Nepal - Structural Adjustment Project

Document of The World Bank FOR OFFICIAL USE ONLY 1 CH 11 Ct) / 0 PROGRAM PERFORI-' MCE AUDIT REPORT NEPAL FIRST STRUCTURAL ADJUSTMENT CREDIT (CREDIT 1769-NEP) JUNE 20, 1991 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ACRONYMS ADB - Asian Development Bank AIC - Agricultural Inputs Corporation FINNIDA - Finnish Department of International Development Cooperation HMG - His Majesty's Government ICB - International Competitive Bidding IFC - International Finance Corporation IMF - International Monetary Fund ITC - International Trade Center NFC - Nepal Food Corporation NRs/IC - Nepal Rupees/Indian Rupees OED - Operations Evaluation Department OGL - Open General License PB/PM - Program Budgeting/Project Monitoring PCR - Program Completion Report PPA - Program Performance Audit PPAR - Program Performance Audit Report PPF - Panchayat Protected Forests RMN - Resident Mission in Nepal SAF - Structural Adjustment Facility SAL - Structural Adjustment Loan SDR - Special Drawing Rights TA - Technical Assistance UNDP - United Nations Development Program USAID - United States Agency for International Development CURRENCY EQUIVALENTS (period averages) Currency Unit = Nepalese Rupee (NR) 1987 NR 21.82 = US$1.00 1988 NR 23.29 = US$1.00 1989 NR 27.19 = US$1.00 FISCAL YEAR July 16 - July 15 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Offloo of Dirotor-General Operations Evaluation June 20, 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Program Performance Audit Report on Nepal - First Structural Adiustment Credit (Credit 1769-NEP) Attached, for information, is a copy of a report entitled "Program Performance Audit Report on Nepal - First Structural Adjustment Credit (Credit 1769-NEP)" prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their officini duties. Its contents may not otherwise be disclosed withjut Wtrld Bank authorization. FOR OFFICIAL USE ONLY PROGRAM PERFORMANCE AUDIT REPORT RAiL FIRST STRUCTURAL ADJUSTMENT CREDIT (CREDIT 1769-NEP) TANLE OF CONTENTS PREFACE ............................................................ i BASIC DATA SHEET ............................ .. ...... ...... . iii EVALUATION SUMMARY .............. ............................... v I. BACKGROUND ........... ........... * ...... I II. OBJECTIVES AND CONTENT OF THE SAL .................... 2 III. InPLEMENTATION AND OUTCORE ........... ..... ... o....... 3 IV. SUSTAINABILITY AND LESSONS LEARNED ................. 6 PROGRAM COMPLETION REPORT PAU: PROGRAM REVIEW FROM THE BANK'S PERSPECTIVE .............. 11 Credit Identity ........... ...................... 11 Macroeconomic Background and Credit Objectives .. ..... 11 Macroeconomic Policy ... ........................... 13 Agricultural and Forestry Policy ................... 14 Industrial and Trade Policies ........................ is Public Enterprise Policy .............................. 15 Development Administration .......... ............ 15 Social Impact ............ . . ......... 0................. 16 Benefits and Risks .... ...... . ..................... ... 17 Role of the Bank ...... ........................... 17 Impact, Accomplishments and Justification ................ 19 Technical Assistance ........... * ...................... 25 Conclusions ............ o......*.............*............... 26 Credit Utilization ................................ ..... 26 Eligible Imports ........... ................. 26 Procurement ................................. 27 Disbursement ....................i...................... 27 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TABLE OF CONTENTS (cont'd.) Paze No. PART III: STATISTICAL INFORMATION Tables 1.1: Gross Domestic Product .......................................... 28 1.2: National Accounts Summary .... ............................... 29 2.1: Balance of Payments Summary .......0*...*.................. 30 3.1: External Public Debt Outstanding Including Undisbursed as of June 30, 1988 ........1.....................**..... 31 4.1: Central Government Budgetary Performance (NRa million) ...... 32 4.1A: Central Government Budgetary Performance (as percent GDP) ... 32 4.2: Central Government Revenue .....oo.............@o.**........ 33 4.3: Expenditure of the Central Government ....................... 35 5.1: Production of Major Agricultural Cropq .........o........... 38 6.1: Production of Principal Industries ........................... 39 ATTACHMENTS: I. Comments Received from Government on PCR .... 41 II. Checklist of Covenants and Results ....................... 43 III. Disbursements by Quarter ....... . .. ............... 45 IV. Statement of Developmwent Policy ..... ...... 47 PROGRAM PERFORMANCE AUDIT REPORT NEPAL FIRST STRUCTURAL ADJUSTMENT CREDIT (CREDIT 1769-NEP) PREFACE This is the Program Performance Audit Report (PPAR) on the First Structural Adjustment Credit for Nepal, involving Credit 1769 in the amount of US$50.0 million. The principal objective of the credit was to help improve the effectiveness of public sector management, by reducing interven- tions that are ineffective or counterproductive, and by doing more effec- tively those things the Government needs to do. The credit was approved in March 1987 and the final disbursement made in January 1989. The credit closed in December 1988, nine months behind schedule. The PPAR consists of the Program Performance Audit (PPA) prepared by the Operations Evaluation Department (OED) and the Program Completion Report (PCR) prepared jointly by the Resident Mission in Kathmandu and the Country Operations Division, Country Department 1, Asia Regional Office of the Bank (Parts I and III). In May 1990, the Bank sent the Borrowers Parts I and III requesting their comments and evaluation (Part II). The Borrower replied in a letter (Attachment I) that they felt that Parts I and III were excellent, and did not provide any additional evaluation. The PPA is based on the attached PCR, the President's Report, sector and economic reports, credit documents, the project files, and dis- cussions with Bank staff. In addition, an OED mission visited Nepal in November 1990 and discussed the effectiveness of the Bank's assistance with Government officials and business leaders. Their kind contribution and valuable assistance in the preparation of this report is gratefully acknowledged. The PCR provides a very good account and assessment of the program experience and discusses the performance of the Bank and the Government. The PPA reinforces the conclusions reached in the PCR. The draft PPAR was sent to the Borrower for comments, but none were received. - iii - PROGRAM PERFORMANCE AUDIT REPORT NEPAL FIRST STRUCTURAL ADJUSTMENT CREDIT (CREDIT 1769-NEP) BASIC DATA SHEET CREDIT POSITION (Amounts in US$ Million) As of Apr. 30, 1991 90,Rina Disbursed La Cancelled Regaid Outstanding La Credit 1769 50.0 54.2 - - 54.6 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY87 FY88 FY89 Appraisal Estimate (US$ M) 25.0 50.0 50.0 Actual (US$ M) 18.9 49.3 54.2 Actual as % of Appraisal (%) 75.6% 98.6% 108.4% Date of Final Disbursement: January 24, 1989 PROGRAM DATES Original Actual Initiating Memorandum 08/27/86 08/27/86 Letter of Development Policy 01/26/87 01/26/87 Negotiations 02/24/87 02/24/87 Board Approval 03/24/87 03/24/87 Signing 04/16/87 04/16/87 Effectiveness 04/87 05/12/87 Loan Closing 03/31/88 12/30/88 La The credit was fully disbursed. Disbursed and outstanding totals differ from the original amount of the credit in terms of US$ because of changes in the US$/SDR exchange rates. - iv - STAFF INPUTS (staffweeks) Y87 FY8-8 FY89 U90 U-9. Toti Preappraisal 22.5 - - - 22.5 Appraisal 27.2 - - - - 27.2 Negotiations 26.2 - - - - 26.2 Supervision 19.3 31.2 4.7 3.7 0.6 59.5 Other 2.0 - - - - 2.0 Total 97.2 31.2 4.7 3.7 0.6 137.4 MISSION DATA No. of No. of Staff Date of Month/Year Weeks Persons Weeks Report Preparation 04/86 2 6 22.5 n.a. Appraisal 09/86 2 4 23.2 03/87 Supervision I 06/87 5 5 19.3 n.a. Supervision II 11/87 2 3 28.5 12/87 OTHER PROGRAM DATA Borrower/Executing Agency: Kingdom of Nepal Follow-on Operation: Operation: Second Structural Adjustment Credit Amount: US$60.0 million Credit No. 2046-NEP Board Date: June 27, 1989 - v - PROGRAM PERJORMANCE AUDIT REPORT NEPAL FIRST STRUCTURAL ADJUSTMENT CREDIT (CREDIT 1769-NEP) EVALUATION SUMMARY Introduction ment. Five important areas of change were identified. Macro- 1. Nepal is not the traditional economic policy improvements example of a country suffering un- focussed on budgetary policy and the expected balance of payments diffi- exchange rate (para. 2.02). In culties, and therefore needing a agriculture, both immediate policy structural adjustment program. changes and some institutional im- Nepal's problems run very deep, with provements were the goal (para. extremely severe physical and other 2.03). The objective of industrial obstacles to development, including and trade policy changes was to a relatively weak and inexperienced shift gradually towards a more administration. When the country outward-oriented development did seem to begin to emerge from strategy (para. 2.04). The founda- years of stagnation during the early tions were to be laid for improved 1980s, this was accompanied by a public enterprise management and serious deterioration in the bud- privatization (para. 2.05). And, getary and external finances. In finally, a host of improvements in response, the Government introduced public resource management were to a financial stabilization program, be pursued with the help of several supported by an IMF standby arrange- technical assistance projects (para. ment in 1985, and followed by a $50 2.06). million Bank SAL on March 24, 1987 -- the latter, however, not without Implementation and Outcome some controversy within the Bank. Some felt that if Neppl could not 3. In retrospect, the skeptics implement investment projects satis- about SAL lending to Nepal were factorily, a much more demanding SAL proven wrong, at least in part. The program would be bound to fail, Government was fully committed to while others felt that a SAL was the program, which also received the probably the only means to address support of other donors. Major the country's most basic impediments progress was made in enacting policy to development, including those changes in the budgetary and indus- which kept investment projects from trial and trade areas, which turned being adequately implemented in the out to have immediate and tangible first place (para. 1.03). results (para. 3.02-3.04). In the agricultural sector also, important SAL Objectives policy changes were introduced in, e.g., fertilizer pricing and dis- 2. The overriding objective of tribution, but the management and the SAL was to improve the effec- financial weaknesses of Nepal's tiveness of public sector manage- rural cooperatives contributed to - vi - the failure of reforms in areas This strong Government commitment where these were called upon to play suggests that the process can be an important role (para. 3.05). sustained. The slow progress on the This problem had clearly been under- institutional front is not sur- estimated by the Government and the prising given that Nepal, after Bank as had the political sen- centuries of self-imposed isolation, sitivity and complexi:y of privati- introduced a modern Government and zation, another area where little institutions relatively recently. progress was made (para. 3.06). Advance is bound to be slow and the Finally, technical assistance proj- Government and Bank will need to be ects were designed to bring about patient and perseverant. Any tech- improvements in development adminis- nical assistance which is to be an tration. After some initial suc- integral part of the SAL, however, cess, however, progress in this area must be executed by the Bank itself, came to a halt, as the intract- whatever its source of financing ability of some of the issues became (para. 4.02). Finally, as is often more evident and the Bank found the case, the Nepal SAL was over- itself unable to influence the con- ambitious in its coverage. Especi- tent or implementation of the tech- ally when issues have not been nical assistance given that it was totally clarified or ironed out at being executed by other donor the time, they are best left out of agencies: the technical assistance the SAL program. efforts were regularly marred by delays, were at times inconsistent 5. In sum, the primary value of with SAL or Bank objectives, and, this first SAL probably lay in its above all, often the Bank was in the demonstration effects: it showed to dark about their content or the Government that the Nepalese progress. economy can indeed be brought out of stagnation if appropriate policy Sustainability and Lessons Learned changes are introduced; and it showed to the Bank that a more 4. The SAL stimulated major im- focussed approach, i.e. one which provements in economic policymaking, defers attempts t.. resolve issues and the structural adjustment pro- which have not yet been fully gram was sustained even after the clarified (and is therefore likely economic difficulties occasioned by to fail in these respects anyway) the March 1989 disruption in the can still yield tangible results. trade and transit treaty with India. PROGRAM PERFORMANCE AUDIT REPORT NEPAL FIRST STRUCTURAL ADJUSTMENT CREDIT (CREDIT 1769-NEP) I. BACKGROUND 1.01 By almost any standard Nepal is one of the least developed countries in the world. Per capita income is estimated at about $170, and social indicators also remain well below the average for South Asias about 80% of the adult population is illiterate, life expectancy at birth is 51 years and infant mortality is 126 per thousand. The physical and other obstacles to development, when viewed together, are extremely severe. Nepal is faced with rapid population growth, a narrow and fragile resource base, a landlocked position and extreme inaccessibility of many parts of the country, all com- pounded by a relatively weak and inexperienced administration. Successive development plans, supported by large and growing levels of foreign assis- tance brought, over the years, very little improvement in the lives of most Nepalese people. And, when the country did seem to begi,. to emerge from stagnation during the early 1980s, this was accompanied by a serious deteri- oration in the budgetary and external finances. 1.02 As the 1980s financial crisis worsened, the Government, first, introduced a financial stabilization program and, on December 23, 1985, entered into a standby arrangement with the IMF which was implemented successfully. As a second step, a structural adjustment program was prepared to address some of the long-term constraints to the country's growth and development. In support of this program, the Bank approved the first Struc- tural Adjustment Credit (SAL I) on March 24, 1987, in an amount equivalent to $50 million. 1.03 It is useful to point out from the outset that the decision on whether or not to proceed with this first SAL ior Nepal provoked considerable controversy within the Bank. InterestinSly enough, both the proponents of structural adjustment lending to Nepal and those who felt that such an operation was unlikely to succeed based their conclusions on fairly similar analyses and views of the problems of the country. The most frustrating evidence -- for the Bank, the rest of the donor community and the Government alike -- of the severity of the obstacles to development in Nepal war the very poor record in project implementation: persisting weaknessee in economic policy and administration were seen as the major underlying problem and, at the same time, as one amenable to change. Proponents of structural adjustment lending therefore argued that, because of the apparent inability to influence overall policymaking through traditional project lending, a new approach was called for whereby policy changes would be sought by working through the center of decision-making, i.e. the Ministry of Finance, with support from the Palace. Conversely, those Bank staff opposed to a SAL felt that the proven inability to implement projects satisfactorily, in spite of the detailed attention which accompanies project lending, meant that Nepal's institutional infrastructure was weak to the point that administering more complex non-project lending would, a fortiori, fail. - 2 - 1.04 The latter views were well articulated in a December 6, 1985, internal Bank memo. It was argued that some of the most basic prerequisites for succesfil non-project lending were clearly not well met in Nepal, such as, e.g.t a basic agreement between Government and lender on the diagnosis of the problemn of the economy and what to do about them; cooperation among the different jonore in the implementation of remedial measures; and, above all, a strong institutional infrastructure where deciion-tmaking in public spending and administration is both transparent and orderly. As discussed below and in the PCR, in several instances these prerequisites for a success- ful SAL turned out to be much better met in Nepal than anticipated by some of the Bank staff, although in other instances, especially on the institutional front, major obstacles remain. II. OBJECTIVES AND CONTENT f THE 8AL 2.01 The medium-term macroeconomic objectives of the Government's economic reform program were to sustain a GDP growth rate in the range of 4-5% per annum -- i.e. per capita growth of close to 2% -- while curbing inflation and strengthening the balance of payments. The essence of the structural change needed to achieve these objectives was described very succinctly as "improving the effectiveness of public sector management -- by reducing interventions that are ineffective or counterproductive, and by doing more effectively those things the Government needs to do" (President's Report, SAL 1, para. 14.). The adjustment program, supported by the SAL, was designed to address five important areas where change was needed and deemed feasible. IT is described very well in detail in the PCR (paras. 7-24) and need only be summarized here. 2.02 First, macroeconomic policy improvements focussed ou the budget and the exchange rate. On the budget side, the objective was to increase the public sector surplus available for financing public development outlays by raising Government revenue from about 9% of GDP to about 122 by 1990/91, while keeping the growth in regular expenditures in line with that -f GDP. This, in turn, would allow growth in public development expenditures as a share of GDP from a little over 12% to 162 by 1990/91. A flexible exchange rate policy was to be maintained which, together with other measures (para. 2.04), would ensure real export growth of 52 per annum. 2.03 Second, in agriculture, improvements were sought ;,.I the management of the tvo main public enterprises servicing the sector, the Agricultural Inputs Corporation (AIC) and the Nepal Food Corporation (NFC) primarily through donor-financed technical assistance. Also, the prices and regulatory environment for fertilizer, cereal seeds and foodgraine were to be liberalized to encourage private sector growth. And, changes in forestry legislation and regulations were to be introduced with the objective of improving the overall management and exploitation of forests. 2.04 Third, the objective of industrial and trade policy changes was to shift gradually towards a more outward-oriented strategy. A growth target of 62 per annum was set for the non-agricultural sector. Proposed measures includeds a gradual liberalization of licensing requirements for new indus- tries as well as for imports, more reliance on tariffs rather than regulatory - 3 - controls, a system of duty drawback for exporters as well as selective sales tax rebates and, simplification and strengthening of export procedures. 2.05 Fourth, initial steps were to be taken towards a longer-term process of improved public enterprise management and privatization. Specifically, this included the implementation of a "rewards and penalties" system for public enterprise managers and the formulation of a privatization action plan. 2.06 Fifth, the objectives of th- reforms in development administration weres (a) to improve the efficiency with which public resources are allo- cated to new as well as ongoing projectat this would include identification of a set of high priority "core" projects in the ongoing program; (b) to strengthen the Government's control over the execution of the development program through better monitoring and follow-up action; and (c) to improve management accountability both regarding performance in meeting project targets as well as in the disposition of public financial resources (President's Report, SAL I, para. 57). Donor-financed technical assistance projects would be pivotal in the pursuit of these objectives. A Program Budgeting/Project Monitoring Technical Assistance Project was designed to address objectives (a) and (b). With respect to objective (c), the Govern- ment had already previously increased the power of project managers and senior ministry officials to permit them greater autonomy in personnel management and spending decisions; the improved monitoring information and a technical ar,;istance project in auditing/accounting would further enhance accountability. 2.07 More thin 70 individual actions spread across these five areas of policy reform were to be taken by the Government as part of the SAL program. This was not only a fairly large number without any priority ordering, but upon closer scrutiny many of these actions seemed to be the kind normally put forward under project lending rather than a SAL; the credit was disbursed in two equal tranches, and also the number of second tranche conditions was relatively large. It has been suggested that one possible explanation for this was the high degree of skepticism of Bank management regarding Nepal's ability to implement projects and policies, leading the staff to burden the SAL with a high level of detail to demonstrate substance of the program. There were clearly risks involved: for high level authorities to give due attention to all of the important elements of a program, the number of actions should be limited to what is strictly necessary to constitute a coherent program. III. IMPLEMENTATION AND OUTCOME 3.01 The skepticism expressed by a large mrnmber of staff about the wisdom of proceeding with this SAL at all underscores the fact that the Bank was always fully aware that this was a high risk operation. In the simplest of terms, a complex structural adjustment program was being superimposed on an administration which, given its project implementation record, appeared over- loaded to begin with. Against this background, the achievements of this SAL have turned out to be substantial and the operation must be considered at least a partial success. As discussed below, a good many of the policy actions have been implemented and have shown concrete results. 3.02 First, from an overall perspective and in light of the concerns expressed in paras. 1.03-1.04 above, the skeptics were proven wrong, at least in part. Thus, e.g., the Government, especially the Ministry of Finance, has been highly supportive of the policy reforms. In some instances, when certain segments of the administration were hesitant about specific policy changes there were delays, but eventually implementation succeeded. Also, the donor community has been fully behind the SAL program. In fact, it appears that, when the need arose to trim the public investment program as part of the program budgeting exercise, other donord have on occasion turned out to be more accommodating than the Bank's own project staff. On the other hand, the attempts made to bring about institutional change and improve ecoiomic management with the help of several technical assistance projects have had little lasting impact: this may be due partly to the intractable nature of this problem but is also partly the result of problems with the design and implementation of the technical assistance. 3.03 Second, a detailed account of achievements in the five areas of concentration of the SAL showe both the considerable improvement in economic policymaking during the SAL period is well as the stubborn problems in Nepal's administrative environment. The credit was fully disbursed even though about six months behind schedule because of a delayed second tranche release; there was unanticipated political resistance to fertilizer pricing changes and the proposed privatization of public enterprises and there was bureaucratic inertia in enacting changes in forestry legislation and regula- tions. An excellent and precise item-by-item review of accomplishments and failures is provided in the PCR (paras. 35 through 49) and need not be repeated. The following paragraphs focus on fundamental points. 3.04 In two areas, macroeconomic management and industrial and trade policy, the record of implementation of SAL measures and the results have been impressive. Most noteworthy have been actions to liberalize the indus- trial and trade regime, including the gradual liberalization of industrial and import licensing requirements, the elimination of most export licenses and simplification of export procedures. On the budget side, SAL-supported tax reforms were especially important. Most macro-economic indicators, such as GDP growth, export growth, the current account deficit or government revenues, were at or exceeded program targets during the SAL period, especially after allowance is made for the March 1989 disruption in the trade and transit treaty with India. While good weather played a role in the per- formance of agriculture and while the two primary sources of rapid export growth -- carpets and garments -- were to some extent continuing on past growth trends, it is undeniable that the policy measures (e.g., liberaliza- tion of .ported raw materials in the case of carpets, the domestic resource mobilizatiLn measures) were determining factors in the good performance. 3.05 In the areas of agriculture and forestry, the bulk of the measures proposed in the SAL were implemented, although some after considerable delay while others turned out to have been necessary but not sufficient conditions f or change. Among the main achievements were adjustments in fertilizer prices, the freeing of fertilizer retail dealership regulations to include the private sector, and changes in forestry legislation. An important problem, however, was the political resistance encountered from the Government-supported rural cooperatives (Sajhas) which slowed reform in some - 5 - areas moreover, the management and financial weaknesses of these coopera- tives contributed to the failure of reforms in areas where they were called upon to play an important role, such as in NFC's food procurement business or in seed propagation and distribution. Also, in spite of technical assistance projects to improve the management and financial strength of NFC and AIC, little has changed. Finally, it has to be recognized that the problems of Nepal's rural institutions and envi;onment are complex and intractable; in some cases, it may take years before the policy changes bear fruit. Thus, e.g., in the forestry sector, as reported in the PCR (para. 45), changes in legislation and regulations are only the beginningt "After more than 30 years of having a policing role, forestry officials need to develop a new role -- one of forestry extension agents..." which is "...likely to take years." 3.06 Improvements in the management of public enterprises and privatiza- tion were important objectives of the SAL. In fact, these goals were being pursued by the Nepalese authorities even before the SAL program. As it turned out, the immediate SAL objectives -- the introduction of a rewards and penalties system for managers and a privatization action plan -- were even- tually met, but real progress was elusive: neither the employment implica- tions of privatization nor the likelihood of foreign ownership of enterprises put up for sale proved to be politically acceptable. In other words, while strictly speaking SAL covenants were met, the issue of privatization in particular was too complex and politically too sensitive to be resolved quickly. The associated problems were clearly underestimated both by the Government and by the Bank. The Bank's second SAL for Nepal does not even refer to public enterprises: instead studies supported by technical assis- tance have been proposed to throw more light on the issues involved. 3.07 Finally, in the area of development administration, again most SAL covenants were met but, for two sets of reasons, in the end little progress was made. First, technical assistance projects were the chosen means to address the issues in this area but, given the highly complex nature of the problems, it has proven to be extremely difficult to design a good program. Second, current Bank policy prevents the Bank from being executing agency for technical assistance financed by other donors when this technical assistance is closely aasociated with the execution of a SAL program. In essence, this means that the Bank loses control over the content and implementation of the technical assistance which is vital to the success of the adjustment program. 3.08 The original expectation for the proposed reforms in public sector resource management was to have results on fairly short order, i.e. as part of the SAL program. The technical assistance projects in the areas of pro- gram budgeting/project monitoring and of accounting and auditing (para. 2.06) were initiated as planned, and some progress was made at least for a while. Thus, e.g., program budgeting procedures were followed in the preparation of the 1987/88 development budget and a "core" development program was iden- tified comprising high priority projects in five major sectors. Little by little, however, several difficulties began to surface. On the one hand, problems arose with the quality of some of the consultants, which by itself would eventually lead to a hiatus in some of the work. On the other hand, the information base on the development program turned out to be extremely poor, which prompted renewed concerns about the complexity of making progress in economic management in Nepal's institutional environment... to the point - 6 - that the very question of which problems the technical assistance was trying to solve came to be asked again. Different people came to expect quite different things from the technical assistance. Some felt that it is much more important to first develop a solid data base, a process which could take a very long time, even though this would clearly be at the expense of getting even a modicum of immediate improvement in resource allocation. Others argued that program budgeting which covers only part of the development budget is not very worthwhile if wasteful spending can then be hidden in the part that is not covered by the program budgeting exercise. In sum, doubts arose among all parties involved, about the merits of trying to improve short-term decision-making with whatever partial or imperfect information is available (as part of the SAL) versus the merits of focussing on long-term institution building. Similarly, in the area of management accountability some actions had been taken (para. 2.06) but it became increasingly clear that progress would be slow and that lasting change would require simul- taneous civil service reform. 3.09 The above problems were compounded by the fact that, as mentioned already, the Bank had, in essence, no control over the content and direction of the technical assistance projects. Because of Nepal's policy of using grant funds to finance technical assistance whenever possible, UNDP funds were obtained which, because of the Bank's policy of conflict of respon- sibility (OMS No. 4.30), meant that the technical assistance projects were executed by other donors, mainly ADB. The net result of all of this has been that the technical assistance effort has been a real disappointment i. the eyes of government officials and that, however crucial to the adjustment process, progress to date in improving economic management has been quite limited. There is, e.g., as yet no evidence of improved project implemen- tation. A final observation is that the staff employed on the technical assistance projects in the Ministry of Finance are mostly temporary staff: this is an important shortcoming which may well mean that the project comes to an end once the foreign finance dries up. IV. SUSTAINABILITY AND LESSONS LEARNED 4.01 Nepal is not the traditional example of a country suffering unexpected balance of payments difficulties, and therefore needing structural adjustment. Nepal's problems run very deep and their solution will require a long and sustained effort with as primary objective the improvement of the effectiveness of public sector management (para. 2.01). The main conclusion which can be drawn from the experience with this first Bank SAL in Nepal is that a structural adjustment program can indeed be a catalyst to initiate changes in economic management behavior in an otherwise stagnant environment: as it turned out, major improvements were recorded on the economic policy front; at the same time, it proved difficult to make progress whenever institutional inertia needed to be overcome at the same time. The primary lesson from this is that much patience will be necessary: the authorities will have to stay on the course of change for a number of years and the Bank will have to be perseverant. Evidence to date would suggest that the structural adjustment process can be sustained: Nepal has continued to implement its program in spite of the difficu%ties occasioned by the impasse in the trade and transit treaty, a second SAL was approved on June 27, 1989, - 7 - and the new interim Government (April 1990) quickly managed to resolve the trade and transit dispute with India, as it had promised. With regard to the slow progress on the institutional front, it is worth recalling that it $' only some 40 years ago that Nepal, after centuries of self-imposed isolatiow., began the task of creating a modern Government and the institutions that go with it. In other countries, it has taken generations for Government to acquire the necessary expertise in handling economic and financial affairs, for tradition of personal and family loyalty to give way to wider concepts of public service and for a merit-based system of personnel management to become firmly established. In this perspective Nepal has made remarkable progress in the span of a few years. The sought-for improvements in areas such as program budgeting, project monitoring, auditing or accounting should occur, given time. 4.02 Technical assistance projects were called upon to play a determining role in the Nepal SAL. For all intents and purposes little was accomplished. Two important conclusions emerge. First, it is imperative to be absolutely clear on what the technical assistance is supposed to accomplish. Second, if the technical assistance is an integral part of the SAL program, the Bank should be the executing agency (PCR, para. 51) even if the country insists on obtaining grant (non-Bank/IDA) financing for the technical assistance. The conflict of responsibility issue -- i.e. the borrower is responsible to the Bank for implementation of the SAL, while the Bank (as executor) would be responsible to the borrower (and to the grant-giving agency) for an integral part of the SAL -- is a legal nicety, which in this case severely damaged the SAL. Being executing agency implies the selection of consultants and super- vision, i.e. giving advice, which is an integral part of the Bank's work at all times, and especially so in the case of SALs. It is interesting to note that the original designers of this SAL had no doubts in their minds about the need for the Bank to be executing agency for the technical assistance (internal memo of October 14, 1986). As it turned out, the technical assis- tance efforts were regularly marred by delays, were at times inconsistent with SAL or Bank objectives, and, above all, often the Bank was in the dark about their content or progress. 4.03 Finally, the Nepal SAL I was overambitious in its coverage, a lesson which has already been incorporated in the design of SAL II. In some areas, such as those of the rural cooperatives (Sajhas) or of privatization of public enterprises, there was obviously insufficient preparation and clarity about the depth and complexity of the problems. Little was accomplished as a result. 4.04 In sum, the primary value of this first SAL probably lay in its demonstration effects: it showed to the Government that the Nepalese economy can indeed be brought out of stagnation if appropriate policy changes are introduced3 and, it showed to the Bank that a more focussed approach, i.e. one which defers attempts to resolve issues which have not yet been fully clarified (and is therefore likely to fail in these respects anyway) can still yield tangible results. -9- PROGRAM COMPLETION REPORT NEPAL FIRST STRUCTURAL ADJUSTMENT CREDIT (CREDIT 1769-NEP) June 1990 Country Operations Division Country Department I Asia Region - 11 - PROGRAM COMPLETION REPORT NEPAL FIRST STRUCTURAL ADJUSTMENT CREDIT (CREDIT 1769-NEP) PART 1: PROGRAM REVIEW FROM THE BANK'S PERSPECTIVE CREDIT IDENTITY Name : Structural Adjustment Lending Credit Credit Number : 1769-NEP RVP Unit : Asia Region Country : Nepal Sector : Economic 1. The First Structural Adjustment Credit (SAL I - IDA Credit No.1769-NEP) to Nepal, amounting to SDR 40.6 million (US$50 million equivalent), was signed on April 16, 1987 and became effective on May 12, 1987. The closing date was initially set at March 31, 1988 but was subsequently extended to December 30, 1988, by which time the Credit was 91 percent disbursed; full disbursement was achieved within the subsequent six months. MACROECONOMIC BACKGROUND AND CREDIT OBJECTIVES 2. With a per capita income of about US$170, Nepal is one of the poorest countries in the world. Disease and malnutrition, an annual population growth of over two and half percent, arduous terrain, physical isolation and a scant and fragile natural resource base have made improving living standards especially difficult. Additionally, economic management up to the middle of the 1980s was weak. 3. Following many years of increases in output barely exceeding population growth, real economic growth accelerated in the first half of the 1980s, (averaging between 3 and 4 percent per annum). But, it was accompanied by a pronounced deterioration in the country's budgetary and external finances, mainly the cumulative effect of years of weak economic management. 4. For several years, the Government ran large budget deficits (reaching 12.3 percent of GDP by 1982/83). While agricultural exports dwindled, expansionary monetary and fiscal increased the demand for imports. Up until 1982/83, the economic authorities did not feel an acute need to correct these imbalances since concessional aid covered the budget deficits as well as a significant portion of the steadily widening trade gap. What concessional aid flows did not cover, service receipts and txansfers were able to offset. In the three years commencing 1982/83, however, pronounced year-to-year swings in economic performance -- mainly attributable to the muonsoon -- combined with heavy budgetary reliance on domestic borrowing from the banking system (gross - 12 - domestic borrowing was 6.1 percent of GDP in 1982/83), led to a serious drain on the country's foreign exchange reserves. The long open border with India, in combination with the free convertibility maintained between the Nepalese and Indian currencies, meant that any expansion in domestic monetary demand easily spilled over into the country's balance of payments with India. 5. As the financial situation worsened, the authorities recognized the need for prompt action. They first introduced a program of financial stabilization, followed by one of economic structural adjustment. 6. In late 1985 the Government introduced several policies designed to stabilize the country's financial position. Effective November 30, 1985, the Nepalese Rupee was devalued by close to 15 percent. Concurrently, the government announced its intention to introduce a financial stabilization program and entered into a standby arrangement with the International Monetary Fund on December 23, 1985. The main features of the program were: (a) a flexible exchange rate policy; (b) restraint on public exp-nditures; (c) strengthened tax administration; (d) restraint on the expansion of domestic credit; (e) maintenance of bank interest rates at positive real levels through more flexible interest rate policy; (f) increases in the prices charged by public enterprises and a significant reduction in their subsidies; (g) restraint on commercial external borrowing; and (h) several procedural and institutional reforms to liberalize and rationalize the trade and exchange regime. 7. Nepal achieved substantial stabilization gain from the successful implemertation of the above stand-by measures. The authorities, therefore, started to address structural weakness and constraints in the economy that inhibited rapid and sustained growth. They thus set targets of achieving real per capita GDP growth of close to 2 percent per annum and of raising real per capita consumption growth from its average 0.7 percent per annum over the last five years to almost one and a half percent by 1990/91. They designed a : structural adjustment program to address five important areas of structural weakness in the economy, selected because the nature of the action to be taken was clear at that time and had the political support to make it effective. A principal aim of the structural adjustment program was to change the role of the Government in the economy - strengthening macroeconomic and sectoral development policies and improving the efficiency of public sector expenditures, while at the same time reducing detailed interventions and regulations that have been ineffective and often counterproductive. 8. First, macroeconomic management was to be strengthened further. In particular, domestic resource mobilization was to be increased and recurrent expenditure and domestic borrowing controlled. Second, structural weaknesses in the agricultural sector were to be addressed by rationalizing government interventions in the sector. Changes in forest regulations were aimed at encouraging individuals and communities to assume greater responsibility for protecting the nation's forests (most of which were nationalized in 1956) in the context of the broader objective of environmental management of renewable natural resources. Third, past industrial and trade policies not only had failed to control trade deflection to India, but had also constrained - 13 - industrial development. A new industrial and trade policy was introduced early in the program aimed at mitigating these problems. Fourth, initial steps were identified to ameliorate the poor output performance, financial weakness and heavy indebtedness of many of the public enterprises (PEs) which had over the years caused a sizable drain on the budget and the domestic banking system. And fifth, weaknesses in the Government's financial control functions and in the implementation of the development program had, in many cases, been responsible for very slow disbursement of foreign aid and project completion. Additionally, the composition of the development program was recognized to be a problem. Not only had the Government tended to undertake more projects than it could effectively manage, it continued to seriously underfund essential operations and maintenance activities. Macroeconomic Policy 9. The main focus of macroeconomic policy was to improve budgetary policy while carefully controlling net credit expansion and non-concessional external borrowing and maLntaining a realistic exchange rate. An important objective of budgetary policy was to increase the public sector surplus available for financing public expenditures by increasing domestic resource mobilization and keeping the rate of increase in regular expenditures in line with that of GDP. The authorities undertook to hold the overall central government deficit (excluding external grants) to about 11 percent of GDP while increasing development expenditures from a little over 12 percent of GDP in 1985/86 to 16 percent of GDP by 1990/91 (in the context of designing the Government's medium-term program, a five-year period ending in 1990/91 was used). This was to be done through measures to improve project implementation (see paras.21-24 below) and was to be financed through better aid absorption together with the aforementioned enhancement of budgetary surpluses. Overall, the level of investment was to be increased from about 19 percent of GDP at the beginning of the program to about 24 percent by 1990/91. 10. Domestic resource mobilization was established as a key objective of macroeconomic policy with a target of increasing government revenue as a percentage of GDP from 9 percent to 12 percent by 1990/91. 11. The containment of net credit expansion was to be achieved through the introduction of improved reporting systems and controls. Exchange rate flexibility was to be maintained through a system of regular adjustment which was to take into account the differential between Nepal's rate of inflation and that of its main trading partners. This, together with appropriate commercial policies (including introduction of the open general license/passbook system for industrial imports), sought to achieve export growth of about 5 percent a year in real terms. Although the balance-of- payments current-account deficit was anticipated to increase from a little over 8 percent of GDP to almost 10 percent by 1990/91, the projected volumes of aid disbursements from ongoing projects and prospective new commitments indicated that this deficit would be sustainable. - 14 - Agricultural and Forestry Policy 12. In agriculture, the initial reforms concentrated on fertilizers, seeds, foodgrain marketing, agricultural research, and private and community forest management and were of two types: (a) those to strengthen public sector institutions in agriculture; and (b) those aimed at liberalizing prices and the regulatory system to encourage the expansion of private sector production. 13. As to public sector institutions, the Agricultural Inputs Corporation (AIC), which procures, wholesales and distributes agricultural inputs, and the Nepal Food Corporation (NFC), which operates the Government's special food programs, were provided with technical assistance (TA) to put them on a sound financial and managerial footing. A National Seed Act was promulgated and the Seed Wing of AIC was upgraded with enhanced financial and operating autonomy to improve the quality of its services to farmers. The Sajhas (cooperatives) were to operate some NFC depots and thereby help strengthen foodgrain distribution and to operate mini-seed houses in remote areas. Additionally, two new institutional bodies were created (a research coordination committee and a research services center) with a view to improving the nature and direction of agricultural research in its contribution to agriculture. 14. The price and regulatory environment in agriculture was also to be reformed. Fertilizer prices were realigned to border levels early in the program to discourage large-scale smuggling to India. This was to be followed with increased efforts to monitor and adjust prices on a regular basis; AIC was to be given more price autonomy. Fertilizer distribution, moreover, was to be stimulated by reducing the restrictiveness with which private sector fertilizer dealerships are awarded and by increasing dealer margins on fertilizer retail sales. Measures to improve the efficiency of procurement and sales pricing for cereal seeds and foodgrains were also included in the package of reforms. 15. In forestry, legislations were to be modified to allow forest user committees to retain 100 percent of the revenues earned from the sale of forest products from Panchayat Protected Forests (PPFs), to improve the availability of resources for them to undertake forest management activities. Forest user committees were also to have been legally entitled to employ staff and spend monies required to conduct their day-to-day activities. Additionally, the administrative regulations concerning the ownership of trees on private lands were to be reviewed to ensure that landowners have a clearly- established right to grow, cut and sell trees on their land. 16. Combined measures in agriculture and forestry were expected to contribute significantly to the authorities' target of achieving about 3 percent real growth per annum in the agricultural sector over the program period. - 15 - Industrial and Trade Policies 17. The authorities devised a more outward looking strategy for industry and trade. Exports and efficient import substitutes were to be promoted through incentives to the private sector. To complement the exchange rate policy (para 11 above), they intended to introduce a system of duty drawback for exporters as well as selective sales tax rebates. Regulatory controls were to be de-emphasized with greater reliance placed on tariffs. The authorities recognized, however, that the prevailing trade and payments regime, combined with the open border (with the concomitant ease of trade deflection that this has traditionally provided), would require gradualism in the liberalization of licensing requirements -- both for new industries as well as for imports. 18. Procedural aspects of export transactions were to be handled by an export development committee, comprising senior officials of the principal economic ministries and the Nepal Rastra Bank. The committee was to convene regularly to coordinate those interagency activities required to ensure smooth export trade. The authorities also intended to introduce bonded warehouses, an export processing zone and improved financial facilities for exporters, as well as to streamline the prevailing system of export and import regulatory procedures. 19. These measures, together with those concerned with public enterprises (see para 20 below), were expected to contribute significantly to a real growth target for non-agricultural value added of about 6 percent per annum over the medium term. Public Enterprise Policy 20. Public enterprise reforms to be directly supported by SAL I focused on improving financial control of PEs collectively from a macroeconomic perspective as well as initial actions in sr'7port of what was expected to constitute a longer-term effort both to strengthen PE management as well as commence the divestiture of a number of them. Undertakings were made to formulate a privatization action plan and to implement a "rewards and penalties" system for PE managers that had already been formulated by the Government. More detailed actions, already descritad under "Agricultural Policy", were being introduced to strengthen AIC and NFC with technical assistance from donors. Technical assistance to facilitate the review of public enterprises was also to be arranged. Development Administration 21. The objectives of the development administration reform were to: improve the efficiency with which public resources are allocated to new and ongoing projects; strengthen the Government's control over the execution of the development program through better monitoring and follow-up action; and improve management accountability both regarding performance in meeting project targets as well as in the disposition of public financial resources. Three particular factors were identified as contributing to the slow implementation of development projects: (a) a large number of projects were - 16 - implemented without adequate prioritization or monitoring; (b) project managers and senior line ministry officials did not have adequate decision- making power; and (c) budget release procedures were flawed. 22. To address the first issue, program budgeting and :ighter financial monitoring of projects were introduced. The objectives uere: to identify a set of high priority *core" projects among the ongoing program based on selected effMciency criteria; to improve the procedure for allocating public resources to new projects; and to strengthen the Government's control over the execution oE the development program through better monitoring and follow-up. Based on the information that would be available through the monitoring of projects, the Govetnment intended to address the second issue, i.e., to increase the management accountability in both meeting project targets and utilizing public financial resources. In addition, the Government delegated more decision making power to project managers and senior ministry officials through Gazette notification in 1986. Together with the efforts to strengthen public sector accounting and auditing capabilities within the Financial Controller General's Office and Auditor General's Office, these actions were expected to produce better discipline among project managers and other officials. 23. Third, the Government recognized that the budget release mechanism had several problems. One-third of budgeted funds were released every trimester (every four months) for all projects that had submitted adequate accounts of the previous year. This created a shortage of funds for those projects whose expenditures were concentrated in the first several months of the fiscal year. Also, frequent fund release stoppages became a significant factor delaying implementation of many projects due in some cases to minute problems. Through SAL I, the Government started to experiment with various forms of more flexible fund release mechanisms without, so far, any substantial success. 24. Additionally, a high level trouble shooting unit was established within the Cabinet Secretariat to provide an important "control" function for development implementation activities. The Government also identified a set of actions for the medium- to long-term to improve public sector resources allocationt among them were the strengthening of the National Planning Commission (NPC) and improving the performance of the domestic construction industry. SOCIAL IMPACT 25. Unlike many heavily-indebted countries where SAL-related austerity measures could potentially hurt the poor, Nepal's program was expected to benefit the poor. This was because much of the population is engaged in subsistence activities (mainly agriculture) and thus less affected by developments in the monetized economy. Higher real growth rates were expected to benefit the poor but, also, an improvement in the availability of agricultural inputs and research and more resources for forest user groups in PPFs would directly improve conditions of these segments of Nepalese society. - 17 - 26. In the modern sectors, potentially detrimental employment consequences of industry and trade reforms were expected to be minimal. Indirect benefits for the poor were also expected to accrue in the form of the Government's ability to capture excessive economic rents earned by traders, which in turn could be applied to high-priority public projects and programs, among which social and rural programs could expect a fair share. Although studies have yet to be undertaken to measure the social impact of structural adjustment, it is likely that it has be,mn in these directions. BENEFITS AND RISKS 27. The main benefits of the program were identified as: (i) laying the foundation for more vigorous medium-term growth; (ii) providing the basis for improvement in the balance on external account; and (iii) strengthening the public sector finances. 28. 7wo dominant risks associated with the program were also identified. First, measures would impinge upon vested interests -- interests capable of wielding considerable political clout. Second, administrative risk existed. Historically, Nepal has ha4 difficulty in managing development projects because of limited executing capacity and lack of accountability within the public sector. Superimposing the numerous policy actions required under structural adjustment on top of the bureaucracy's existing work load was recognized as running the risk of overloading the system. Both of these risks materialized, but not to the extent of causing the program to fail. ROLE OF THE BANK 29. The Bank estimated that the measures undertaken and the degree of industrial and trade liberalization being attempted, after taking into account identifiable sources of donor financing (mainly in the form of project finance), would involve a financing gap of about US$80 million over the subsequent two years. This was to be met with an IDA SAL credit for US$50 million equivalent, IMF resources of about US$15 million and the balance was expected to be covered by program lending from ADB and some bilateval donors based on indications at that time, most of which materialized. 30. The Bank examined critically various issues related to Nepal's suitability for such an operation. Despite recurring balance of payments deficits, Nepal's main problems were less external indebtedness on commercial terms than chronically low rates of growth and per capita consumption, attributable to many factors, including a panoply of controls to prevent massive leakage of goods and foreign exchange to India, weaknesses in implementation of the development program and chronic weaknesses in the country's financial institutions. Given the institutional nature of these impediments to well-balanced growth and development, it was qv2stioned whether the authorities could mount the necessary effort not only to introduce appropriate policies but also to implement them effectively. 31. Notwithstanding the aforementioned risks, it was decided that a SAL could tackle the country's macroeconomic and structural problems in a more - 18 - cc;prehensive and better way than the fragmentary approach inherent in traditional donor project financing. Because project preparation and financing does not provide a convenient vehicle for reaching agreement on broader economic policy matters, it was presumed that broad-ranging p,'icy discussions with the central economic authorities in the context of structural adjustment lending might achieve a degree of focus and coordination previously missing in donor/HMG discussions. It was also understood that a SAL could not be a substitute for traditional project finance but an important complement. Strong support at the political level augured well for this approach. In large measure, this presumption has proven correct. 32. The program supported by SAL I comprised more than 70 actions across the five areas of policy reform identified in para 8 (not all of which were conditions) and the credit was designed to be disbursed in two equal tranches. More than half of these actions were introduced prior to credit effectiveness; the balance comprised a few salient actions as conditions for second tranche release with the others to be monitored. Second tranche conditions were: (a) satisfactory progress in implementing macroeconomic policies; (b) commencement of a program of tariff reform; (c) introduction of more flexible fertilizer pricing with increased incentives for fertilizer distribution; (d) improvements in the institutional arrangements governing seed marketing; (e) strengthening the finances of AIC and NFC; (f) permission awarded to forest user groups to retain the proceeds of sales of forest products from PPFs; and (g) preparation of an action plan for reform of the PE sector. 33. The Bank played a key role in helping the authorities develop the program of action to be supported by SAL financing. Consultations with a number of donors, bilateral and multilateral, also served to shape the package of reforms. The actions thus selected were generally felt (i) to warrant priority; (ii) to complement other donor activities; and (iii) to be ready for enactment from the viewpoint of political and bureaucratic commitment. A prominent feature of the lank's role in achieving the degree of coordination with other donors approgriate to launching a SAL was the Local Donors Aid Group, co-chaired by the resident representatives of the UNDP and the 'dorld Bank in Nepal. The Bank also complemented and reinforced the SAL po!Ucy initiatives through other lending operations in agriculture, forestry, cottage and small industry and industrial finance. It also mounted a program of country economic and sector work which also closely complemented the SAL. However, many studies and areas of technical assistance on which the SAL depended were to be managed by other donor agencies. 34. Monitoring of the SAL was undertaken by the Bank's Resident Mission in Nepal (RMN) and supervision was shared between the country operations division and the RMN. Reporting by the RMN served as the basis for SAL supervision missions mounted from headquarters. In addition, however, the staff of the RMN took an active role in maintaining a policy dialogue with the authorities. This included follow up on outstanding areas of compliance, informal coordination in some cases (both among government agencies and with donors involved in the execution of related technical assistance) and it involved seeking ways to overcome problems as they occurred. - 19 - IMPACT, ACCOMPLISHMENTS AND JUSTIFICATION 35. Nepal's compliance under the program has been generally satisfactory. Particularly encouraging have been the improvements in macroeconomic management and industrial and trade liberalization. Slow progress in some areas (PE reforms, agricultural research and improvements in decentralized seed marketing and distribution) was more a result of intractable administrative and other systemic problems rather than lack of commitment. In two main areas, however, although compliance with agreed undertakings was eventually achieved, it occurred belatedly and in some respects reluctantly, reflecting a wavering commitment for these particular reforms. They were: (i) liberalization of fertilizer distribution and pricing; and (ii) actions to enable and encourage community and private management of forest resources. 36. From a macroeconomic perspective, the benefits of the SAL became readily apparent. Economic growth over the three-year period 1986/87 and 1988/89 averaged over 4.5 percent and would have been closer to 6 percent had Nepal not been struck by the trade and transit disruption in March 1989 (see Table 1). TABLE 1: KEY INDICATORS Projected During Preparation of SAL I Actual 86/87 87/88 88/89 86/87 87/88 88/89* GDP growth 1.5 5.0 4.0 2.7 9.7 1.5 Govt. Revenue/GDP 9.5 10.4 12.0 10.1 10.6 10.4 Tax Revenue/GDP 7.7 8.7 9 3 7.6 8.5 P.4 Expenditure/GDP 19.4 21.2 21.8 19.0 20.0 24.3 Dev. Exp./GDP 12.7 14.1 14.6 12.8 13.9 16.7 Deficit/GDP 9.5 10.4 11.0 9.6 10.0 13.9 Domestic Financing/GDP 1.7 1.6 1.5 2.7 1.3 4.5 Inflation 12.0 7.0 5.0 11.7 6.9 8.3 Domestic Savings/GDP 9.9 10.8 11.1 10.0 9.8 10.3 Net/Savings/GDP 12.0 12.7 12.7 14.6 14.3 12.3 Investment/GDP 20.7 23.5 24.0 19.6 21.2 22.4 Resource Gap/GDP** -10.6 -12.' -12.9 -S.3 -10.8 -12.3 Current Account Deficit/ GDP** -8.5 -10.8 -11.4 -7.3 -8.7 -10.2 * The economy was negatively affected by the trade and transit impasse with India starting March 1989. ** From balance of payments data. - 20 - Agricultural growth proved stronger than the program anticipated (eVen with the trade and transit disruption) and non-agricultural growth was only moderately lower (around 4 percent on average instead of the program's target 6 percent over the three years) after taking a major blow resulting in close to 6 percent contraction in 1988/89. Export growth was strong, averaging close to 16 percent a year in nominal rupee terms or 10 percent in nominal US$ terms between 1985/86 and 1987/88, which was above the program target, largely as the result of policy actions to liberalize imported raw materials (particularly raw wool for the carpet industry) and the current account deficit as a percent of GDP improved more than projected under the program (a little over 8 percent instead of 9-10 percent target). The budget deficit was similarly kept manageable throughout SAL I with domestic revenue mobilization strengthened by more than the 0.7 percent of GDP required by the program (revenues reached 10.6 percent of GDP by 1987/88, in line with the program's target but dropped back to 10.4 percent in 1988/89, falling short of the 11 percent target for that year because of the trade and transit problem), the overall budget deficit (excluding grants) was held to the target of 10 percent of GDP and domestic borrowing by the government was kept to less than 3 percent of GDP on average. Between 1985/86 and 1988/89, development expenditures increased from a little over 12 percent of GDP to almost 17 percent of GDP, reflecting partially improvements in development administration. 37. Maintenance of sound macroeconomic management, reflects in part the Nepalese economy's heavy dependence on the neighboring Indian economy. With the Indian economy undergoing gradual liberalization in recent years, benefits have spilled over into Nepal. Moreover, the impact of good weather on agricultural output undeniably contributed to overall economic performance as well. This should in no way detract from the resolve with which the Nepalese authorities have approached macroeconomic management. But at the same time, it would be wrong to assign full credit for improving economic conditions in the country (up to March 23, 1989 when the trade and transit impasse started) to HMG policy. Further improvement in macroeconomic management is needed for the structural measures taken thus far to run their course and produce the desired results. The scope for better macroeconomic management depends on the speed with which accounting and reporting of key information can be improved qualitatively as well as quantitatively and additional policy instruments (such as monetary instruments in the form of effective open market operations for government securities, etc.) can be developed. 38. The authorities have done a commendable job in liberalizing industry and trade. The task has been a daunting one, largely because of the peculiarities of Nepal's trade and payments regime and proximity to India. Initial reluctance to liberalize licensing requirements eventually gave way to an earnest effort by the authorities to significantly reduce the number of industries requiring licensing, the amount of "red tape, involved in the licensing process itself and the restrictiveness of import licensing, particularly for industrial raw materials. Export licenses were eliminated for all exports except strategic items or those covered by the trade agreement with India. Steps were also taken to simplify export procedures. In this area, the authorities significantly reduced the maximum number of steps - 21 - required to make an export shipment and with UNDP-financed technical assistance (executed by ITC) are exploring further ways to improve export policies and procedures. 39. Commercial imports were also liberalized significantly with items imported under the passbook/OGL system reaching more than 20 percent of non-aid third country imports (under SAL II this percentage has exceeded 50 percent). An import license auction system was implemented, starting with a list of 11 items. This list was subsequently expanded to include all major items which previously had been subject to quantitative restriction, now more than 70 items. The auction yielded large premia, ranging from 40 percent to as high as 100 percent of the value of goods imported under it. Commercial policy, however, still needs improvement in two main areas: (i) the authorities must ensure policies are being applied by officials without excessive abuse of authority or individual interpretation of the rules -- a main criticism by private businessman; and (ii) the levels of policy instruments such as trade taxes need to be set with the benefit of improved policy analysis so as to adequately take into account trade-offs with respect to other economic policy objectives (such as revenue collection, employment, etc.). 40. Exchange rate management was to involve adjusting the Nepalese rupee in line with the currencies of Nepal's main trading partners. Seven currencies were included in the basket with the dollar as the intervention currency but with the Indian rupee accorded a weight of 52 percent. In fact, the NRs/IC exchange rate has been kept fixed since May 1986. Subsequent nominal depreciation of the Nepalese rupee against the dollar by over 30 percent reflects mainly movements in the IC/US$ rate. This system has largely stabilized Nepal's finances (by ensuring that unanticipated flows are not occasioned by a split in the cross rates) and has, together with non-price factors such as product improvement in carpets and ready-made garments, strengthened the competitiveness of Nepal's exports and import substitutes. 41. Results were mixed regarding improvements in development administration. Although the explicit SAL condition (to start the technical assistance project on program budgeting and project monitoring and to establish a set of high priority core projects in five major sectors) was met and an institutional set-up was established to carry out annual program budgeting and project monitoring within the Ministry of Finance. The objective of faster project implementation and a more focused development program based on the concept of the "core program" has yet to be realized. The main factor responsible for this outcome has been that the information base on the development program was so poor that neither the authorities nor the donor community could identify in advance what the crucial problems were with the public investment program -- other than that its implementation was very slow. The program budgeting and project monitoring technical assistance per sc had thus become the focus of attention; it was expected to perform several functions: build the information base; identify problems with the development administration; propose and implement solutions to these identified problems; increase efficiency of the development program; and institutionalize the procedures so that future development programs would continue to benefit from them. This - 22 - was too much to ask of one technical assistance project particularly when the issues to be addressed had not been clearly identified in advance. Aggravated by other problems associated with technical assistance projects under SAL I (see paras 50-51), therefore, the TA became an institutional development project that merely created the improved information base and procedures. The expectation that this improved information would identify both problems with the development administration and their solutions has not yet been met. 42. Regarding the objective of improving the accountability for the allocation and the management of public resources (see paras 21-22), it is difficult to assess how effective the efforts have been. Measures to give project managers more decision-making power floundered largely because of the reluctance of project managers to exercise the full extent of their new authority. Although appropriate, such measures require careful coordination with broader civil service and public service reforms. Efforts to reform the overall public service will be successful when public officials become increasingly aware that their actions are more amenable to scrutiny. These efforts have been reinforced by early retirements, transfers and firings of senior and middle-level officials related to their performance, and this has led to some improvement in the discharge of public functions and the use of public resources. But the progress has been slow partly because of the enormity of the change being attempted and partly because of difficulties in maintaining the momentum of the supporting TA projects (paras 50-51). In any event, improving the "transparency" of managing public resources will need to be accompanied by efforts by the authorities to introduce complementary public administrative reforms if significant and sustainable results are to be achieved. 43. Effort to reform public sector resource management also focused on PEs. SAL I actions in this area were of two typess (i) the strengthening of agriculture-related PEs thro-gh both TA and specific actions aimed at improving the accounting and financial management of AIC and NFC; and (ii) broader PE privatization. While the Government's compliance with covenants in these areas was adequate to meet the requirements for tranche release, it was not as successful as was initially hoped. First, there were difficulties with the associated TA (for example, the consultant for AIC were in the field more than 9 months without being granted a meeting with AIC's General Manager; NFC's TA was hampered by the lack of effective guidance provided to the consultant; also see paras 50 and 51 below). Second, regarding the broader PE privatization, the complexity of issues and political resistance were seriously underestimated by both the authorities and the Bank. * The requirement of preparing a privatization action plan was met but remained a paper exercise because the initial efforts by the authorities to privatize a number of PEs met with difficulties including the potential dislocation of . labor and foreign ownership. Although not specifically required under SAL II, the authorities decided to continue with their efforts to privatize some PEs, by commissioning the IFC to undertake divestiture of at least one company and by seeking additional TA resources for other PE reforms. 44. In areas dealing with rural development (such as in agriculture and forestry), a major problem has been the constitutionally-sanctioned but - 23 - financially unsound, Sajhas. Not only are they an ineffectual instrument for institutional change because of their own administrative and financial weakness, more importantly they are a force for political resistance to the changes being attempted. This resistance has been reinforced by strong vested interests. The Sajhas have steadily resisted the liberalization of fertilizer distribution, have been ineffective in assisting NFC in its food procurement activities and have been responsible for the failure of improved operation uf remote seed propagation and distribution centers (mini-seed houses). Moreover, because of the higher-level at which the Sajhas are sanctioned, the economic authorities have generally found themselves powerless to deal with them effectively. This fact may or may not have been underestimated by the authorities; it was underestimated by the Bank. 45. In forestry, the changes in statements of policy and enabling legislation have been along the right lines. In fact, regarding the liberalization of the rights of private landowners to dispose of trees on their property, a royal directive to this effect went beyond the contractual obligation under SAL I. The main weakness, however, has been administrative. After more than 30 years of having a policing role, forestry officials need to develop a new role -- one of forest extension agents and to be trained accordingly. A positive development to start this process has been the formulation and adoption of a Forestry Master Plan with direct support from several donors (FINNIDA, ADB, UNDP, USAID, Australian Aid and IDA). Tangible benefits from this program, however, are likely to take years. 46. Public sector intervention in the field of foodgrain procurement and distribution has been moderately successful from the perspective of covenanted actions under SAL I. Several main problems have limited the speed and intensity of reform in this area. First is the financial weakness of NFC, which despite TA to help correct this problem, has proven intractable. Second, weaknesses in central government fiscal management have circumscribed efforts to improve NFC's tinances and management. This has been partly because of the lack of a framework for managing intra-governmental financial flows within a set of consolidated public sector accounts and partly the result of the authorities' tendency to address policy issues in a "compartmentalized" way (i.e., NFC's problems, like those of other PEs, have been seldom viewed in terms of their interaction with and impact on broader fiscal management and broader resource allocation); rather, they tend to address policy areas independently of one another. Consequently, formal statements in Budget speeches (that subsidies will be made more transparent and funded directly from the Budget) notwithstanding, required subsidies have not been adequately estimated, which has not only kept PEs like NFC (and AIC) financially weak, but has occasioned frequent and unprogrammed recourse to domestic credit. This has been an important contributor to the weakness of the commercial banks as well. A third problem has been the difficulty of adequately targeting the poor and the vulnerable as deserving recipients of the government's welfare programs. Fourth, with respect to price intervention, although a pilot price stabilization program in the Kathmandu Valley was moderately successful, both geographical dispersion and limited administrative capacity have made replication of such intervention highly difficult. And fifth, support of agricultural prices (particularly for -24 - foodgrains) has been complicated by the fact that Indian practices in this regard and the open border circumscribe the manageaility and effectiveness of this policy. Recent information has also shown that NFC is not fully meeting its costs under its food price stabilization scheme which is in contravention of SAL I. 47. Measures to introduce institutional reforms in the field of agricultural research, specifically to establish a National Agricultural Research Coordination Committee, a permanent secretariat and a National Agricultural Research Services Center, with a plan for staffing these bodies, were sufficient to satisfy conditionality. However, a number of broader public service issues have tended to dilute the effectiveness of these efforts to date and will no doubt protract the associated payoff period. These include, terms and conditions of service, shortages of professional manpower, institutional rivalries and debates over the merits and demerits of keeping import4nt functions in the public domain. Although benefits from actions in agricultural research have not been discernible during the implementation of SAL I, this is because these are longer-term institutional issues which need to be followed up under successive projects. SAL I, however, has contributed to a start in the right direction. USAID-funded assistance is reinforcing this effort and a future IDA-financed project may lend additional support. 48. The enactment of a new Seed Act has discernibly improved the * availability and quality of seeds in Nepal. Performance in other areas of SAL ; conditionality pertaining to seeds were less successful. The requirement to upgrade the status of the Seed Wing of AIC (elevating the chief of the Seed Wing to the status of Deputy General Manager) was a case of misjudging the problem. AIC has 78 offices scattered throughout the country, many of which are staffed by a single representative who handles fertilizer, seeds, herbicides, pesticides and farming implements and for whom the subtleties of the balance of power within headquarters is of limited relevance. To the extent that things get done in the periphery it is usually in spite of deliberations in AIC headquarters, not because of them. Thus, to focus on organizational arrangements in AIC's Kathmandu headquarters, given the corporation's gross administrative inefficienciss, was largely a measure of inconsequence. 49. The importance of fertilizer pricing was twofold. It aimed to improve resource allocation in the sector over the medium-to-long term, with particular regard to the availability of agricultural inputs. But secondly, and of even greater short-term significance, it aimed at bringing administered fertilizer prices in Nepal up to levels in nearby India to curtail a hemorrhage of fertilizer (and consequently SAL resources) from Nepal into that country. This was done effectively. From the resource allocation perspective it was not just a matter of ugetting the prices right" on a once and for all basis. An accompanying requirement was for AIC to be accorded price autonomy (subject to a 10 percent ceiling on individual price hikes, beyond which permission from Cabinet would be required) to introduce automaticity into fertilizer pricing. After an initial price adjustment prior to approval of SAL I by IDA's board, a subsequent adjustment was resisted for more than 6 months by the authorities. This, combined with dilatory action both in - 25 - enacting forestry measures as well as in the preparation of the action plan for privatizing PEs, led to an impasse between the Government and the Bank and a consequent delay (from late 1987 to April 18, 1988) in the release of the second tranche until the requisite action was satisfactorily taken. The delay in tranche release caused the authorities to overshoot credit ceilings agreed with the IMF. Moreover, despite directives empowering AIC to use its management discretion to adjust fertilizer prices as required, this was not done during SAL I; it has since been done under SAL II. Action by the authorities to increase allowable commissions to fertilizer dealers by 2 percentage points was also slow in coming. In July 1988, however, the authorities belatedly raised commissions in the hills by 2 percent (commissions in tk4 terai were not raised on the grounds that adequate dealer interest in distributing fertilizer was forthcoming). An increasing appreciation of the complexities of the fertilizer subsector in Nepal on the part of the Bank led to the fertilizer management study currently being conducted under SAL II. Technical Assistance 50. Many of the areas of reform required significant amounts of TA to be undertaken effectively. Chief among these were program budgeting/project monitoring, public sector accounting and auditing, management and financial strengthening of AIC and NFC and export policies and procedurer. !UNDP's grant funds play a key role in providing resources for TA in Nepal. Moreover, the Government's policy is to use grant funds for TA first whenever possible before borrowing from donors on concessional terms. In all cases in which TA was identified to support the SAL, the Bank's own policy on conflict of responsibility precluded it from being the executing agency for UNDP-funded projects. Consequently, other donors (mainly ADB) assumed the executing role on these TA projects. This entailed major drawbacks as far as SAL implementation was concerned. First, the commencement of important TA projects, managed by others and on which SAL progress depended, was very lete in nearly all cases -- a matter over which the Bank and the authorities had virtually no control. Secondly, the separation of responsibilitie4 for executing the TA among other donor agencies, who did not always share the same view as to urgencies for SAL compliance, also made verification of the status of activities difficult for the Bank. Moreover, because of the strong "process" orientation (e.g., PB/PM, accounting and auditing, strengthening of NFC and AIC finances and management, etc.), reporting on SAL progress was often only possible on the basis of agency assurances rather than tangible results. In a number of instances, subsequent verification by cross-checking showed discrepancies between previous progress reported and the results finally available. 51. Furthermore, a better distinction should have been made (and for SAL I was not) between the executing needs of a TA project designed to support more immediate policy and management reform under a SAL and the same project undertaken for longer-term "institution building" needs. Specifically, if balance-of-payments support from SALs is to be justifiable, then macroeconomic management must improve fast enough to prevent resources from being wasted as a consequence of inefficient allocating mechanisms. Unfortunately, however, - 26 - the donor agencies involved in executing the TA did not always accord sufficient importance to those aspects which would have the greatest impact on reducing macroeconomic distortions and tended to execute the TA projects independently of SAL requirements. While discussions between the Bank and the executing agencies on SAL-related needs were cordial enough, these discussions seldom led to changes in either work plans or approaches. TA crucial to the success of the SAL should have been supervised directly by the SAL task manager. This should be a sine qua non for future policy-based lending. If the role of Executing Agency for UNDP projects cannot be prudently rationalized because of the potential for conflict of responsibility, then this would imply that countries like Nepal should be persuaded to undertake TA using an IDA credit, which the SAL task manager could then supervise accordingly. CONCLUSIONS 52. Within HMG, the program increasingly became a Ministry of Finance responsibility, with the result that other ministries tended to assign lesser priority to SAL actions in many cases than they should have. MoF staff were often frustrated in their own attempts to determine the status of actions (they were frequently informed that work was in progress) and to pressure other ministries into taking action. The President's Report identified management limitations as a potential risk and assurances were sought that HMG would set up committees to manage the SAL; this was done. Paradoxically, however, while several TA projects were initiated to improve the managerial, procedural and institutional aspects of individual components of the program, these TA projects themselves tended to increase the need for coordination and the central management burden of the Ministry of Finance. Nor did the program make adequate provision within the TA to equip the authorities with the coordinating mechanisms to manage a multi-jurisdictional program effectively. This was exacerbated by a tendency on the part of the authorities to "compartmentalize" policies, an aspect that has prevented them from truly appreciating the "economic costs" of both taking and not taking certain actions. This caused a lack of adequate perspective and affected the quality of some actions with the resulting percepuion that in some cases the letter but not the spirit of covenants had been met. The Bank was perhaps remiss as well in not specifying clearer objectives and criteria for periodic review. 53. SAL I covered many areas and involved many ministries because it was the first SAL in a country where there were many policy issues and substantial institutional weaknesses. Coordination/follow-up was thus quite difficult. Learning from this, however, the SAL II has taken a narrower and more focussed approach. CREDIT UTILIZATION Eligible Imports 54. All imports other than those covered by a short list of items were eligible under the Credit. - 27 - Procurement 55. Contracts for the import of goods by the private sector were awarded on the basis of normal commercial practices of the purchaser. Purchase of imports of less than US$ 1,000,000 equivalent by the Public Sector followed the public sector's procurement regulations. Except for proprietary items, all imports by the public sector exceeding the US$ 1 million equivalent limit were to be procured through international competitive bidding in accordance with Bank guidelines; in fact, no ICB took place under SAL I as most import expenditures were those of the private sector with the few public sector imports falling under the aforementioned limit. Disbursement 56. Actual quarterly disbursements under the Credit are shown in Annex 2. The original closing date was extended from March 31, 1988 to December 30, 1988 because of problems in release of the second tranche. The proceeds of the credit were 91 percent disbursed by the extended closing date and fully disbursed within the following six months. Table 1.1 Gross Domestic Product (NRs. Million) *** 1975/76 1980/81 1981/82 1982183 1983/84 1984/85 1985186 1986/87 1987/88 1988/89 Nominal GDP 17394 27307 30988 33761 39390 44417 50428 57828 67835 74575 Agriculture 11611 15679 17903 19282 22771 24171 26819 30582 35648 41608 Non-Agriculture 5783 11628 13085 14479 16619 20246 23609 27246 32187 32967 Real GDP (1974/75 prices) 17300 20158 20920 20297 22262 23630 24645 25299 27765 28189 Agriculture 11615 12066 12616 12478 13668 13990 14705 14789 16068 17161 Non-Agriculture 5685 8092 8304 7819 8594 9640 9940 10510 11697 11028 GDP Deflator 100.5 135.5 148.1 166.3 176.9 188.0 204.6 228.6 244.3 264.6 Agriculture 100.0 129.9 141.9 154.5 166.6 172.8 182.4 206.8 221.9 242.5 Non-Agriculture 101.7 143.7 157.6 185.2 193.4 210.0 237.5 259.2 275.2 298.9 Percent Change Over the Previous Year Nominal GDP 5.0 16.9 13.5 8.9 16.7 12.8 13.5 14.7 17.3 9.9 Agriculture 0.5 14.6 14.2 7.7 18.1 6.1 11.0 14.0 16.6 16.7 Non-Agriculture 15.2 20.3 12.5 10.7 14.8 21.8 16.6 15.4 18.1 2.4 Real GDP (1974/75 Prices) 4.4 8.3 3.8 -3.0 9.7 6.1 4.3 2.7 9.7 1.5 Agriculture 0.6 10.4 4.6 -1.1 9.5 2.4 5.1 0.6 8.6 6.8 Non-Agriculture 13.2 5.5 2.6 -5.8 9.9 12.2 3.1 5.7 11.3 -5.7 GDP Deflator 0.5 7.9 9.4 12.3 6.4 6.2 8.9 11.7 6.9 8.3 Agriculture 0.0 3.8 9.2 8.9 7.8 3.7 5.6 13.4 7.3 9.3 Non-Agriculture 1.7 14.0 9.7 17.5 4.4 8.6 13.1 9.1 6.1 8.6 Source: Economic Survey, 1988/8, table 1.1. * Preliminary Estimate; ** Revised Preliminary Estimate. - 29 - Table 1.2 National Accounts Summary (NRs. Million) ** * 1975176 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 Gross Domestic Product fc 16589 25466 29037 31644 37004 41556 47064 54209 62998 Plus Net IndirectTaxes 805 1841 1951 2117 2386 2861 3364 3619 4837 Gross Domestic Product mp 17394 27307 30988 33761 39390 44417 50428 57828 67835 Plus Importof Goods andNfs 2466 5357 5828 7196 7661 9317 11218 13148 15464 Total Resources Avadable=Uses 19860 32664 36816 40957 47051 53734 61646 70976 83299 Total Consumption 15354 24333 27910 30874 35504 38178 44725 52067 61158 Private Consumption 14060 22411 25272 27458 31860 33807 39592 46375 54230 Public Consumption 1294 1922 2638 3416 3644 4371 5133 5692 6928 Total Investment 2632 4808 5314 6628 7351 10184 10415 11346 13392 Gross Fixed Capital Formation 2443 4299 5465 6576 6907 9386 9247 10273 12070 Public 632 1823 2487 2941 3139 3629 3909 4491 5373 Private 1811 2476 2978 3635 3768 5757 5338 5782 6697 Change in Stock 189 509 -151 52 444 798 1168 1073 1322 Export of Goods and Nfs 1874 3523 3592 3455 4196 5372 6506 7563 8749 Memorandum Items Gross Domestic Savings 2040 2974 3078 2887 3886 6239 5703 5761 6677 Net Factor Income 277 587 615 697 625 661 709 1169 1575 Net Current Transfer /a 375 951 1228 1373 1498 1436 1532 1500 1435 Gross National Savings 2692 4512 4921 4957 6009 8336 7944 8430 9687 Private 2251 3454 3876 4113 4873 7326 6884 6590 7156 Public 441 1058 1045 845 1136 1010 1061 1840 2531 Gross National Product mp 17671 27894 31603 34458 40015 45078 51137 58997 69410 Source: Economic Survey, 1988/89, table 1.3. * Provisional Estimate; ** Provisional Revised Estimate; /a Including grants. - 30 - Table 2.1 Balance of Payments Summary (US$ Million) 1975176 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 Exports (ONFS) IS6.0 294.3 278.4 249.4 273.5 301.4 329.3 349.8 395.2 381.4 Morchandise f.o.b. 100.6 134.7 115.9 82.0 111.5 154.1 IS6.2 139.1 187.1 162.9 Non-factor Services S5.3 159.6 162.4 167.4 162.0 147.3 173.1 210.8 208.1 218.5 Imports (GNFS) *05.3 447.4 451.5 519.5 499.4 523.2 SS9.0 599.1 728.9 739.5 Morchandise c.i.f. 168.3 371.2 383.5 457.2 425.9 435.9 474.3 506.0 629.9 635.7 Non-factor Services 37.0 76.2 68.0 62.3 73.5 87.3 84.7 93.2 99.0 103.8 Rosource Gap 49.3 153.1 173.1 270.1 225.9 221.8 229.8 249.3 333.7 358.1 Not Factor Income 5.3 9.9 12.4 12.9 3.2 0.6 8.7 -9.8 8.8 4.4 Factor Receipts 6.9 13.4 15.3 14.7 6.2 5.2 3.2 4.7 8.9 19.6 Factor Payments 1.6 3.4 2.9 1.7 3.0 4.7 11.9 14.5 17.7 15.3 Not Current Transfers 27.4 46.5 40.7 41.6 45.1 42.7 44.8 64.3 74.9 57.5 Transfer Receipts 28.9 48.0 42.5 44.0 47.6 44.6 49.9 67.5 80.0 67.5 Transfer Payments 1.5 1.5 1.8 2.4 2.5 1.9 5.0 3.2 5.1 10.0 Current Account Balance -16.6 -96.6 -120.1 *215.6 -177.6 .178.5 -193.7 -194.8 -267.6 .296.2 Offici Grant Aid 21.6 71.9 89.7 94.9 90.0 74.8 68.6 60.4 58.0 48.7 Net M&LT Loans 12.1 53.0 60.0 66.7 78.5 71.3 91.7 87.4 198.1 231.3 Disbursements 13.6 55.6 62.5 69.6 83.1 76.5 101.5 97.1 212.0 246.2 Repayments 1.5 2.6 2.5 2.9 4.6 S.2 9.8 9.7 13.9 14.8 Capital Flows N.E.I. 12.7 -12.0 9.3 5.2 0.9 .16.1 61.8 64.5 114.7 29.1 Overall Balance 29.8 16.2 38.9 .48.7 8.2 -48.6 28.4 17.4 103.1 12.9 Memo Items Gross Reserves (end period) 120.3 195.8 232.6 230.3 202.6 142.0 164.6 205.0 310.7 312.9 In months of imports 7.0 5.2 6.2 5.3 4.8 3.2 3.5 4.1 5.1 5.0 Official Exchange Rate 12.0119 11.9687 12.9022 13.8510 15.3406 17.8213 19.7585 21.5960 22.0550 25.6000 Sources: Economic Survey, 1988/89, Table 6.8 and Nepal Rastra Bank. - 31 - Table 3.1 External Publc Deb U tanding IncIus ing Und~~bursed as of lune 30,1988 /a Mn~luds only dbt ommitted 000000- Jun 30, 1988 Det Repayable in for~igu Cun~nopend Goo"a (In dm aof U.8. D~iir) IDebt OutWamdng In Ansirs Dibe~d Uodåb .d Total P~ Credli Tpe SunIlia Credit Creditor Counry- China 6.885 6,885 2,5M4 504 Denmørk 212 212 24 36 Germany, Fed. Rep. of 35 35 India 272 United Kingdom 246 246 Total Suppliers Crdits 7,650 7,650 2,568 540 Credltor Tpe: Muldlata Loana Creditor Country Asia Deve~opment Bank 264,128 401,049 665,177 ESC 8,533 - 8,533 IDA 435,864 370,385 806.249 IFC 5,475 • 5,475 Ind Fund Arg (IFAD) 32,869 31,180 64,049 Opec Spocial Fund 16.117 2.360 18,477 Total Multil~teral Lomna 762,986 804,94 1,567.960 Creditor Type: Bilatral Loana Creditor Country Belgium • 2,620 2,620 Franco 7,011 8,301 15,312 Japan 102,689 16,390 119,079 - Kuwait 25,087 15,623 40,710 Saudi Arabia 6,114 16,850 22,964 United States 87 - 87 • USSR 3,655 3,655 Total Bil~teral Lmaa 144,643 59,784 204,427 Creditor TI= Export Credita Creditor Counry France 47,138 62,145 109,283 India 2,421 2,421 United Kingdom 5,908 5,908 • United States 7,262 3,111 10,373 1,325 755 Total Eport Credits 62,729 65,256 127,985 1,325 755 CrEditor To Suppliers Credits 7,650 • 7,650 2,567 539 Multilateral Lms 762,985 804,974 1,567,959 Bilateral Loans 144,643 59,784 204.427 - Export Credits 62,729 65,255 127,984 1,325 755 Total Eturnal Det 978,007 930,013 1,908,020 3,892 1,294 la Data from World Bank Debt Reporting System. Bccausø of differe~oes in methodology, the figume may not be ounm with others in the report. Notes: (1) Only debta with an original or aeredød matuuity of over onw year ar includød In this table. (2) Del outstanding includes pr~ncipul in arrears but xclude Intere in arrua. - 32 - Table 4.1 Central Government Budgetary Performance (NRs. Million) Revised Budget __shimte atimate 1975/16 19O0/81 191182 1982/83 1983/84 1954/85 1985/86 1986/87 1917/8 1988/89 1989/90 Revenue 1116 2419 2680 2842 3409 3917 4645 5975 7350 7777 8501 Tax Revenue 911 2036 2211 2421 2737 3131 3659 4372 57S4 6287 6826 Non-Tax Revenue 205 383 468 420 672 766 985 1603 1596 1490 1674 Expenditure 1913 4092 5361 6979 7437 8395 9797 11513 1410S 18120 20242 Regular 674 1361 1634 1997 2274 2906 3584 4135 4677 3652 6651 Development 1239 2731 3727 4982 5164 5489 6213 7378 9428 12409 13591 Overall Deficit 798 1673 2682 4138 4028 4478 5153 5538 6755 10344 11741 Financed by: Foreign Orants 360 869 993 1090 877 923 1173 1285 2077 1726 2224 Oross Foreign Borrowing 146 693 730 986 1671 1755 2501 2706 3816 3297 7767 Oross Domestic Borrowing 292 111 959 2062 1480 1800 1479 1547 862 3320 1750 Source: Budget Speeches and Ministry of Finance. Table 4. 1A Central Government Budgetary Performance (As Percent GDP) Revised Budget Estimate Estimate 1975/6 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 Revenue 6.4 8.9 8.6 8.4 8.7 8.8 9.2 10.3 10.8 10.4 10.5 Tax Revenue 5.2 7.S 7.1 7.2 6.9 7.1 7.3 7.6 8.5 8.4 8.4 Non-Tax Revenue '.2 1.4 1.5 1.2 1.7 1.7 2.0 2.8 2.4 2.0 2.1 Expenditure & Net Lending 31.0 15.0 17.3 20.7 18.9 18.9 19.4 19.9 20.8 24.3 23.0 Regular 3.9 S.0 5.3 5.9 5.8 6.5 7.1 7.2 6.9 7.6 8.2 Development 7.1 10.0 12.0 14.8 13.1 12.4 12.3 12.8 13.9 16.7 16.8 Overall Deficit 4.6 6.1 8.7 1.3 10.2 10.1 10.2 9.6 10.0 13.9 14.5 Financed by: Foreign Grants 2.1 3.2 3.2 3.2 2.2 2.1 2.3 2.2 3.1 2.3 2.8 Gross Foreign Borrowing 0.8 2.5 2.4 2.9 4.2 4.0 5.0 4.7 5.6 7.1 9.6 Gross Domestic Borrowing 1.7 0.4 3.1 6.1 s.8 4.1 2.9 2.7 1.3 4.5 2.2 Source: Statistical Appendix tables 2.1 and 5.1. - 33 - Table 4.2 Central Government Revenue (NRo. Million) Revised Budget Estimate Etmate 1975/76 1980/1 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 Ia 1989/90 1. Tax Revenues 910.9 2035.5 2211.4 2421.1 2737.0 3150.9 3659.5 4372.4 5754.4 6287.3 6826.2 Customs 358.5 815.8 825.1 760.9 825.9 1064.4 1231.1 1505.7 2214.7 2289.9 2407.0 Imports 204.5 685.1 739.5 714.8 746.2 907.6 1081.1 1285.3 1984.2 2133.9 2350.0 Exports 37.7 69.5 42.2 25.1 30.4 55.7 73.3 79.9 107.9 62.7 25.0 Indian Excise Refund 112.0 58.1 40.4 20.0 49.0 100.0 75.6 138.3 121.2 91.6 0.0 Others 4.3 3.1 3.0 1.0 0.3 1.2 1.0 2.1 1.3 1.7 32.0 Tax on Goods and Services 324.1 866.8 1006.2 1215.1 1369.3 1526.9 1766.6 2098.0 2529.5 2665.6 3039.2 Industrial Production 96.7 224.7 293.9 355.5 425.8 479.0 555.4 675.4 822.4 870.9 1018.1 Liquor 0.0 17.5 11.8 10.3 6.3 4.9 3.3 3.2 2.9 1.7 1.1 Sales Tax 161.9 537.7 597.4 709.3 770.7 845.8 985.9 1143.8 1300.5 1384.9 1477.0 Entertainment Tax 7.0 12.0 15.2 16.3 24.0 24.4 22.3 26.9 32.3 32.7 43.0 Hotel Tax 3.5 17.4 23.1 29.0 34.5 38.8 47.8 66.0 80.6 92.8 94.0 Air Flight Tax 2.7 20.6 21.9 22.7 25.4 26.9 24.9 44.7 65.4 66.8 100.0 Contract 9.5 36.9 43.0 70.4 78.3 103.6 117.0 126.3 199.1 194.4 220.0 Road & Bridges Maintenance Tax 7.6 0.0 0.0 1.5 4.2 3.6 9.9 11.5 24.8 21.5 18.0 Others 35.3 0.0 0.0 0.0 0.1 0.0 0.0 0.0 1.5 0.0 68.0 Land Revenue 134.4 186.3 172.5 171.5 212.4 218.6 258.8 285.3 368.4 401.8 400.0 Land Revenue 94.8 100.7 81.7 66.7 77.2 76.9 74.2 72.4 80.7 80.6 69.0 House and Land Registration 39.6 77.8 88.3 104.8 135.2 141.7 170.1 211.6 286.2 320.6 331.0 Stamp Fee 0.0 0.0 0.0 0.0 0.0 0.0 14.5 1.3 1.5 0.5 Panchayat Dev. & Land Tax 0.0 4.2 2.3 0.0 0.') 0.0 0.0 0.0 0.0 0.1 Local Development Tax 0.0 3.6 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Tax on Property, Income 93.9 166.6 207.6 273.7 329.4 341.0 403.0 483.4 641.7 929.9 980.0 PE Income Tax 0.0 41.0 37.4 53.4 63.7 93.1 110.8 120.9 193.2 219.4 22S.0 Semi-PE Income Tax 0.0 0.8 0.3 1.5 2.2 1.4 1.8 1.2 1.9 3.0 5.0 Private Firm Tax 0.0 1.0 0.2 0.3 0.8 0.5 2.0 0.2 1.9 0.0 3.0 Indivudual Income Tax 87.2 91.4 143.7 173.9 212.5 196.0 234.5 284.3 348.6 598.6 647.0 Income Tax from Salaries 0.0 9.8 8.1 11.0 11.7 16.3 15.3 30.9 33.4 42.6 40.0 House Ret Tax 1.4 1.1 0.5 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.0 Urban House and Land tax 3.3 6.6 9.3 11.4 14.3 12.1 10.3 13.4 17.4 '9.0 18.0 Vrbicle Tax 2.1 1.8 2.4 11.0 16.2 15.3 18.1 22.8 28.3 31.0 22.0 Tax on Intcros: 0.0 13.2 5.7 11.1 7.9 6.4 10.2 9.7 17.1 16.0 20.0 - 34 - Table 4.2 Central Government Revenue (Cont) (NRs. Milion) Revid Budget Estina:, Estimat 1975/76 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 /a 1989190 11. Non-Tax Revenos 204.8 383.4 468.2 420.5 672.3 765.8 985.1 1602.7 1596.0 1489.6 1674.4 Chargea Fees and Others 19.2 48.7 56.9 71.5 170.6 283.3 201.7 852.0 676.5 555.3 539.7 Firm Registation 0.5 2.7 3.4 5.2 7.4 7.8 8.2 11.7 12.9 13.8 16.0 Arm Registration 0.3 0.7 0.8 0.8 0.8 0.9 0.9 1.0 1.0 1.0 0.7 Vic icnses 0.4 2.8 3.1 3.1 6.3 6.2 7.1 7.7 9.1 11.0 8.0 Judiciary 4.0 7.6 8.6 10.1 11.3 11.7 13.5 15.8 27.3 28.8 35.0 Administration 14.0 34.9 41.1 52.3 144.7 256.6 172.1 815.9 626.2 500.7 480.0 Salea of commoditis & servi 44.9 171.9 189.4 162.9 225.7 253.1 305.6 311.4 348.2 340.2 388.5 Driking Wat~r 0.2 0.6 0.5 0.6 0.8 1.2 1.4 1.6 1.8 1.9 3.0 Irrigtion 0.3 0.5 0.6 0.9 1.0 1.0 0.5 1.2 3.6 3.5 2.5 Electricity 3.3 8.2 4.1 4.1 24.4 25.9 5.7 1.2 2.2 0.1 2.0 PoMtal Sevices 9.5 20.9 23.9 22.7 32.4 37.3 36.4 44.3 60.6 58.0 72.0 Food and Agriultur 0.0 7.4 7.8 10.6 11.7 13.4 31.9 17.6 23.2 22.9 26.0 Educadon 1.1 3.2 3.3 3.6 6.3 6.7 6.9 9.8 10.6 13.2 18.0 Forest 24.0 90.5 113.6 53.9 60.6 90.5 115.6 129.3 101.1 75.9 85.0 Transport 6.4 25.3 19.2 35.2 41.2 32.4 46.0 37.5 44.6 65.6 85.0 Others 0.0 15.1 16.3 31.3 47.3 44.7 61.2 69.0 100.5 99.0 95.0 Dividend 93.6 87.3 106.4 119.0 109.0 86.2 110.1 106.6 117.2 198.5 205.7 Finacialindu~n 0.0 83.9 101.1 114.4 103.5 81.1 97.5 101.0 · 115.1 179.8 190.0 Trading Conern 0.0 0.1 0.0 0.1 0.1 2.0 0.3 1.1 0.2 11.8 12.2 Industrial Undrtaking 0.0 3.2 5.3 4.5 2.4 3.1 11.8 4.5 1.9 6.9 3.0 Service Setor 0.0 0.1 0.1 0.1 3.0 0.0 0.4 0.0 0.0 0.0 0.5 Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Royalty and Sa of Fixed Å 4.6 8.0 16.8 9.2 40.6 31.7 32.6 25.4 25.7 38.5 94.5 Royaty from Mning 0.0 1.3 1.8 1.4 1.7 2.6 2.6 4.1 5.9 3.1 1.5 Royalty frm E~ectrielty 4.6 0.2 0.0 0.2 0.0 0.0 0.0 0.0 Other Royalti 0.0 1.6 2.5 2.6 2.6 15.1 5.3 11.6 5.9 10.0 8.0 Other 0.0 5.0 12.5 5.1 36.1 13.9 24.7 9.6 13.9 25.3 85.0 Mint 0.0 21.3 5.3 6.9 3.7 0.0 0.0 0.0 0.0 1.5 0.0 Principe amd iner Roe 32.0 30.1 29.2 47.7 117.4 101.6 324.6 300.3 358.6 343.1 431.0 Loan Repaymnt 18.5 16.5 11.5 34.0 67.1 67.5 136.7 150.9 150.4 178.9 200.0 Intrnst 13.5 12.5 16.2 12.6 49.2 33.2 186.1 148.3 207.4 163.4 230.0 Otber 0.0 1.1 1.4 1.2 1.1 0.9 1.7 1.1 0.8 0.7 1.0 Mibodanoua 10.6 16.1 64.2 3.3 5.3 9.9 10.5 7.1 69.8 12.6 15.0 Total Ravenue ( + 11) 1115.6 2419.0 2679.5 2841.6 3409.3 3916.6 4644.5 5975.1 7350.4 7776.9 8500.6 /a Røvisd fgur. Brutown o b avullable soon Source: Miniry of Finance. Sadget Spech, 1977/8 - 1989/90. - 35 - Table 4.3 Expenditure of the Central Government (NR. Million) Revised Budget Estimate Estimate 19756 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 Ia 1989/90 1. Regular Expenditure 674.5 1361.0 1634.4 1997.1 2273.5 2906.2 3584.0 4135.2 4677.0 5651.6 6651.2 Constitutional Organs 20.4 61.9 60.4 54.4 58.0 60.9 113.2 132.2 106.2 144.4 HM & Royal Family 7.8 9.7 12.3 15.9 17.2 17.3 25.5 25.5 28.2 42.4 State Council 0.3 0.6 0.9 1.2 1.7 2.0 1.9 2.6 2.4 3.5 National Panchayst 2.7 4.2 5.3 6.7 7.9 7.7 9.5 11.8 11.2 16.2 Dept of Auditor General 2.1 4.3 4.7 6.5 7.1 8.9 8.1 10.1 11.0 16.0 Supreme Court 0.9 1.5 2.5 3.9 3.6 3.4 3.7 5.1 S.1 7.3 Public Service Commission 2.2 3.5 4.7 7.6 8.S 8.8 8.9 12.5 15.4 15.0 Election Commission 4.3 36.8 28.3 4.2 3.7 4.8 46.3 41.9 3.2 6.9 Commission for Prevention of Misuse of Authoity 0.0 0.7 0.9 0.9 1.4 1.1 1.1 1.9 1.8 2.3 Attorney General 0.0 0.6 0.7 3.0 1.5 1.5 1.5 2.2 2.3 3.1 Panchayat Policy and Investigation Committee 0.0 0.0 0.0 4.6 5.4 S.3 6.5 18.7 25.6 31.7 Go To Village Nati Campaign 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 General Administration 115.9 218.8 253.1 323.7 351.0 411.2 516.1 601.1 675.8 1027.8 Council of Ministers 1.6 2.6 3.8 4.7 3.6 4.0 4.2 4.1 5.3 10.4 HMO Secretariat 14.5 25.9 31.2 39.0 41.5 43.3 51.7 73.1 78.5 131.3 District Administration 15.2 24.0 28.8 37.4 34.7 40.3 43.8 51.3 56.7 75.8 Police 65.4 145.7 162.9 210.2 237.4 288.0 377.5 409.1 462.3 693.2 Jail 8.4 14.3 17.7 21.9 23.5 25.0 26.0 28.8 32.0 51.9 Miscellaneous 9.8 6.2 8.3 10.3 10.2 10.3 12.4 34.4 39.5 62.8 Administrative Refosm 1.1 0.1 0.5 0.0 0.2 0.2 0.5 0.5 1.5 2.4 National Election Commission 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.0 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Revenue Administration 20.7 35.9 43.9 54.6 58.6 62.9 75.3 95.6 101.0 139.2 Land Revenue 8.0 16.6 21.1 26.0 26.8 29.1 34.0 42.2 42.5 62.2 Customs 6.5 9.9 11.4 15.4 17.1 18.3 23.4 29.5 31.8 38.7 Excise 2.9 5.1 6.3 6.7 7.1 8.0 8.1 10.4 11.3 15.6 Tax 2.9 4.0 4.9 6.4 7.4 7.3 9.5 13.0 15.0 22.2 Revenue & Tax Cowst 0.4 0.2 0.2 0.2 0.3 0.3 0.4 0.4 0.5 0.5 Economic Ada and Panaing 8.6 13.5 19.3 32.1 25.1 28.0 S1.5 33.3 38.2 51.6 Planning 0.6 0.7 0.8 0.9 1.1 1.2 1.4 2.0 2.1 3.2 Statistics 1.4 0.7 0.7 0.9 1.0 1.1 1.5 1.8 2.1 3.4 POOO 2.5 4.2 8.9 20.4 20.9 23.6 26.2 31.5 34.0 45.0 Metric Measurement 0.6 1.1 1.6 2.0 2.0 2.1 2.4 2.9 0.0 0.0 Mint 3.5 6.9 7.3 7.8 0.0 0.0 0.0 0.0 0.0 0.0 - 36 - Table 4.3 Expenditure of the Central Government (Cont) (NRs. Million) Revised Budget Estimate Estimate 1975176 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1 1989/90 Judicial Administration 10.6 18.5 25., 38.5 39.9 43.9 S1.7 66.3 71.0 99.0 Coust 10.2 18.3 25.6 38.2 39.6 43.6 51.3 65.9 70.6 98.5 Court for Prevention of Misuse of Authorities 0.0 0.2 0.2 0.3 0.3 0.3 0.3 0.4 0.4 0.5 Attorney Gencral 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Foreign Services 24.7 38.8 50.1 52.4 $4.9 62.3 71.6 100.7 106.9 158.4 Foreign Services 18.5 33.2 44.2 44.2 45.5 53.0 61.0 77.0 88.9 137.0 Miscellaneous 6.3 5.6 5.9 8.2 9.3 9.3 10.6 23.7 18.0 21.4 Defence 134.6 259.0 282.8 392.4 453.6 507.9 606.2 712.4 768.4 1114.0 Defence 134.6 211.0 233.3 337.3 388.8 435.4 514.5 602.1 638.0 905.8 Miscellaneous 0.0 47.9 4..5 55.1 64.9 72.5 91.7 110.3 130.3 208.3 Social Services 141.5 210.3 249.6 320.5 360.4 410.6 493.1 $08.2 562.0 785.1 Education 77.1 98.6 106.7 129.4 137.2 161.4 207.6 242.3 262.5 349.4 Health 33.2 65.2 80.5 102.3 117.8 139.4 150.0 182.5 204.1 318.6 Drinking Water 0.9 3.1 3.9 6.4 6.0 8.8 10.2 12.3 14.6 2.5 Panchayst & LEal Devp 16.3 22.5 31.6 51.8 65.0 69.4 89.6 25.1 28.7 9.6 Other Social Services 14.0 20.8 26.8 30.5 34.5 31.5 35.7 46.0 52.1 105.0 Economic Services 72.3 110.2 130.6 165.8 174.6 199.4 232.3 286.1 289.6 455.0 Agriculture S.3 3.4 3.7 4.5 S.2 6.3 6.6 8.3 9.0 36.7 Irrigaton 1.7 3.2 3.6 4.7 5.1 5.8 6.2 6.9 7.9 12.7 Land Reform 10.1 12.9 15.7 18.1 19.2 17.5 23.6 27.4 29.6 13.1 Survey 2.0 4.2 5.3 6.8 7.4 8.3 9.5 11.8 12.7 15.9 Forest 5.4 4.6 5.4 7.3 8.0 8.7 10.0 13.3 14.6 20.2 Industry & Mining 2.0 2.9 3.4 4.1 4.4 5.2 6.8 8.1 14.5 17.1 Communicatio 19.3 35.6 45.2 58.4 59.8 74.8 98.4 119.1 107.9 192.2 Transportation 20.4 36.6 40.1 50.8 54.6 61.3 66.4 86.0 88.0 137.7 Electricity 5.1 4.6 5.5 7.7 7.5 8.3 0.9 0.0 0.0 0.0 Other Economic Services 1.0 2.1 2.6 3.3 3.4 3.2 3.9 5.0 5.5 9.4 Loanand Investments 4.2 11.3 7.9 3.3 0.0 11.1 9.0 8.6 2.6 9.5 Debt Services 63.7 216.2 256.7 306.9 497.6 678.2 1019.3 1196.6 1496.5 2086.1 Amoftization 16.1 86.3 103.8 93.6 166.5 174.7 342.8 350.6 397.5 581.9 Interest 47.6 129.9 152.9 213.3 331.1 503.5 676.5 846.0 1099.0 1504.2 Miscolausous 57.1 166.7 254.2 252.5 199.8 429.7 364.7 389.2 458.8 581.1 Travelling Expenses 6.4 6.3 10.0 12.4 26.3 13.1 33.0 40.1 25.2 45.0 Peasion Allowances 12.5 21.8 21.7 42.4 44.7 59.3 98.1 119.8 102.3 156.5 Hospitality 0.3 0.1 0.1 0.0 0.2 0.3 0.5 0.8 1.1 1.0 Emetsency, Donation, Prizes 0.0 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.2 Compensation 0.7 0.4 0.8 0.7 0.4 0.3 0.3 1.2 1.0 15.0 Miscellaneous 22.7 39.7 63.9 81.0 18.4 99.4 140.3 154.4 211.2 243.4 Contingency 14.5 96.4 157.7 115.9 49.7 257.1 92.6 72.9 118.1 120.0 - 37 - Table 4.3 Expenditure of the Central Government (Cont.) (NRs. Million) Revised Budget animate Estimate 1975/76 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 /a 1989/90 II. Development Expenditure 1238.9 2731.1 3726.9 4982.1 5163.8 5488.8 6213.1 7377.9 9428.0 12468.9 13590.8 Ocneral Administration 0.6 0.7 2.9 7.9 13.0 11.9 10.3 18.3 24.4 16.4 Administrative Reform 0.6 0.7 2.9 7.9 13.0 11.9 10.3 18.3 24.4 16.4 Economic Administration 4.4 30.0 14.4 20.2 15.4 5.2 4.0 4.0 5.9 18.1 Planning 0.6 8.8 6.1 9.6 10.8 2.7 1.9 1.2 1.6 6.9 Statistics 3.8 21.2 8.2 10.6 4.6 2.5 2.1 2.8 4.3 11.2 Social Services 320.9 572.6 10S9.6 1540.2 1493.5 1501.2 1699.8 2036.3 2433.3 4334.6 Education 152.3 285.6 412.3 604.6 678.6 644.2 879.4 1036.5 1226.8 1736.1 Health 93.3 97.8 152.8 216.3 199.8 254.8 255.9 309.2 385.2 614.9 Drinking Water 29.4 73.2 107.5 241.9 220.9 201.6 228.3 274.2 236.3 660.9 Panchayat & Local Devp 29.6 90.0 270.3 335.1 334.5 339.3 280.8 317.0 442.7 521.7 Other Social Scrices 16.3 26.0 116.7 142.2 59.7 61.3 55.5 99.5 1V 4 801.0 Economic Services 892.0 2101.0 2556.1 3287.1 3582.5 3617.1 4414.5 5168.5 6751.7 8506.7 Agriculture 207.3 257.0 468.0 668.6 547.1 703.6 856.2 681.7 928.9 1382.7 Irrigation 98.1 288.2 359.6 487.4 545.2 652.2 846.7 846.8 854.7 1351.6 Land reform 9.8 12.2 16.3 20.6 21.4 17.9 18.9 26.7 19.6 43.6 Survey 13.2 30.2 37.7 45.6 45.9 40.7 46.7 67.5 72.1 69.7 Porest 37.0 89.3 185.4 228.1 234.5 290.4 365.0 388.4 449.6 638.6 Industry & Mining 113.6 123.2 266.5 373.0 651.3 347.0 397.5 377.0 604.0 789.1 Communication 9.4 30.9 49.2 74.3 97.2 90.4 89.S 139.8 519.0 124.3 Post Office 1.2 3.2 4.8 4.1 2.1 3.2 2.9 1.9 3.2 4.3 Tele-communications 8.1 27.7 44.3 70.2 95.1 85.1 86.6 137.9 S15.8 120.0 Transportation 336.9 601.3 744.0 802.2 746.8 923.0 717.0 986.0 1214.6 2668.6 Roads 203.1 472.2 543.4 623.9 615.7 519.5 566.1 792.2 958.4 1930.0 Bridges 30.9 54.9 56.6 43.6 41.4 53.5 49.9 42.8 112.4 115.9 Civil Aviation 102.9 74.2 144.1 134.7 89.7 347.1 100.3 150.4 143.0 574.3 Others 0.0 0.0 0.0 0.0 0.0 2.9 0.8 0.6 0.8 48.3 Electricity 48.6 653.2 382.2 443.3 653.0 504.9 1035.4 1239.2 1924.7 1124.9 Other Economic Services 18.1 15.6 47.2 143.9 40.0 46.9 41.6 415.5 164.6 313.6 Miscellaneous 21.0 26.9 93.9 126.7 59.4 353.3 84.6 150.7 212.6 715.0 Miscellaneous 16.3 6.4 59.2 90.4 20.6 54.3 20.7 76.3 80.3 4S5.0 Contingency 4.6 20.5 34.7 36.3 38.8 299.0 63.8 74.4 132.3 260.0 Total Expenditure (I. II) 1913.4 4092.1 5361.3 6979.2 7437.3 8394.9 9797.1 11513.2 14105.0 18120.5 20242.0 la Revised figure. Breakdown to be available soon. Source: Ministry of Finance, Budget Speech, 1977/78 - 1989/90. - 38 - Table 5.1 Production of Major Agricultural Crops ('000 metric tons) Value S.No. Agri. Crops Weighs 197475 197910 198011 1981/82 1982/13 1983/84 1984/83 1985/86 19W7 1987/88 1988/89 (percent) 1. Foodgrains 41.04 3775 3196 3829 3983 3350 4289 4211 4436 4104 4803 5395 Paddy 21.09 2452 2060 2464 2560 1833 2757 2709 2804 2372 2982 3283 Maize 10.26 87 S54 743 752 718 761 820 874 868 902 1072 Wheat 5.70 331 440 477 526 657 634 534 598 701 745 830 Millet 3.42 140 119 122 122 121 115 124 138 138 150 183 Barley 0.57 26 23 23 23 21 22 24 23 25 24 27 2. Cash Crops 7.98 671 798 900 1036 1105 997 952 1060 1123 1494 1665 Sugarcane 0.57 251 384 483 590 617 509 408 558 617 814 903 Oilseeds 2.28 66 62 77 79 69 73 84 79 83 94 99 Tobacco 0.S7 5 6 5 5 7 7 6 5 5 4 5 Jute 1.14 41 68 59 43 39 25 33 61 23 15 18 Potato 3.42 307 278 275 320 373 383 420 357 395 567 640 3. Other Crops 7.98 0.77 0.88 0.91 0.97 1.12 1.17 1.23 1.30 1.38 1.41 1.48 Pulses 2.58 0.11 0.12 0.13 0.14 0.13 0.13 0.15 0.15 0.17 0.14 0.16 Fruits 3.71 0.25 0.27 0.27 0.32 0.32 0.34 0.34 0.37 0.39 0.40 0.40 Vegetables 1.69 0.41 0.49 0.51 0.52 0.67 0.70 0.74 0.78 0.82 0.87 0.92 4. Uvealdck 27.00 0.85 0.89 0.86 0.99 1.05 1.10 1.12 1.28 1.17 1.22 1.26 Meat 7.25 0.10 0.!0 0.10 0.11 0.12 0.12 0.13 0.13 0.13 0.14 0.14 Buffalo 0.97 0.07 0.07 0.07 0.08 0.08 0.08 0.09 0.09 0.09 0.09 0.09 Sheep 1.46 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Goat 1.45 0.02 0.02 0.02 0.02 0.02 0.02 0.03 0.03 0.03 0.03 0.03 Pig 0.46 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 Poultry 2.91 0.00 0.00 0.00 0.00 0.00 0.01 0.01 0.01 0.01 0.01 0.01 Milk & Milk Products 14.53 0.62 0.63 0.56 0.67 0.71 0.74 0.75 0.88 0.77 0.81 0.83 Milk 14.47 0.62 0.63 0.56 0.67 0.71 0.74 0.75 0.88 0.77 0.81 0.83 Milk Prods. a/ 0.06 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Eggs S.22 0.13 0.15 0.20 0.21 0.22 0.23 0.25 0.26 0.27 0.28 0.29 5. Fisbery 1.00 0100 0.00 0.00 0.00 0.00 0.01 0.01 0.01 0.01 0.01 0.01 Source: Burcau of Statistics and National Planning Commission. - 39 - 11 l §i A l E l* l 1 I I I JI-l m-§11=linliei~ ilERNRUItEIMsigi: 1!@igmgaexcl ln E-fl kl0nI j 1 - 41 - TRUE COPY Attachment I Comments Received from Government on PCR HIs MAJESTY'S GOVERNMENT MINISTRr OF FINANCE Bagdurbar KATHMANDU NEPAL June 20, 1990 Hr. Eric Cruikshank Deputy Resident Representative The World Bank Jyoti Bhavan Kathmandu, Nepal Dear Mr. Cruickshank: Subject: SAL I Project Completion Report We have gone through the Nepal SAL I (CR.1769-NEP) Project Completion Report and we found it excellent. So far, we have no objections to its content, and thus, you may please forward this to the World Bank Headquarters. With best regards, Very truly yours, (Sgd. T.N. Pant) T.N. Pant Joint Secretary FIRST STRUCTURAL ADJUSTMENT CREDIT PROJECT COMPLETION REPORT Checkists of Covenants and Results DCA Sector Ara of P~licy haprovees Refee~ce Related Cm~venants Results 1. Econmy 0) Com Develoment Pcogram 5~sd 3, Foem~lae Com De ~lopnt Pogam and cany om Cou duloinent paa 1 & 2 be of fbs projects and operat and mainai program founuted. cab of the fac~ilies included in the Program; also. a ~ acion for T1e bu~lasy altocati~os for enyig o of th~ or deuon" pojects imluded i he Program. ( Operaon and Maiena~ Se~ 3, Com-encimg rem FY 1987Mgg, etake necesary Prog~a beeting proced~es pama3 aci~ns to ado~s adegate b~dp for carying omt ah applied om aD proje~s in &he opeatio and maka~ of thg facilities agricuu, irrigain, foety, ktu inthe om developnm pressam. power and uneposation 2. Induhay (3) M ~ ~ ~ libena policy 8*gime ehaa 3, Adop and imea an inom, sa ml excia s An nm. mies and excise refoam and Tade for ibuy, expouts and par 5 &6 refom prgam; cesioof Mtho arffsture program fomated and tari imposts to bs system of7 bands ra-ing fsom(0100%. ~isu 7~e landa adopted. 3. Agricullme (4) b~teasply and ti~ely Seaa 3, nase ahe geiail arading margins by two peentage Actia ben takem avaiability ofapropiate pars 7 & a pois and semi-amna l review ofwhateale frili featilizess priees; A1C to imnase apio0 its ex-AJC depo f ilizersles prie in te Teai. 0) Cera Seeds Puicin Sysiem Seadh 3, Iaplemet a simplified cereal seed 8a~, pricing Simpliied cereal paa system, inew~ ding etn idyon oeeds. ned alm prtcing 09 rt ______~W å__ _ _ _ _ _ _ _ _ __ _ ________~______sse 01 Et lj lre-1- FIRST STRUCTURAL ADJUSTMENT CREDIT PROJECT COMPLETION REPORT (Cont) Checklists of Covenants and Results DCA Sector Area of P~licy lmprovements Reference Related Convenanta Results (6) Financial Autenfmy to te Schedlo 3, Pvide grmter finanmii and opmrational autonomy Fiancial and Seed Division of AIC paa 10 to th Seed Division of AIC and transfer within operational AIC o! raonsibility for seed distribution antonomy provided. and maketing to the Seed Division. (7) Natioal S~ed Board Schedule 3, Establisb and maintain th National Seed Board. National Seed para 11 Board establiahed. (8) Shbimi of Ac-mut. and Sched~le 3, Fmis to th Auditor nral' ofice complcm Accouta mb~nitted. Finanial an lparn 12 & 13 final ccouga and finacial tatemea for AIC and NPC for aU financial year through 1985/86 and completion by dw Auditor General's office of audits for AIC aud NPC accoufts for the yeas fom 198283 thrugh 1985/86. (9) Bodgetary Anlo~atin for NC S ed 3, Proviion of auffi~ieit budgetay aUocation to Sfficient budgeary para 14 conpensate NPC for dm costs of carying ou allocation provided. welfare-orieted fuctions on behalf ofHMG. 4. porestry (10) prove d roe ofd Sethe~d 3, Alow fore«t uers' committe to retin 100% of Action ndeftaken Pacayats in developig, paa 15 ~venues from fort aCtivities in dhn foreasry resouresa Panchayat Protected Porests. ørt 5. Ptublic (11) luaprovneofficiency of Public Scbh 3, Prepamtion of an action plan for closure, Action plan prepared fl Enterprise Enterisea para 17 divstitmre and/or amagemet reform of thu PEs. - 4- Attachment III NEPAL FIRST STRUCTURAL ADJUSTMENT CREDIT (Cr. 1769 - NEP) PROJECT COMPLETION REPORT Disbursements By Quarter (Amount in million) SDR Cumulative Percent Historical Disbursement Disbursement Disbursed US $ Eqv. FY 87 Fourth Quarter 14.7 14.7 35.9 18.9 TOTAL 14.7 18.9 FY88 First Quarter 5.7 20.4 49.7 7.1 Second Quarter 0.0 20.4 49.7 0.0 Third Quarter 0.0 20.4 49.7 0.0 Fourth Quarter 16.8 37.2 90.9 23.4 TOTAL 22.5 30.4 FY 89 First Quarter 0.0 37.2 90.9 0.0 Second Quarter 0.0 37.2 90.9 0.0 Third Quarter 3.7 40.9 100.0 4.9 TOTAL 3.7 4.9 GRAND TOTAL 4. 54.2 Source: World Bank Loan Department - 47 - IiNGDOM OF NEPAL At chment IV Page 1 of 12 STATEMENT OF DEVELOPMENT POLICY Dear Mr. Conable Introduction 1. Notwithstanding three decades of development effort which has been supported by the international donor community, Nepal's per capita income is still about US$160. Over the past 15 years real GDP growth has barely kept up with the growth of population and such social indicators as life expectancy, infant mortality, and adult literacy have remained unacceptably low. Even more worrisome is the fact that in recent years per capita food production has been falling. 2. Much of Nepal's difficulttes in achieving a better record in respect of growth and development derive from its meagre resource base and its ladlocked position. However, while geographical factors and poor resource endoument have hindered economic performance, the system of production incen- tives has been inadequate and distorted, and budgetary management has had many shortcomings. 3. In the first half of the 1980s, these factors and a difficult exter- nal environment led to increasingly poor economic performance. Although the Sixth Plan (1980/81-1984/85) witnessed an average annual real GDP growth rate of 4.1 percent, the annual performance fluctuated widely on account of the vagaries of weather. Financial indicators increasingly pointed to the emerg- ing difficult situation. Domestic savings was low, and the expansion of bank credit to both the Government and the rest of the economy was high. This contributed to a substantial deterioration in the balance of payments, as a cumulative deficit of over US$100 million was incurred during 1982/83-1984/85. Vhile most of Nepal's external debt has been incurred on highly concessional terms, in recent years the ratio of such debt to GDP and the debt service ratio rose substantially. During the five years ending June 1985 the former rose from 10.1 percent of GDP to 17.6 percenc and the latter measure rose from about 2 percent to about 5 percent. The Need for Stabilisation and Structural Chanse 4. In the face of the continuing deterioration in both external and internal accounts HNG adopted a stabilisation program in December 1985 which has been supported by an 18 month stand-by arrangement with the International Monetary Fund. Principal elements of our program are and have beens a devaluation of the rupee by 14.7 percent, with the exchange rate of the rupee to be managed flexibly with due regard to changes in relative prices and other balance of payments indicators; tighter budgetary policies with the initial focus on aspenditure restraint, to be followed by revenue measurest reduced expansion of credit to government and public enterprises; a very - 48 - Attachment IV Page 2 of 12 substantial liberalisation of interest rates$ adjustment in administered prices$ restraints on external borrowings and import liberalization. In addition to these measures HNG also embarked on a nuaber of other policy initiatives in the area of public administration and the anagement of the public enterprises with a view to further supporting the st&bilisation effort. 5. Our efforts at stabilization have been successful. Real output rebounded in 1985/86 reflecting not only good weather but an improved supply of imported inputs. While inflation picked up, as expected, subsequent to the devaluation, by the end of the fiscal year it had begun to moderate substantially. A tight policy on the wage front has served to consolidate the gains of devaluation. Better budgetary policies were reflected in a reduced fiscal deficit and, must importantly, a halving of domestic bank financing of the deficit which has allowed more credit for the finance of directly productive activities. The balance of payments turned around substantially as a modest surplus was posted compared to the previous year's deficit of US$50 million. 6. HNG fully intends that the present stabilization program and other initiatives are fully implemented so as to provide the necessary precondi- tions for orderly decision making by economic units. If growth and develop- ment are to be ensured, however, the structure of the economy will have to change. Nepal's economy is beleaguered by numerous structural problems. First, serious environmental degradation (especially in the ecologically fragile bills and mountains), a burgeoning population and pronounced depend- ence on the vagaries of monsoon agriculture have contributed to a multi- faceted rural crisis. Second, macroeconomic management needs to be strengthened further, and requires special effort to improve performance in the areas of domestic resource mobilization and control of recurrent expendi- ture and inflationary financing. Third, inadequate control in managing development spending. Fourth, our public administration needs to be strengthened further to support the country's development effort. Fifth, regarding industry and trade, policies which have sought to maintain a low cost economy and at the same time prevent trade deflection, have, inter-alia, given rise to a large number of controls which have provided unwarranted profits to traders and little incentive to productive industrial investment. Sixth, a substantial number of financially weak and, in some cases, heavily indebted public enterprises have not performed well and are a drain on the budget and the banking system. Seventh, agricultural policies also need to be improved in order to stimulate food and other agricultural production. Financially weak sectoral institutions have not only been a drain on public sector finances but have failed to provide the services for which they are mdated. Koreover, there is substantial scope for increasing the role of Lhe private sector. -49 - Attachment IV Page 3 of 12 7. As a first step the policies for which we seek IDA's support focus on the areas ofs macro-economic management; development expenditures; trade and industry; agriculture and forestry; and public sector enterprises. In the paragraphs below I will outline the policies which HNG intends to pursue in the near- and medium- term. Macro-economic Policies 8. It is the intention of HNC that the current stance of macro-economic policy to promote growth with stability be continued. In that spirit it is our intention to continue uo seek the support of the INF after the expiry of the current stand-by arrangement. Over the medium-term we hope to be able to achieve a rate of growth of real output of 4.5 percent per annum by the end of the Seventh Plan and to reduce the rate of inflation to about 5 percent per annum. An important element of policy is to increase the level of investment and development expenditures (which includes operations and saintenance). The projected rise in development expenditures by four per- centage points to 16 percent of GDP will be financed by both increased utilization of concessionary foreign assistance and domestic resources. At the same time, we intend to maintain the overall fiscal deficit at no more than 11 percent of GDP through 1990/91 and to reduce domestic financing to about 1.5 percent of CDP by improving the utilization of foreign assistance. This will require a major elomestic revenue mobilisation effort and we intend to increase these revenues, through a combination of new measures and improved administration, to 12 percent of GDP from the present level of 9 percent. Drawing upon past technical assistance it is our intent to intro- duce a package of fiscal reforms in the FY87/88 Budget - this will include the reform of trade, excise, sales and income taxes. At the same time we plan to limit the growth rate of regular expenditures to that of the economy. notwithstanding the upcoming three year review of salaries it is our inten- tion that the share of wages in the regular budget will soon return to its present level$ it is our intention to strive to reduce the share by contain- ing the sise of the civil service payroll through a judicious policy of allowilag natural attrition, while at the same time paying due regard to provide adequate salaries. As regards the balance of payaats it is our intention to continue to manage the exchange rate flexibly with due regard to movements in relative prices, and the need to Iacrease the production of tradable goods and to strengthen the overall balance of payments position. Development ESpenditure Policies 9. During the period ahead we intend to implement policies to improve the managemnt of individual projects and strengthen program/project control structures. We intend to achieve the latter through policies to improve - 50 - Attachment IV Page 4 of 12 guidance though improved project selection, program budgeting and work plan- aing based on standare setting. Improved information flows leading to review and corrective action will take place through the installation of monitoring units and a system of reporting and referral to decision makers. Internal discipline will be improved through improved financial accountability and evaluation of managers baaed on monitoring. 10. During the first part of FY87 we have taken a number of steps to improve developmeat administration. These include the introduction of programming and budgeting in the Ministry of Finance during the 1966/87 Budget preparation period; delegation of more authority to project managers and other senior government officials regarding personnel management and spending; and organising local donor aid coordination in consultation with the World Bank and UNDP resident eepresentatives. 11. More recently we have installed a trouble-shooting unit in the Cabinet Secretariat. Prototype monitoring systems have been installed to measure progress in this fiscal year in advance of the more comprehensive system which will be installed later. In order to promote and ensure progress toward efficient development spending in the present fiscal year a list of key, foreign-financed projects, have been identified and an overall, spending target for them established, as a oasis for determining that a concerted effort is being made to improve global development expenditure performance. Actions to improve their execution will be monitored and work programs for major projects have been drawn up. To ensure that increased spending is resulting from improved management, a sub-set of the key development projects has been identified for prototype monitoring and control using the work breakdown structure (WS) system. This will allow monthly reporting on resources deployed and progress made against work plans. 12. To improve project auditing and accounting, TORs and the UNDP project document have been prepared in conjunction with the Financial Controller General (G) and Auditor General (AG). On the basis of the preliminary findings of this technical assistance, HNG intends to make an assessment of available accounting staff, including the private sector, in terms of quan- tities of persons and skill levels relative to the need for staff in the FCGOs and AG's offices. We further intend to develop an action plan for upgrading, training new staff and for deputing staff to developmant projects. The plan would also provide for any additional actions identified during toe ssesmnts required, to improve the accounting and auditing functions for development projects. This will ensure that project accounts are submitted to the FCC on time and that submission of audited reports to IDA comply with dated covenants. - 51 - Attachment IV Page 5 of 12 13. With a view to strengthening the domestic construction industry we have agreed on guidelines for 20CU for consultants to develop an action plan. This plan will address the issues of manpower training, contractor registraton, contracting procedures# equipment supply, paymeant, acceds to credit, etc. 14. During the course of this SAL, and in any case by the tim of the foralation of the 1987/88 Budget, we will adopt economic management policies to achieve the objectives of this progra, including identifying a core development programe. This program would comprise about 70 percent of the development budget and be developed through the newly introdLced program budgeting function in the line ministries. The core program would contain a list of facilities to be operated and maintained in six sectors as well as a list of high priority projects selected on the basis of the following criteria: foreign aid contents nearness to completion; economic efficiency; and strategic importance in the country's overall development program. 15. We also intend to strengthen the AG and FOG offices through, inter- alia, the provisions of TA in order to improve audit procedures for all IDA piojects. This will ensure that project accounts are submitted to the FCC on time and that submission of audited reports to IDA comply with dated covenants. Industry and Trade Policies 16. Our industrial sector remains mall and undeveloped. Although we provide incentives wbich include, inter-alie, tax holidays and sales tax and import duty concessions there has been littEe real development in this sector. A major reason for this is that Nepal's tariff structure has not been appropriately aligned with its major trading partner. As a result there has been incentive to re-export, especially in the area of raw materials and intermediate goods and luxury goods. This has created a strong incentive to trade rather than invest in productive industry. Although a large panoply of controls and regulations has been set up to discourage this trade, they have not been succesetM nor have they increased the profitability of such trade. Such industry as has been set up is heavily biased toward high import content and low domestic value added; issuance of import 1icenses for goods on the basis of Installed capacity has resulted in incentives to overinvest in capacity for wbich there is no domestic market. With support from the Asian Development Bank and in consultation with the private sector we have reviewed our industrial policy. We are currently reviewing our industrial policy with a view to reducing direct controls and licensing. We anticipate that the new policy will be issued by the end of this fiscal year. - 52 - Attachment IV Page 6 of 12 17. Foreign trade with India, our largest trading partner, is generally free. We have recently taken measures to reduce restrictions on foreign trade with other countries. In the area of export licensing we have aban- doned the practice of announcing a list of items free from export licensing and have changed to announcing a list of items requiring eport licenses with all others remaining free. Items remaining subject to license are certain strategic goods, such as foodgrains, and other items which are subject, from time to time, to export controls in India and consequently covered by a protocol in the Trade and Transit Treaty which provides that Nepal will endeavor to prevent this type of trade deflection. In these cases licenses will be freely given when the bonasfides of Nepal origin are established. 18. A principal objective of policy is to introduce more Liberal import policies. At the beginning of this fiscal year we introduced a passbook system Nf automatically granting import licenses for goods subject to licens- ing or zhe basis of their installed capacity. This was an improvement over the p evious system which called for the periodic issuance of such licenses and thus gave rise to uncertainties. Moreover, we have introduced a system of auctioning import licenses for goods subject to quantitative restriction. It is also our intention to begin converting the current passbook system to an open general license system. At the-same time the introduction of higher tariffs will aim inter-alia at reducing the incentive to re-export. This process will take some time. However, as a first step, effective February 1987 we are placing raw wool, gypsum and iron billets under open general license. At the same time, to strengthen the new liberalized trading environment, we intend to increase substantially the penalties for deflection of trade and contravention of the exchange and trade laws of Nepal. 19. The steps to liberalize the industrial and trade environment should contribute directly to our export promotion campaign. Technical assistance is being secured from UNDP to improve our export policies and procedures. This would cover customs (for imports also) and licensing procedures, access to duty free imports including efforts to set up the RPZ, and further rationalization of export licensing and other procedures. Moreovez, we have recently established a two-tier export development comittee, chaired by the Governor of the Bastra Bank and including the Secretaries of Comerce, Finance and Industry which will meet periodically -- with a secretariat to be provided by the Trade Promotion Center. Finally, two of our principal export industries have been subject to significant vagaries with respect to imported inputs (carpets) and market shares (garments). With a view to guaranteeing the timely and adequate stock of imported wool for carpets we have recently placed wool under open general license. As regards garments we have introduced a policy from late 1986 of allocating the garment quotas well before the end of the Gregorian calendar year, that is by November 1, for the following year. -53 - Attachment IV Page 7 of 12 20. Under our now industrial policy, we have recently moved to liberalize industrial licensing. Whereas previously most industries were subject to license, now cottage industries and those with imported raw material require- meats that do not exceed 10 percent of total requirement will not be subject to license. Firms with raw material import requirements that range from above 10 to 40 percent of total requirement and do not exceed Rs 2 million will be subject to license. However, issuance of licenses for this category will be automatic upon review of the bonafides of their technical specifications. Firms having raw material irgort requirement of greater than 10 percent or gs 2 million will be licensed as in the past. These measures will substantially increase the number of industries free from licensing. 21. Switching to a simplified system of tariffs is a key element of our adjustment policy. During the course of this SAL, it is our intention to introduce a series of ? tariff slabs, ranging from 0 percent to 100 percent. An important principle in setting the tariff bands on third country imports is that they will be set with a view to reducing the incentive to re-export them. With a view to harmonizing this objective with our intent to gradually achieve an appropriate rate of real effective protection, fiscal incentives, such as duty draw backs will be introduced. While in principle it is the intent that all commodities should fall within the bands, certain luxury items will remain above the bands and certain commodities which are being taxed to support an administered price, such as POL products, will remain above the ceiling. 22. Finally, with regard to fiscal incentives, we have received substan- tial advisory assistance with respect to tax policy as it effects both government revenues and incentives. It is our intention during the course of this SAL to draw up an action plan taking into account the advice that we have received from the IMF, the ADB and the IBRD and our private sector. This plan is reflected in our industrial policy statement as well as in our fiscal planning; it will also assist us in our efforts to increase substan- tially government revenue collections. Agriculture and Forestry Policies 23. Despite considerable and rapidly rising investments in the agricul- tural sect3r, crop production has failed to keep pace with population growth. Major causes of this trend include organizational and institutional weaknesses in supporting agencies, the absence of a consisteqt policy framework and sometimes ineffective operational follow-up. Therefore, in this sector our adjustment policies call for: strengthening the effective- ness of public sector institutions charged with supporting agriculture; reducing, if not eliminating, the drain on public sector finances caused by - 54 - Attachment IV Page 8 of 12 such entities as the Agricultural Inputs Corporation (AIC) and the Nepal Food Corporation (MFC); rationalizing the direction and scope of public sector interventions; and making increased use of the private sector to further agricultural development, diversification and growth. 24. An important first step in improving the effectiveness of both AIC and PC is to strengthen their finances and their financial management. Thus we intend to prepare and implement a time-bound plan to restore the financial viability of both institutions. Technical assistance programs have already been initiated to help improve the accounting systems of both corporations. We intend that AIC will complete its overdue accounts for 1984/85 and 1985/86 within the next few months. In addition we have taken steps to liquidate AIC's debts and to ensure that it is paid for fertilizers sold to the rural cooperatives (Sajhas). Adequate provision of funds will be made in UNG's 1987/88 Budget to cover the difference between AIC's budgeted costs and expected sales revenues. MFC's accounting capacity has already been sig- nificantly strengthened; an important aspect of this concerns the adoption of practices to allow a clear distinction between MFC's commercial operations and its social welfare responsibilities. We expect NFC to submit final accounts for all years through 1985/86 very shortly and to henceforth submit accounts within six months of the close of the financial year. We have also taken measures to ensure full and prompt payment to NFC by other public sector entities for foodstuffs delivered to them by November 1987. Similar to the provision to be made for AIC, beginning with K0G's 1987/88 Budget adequate provision will be made to compensate MFC fully for carrying out welfare functions on behalf of HG; additionally, NFC will be provided with sufficient operating funds to undertake its day-to-day operations. 25. Improving the effectiveness of fertilizer procurement and distribu- tion throughout the country is an important goal of our structural adjustment policies. Among major issues being addressed are nutrient content and agronomic suitability of fertilizers imported, finances and pricing, and improvements in the distribution system. Substantial quantities of fer- tilizer have been imported into Nepal which are low in nutrient content, have high unit transport costs and are of doubtful utility on most of Nepal's soils and crops. Our farmers, however, have grown accustomed to this fertilizer. While eliminating such imports in one year is not feasible, therefore, it is our intention to phase out the imports of such fertilizer financed by our own resources and to request donors to finance fertilizers more appropriate to Nepal. 26. Consistent with our ongoing efforts to strengthen AIC's financial and operational management and to promote the economic use of fertilizer, we have introduced more flexibility into fertilizer pricing. These measures include: clarification of the criteria for determining the structure of fertilizer - 55 - Attachment IV Page 9 of 12 wholesale prices in different regions; regular monitoring of fertilizer prices on both sides of the Indo-Wepal border and, if significant differences exist, prompt adjustment of fertilizer wholesale prices with a view to eliminating the incentive for unauthorized fertilizer exports; and empowering AIC to automatically adjust prices by up to 10 percent if incentives to smuggle begin to emerge or costs increase. As regards the distribution of fertilizer, we have in recent years been relying increasingly upon the private sector. Its share in total distribution is estimated to have increased from less than 3 percent in 1983/84 to 25 percent in 1985/86. To improve fertilizer availability throughout the country we are now licensing private traders to engage in fertilizer distribution in all parts of the country on both a wholesale and retail basis. Consistent with this, we will increase the permissible retailers' margins in FY88, so as to provide better incentives, and by Sajhas provide financial incentives for off-season pur- chases from AIC. Our cooperatives, the Sajhas, represent an important part of our national institutional structure. In the past they have relied primarily upon profits made from trading in fertilizer to finance their activities. It is our intention to frame a plan to reduce their dependence upon fertilizer related activities, to the extent mandated by the growing role of the private sector, and to help them find alternative means to finance their activities. 27. Crop production is also constrained by inadequate supply and the very low rate of use of quality cereal seeds. Improvement in this sector requires a broad range of actions with respect to institutions, operations and finan- cial arrangements. The key objectives of structural reform in this subsector include: improving the supply and timely availability of quality cereal seeds; providing a clear legal basis and effective institutional arrangements for all essential institutions involved; and expanding the capability of the existing seed production, processing and marketing system, including through increased utilization of private sector capacities. Key elements of change will be the adoption of a National Seed Act to provide the legal framework and basis for regulating seed production, processing, certification and marketing and the creation of a national authority to regulate the seeds industry and trade. 28. Foodgrain marketing and distribution is another area where we intend to effect substantial changes. Although foodgrain trading in Nepal is over- whelmingly a private sector activity, increasing concerns over potential threats to food security have led to some public sector involvement. The objective of adjustment in this sector is to promote increased foodgrain security throughout the country and to achieve this more effectively and at a lesser cost than in the past. An important precondition for this is to improve the financial and operational efficiency of NFC, and we have detailed - 56 - Attachment IV Page 10 of 12 measures to achieve this above. Beyond that, we intend to adopt a number of measures which will improve operations in this sector. 29. With respect to domestic foodgrain procurement by NFC, we have already discontinued procurement through levies; henceforth, all procurement from domestic production will be exclusively through purchases at or above procurement prices announced prior to sowing/planting and set with due regard to those in effect across the border. As noted above, we have already made provision for sufficient operating funds to NFC to ensure effective primary procurement operations during 1986/87, and we intend to ensure adequate funding in the future. To make procurement more efficient at the farmgate level, we are now also utilizing Sajhas as intermediaries in NFC's foodgrain procurement. 30. NFC foodgrain sales in the Kathmandu Valley have long taken place at subsidized prices and to the population at large, rather than to clearly identified needy target groups. We have already begun to implement a program for operating an effective consumer price stabilization program in the Kathmandu Valley, replacing the current practice of subsidized year-round sales, as a pilot operation for future replication in other major consumer centers. It will be extended to all other accessible areas in two additional phases. An important aspect of this program is that NFC's market sales (e.g., excluding food distribution under specific relief and welfare programs) will take place at prices that fully cover domestic unit costs. Furthermore, we have begun work on preparing a detailed plan for identifying consumer groups vulnerable to chronic and/or severe seasonal food shortages and for distributing foodgrains to them. 31. Agricultural research in Nepal has been fragmented, inadequately funded, without clear objectives and priorities, and subject to inappropriate administrative procedures. As a first step toward the eventual creation of an autonomous research planning, funding, and coordination body at the national level, which would set national research priorities, control funding and provide the necessary incentives for research and coordination with other institutions, we have established a National Agricultural Research Coordination Committee (MACC), supported by a permanent secretariat, with adequate permanent staff and other resources. In addition we have established a National Agricultural Research Services Center (NARSC) to manage agricul- tural research activities in accordance with the guidelines and priorities established by NARCC. We also intend to prepare a plan for establishing, by the and of the Seventh Plan period, an autonomous National Research Board or Council, to be created out of the nucleus provided by MARCC, NARSC and the research units of other entities currently under the administrative control of the Ministry of Agriculture. -57 - Attachment IV Page 11 of 12 32. Nepal's forestry resources are rapidly diminishing. Civen the lim.iLs on HNC's fin4ncial and human resources, it is essential to involve the population at the local level in efforts to manage the country's forestry resources. We have already taken various steps to facilitate this, but have found that there still are important disincentives which need to be eliminated. Accordingly, we intend to modify the existing legal and administrative regulations concerning revenue collection so as to allow legally established forest user groups at the Panchayat or Ward level to retain the entire revenues realized from the sale of forest products extracted from Panchayat Protected Forests under their management immediately upon the realization of such revenues. Moreover, we intend to authorize these forest user groups to employ a paid member-secretary to conduct day-to- day business, and hire laborers needed (e.g., nursery staff, forest watchmen, forest foremen) to managv forests and related assets and facilities under their care. We also will take steps to provide the necessary clarification of legal and administrative provisions concerning the ownership and utiliza- tion of trees on privately-owned land. Public Enterprise Policies 33. Nepal's public enterprises represent a very mixed group of undertak- ings and they have generally performed poorly. During the immediate period ahead we plan to focus on measures to improve the operating efficiency and strengthen the finances of the AIC and the NFC. Consistent with HMG policy in this sector--which is that most of these industries should be sold in whole or part and that only those industries occupying a non-commercial or natural monopoly position should continue to be operated in the public sector--we intend to implement a number of other measures to begin to reduce the sise of this sector and strengthen its managerial capacity and finances. We have classified most of the existing corporations into those which are to be sold, in whole or part, and those to be retained in the nublic sector. For those PEs which remain in the public sector and require subsidies there will be explicit budgetary provision. Furthermore, to guide future decisions in this area we plan to formulate by early 1987/88 a policy to guide any new investments in and by public enterprises and their operation. 34. Recently, with a view to gaining better control over the finances of the PEs we have adopted a new policy of limiting severly the issuance of government guarantees for PE borrowings from the banking system. This will curb the use of bank credit by PEs and eade the task of the financial manage- ment of the economy as well as disciplining the PEs. Henceforth, PEs will have annual credit plans and the Governmeart will limit its guarantee only to the amount in the annual plan. - 58 - Attachment IV Page 12 of 12 35. With a view to increasing the efficient management of the k4, Government has for the last two fiscal years establiohed criteria for apply- ing as to awards and penalties to PE managers on the basis of their performance. We are currently determining the awards and penalties to be applied and intend to implement these accordingly. This should enhance the management of the sector. 36. During the course of this SAL we intend to prepare an action plan to be supported with technical assistance for closure, partial or complete divestiture, and/or managemenL and financial reform of the PEs. It is envi- sioned that these plans will be formulated for each PE and that they will include specific time-bound recommendations with respect to finances, management and steps to lead to divestiture or closing if that is the case. Recomendations with respect to finances will include, inter-alia, changes required to adjust the prices charged by natural monopolies to at least break-even levels. 37. Finally, studies will be undertaken in the period ahead to lay the foundation for subsequent policy and institutional reforms. These might be in the areas of agricultural development strategy; further analysis of industrial and trade policy (including tourism), and possible linkage with the power sector; public administration reform; financial sector reform; and the issue of the pricing trade in energy. 38. It is the belief of His Majesty's Government that the policies set out above provide the basis for a atrong program of structural adjustment as well as reflecting our commitment to a process which will spread over a number of years. We look forward to the support op IDA and to working with you and your colleagues in the years ahead. Mr. Barber B. Conable (Bharat Bahadur Pradhan) President State minister for Finance The World Bank and Industry 1818 H Street, His Majesty's Government Washington, D.C. of Nepal