Focus on donor reaction to growing insecurity

Some of Nepal's donors have said they are faced with having to choose between continuing with aid to the impoverished Himalayan kingdom, or reducing assistance in the light of growing insecurity and King Gyanendra's decision to suspend democratic government on 1 February. The consequences of a reduction in aid could be catastrophic for millions of poor Nepalis now caught up in the escalating civil war. Some 11,000 people have been killed in the Maoist revolt since 1996. Insurgents control large parts of Nepal's countryside and want to overthrow the monarchy in order to establish a communist republic. On 18 March, 11 donors, including the United Nations and the European Union (EU), issued a statement warning that insecurity, armed activity and blockades enforced by Maoist insurgents were pushing Nepal "towards an abyss of a humanitarian crisis". The donors' group also called for "free, safe and unhindered access for all groups providing emergency, humanitarian and development assistance to people at risk and to provide the necessary protection for aid workers". AID WORK IN AN ENVIRONMENT OF GROWING INSECURITY "Our main concern is our ability to continue working in the districts in a situation where the insurgency has taken over most of rural Nepal," Mark Mallalieu, chief of the Nepal office of Britain's Department for International Development (DFID), told IRIN. He added it had become increasingly difficult to work in many districts, because project staff were scared to go to villages, either because they were intimidated by security forces or because the Maoists had threatened them. Although the United Nations Development Programme (UNDP) and other UN bodies remain active in most of Nepal's 75 districts, they have no projects that have been unaffected by the escalating conflict and growing insecurity. "It is not a normal development situation, we are a long way from normalcy, especially in terms of the way our programmes were designed and targets were set," said Matthew Kahane, UNDP Resident Representative and Humanitarian Coordinator in Nepal. He said the UN and other donors were continuously trying to ensure that project work in rural districts continued, but warned that they would be reviewed. "If they [programmes] cannot deliver or be effective, one may as well suspend or keep them dormant until they can," Kahane added. Another general donor concern is that of money and resources being diverted for meeting the costs of the government's war against the Maoists - especially in the absence of any parliamentary scrutiny. CALLING A HALT TO NEW AID Some European donors, Denmark and Switzerland, for example, have been very vocal about their displeasure at the suspension of democracy in Nepal and have called a halt to any new assistance. The Swiss and the Danes were the first ones to cut bilateral aid after the 1 February events. Danish-funded activities under the Revenue Administration Support project were suspended until further notice. The Danish government has decided not to enter into any project or programme agreements with the Nepalese authorities. "Our basic concern is that we would like to see a revival of democracy and restoration of civil liberties. We want to see a democratisation process restored through peace," Susan Ulbaek, head of the Asia Department of Royal Danish Ministry of Foreign Affairs, told IRIN on 6 April while on an official visit to Nepal. Others, like Britain's DFID and the World Bank, have taken a case-by-case approach. On 8 March, the World Bank said it would not process a new Poverty Reduction Support Credit or budget support for fiscal year 2004-05 (ending mid-July). The bank used a technicality as a reason to step back. "The agreed reform actions have not been completed, and there is no time to process [the loan] in FY05 now," Ken Ohashi, head of the bank in Nepal told his directors. The World Bank statement added that it was too early to speculate whether it should reconsider credit for 2006, saying it would have to closely watch evolving public expenditure patterns. The US $70 million credit approved by the bank in November 2003 had improved cash flow and given the government flexibility over spending on programmes intended to produce quick results - especially those aimed at addressing the factors that feed Nepal's nine-year-old Maoist insurgency, such as land reform, poverty reduction and the stimulation of micro-enterprises. In mid-March, DFID cancelled about $2.5 million in aid it had committed to projects with the Nepal Police, prison reforms and the prime minister's office. Denmark has also suspended its support to a project on improving revenue administration. DFID has earmarked about $90 million (GBP47m) in aid to Nepal in 2005/06 but is now screening all projects using two criteria - safety of staff and effectiveness of support - to decide on whether to approve financing. Projects reaching out to vulnerable communities remain unaffected so far. IMPORTANCE OF FOREIGN AID Foreign aid finances about a quarter of Nepal's annual budget of about $1.4 billion. Over 60 percent of the money is spent on development and assistance programmes, including road building, health centres, schools, and clean drinking water. Analysts told IRIN the impact of possible aid cutbacks would not be immediate because Nepal has about $1.8 billion in foreign reserves and the banks have enough liquidity in the event the government decides to borrow. But there are no guarantees that borrowed money will be used for development, given the national priority now is to force the Maoists to negotiations and that two main donors, India and the UK, have suspended all military assistance, local observers say. Nepal's new leaders are putting on a brave face against possible aid cutbacks but the situation remains uncertain. "Nepal has always stood on its own feet," Kiritnidhi Bista, one of two vice-chairmen in the cabinet chaired by King Gyanendra, told reporters in mid-March. "As far as us dying if foreign aid ceases, no one has died before and Nepalis have [always] lived on their own strength," Bista added. An official at the National Planning Commission has a more realistic assessment. "As a worst case, we may have to borrow, but I don't think donors will shut out all assistance, if our priorities do not change." The new government's priorities will be clear after it announces the budget for fiscal year 2005/06 in mid-July, but there will be continued pressure to increase spending on security, especially after recent military aid cutbacks, analysts said. The United States, which is also arming the military, has said its support is "at risk" and "under review". It has also been coordinating its policies with India and the UK. On a visit to India in mid-March, US Foreign Secretary Condoleezza Rice said there was "outstanding cooperation" between US and Indian ambassadors to "try and get that country [Nepal] back to multiparty democracy." She added: "We are in complete agreement that it needs to happen very, very soon." The conflict has made it difficult for government to spend money allocated to development programmes, which may, ironically, help it to cushion short-term cash flow problems. But Kathmandu's inability to take development services to rural villages over the longer term, may leave the root causes of the conflict unaddressed.