WB threatens to pull out of financial sector reform

The World Bank (WB) has threatened to suspend all assistance related to the financial sector reform project, as well as the proposed budgetary support, if the government doesn't restore the ICCMT management team at Nepal Bank Limited (NBL) by the end of August.

In a letter sent by WB Thursday to Bidhyadhar Mallik, finance secretary, WB said that it intends to suspend the right of the borrower (Nepal government) to make further withdrawals of assistance unless the management contract with ICCMT, an Irish/Scottish consulting firm, is extended for a six-month period.

The consulting firm had unilaterally terminated the management contract on July 22, citing inadequate cooperation from the Nepal Rastra Bank NRB.

The letter signed by Susan Goldmark, country director at the WB Nepal office, has also alleged that NRB failed to create a conducive environment for the operation of the NBL and has asked for decisive action satisfactory to the WB to restore the operational autonomy of the NBL management team.

In the face of increased interference by NBL's board and unions in the day-to-day operation of the bank, NRB has not taken necessary measures to ensure effective control over NBL as required by the agreement signed in June 2004, said the letter.

The WB has recommended convening a meeting of all parties, including the finance ministry, NRB, the consulting firm and the WB before the departure of the consultant.

WB has also made it clear that following a six month extension for ICCMT, the government is free to hire a professional management team for NBL, foreign or local, but with at least one expatriate as either CEO or chief credit manager.

However, the team needs to have qualifications and terms of reference acceptable to the WB and should be hired as per the procurement procedures agreed between Nepal and the WB, said the letter.

Reports said that if the WB pulls out assistance, it will immediately affect US$ 100 million reform projects at NBL and Rastriya Banijya Bank (RBB) and reengineering at NRB. Likewise, a proposed grant assistance worth US$ 30 million aimed at enhancing Access to Finance will be an immediate victim too.

Similarly, expected budget support of Rs 100 million for the current fiscal year will also become uncertain.