment). These teachers, and the accountability of the school supply-side factors are exacerbated by the high system to households has been low. There are no out-of-pocket costs that further limit the quality of effective accountability mechanisms in the system services most households can access. that focus adequately on teaching-learning processes in the classrooms. This often results in classroom Addressing malnutrition requires improving instruction that occurs at a level that most students people’s behavior toward adopting good cannot follow. Finally, improved data can help nutrition practices and improving the quality identify which schools need more resources, which of nutrition services. Currently, only 42 percent teachers need more training, and which students of women age 15 to 45 with a child born in the need more instruction. Nepal has taken positive past five years took iron tablets for at least 180 steps toward better measurement of learning. To days.57 Only 36 percent of children 6 to 23 months that end, several rounds of the National Assessment met the criteria for a minimum acceptable diet. The of Student Achievement have been completed. National Micronutrient Survey 2016 shows that However, there is very limited use of these data in multiple micronutrient supplementation besides guiding policy or practice. For instance, learning iron/folic acid is needed to combat anemia. As per data can be useful in helping policy makers decide the survey, anemia in pregnant women is high at which schools need additional resources and which 27 percent. The same survey shows that zinc teachers need additional training. Similarly, these deficiency in children 6 to 59 months is as high as data can help teachers see which areas of instruction 21 percent, and only 7 percent of these children and which students need greater attention. Currently, with diarrhea had received zinc supplements. even though learning data are being produced, they could be much better used to improve policy and Strengthening the multisectoral approach for practice. One way to ensure this is to devote delivering nutrition services will require resources and effort to the timely distribution of addressing the challenge of coordination understandable results to key stakeholders. failures in implementing the national multisectoral action plan. Reducing stunting and Improving the quality of health services needs other forms of malnutrition by investing in investment to ensure availability of essential nutrition is a national agenda in Nepal. Nepal’s and priority drugs, adequate training of health World Health Assembly target for stunting workers, and proper facilities and equipment. reduction is 25 percent (by 2025) and the Sustainable Quality of health services is largely constrained by Development Goal target is 15 percent (by 2030). the availability of critical inputs such as essential The Government of Nepal has committed to drugs and adequately trained health workers. For reducing malnutrition by cultivating a proper example, the National Health Facility survey found investment climate for nutrition interventions, and that only 3 percent of the health facilities providing donors have committed to financing nutrition outpatient care for children have all the infection programming. It has made nutrition and food prevention items needed to control infection among security a national priority by undertaking a Nutrition sick children. Only 55 percent of health facilities Assessment and Gap Analysis (NAGA 2011), have a proper expanded program on immunization developing Multisector Nutrition Plans (MSNP (EPI) guidelines; 20 percent of staff are trained in 2013 and MSNP 2018), and creating a National EPI; 3 percent have a needle destroyer, and less Nutrition and Food Security Secretariat under the than 8 percent have all the training and equipment umbrella of the National Planning Commission to 57 Ministry of Health 2017. June 2019 World Bank Group 52 Investing in People to Close the Human Capital Gap Nepal Development Update strengthen coordination and integrated delivery of for catalyzing investments in human capital. Labor services, as well as guide and oversee nutrition market outcomes and earnings can affect human activities. Despite such policy commitments, capital investment decisions, which in turn effect implementation is lagging mainly due to coordination skills, productivity, and earnings. Increased failure. The new federal structure provides an investments in the human capital of youth and opportunity to coordinate implementation at the women is therefore important given Nepal’s recent local level, where all the implementing agencies history, and the interplay between poor labor market can converge. conditions, the prospects for youth, and social unrest. The quality of social protection services is also in need of improvement to support higher Labor force participation among youth is investments in human capital. Despite limited, especially among women (Table 6). significant spending, access to social protection is On average, only 29 percent of those age 15 to 24, uneven. Based on the Nepal Living Standard and 53 percent of those age 25 to 34, participate Survey II, social insurance covers only 7 percent in the labor market. Also, the unemployment rate of the population, mostly public sector employees is highest among young people; while young people and richer segments of the population. Despite accounted for 48 percent of the labor force, they covering around 35 percent of the population, made up 69 percent of those unemployed. Among social assistance schemes are not targeted explicitly all age groups, women’s labor force participation toward the monetarily poor. Instead, it relies on (on average 26 percent) is much lower than men’s targeting based on ethnic and social categories. (54 percent). While trends show increased The benefits provided by some programs are too education among the younger cohort (and hence small to effectively remove the income barrier most decreasing labor force participation), the share of of the poor face when trying to access services. young women who neither work nor study has Improved targeting could promote greater efficiency increased in rural areas.58 Cross-country surveys in reaching the poor and also help release more suggest that working Nepalese youth are particularly resources for the poor. Finally, most programs dissatisfied with their employment status (only 41 would have greater impacts on investments in percent are satisfied compared to over 80 percent human capital if the income support they provided in Bangladesh, Cambodia, and Vietnam).59 was accompanied with information and incentives to adopt behaviors that promote greater investments in the nutrition, health, and education of children Table 6: Key labor market indicators by age and and in the productive and earning capacity of adults. gender Quality labor market interventions are also Age Group Labor Force Unemployment essential to ensure that human capital (Years) Participation Rate Rate investments effectively support inclusive Male Female Male Female growth. The human capital situation of youth is Total 53.8 26.3 10.3 13.1 both an opportunity and a challenge. Nepal is in 15–24 38.9 20.3 19.7 23.9 the middle of a youth bulge in its demographic structure, and these dynamics present real 25–34 74.9 37.6 11.9 13.9 opportunities for Nepal’s economic growth and 35–44 76.8 36.7 7.5 9.9 development. To realize this potential, Nepal needs 45–54 63.4 28.0 5.2 7.6 to provide sufficient and suitable employment that 55–64 42.2 16.9 5.5 3.5 is productive and adequately remunerative for the 65+ 21.1 7.0 3.5 0.6 country’s youth. Attention to labor markets, particularly for youth and women, will be important Source: Central Bureau of Statistics 2019, Table 3.6. 58 Raju and Rajbhandary 2018. 59 Raju and Rajbhandary (2018) based on Elder et al. (2015). June 2019 World Bank Group 53 Investing in People to Close the Human Capital Gap Nepal Development Update Currently, labor market interventions are generations of youths and adults; (d) adopt relatively limited in Nepal, especially for the transparent performance management measures to poor and vulnerable. Improving the situation of incentivize service providers; and (e) strengthen youths and adults, especially adolescent girls and coordination across government programs and women, will require addressing the challenge of ensure policy continuity. low-productivity employment (which is an area where efforts both on the labor supply and demand (a) Invest early in human capital and early sides are needed) through comprehensive programs. childhood development, adopting a In addition to translating increased human capital multisectoral approach into growth, these policies will also motivate A multisectoral approach to early childhood households to invest in the human capital of their development has been demonstrated to be children by showing that there are potential large most effective in enabling children to reach returns to this investment. their full potential. This includes interventions Priority interventions for improving the not only from health and education, but also from quality of services sectors such as agriculture, and water and sanitation, that also impact health, nutrition, and educational Federalism provides an opportunity to improve attainment. Although this Special Focus has access to and quality of services, and to adopt concentrated on the components of the Human a multisectoral approach to investing in human Capital Index, Box 2 highlights the importance of capital. But there are both opportunities and a multisectoral approach to investments in human challenges. Being closer to the people, local development, including the importance of early governments can adopt a more community-centric childhood development for establishing the approach while planning and budgeting for social foundation for improved human capital. The services. Thus, resources and services can be empirical evidence shows that family planning targeted more to where they are most needed. interventions will help reduce unwanted pregnancies Citizens are more empowered to hold elected and optimize age at first pregnancy and reduce the representatives of the local governments and risk of children being born small. Quality providers accountable. Federalism also provides an reproductive health services to mothers including opportunity for services to be delivered in a more micronutrient supplementation have also been coordinated fashion – when they are all delivered proven to reduce the risk of low-birth-weight by local governments (rather than by multiple children and small-for-gestational-age children. central ministries that work in isolation). However, there are also challenges arising from inadequate It is essential to expand cost-effective human resources and weak capacity to plan, budget, interventions, specifically, coverage of adequate and implement programs. In addition to the risks intake of iron/folic acid to pregnant women. of disruption in service delivery, there are also risks A multisectoral approach also calls for of divergence in the package of services offered supplementation of other micronutrients to throughout the territory, which would jeopardize mothers, given the evidence that anemia is not due national objectives in terms of human capital. only to iron deficiency. The government should ensure effective coverage of counseling of pregnant To raise the quality of service, it is necessary women and mothers of infant and young children to (a) invest early in human capital and early for good infant and young child feeding and childhood development, adopting a multisectoral hygiene practices, including increased access to approach; (b) invest in building the systems that zinc supplementation during periods of diarrhea. would ensure the availability of quality-assured The analysis of the progress of nutrition-sensitive essential drugs and adequately trained health interventions in Nepal during the Multi-Sector workers, including in more hard-to-reach areas; Nutrition Plan 2013–2017 (prepared by the NPC) (c) invest in the human capital and skills of existing found that the majority of selected nutrition- June 2019 World Bank Group 54 Investing in People to Close the Human Capital Gap Nepal Development Update sensitive indicators increased their coverage. The sensitive programs of other sectors can help increases in coverage were for secondary school scale-up nutrition-specific interventions and create enrolment, disposal of child feces, handwashing a stimulating environment in which young children with soap and water, and access to improved can grow and develop to their full potential, so it sanitation. More remains to be done on reducing is equally important to generate evidence of, and early marriage and installing well-functioning water implement at scale, effective nutrition-sensitive supply systems, which currently cover only interventions. one-third of targeted populations. Nutrition- Box 2. The importance of early childhood development programs for building human capital Boosting Nepal’s human capital will require wasting among children 10 to 22 months old.b critical investments to increase the coverage Finally, holistic multisectoral approaches are and quality of early childhood development effective. Chile’s Crece Contigo program integrates (ECD) interventions. There is compelling the services provided by the health, education, scientific and economic evidence that shows that welfare, and protection services so that a child’s experiences in the early years have a profound first contact with the system occurs in utero, impact on brain development, affecting learning, during the mother’s first prenatal visit. health, adult productivity and, ultimately, the economic competitiveness of nations. Focusing The government is taking steps to expand on human capital during the first 1,000 days of a the provision of quality early education. child’s life, therefore, is one of the most cost- Under the School Sector Development Plan, effective investments governments can make. early grade reading assessments were undertaken Boosting early childhood outcomes requires a in 3,600 schools across the country and results multisectoral approach, focusing on the provision disseminated within communities. The government of services as well as focusing on providing is also implementing the national early grade incentives and removing barriers for households reading program, which aims to address the to access these services. Examples of interventions problem of low school preparedness. The program include services for pregnant and lactating includes provision of free textbooks and mothers; maternal, and child pre- and postnatal supplementary early grade reading materials, care; daycare, preschool, health, and nutrition teacher training in early grade reading, and book programs for mothers or children; parental corners. Through the child grant (see below), the education on how to engage in early stimulation government is also providing support to promote activities with young children; and safety nets to investments in young children’s capital. To boost support welfare and nudge households to invest. the impacts of these investments, it will be essential to ensure social safety nets reach the Global evidence provides some lessons for poor and vulnerable and provide information effective ECD provision, highlighting the and incentives to use services. Nepal has made need for an integrated approach. In some significant progress in expanding maternal and contexts, community-based playgroups have child health services, including the coverage of generated sustained outcomes at a low cost. In vaccinations, prenatal care visits, and institutional Indonesia, one such program positively affected delivery. Furthermore, the government has children’s language, socioemotional, and cognitive prepared a national multisectoral action plan for skills; those from disadvantaged backgrounds nutrition to guide sectoral investments for maximum benefited more in the short and long term.a In coordination and convergence of interventions. others, cash transfers can be an effective way to Recognizing the importance of investing in the support early childhood development for the early years, a multisectoral nutrition project poorest children. A cash transfer program in targeting the first 1,000 days of a child’s life is being Bangladesh significantly reduced the incidence of implemented with the support of the World Bank. Sources: a. Brinkman et al. 2017. b. Ferre and Sharif 2014. June 2019 World Bank Group 55 Investing in People to Close the Human Capital Gap Nepal Development Update Figure 48. Key Interventions for the Early Years at Different Stages of development Pregnancy Birth 12 Months 24 Months 36 Months 54 Months 72 Months Counseling on adequate Exclusive Complementary Feeding Adequate Nutritious and Safe Diet diet during pregnancy breast feeding Therapeutic zinc supplementation for diarrhrea NUTRITION Iron folic acid for pregnant mothers Prevention and treatment and acute malnutrition (moderate and severe) Micronutrients: supplementation and fortification Antenatal visits safe wa Immunizations HEALTH Attended Deworming deliveries Planning for family size and spacing; Access to healthcare; Prevention and treatment of parental depression WATER AND Access to safe water; Adequate sanitation; Hygiene/Handwashing SANITATION Maternal education EDUCATION Education about early stimulation, growth and development Early childhood and pregnancy programs Continuity to quality primary education Birth SOCIAL Registration PROTECTION Parental leave and adequate childcare Child protection services; Social assistance transfer programs Source: Denboba et. al. 2014. There should also be attention to adolescent asset accumulation, consistent with a rapid growth health and nutrition and to maternal health in household income, was important for increasing and nutrition before and during pregnancies, all nutrition indicators. Second, educational which have long-lasting impacts on the improvement, particularly maternal education, also development of children. Nutrition-specific helped to improve nutrition outcomes. In addition, priority interventions targeted to pregnant women impressive improvements in access to health care and mothers of infants and young children should services including prenatal, neonatal, and postnatal focus on cost-effective and evidence-informed care through rapid expansion of health extension interventions. Nepal should strengthen critical workers as well as financial incentives have helped interventions that focus on reducing stunting and reduce stunting. Improved sanitation, particularly anemia, including prenatal micronutrient a reduction in open defecation, has also helped supplementation, protein supplementation, reduce undernutrition. Finally, social protection counseling on infant and young child feeding and programs, such as the child grant (one of the five hygiene, and intermittent presumptive treatment Social Security Allowances, which is provided to of malaria in pregnancy in malaria-endemic regions. all children under five in selected districts and to This includes nutrition-specific interventions for all Dalit children under five elsewhere) can all women of reproductive age focused on iron contribute positively to reducing malnutrition by and folic acid supplementation for non-pregnant promoting good feeding practices and protecting women, as well as staple food fortification for the the income of the poor. Looking forward, to ensure general population that supports overall balanced high-quality nutrition services, it will be important nutrition. to adopt an integrated approach to service delivery that improves coordination across agencies to To further reduce stunting, Nepal needs to support well-rounded diets including improved adopt an integrated approach to improved infant and young child feeding practices. nutrition. A recent study60 reported that rapid 60 Headey and Hoddinott 2015. June 2019 World Bank Group 56 Investing in People to Close the Human Capital Gap Nepal Development Update A cross-sectoral and coordinated approach standards, was already a challenge. The transition could include integrating nutrition services to a federal system presented the possibility for with other early childhood interventions at the subnational governments to derive their own local government levels to maximize solutions and possible innovations. At the same administrative efficiency and create a protective time, the federal structure has become more environment for children to thrive to their complex in its need to define responsibilities, fullest potential. For the integration and improved coordinate necessary action, deal with hundreds delivery of services across human capital more stakeholders, compete in local markets for dimensions, a national identification system supplies and human resources, and other comprising two instruments – the civil identification complicating factors. Addressing these challenges system and the national population registry – is requires (i) developing a process by which essential to ensure individuals are uniquely identified coordination across levels of government can in the system. Interoperability between the coordinate functions and resolve problems such as identification systems and program information a national health assembly; (ii) investing in systems systems (health, education, Social Security that would be useful across the different stakeholders Allowances, health insurance, scholarships, and so for making informed and coordinated decisions forth) can then foster integration and boost such as a quality assurance system for key health efficiency. inputs such as drugs and health education and training, logistics, and management information (b) Invest in the systems needed to supply quality systems and framework agreements for centralized health services procurement for local purchasing; (iii) supporting Invest in the systems necessary to improve the the development of tools that would make it easier availability of key inputs for the delivery of to provide and measure the delivery of quality quality health services. Evidence shows that services, such as simple decision charts, checklists, even when households have access to health and citizen accountability and redressal mechanisms; services, use of services does not always translate and (iv) promoting innovations to address shortages, to improved outcomes mainly due to the poor particularly in order to reach areas, such as quality of the services. For instance, access to strengthening community health workers, institutional delivery failed to improve maternal telemedicine, and drone deliveries. mortality because of weak capacity of health facilities to manage complications. To improve (c) Invest in the human capital and skills of access to quality health services, Nepal plans to existing generations of youths and adults expand the Basic Health Services Package that is to be available to all citizens, and to set minimum Ensuring human capital investments effectively facility standards to deliver those services. This will support inclusive growth requires labor market require capital investments, but construction and policies that address challenges linked to labor purchasing of equipment is fairly easy. The more market participation (especially for adolescent challenging task involves the logistics of ensuring girls and women). It also requires addressing the all the necessary inputs are in the right place at the challenge of low-productivity employment (which right time and are of sufficient quality. is an area where efforts both on the labor supply and demand sides are needed). In addition to Two inputs in particular that are absolutely translating increased human capital into growth, essential for the delivery of quality services are these policies can also motivate households to (i) quality health commodities, including invest in the human capital of their children by pharmaceuticals, medical supplies, vaccines, family showing that there are potential large returns to planning commodities, and the like; and (ii) this investment. knowledgeable and competent health workers. Ensuring the availability of these inputs in sufficient While investments in future generations have quantity and timeliness, and that meet the necessary proven to be the most beneficial, attention June 2019 World Bank Group 57 Investing in People to Close the Human Capital Gap Nepal Development Update should also be paid to increasing the human that encourages conceptual understanding and capital of existing generations with skills development of cognitive skills, instead of rote deficits. Programs that promote increased learning. It also requires addressing the challenges productivity among youths and adults come in various of inadequate teacher performance management shapes, but those that are most effective at helping systems, a supply-driven approach to school the poor and vulnerable improve their living financing, and insufficient support to the training conditions typically combine a series of areas to of science and math teachers. Targeted support to address the multiple barriers faced in labor markets. teachers that enhances their skills and motivation Packages typically combine some of the following: to teach to the level of the child would yield strong technical skills training, basic literacy, on-the-job results. This necessitates aligning incentives at each experience, development of agency and self-efficacy level of the education service delivery chain toward (socio-emotional skills), preparation of business a common goal – improved learning. A key measure plans, coaching for microentrepreneurs or the would entail implementing transparent performance self-employed, grants or loans, and access to management where teacher rewards are linked to financial services. student learning and time on task. This would help stimulate better teaching effort in the classroom The newly announced Prime Minister’s (see Chile example in the next paragraph). Similar Employment program is establishing Employment performance-based incentives could be implemented Service Centers in every local government and at the school and local government levels. The boosting the employability of youth. These Government of Nepal through its School Sector Employment Service Centers have the potential to Development Program is putting in place processes address inequities in access to information related and systems to track teacher time spent teaching to employment opportunities. Partnerships with the and improve existing policies around teacher private sector to both identify skills areas that are deployment. needed and to provide the skills training both directly and on-the-job need to be explored. With Recent data show that school leadership can a large number of youths entering the labor market be significantly enhanced in terms of the extent every year, it is also essential that the private sector to which head teachers take ownership of the generates new and better jobs. Government policies learning of lagging students and of improving can be used to incentivize the private sector to teacher performance.61 There is also potential to develop labor-intensive jobs. significantly improve the school grants management system by basing grant allocations on a robust (d) Adopt transparent performance management funding formula, introducing a performance-based measures to incentivize service providers component, and building a system to verify Strong incentives and accountability mechanisms compliance on funds eligibility and utilization. For will be critical across all sectors. Nepal could example, in the 1990s, Chile implemented a similar establish incentive mechanisms that motivate program that awards a bonus to schools and to all teachers or health care providers, engage students teachers in the school for outperforming other in learning, and encourage households to invest in schools on a national student exam. Schools serving various aspects of human capital. There is a need students with similar demographic characteristics in to realign and synergize incentives at each level of similar settings are grouped together. Teachers access to services and service delivery toward the receive a bonus (not a permanent salary increase) same objective. equivalent to 5 to 7 percent of their annual salary. As much as 90 percent of the bonus award is In the education sector, reforms are needed to divided among teachers, and the school director update curriculums and develop an exam system determines how to use the remaining 10 percent. Chile’s program has had a cumulative positive 61 Sabarwal et al. 2019. June 2019 World Bank Group 58 Investing in People to Close the Human Capital Gap Nepal Development Update impact on student performance in schools with identify and monitor the progress of basic service reasonably good chances of winning the award. delivery. The federal Ministry of Health and Nepal is building on some of the lessons from Population can also lead the way to using improved countries around the world to improve contracts with autonomous service providers by accountability and efficiency in the education increasing the use of contracts – with defined sector. Some of the measures include the service standards and performance benchmarks – introduction of capacity building and performance with the national-level hospitals that currently -based incentives for local governments to pursue receive block grants. quality and equity improvements through activities embedded within the School Sector Development Overall, more evidence-based policy formulation Plan. Notable activities include implementing and interventions will require improved targeted scholarship schemes for poor and monitoring and evaluation functions. In education, marginalized children at the secondary level, this includes measuring learning outcomes, and expanding school-based early childhood education, enhanced assessments, curriculums, and certification. tracking teacher time spent teaching, conducting Nepal has taken positive steps toward better social audits, and administering conditional grants measurement of learning by completing several to community schools that meet minimum rounds of the National Assessment of Student accountability requirements with regard to indicators Achievement. However, there is limited use of on time spent teaching, student attendance and these data in guiding policy or practice. This will retention, and textbook availability, among other involve enhanced learning assessment systems indicators. Capacity building and conditional grants that (i) monitor progress in learning outcomes, to local governments are also being tied to open and (ii) feed this information back, not just to data or information on the flow of conditional policy makers but also to school administrators grants released from local governments to schools and teachers. For example, in Chile, all students on accessible websites and/or physical spaces, to in grades 4 and 8 take the Sistema de Medición help strengthen accountability. de la Calidad de la Educación each year. The test identifies the 900 schools scoring in the lowest Incentives and accountability in health services 10 percent on the tests, and the schools receive could be strengthened through the federalism special resources. Hence, the data are clearly linked process. The local governments that are responsible to action. It will also include complementary for the provision of basic services are better curriculum and examination reforms. Similar positioned to hold health service providers approaches could be adopted for health facilities accountable and are more likely to be responsive to and the delivery of essential services or preventive the demands of the community. However, such care. systems need to be established early on in order to avoid the pitfalls of decentralization in service Across all sectors, federalism could be used to delivery that are observed in other countries.62 The strengthen accountability and improve government can exploit the past experience with efficiency in service delivery tailored to local piloting social accountability systems in the health conditions. Global evidence suggests that building sector and build on these to improve accountability capacity, adopting the right incentives, and of health service providers. Linked to this is the strengthening accountability of local leaders are need to ensure there is clarity on what services are each important for improved service delivery. In to be available, the service standards of the facility, Bangladesh, local-level upazilas (administrative and that the facility has the inputs necessary to regions) implement education plans, but lack of deliver those standards. To help subnational upward flow of accountability creates few incentives governments align with national-level efforts, for improving education quality.63 Another important simple monitoring tools should be developed to lesson is that the federal government can play a 62 Thapa et al. 2019. 63 Shrestha 2017. June 2019 World Bank Group 59 Investing in People to Close the Human Capital Gap Nepal Development Update role in establishing performance- based goals and to build a national consensus on key national targets to support and incentivize local governments. human capital priorities. For example, the federal government in Brazil created a uniform tool to measure school-level and The devolution of many basic service delivery municipal performance, based on their national functions to local-level governments is also an student assessment and pass rates. This was used to opportunity to strengthen the coordination and set custom targets for each municipality. Various integration of programs and delivery systems. municipalities have independently used this tool to This integration can contribute to improving the introduce incentive programs in their schools.64 impact of interventions. Indeed, as mentioned, for Community-based services and performance- most human development outcomes – nutrition, based incentives for service providers could also education, health, skills, and employment, among be adopted for health and nutrition services. others – multisectoral interventions are the most effective. These combine elements focused on the (e) Strengthen coordination across the levels of supply side, ensuring services are available and have government and programs and ensure policy the quality required, with elements focused on the continuity demand side, ensuring households have the resources Promote coordination within the government and incentives to use the services. They also combine and between different levels of government. complementary interventions, which together can Promote strong coordination within the federal effectively move the needle for key outcomes government and between the federal and local (combining education of parents with supply of governments and with development partners for nutrition services, and with income support for effective investment in human capital. Such the poorest, for instance). The fact that many basic coordination will ensure complementarity of services will be managed locally provides an investments, enable synergies among the various opportunity to break sectoral silos and integrate interventions exploited, and most importantly, interventions. For instance, scaling up early allow for convergence of interventions in geographic childhood development programs could include areas/beneficiaries. Ethiopia is one example where integrating nutrition services with other early the coordination within the government and childhood interventions at the local government between government and development partners level to maximize administrative efficiency and around the government-led safety net program create a protective environment for children to harnessed synergies. The program brought more realize their fullest potential. In social protection, than 10 development partners to establish a unified the government could assess the possibility of stream of technical assistance in support of the increased coordination across multiple programs program implementation. The success of the and the opportunity to set objectives for programs program is such that it was credited with lifting that go beyond income support and include targets more than 1.4 million people out of poverty. in terms of promoting use of health or education services or adopting particular behaviors (such as Ensure policy continuity over successive good hygiene, or cooking or feeding practices, governments. Improving human capital outcomes which are essential to nutrition outcomes). requires sustained investment over a long period of time, a time horizon usually not well aligned Well-coordinated and integrated delivery with the political cycle. As such, sustained effort systems can also improve quality, as well as that is beyond the political cycle is required. Often administrative efficiency and oversight. For the the efforts of countries fail to produce the desired integration and improved delivery of services human capital outcomes because of a lack of across human capital dimensions, a national sustained effort over the political cycle. Key to identification system is essential. It comprises the sustaining efforts over successive governments is national identification system and the civil 64 Bruns, Evans, and Luque 2011. June 2019 World Bank Group 60 Investing in People to Close the Human Capital Gap Nepal Development Update registration system, which ensure individuals have spatial data) and be used by all social programs to a unique and robust identity that ensures their identify their beneficiaries. A shared social registry uniqueness and their authentication by programs. would ensure improved targeting, more efficient Efficiency and effectiveness could be strengthened delivery of services, and greater coordination. by improving targeting across programs that aim at Interoperability between the identification systems supporting the poor, by establishing a registry, often and program information systems (health, education, called a social registry (Figure 49). This social Social Security Allowances, health insurance, registry would contain information on households scholarships, and so forth) can then foster integration (their composition as well as socioeconomic and and boost efficiency. Figure 49. Social registries serve multiple programs and sectors in the world Source: Denboba et. al. 2014. Priority number 3: Promote households’ and reported experiencing a shock in FY2014/15 and services’ resilience to shocks FY2015/16, and about 30 percent reported two or more shocks in the same period (Figure 50). One-quarter of the population in Nepal lives For those households that are near the poverty in poverty and a large percentage remains line, these shocks can push them into full-fledged vulnerable to shocks (natural disasters, health poverty, especially in the absence of disaster- or economic), which can erase years of responsive safety net mechanisms. Also, a higher progress in human development. Covariate percentage of children are malnourished because shocks, which affect numerous households they come from severely food-insecure households simultaneously, may be natural (drought, floods, (46 percent are stunted, and 35 percent are earthquakes, landslides, fires), economic (price underweight) compared with children from food- increases, a decline in remittances), or political. secure households (where 29 percent are stunted, Typically, these shocks have a disproportionate and 22 percent are underweight),65 and such impact on the poor and can push the vulnerable insecurity is worsened when shocks occur. Overall, into poverty. These shocks can have long-term shocks affect poorer households (quintiles 1–3 in effects on human capital, especially for children, Figure 50) more than richer ones, thereby through their effects on nutrition, education, and reinforcing inequalities. assets. Almost half of the households in Nepal 65 Ministry of Health 2017. June 2019 World Bank Group 61 Investing in People to Close the Human Capital Gap Nepal Development Update Figure 50. Nepal is vulnerable to shocks that can erase years of progress made in human development Source: Denboba et. al. 2014. The lack of a poverty focus of Nepal’s existing as part of the national disaster risk management social protection programs is compounded by strategy, and to ensure infrastructure and facilities the inflexibility of services in times of disasters. for human capital services are resilient to shocks. The 2015 earthquakes and the recent floods have demonstrated that while the government was able (a) Establish adaptive social protection to mobilize significant external aid, the existing programming as part of the disaster risk programs could not be mobilized to provide disaster management strategy. relief. International experience shows that social Adaptive social protection programming should protection programs can be effective channels for be established as an integral part of a disaster the delivery of disaster relief, and that it can also risk management (DRM) strategy and reduce loss of productive assets by providing implementation plan. International experience immediate assistance post-disaster. The existing has shown that regular, adequate, and well-targeted programs in Nepal are not flexible during disasters social protection programs can help build community due to rigid program design and fund flow and household resilience to shocks, and adaptive arrangements, and limited coordination between social protection programs can provide timely and government agencies responsible for disaster efficient assistance to protect well-being after shocks management and social protection. occur (as illustrated by the green line in the bottom of Figure 51). The “adaptive” approach to social To promote resilience to shocks, it will be necessary protection requires integration with disaster risk to establish adaptive social protection programming management and climate change adaptation June 2019 World Bank Group 62 Investing in People to Close the Human Capital Gap Nepal Development Update strategies. Existing programs in Nepal are neither Figure 51. Adaptive social protection protects explicitly designed to reduce poverty and build against destitution after a shock occurs resilience, nor to be scalable in the aftermath of a shock. Recent institutional developments position the government to efficiently use social protection as one of its instruments to respond to shocks and disasters. The 2017 Disaster Risk Reduction and Management Act includes a provision to target response to vulnerable groups. It also provides for the establishment of a National Disaster Risk Reduction Management (DRRM) Authority to coordinate all disaster management actions. In addition, the Ministry of Home Affairs is now responsible for administering the largest social protection program (the Social Security Allowances Program), in addition to its ongoing responsibility for planning and implementing all DRM-related activities. This provides a unique window of opportunity to establish “adaptive” social protection Source: Pandey and Lakhey 2018. programs as an integral part of the government’s DRM strategy. The following activities would be Figure 52. Percentage of households’ total health required: (a) establish mechanisms for a social and medical expenditures as a share of non-food registry to identify vulnerable households that household consumption expenditures using would need temporary support when shocks occur, different thresholds: Nepal (NLSS 2010/2011) (b) implement adaptive programs that build resilience and can be scaled up for rapid response, (c) develop financing mechanisms to ensure timely response, and (d) establish institutional links between DRM and social protection at all three levels of government.66 The risk of catastrophic health expenditures in Nepal due to an illness or injury is high. As shown in Figure 52, 55 percent of total health spending is spent directly by households out of pocket (OOP). According to the World Health Source: Adapted from Adhikari and Sapkota 2018. Organization, “when people have to pay fees or copayments for health care, the amount can be so foreseeable as to when it will happen or the high in relation to income that it results in financial magnitude of the severity. The data from the catastrophe for the individual or the household. Nepal Living Standards Survey (NLSS) 2010/11 Such high expenditure can mean that people must (the last available) allow an analysis of catastrophic cut down on necessities such as food and clothing health spending in Nepal. Considering non-food or are unable to pay for their children’s education.”67 consumption expenditures as a denominator At the same time, and as shown in Figure 50, illness (Figure 52), the proportion of households with or injury of a household member is a shock, not 66 Based on recommendations of policy note on “Adaptive Social Protection for Effective Disaster Risk Management,” Pandey and Lakhey (2018). 67 Xu et al. 2005, p1. June 2019 World Bank Group 63 Investing in People to Close the Human Capital Gap Nepal Development Update catastrophic health spending varies from 20.3 identifying the poor and other vulnerable groups. percent (using a threshold of 15 percent) to 9.8 Similarly, international experience has shown that percent (using a threshold of 40 percent for total national coverage requires the collection of health expenditures). Detailed analysis using the premiums from the formal sector through a NLSS 2010/11 highlights some factors that could taxation system, and a high subsidy without increase the likelihood of catastrophic health automatic enrollment of those individuals not in expenditures: (a) households with a greater number the formal sector. Nepal has a good basis to of children under age five and of elderly people, transition to such a system and now has valuable (b) Dalit households, (c) residents of the Terai, institutional capacity to contract public and private (d) increased household size, (e) households in the providers to provide an explicit benefits package three poorest income quintiles, and (f) no or to an explicit beneficiary group. However, certain minimum educational attainment by the head of a fundamental changes are required to transform the household.68 system into one that would be effective in mitigating health shocks for the poor and vulnerable. This A reoriented health insurance system – with includes (a) a robust system for defining and the priority to ensure effective coverage of the identifying the poor in a regular and systematic poor and vulnerable – could be a means of way, in coordination with the social protection increasing access to health care and reducing system; and (b) a political and financial agreement the risk of impoverishment in case of illness to highly subsidize the informal sector above the or injury. In 2017, the Nepal Health Insurance poverty line and who are at high risk of Act, which established a national health insurance impoverishment in case of illness or injury. The system, was signed into law. The law mandates health insurance system also needs to be coordinated coverage to all families (including formal and with the free health services and other health and informal workers, and the poorest families). The social security schemes to reduce duplication and health insurance system received a block grant to fragmentation. cover the “poor” and collects premiums from other households. The health insurance system has (b) Ensure facilities and infrastructure are resilient been rolled out to about two-thirds of the country. to shocks and invest in emergency preparedness An average of 5 percent of the total population of When societies face disasters, fragility, or Nepal and 17 percent of the total population of conflict, education and health often suffer the the districts that implemented health insurance are most. This in turn prevents entire generations currently covered by the system. from achieving their potential. To prevent this, it is important to put in place measures that ensure In theory, the health insurance system could continuous provision of educational opportunities be a mechanism for increasing access to health and health services as early as possible during a care and protecting the poor and vulnerable crisis. One way to do this is to ensure that disaster- from catastrophic health expenditures. However, resilient materials are used in the construction of there is no functional system currently operating schools and health facilities. This is especially for defining and identifying the poor. The current important for Nepal, which is vulnerable to system relies on a household survey that is more earthquakes and climate change. Building resilience than seven years old and that only covered part of in school and health systems also involves plans the country. The principle is good. However, the for the provision of health services, developing countries that have such systems that target the poor emergency preparedness to support the response and other vulnerable groups, such as India, with and recovery effort, disaster education, securing safe the PMJAY National Health Protection Scheme, or school environments, developing school disaster Vietnam, with the Vietnam Social Health Insurance management plans, and building the capacity of System, have a regular and credible system of health workers, school teachers, and local educational officers. 68 Adhikari and Sapkota 2018. June 2019 World Bank Group 64 Investing in People to Close the Human Capital Gap Nepal Development Update Improving Table Competitiveness 7: Priority and interventions to Integration invest with in people andGlobal Markets scale-up human capital investments Reform Areas Selected Key Recommendations and Priority Interventions Priority Number 1: Reduce inequity across gender, social, income, and geographic groups Eliminate barriers for the poor • Across all services design programs that incentivize investments in human in accessing human capital capital (education and skills, health, nutrition) by households, while reducing services out-of-pocket costs for the poor • Health. Increase public financing to ensure the availability of a standardized and basic health care service package • Reorient the current health insurance system to provide effective coverage of the poor and other vulnerable groups, starting with a systematic means of defining and identifying the poor and vulnerable, in coordination with the social protection system • Social protection. Design or expand social protection programs that incentivize investments in education, health, nutrition for poor households while reducing their out-of-pocket costs • Link design to information or incentives that promote behavioral changes that improve access to services and human capital outcomes • Establish a social registry that includes information on poor households, so that beneficiaries can be effectively identified and targeted Increase the availability of Support local government capacity to address geographic disparities services in poor and • Increase resources allocated to the local level to ensure sufficient and underserved geographic areas well-equipped facilities for provision of basic health, education, nutrition, labor, and social protection services by local governments • Assess local needs and revenue capacity to refine the basis for fiscal transfers • Provide capacity support to local governments to improve planning, budgeting, implementation, and monitoring of programs • Support local governments to develop own-revenue capacity • Define and establish a minimum standard of social protection Priority number 2: Improve the quality of education, health, nutrition, labor, and social protection services from early childhood to adulthood Invest early in human capital ECD/Education and early childhood • Increase the quality and coverage of early childhood education (ECD) development, adopting a • Build capacity of local governments to monitor the quality of early ECD programs multisectoral approach • Expand early reading programs that help ensure all children can read by age 10 • Evaluate the child grant to strengthen household incentives for investing in human capital. Nutrition • Scale-up cost-effective essential nutrition interventions including iron/folic acid intake for pregnant women and promote the same for non-pregnant women/adolescent girls • Consider prenatal supplementation of other micronutrients for pregnant women and mothers of infant and young children • Increase counseling of pregnant women and mothers of infant and young children for good infant and young child feeding and hygiene practices • Integrate nutrition services with other interventions of early childhood development at the local government levels • Generate evidence of and scale-up effective nutrition-sensitive interventions June 2019 World Bank Group 65 Investing in People to Close the Human Capital Gap Nepal Development Update Invest in the systems Health necessary to deliver quality • Develop a national- and local-level Health Assembly as a means of coordination health services across different levels of the health system and to resolve problems • Invest in systems needed by all tiers of government for service delivery and informed decision making such as quality assurance systems for supplying drugs, qualification systems for public and private education and training, logistics management and information systems and framework agreements for centralized procurement for local purchasing • Develop testing and dissemination of tools for providing and measuring service quality such as simple decision charts, checklists, and citizen accountability and redressal mechanisms • Promote innovations to address shortages and motivate performance, particularly in harder-to-reach areas, such as strengthening community health workers, telemedicine, drone deliveries, and performance bonuses. Invest in the human capital Labor market programs and skills of existing • Strengthen programs that address the multiple constraints faced by the poor generations of youths and and vulnerable in labor markets, especially for youths and women, including skills training, basic literacy, on-the-job experience, development of adults socio-emotional skills, business development, coaching for the self-employed, grants or loans, and/or access to financial services • Implement the Prime Minister’s employment program, which is establishing an Employment Service Center in every local government and boosting youth employability Adopt transparent Education performance management • Update curriculums and develop an exam system that develops conceptual measures to incentivize understanding and cognitive skills, instead of rote learning • Implement a performance-based approach that links teacher rewards to service providers student learning • Adopt performance-based approaches at the school facility and local government levels, to promote quality and equity improvements through the School Sector Development Plan • Strengthen the formula for the school grants management system by introducing a performance-based component, and building a system to verify compliance on funds eligibility and utilization • Implement capacity building and conditional grants to local governments tied to open data or information on conditional grants released to local governments and schools, to strengthen accountability. Health • Draw on past experience with social accountability systems piloted in Nepal’s health sector to improve the accountability of health service providers • Clarify services to be provided where and service standards of the facility • Help subnational governments align with agreed national priorities with development of dashboards and monitoring tools for delivery of specified services • Scale-up and improve performance-based contracting of national hospitals using block grants received as a potential model for Provinces. June 2019 World Bank Group 66 Investing in People to Close the Human Capital Gap Nepal Development Update Strengthen administrative efficiency in health, education, nutrition, and social protection • Build local capacity to plan, budget, and implement in the key sectors • Strength administrative and other data to improve monitoring and evaluation to inform the design of performance-based incentive mechanisms. Strengthen coordination Across all services across government and • Use conditional grants to strengthen national standards and ensure consistency programs and ensure policy across regions • Develop simple monitoring tools to assess progress and provide feedback to continuity implementation • Build a national consensus on key national human capital priorities to ensure policy continuity over successive governments Social Protection • Develop a national identification system comprising the national population registry and the civil registry system, to ensure individuals can be uniquely identified • Ensure interoperability between the national identification systems and program information systems (health, education, social security, health insurance, scholarships, etc.) • Develop a social registry to be used by programs in identifying the poor and vulnerable • Increase coordination across programs and set objectives that go beyond income support to include targets to promote use of health or education services or particular behaviors • Establish a social registry to be used by all programs to improve targeting. • Develop a national social protection strategy, building on the National Social Protection Framework, that clarifies the roles of the three levels of government. Priority Number 3: Promote households’ and services’ resilience to shocks Establish adaptive social Social protection protection programming as • Establish mechanisms for using the social registry to identify vulnerable part of the disaster risk households that need temporary support when shocks occur • Build adaptive programs that can be scaled up for rapid response management strategy • Develop financing mechanisms to ensure a timely response • Establish institutional links between disaster risk management and social protection at all three levels of governments. • Invest in disease surveillance and disaster preparedness in case of mass casualty events. Ensure facilities and Health, education, social protection infrastructure are resilient to • Ensure disaster-resilient materials are used in constructing service facilities shocks • Adopt measures to ensure continuous provision of education, health and social protection services and labor market interventions, as early as possible during a crisis • Build resilience by developing disaster management plans, securing safe environments, and building the capacity of health workers, school teachers, local educational officers, local social protection staff, and all local government workers. 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