Keeping Nepal afloat

Financial regulation is what keeps a country’s balance sheet in the black. Jason Hesse speaks to the senior project manager behind the Nepal Macroeconomic Reform Programme.

Delivering a complex financial reform project in the world’s 16th poorest country can, to say the least, be challenging.

Despite 2010 figures that showed 25 per cent of Nepal’s population are living below the international poverty line of $1.25, the country’s financial services industry is booming: there are currently 215 banks (compared with fewer than 100 in the UK). However, this rapid growth has not been matched by sufficient regulation, which has allowed poor financial practices to flourish.

Recognising the complex challenges facing the financial sector in Nepal, plans were developed by the World Bank, the International Monetary Fund and the UK Department for International Development to prevent and mitigate the effects.

“The Nepali government asked international donors for a response package to provide technical assistance to help the financial sector,” explains Christopher Tomlinson, senior project manager at Adam Smith International, who led the reform programme.

“Although attempts to rectify some of the underlying drivers of systemic risk in the financial sector in Nepal have been attempted previously, their impact had been limited.” Adam Smith International was instructed to deliver a highly-targeted programme to help stabilise Nepal’s financial sector through assisting the government in implementing a challenging package of reforms. This was called the Nepal Macroeconomic Reform Programme.

At the heart of the programme was building the capacity of over 300 government officials to improve their ability to regulate and supervise the financial sector.

Capacity building
The core of the project was an update to Nepal’s financial reporting methods. Most countries today use International Financial Reporting Standards (IFRS) – this is the way that banks and companies manage their balance sheets and how they report their income, profit and turnover. In Nepal, they were using the Nepali Accounting Standards, which were outdated. The government decided to align itself to IFRS, and Adam Smith International was brought in to train the regulators on how to do their job using this international best-practice standard.

This capacity-building training project involved providing courses between 8-16 weeks long. “This was a long time for government officials to show up for training,” recognises Tomlinson. “So we had to deliver the training at a scale where we could be very flexible in terms of their attendance at sessions.”

The project meant putting together a complex schedule where 300 government employees could drop in and out based on when they could attend.

The training was separated into three parts: a module on basic accounting, an introduction to IFRS, and applied theory – this meant teaching officials how the new standards would affect their work day to day.

“We had to be very flexible and hands-on, as well as conscious of their time and the limited capacity within their institutions to take time out for training,” Tomlinson explains. “We had to be very flexible and hands-on, as well as being acutely conscious of the cost to the institutions of releasing key staff to take time out for training.”

A big carrot
In previous iterations, attempts to successfully deliver a change programme in Nepal’s financial sector have often failed because of a series of highly bureaucratic systems and processes and a general inability to gain consensus among stakeholders.

Many projects provide governments with the assistance required to embark on reform programmes, but these all too often get stuck in a labyrinth of bureaucratic procedures and fail to deliver capacity flexibly and when it is needed.

To overcome this, explains Tomlinson, Adam Smith International’s Nepal Macroeconomic Reform Programme was linked to the World Bank’s multi-million dollar concessionary grant programme. The goal was to provide the Nepali government with a financial incentive to drive successful reforms.

The World Bank agreed a number of reforms for Nepal’s government to carry out that would increase the stability of the financial sector – as well as timings – in exchange for a $130m concessionary grant over two years, being released as reforms are successfully implemented.

“This was a very good incentive to carry the programme out,” says Tomlinson. “There was a big $130m incentive on the successful completion of these reforms.”

The strong financial incentive provided the government with a powerful tool for change agents to champion reforms, avoiding blocking actions from individuals who may have vested political or financial interests and overcoming the inertia of the bureaucracy.

“These large grants provided cover for individuals to make decisions – they could tie their decision to the grant.”

Consensus
This was a key learning experience for Tomlinson. One of the main challenges was high staff turnover in institutions.

“We would have worked with someone for several years and built a consensus – got them on board and activities were ready to roll out when, the next morning, that person has been transferred out and you needed to start again from scratch,” he explains. “To mitigate that, we’ve had to work with the individuals, but also with the institution: building a consensus with the institution as a whole.”

This was achieved by putting together committees that would sign off on an activity. Instead of relying on just one person’s decision, the committee could back it up.

“The rapid rotation of senior officials has emphasised the importance of investing the time to maintain contact with – and brief – a wide range of officials in the core institutions,” Tomlinson says.

Even though officials may not have currently been involved in a programme work stream, they could become responsible for it later or may be members of a collegiate body which would take the final decision on a proposed action – key to getting a reform accepted.

Two years later
The Nepal Macroeconomic Reform Programme has already delivered results and continues to do so. Nepal’s financial sector has taken effective steps to reform supervision and regulation, and more than 300 government officials have been trained to improve their ability to supervise the financial sector.

“Prioritising the financial sector is not a particularly sexy thing for donors to be involved in – financial regulation doesn’t give pictures of happy farmers. But it is integral for the economy. The risk of financial collapse had the potential to annul the gains that Nepal made in the last few decades,” says Tomlinson.

“This has been a very successful programme and has contributed a lot to the country’s financial stability. We have even had unprompted follow-up requests from the government for more training – a sign that we must be doing something right.”

Jason Hesse is the editor of Project.