Nepal is a country in South Asia. Kathmandu is its capital city. Area of this country is about 147,181 sq kms. Nepali, Maithir and Bhojpuri are its principal languages. It lies in the Himalayas mountain range and is land-locked. It is bounded on the north by Tibet, on the east by Sikkim and West Bengal states of India, on the south and west by Bihar and Uttar Pradesh states of India. !!History Following a decade of conflict, elections for a Constituent Assembly were held in April 2008, with the Maoists emerging as the largest parliamentary party. In May the CA voted for Nepal to abolish the monarchy and become a republic. A new government took office in August. These political events set the scene for a process of developing a new constitution. !!Governance Nepal’s recent history is marred by political instability and violence. Difficult geography and low endowments of physical and human capital impose significant challenges. Liberal economic policies have resulted in significant gains; however, these gains have not accrued equitably across the diverse population. Although Nepal’s civil service is not overstaffed by some measures, it suffers from poor incentives, fragmented decision-making, large numbers at the lower levels, and inflexible working practices. Immediate priorities for the government include addressing human resource management and development within the civil service, wage decompression, health insurance, a contributory pension scheme, and an effective promotion and transfer policy. Expanding the inclusiveness of the civil service through a program of affirmative action remains an important priority. Nepal has made considerable progress with tax policy and administrative reforms in recent years. However, overall revenue collection remains low and two issues have to be addressed: improving tax administration to further strengthen the revenue effort and make the tax department more private-sector friendly; and removing loopholes and price distortions arising from exemptions of some products and services, and taxes and duties on others that create a bias against foreign trade. A number of initiatives to combat corruption have been taken, including the establishment of a National Vigilance Center and the Commission for Investigation of Abuse of Authority (CIAA). While the record on enforcement and prevention has improved, considerable work remains in improving the capacity, professionalism, and outreach in these units. Expanding enforcement activities to the districts and expeditiously processing anti-corruption cases will be an important area of Governance activity. Nepal has an independent judiciary with three tiers: the Supreme Court, 16 Appellate Courts, and District Courts in each of its 75 districts. In comparison with other countries in South Asia, Nepal’s judiciary fares well. According to a recent study by Transparency International, less than half of citizens who had regular interaction with the judiciary reported encountering corruption, as opposed to a major proportion of respondents in many other countries of the region. The Government has introduced an improved public expenditure process—the Medium Term Expenditure Framework (MTEF). By prioritizing public expenditures, aligning policies and spending priorities, focusing on an Immediate Action Plan (IAP), reducing budget transfers and increasing capacity, the government has improved fiscal discipline and improved the budget’s pro-poor impact. Notwithstanding this impressive process, the MTEF process still needs to be broadened and deepened across the public sector and additional measures are needed, including: harmonizing donors, increasing institutional capacity, and improving the alignment of plans to budgets.