Nepal - Birganj Irrigation Project

CIRCULATING COPY TO BE RETURNlED TO- REPORTS DESK DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use F Amy - ILE to FReport No. P-1197-NEP REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR AN IRRIGATION PROJECT March 6, 1973 This report -was prepared for official use only by the Bank Group: It may not be published, -quoted' oi, cited. without Bank Group authorization. The Bank' Group does not accept. Irisp6onsbility for, the accuracy or completeness of'the report.  Currency Unit - Nepalese Rupee (NR) Until February 20, 1973 US$1 = NRs 10.125 After February 20, 1973 US$1 = NRs 10.56 Nl - US$0.095 NRs 1,000 US$94.70 NRs 1,000,000 = US$94,697 Nepal Fiscal Year - July 16 to July 15 Nepal Calendar Year - April 16 to April 15 NOTE: All calculations in this Report and in the Appraisal Report are made on the basis of the rates of exchange in force prior to February 20, 1973. On that date the Nepalese rupee was -devalued in terms of the US$ by 4.12 percent.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOnIENDATION OF TIE PRESIDENT TO TIIE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR AN IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Kingdom of Nepal for the equivalent of US$6.0 million on standard IDA terms to help finance a project for irrigation development in the Narayani Zone of the Terai near Birganj. PART I - TH.1E ECONO0Y 2. The most recent economic report entitled "Current Economic Position and Prospects of Nepal" (SA-7a) was distributed to the Executive Directors on June 26, 1969. An economic mission visited Nepal last year. The mission's report will be circulated soon and its findings are summarized below. 3. Lack of dependable statistical data makes difficult a precise assessment of the recent economic performance of the Kingdom of Nepal. Available statistics should therefore be considered as indicating no more than orders of magnitude and trends. There is, however, evidence that since 1965 Nepal's real growth has been almost entirely neutralized by population growth, estimated at 2 percent a year. Nepal is one of least developed countries in the world with a per capita income of 870-80 per year and an estimated literacy rate of only 10 percent. Agriculture accounts for about 70 percent of GDP and provides employment for about 90 percent of the labor force of which the great majority are subsistence farmers. The industrial sector is very small and its contribution to GDP has been marginal. 4. Serious efforts toward development have been underway only since the late 1950's. Development expenditures have increased rapidly - expanding from NRs 232 million in 1964/65 to NRs 570 million in 1971/72. Public invest- ment has been largely concentrated on infrastructure particularly roads, power and irrigation facilities. On average, about half of expenditures for development during this period have been financed with external assistance, notably from India, the United States and China. About 80 percent has been in the form of grants. Nepal's external debt service has thus remained very low. External reserves have been increasing and as of mid-1972 stood at $112 million of which about $95 million were in convertible currencies. 5. In its efforts to formulate and implement development programs and projects, the Government is faced with unusually severe constraints. The country is landlocked and the physical resource base is very narrow consisting mainly of agricultural land, hardwood forests and abundant water resources available for both power generation and irrigation. No minerals in commercial quantities have been discovered. Nepal's internal market is  - 2 - small and production costs tend to be high. About 60 percent of the population live in the central Hills at or near subsistence levels. For lack of transportation facilities, large numbers of communities are virtually isolated from each other. 6. Preliminarv analysis of Nepal's future food grain position indicates that unless timely and effective measures are taken, the current export surplus (about 300,000 tons of rice per year to India) is likely to turn into a deficit around the end of this decade. In the Hills, where no addi- tional land is available and yields are low, the principal requirement is to increase productivity by means of improved technology and to restructure agriculture away from food grains towqard more suitable horticulture and livestock production. In the rolling Terai to the south, food grain production can be substantially increased not only with improved technology but also by expanding the area under cultivation and making use of the potential for extending irrigation and for controlled resettlement in cleared forest areas and waste land. Cultivated land in Nepal amounts to about 1.8 million ha or about 13 percent of the total area of the country. However, only about 120,000 ha are irrigated and all of the systems in operation are designed primarily to provide supplemental water to the wet season rice crop. Few of them have significant supplies of water during the dry season and double cropping is therefore very limited. Expansion of irrigated agriculture in areas where double cropping can be practised offers the best Dossibility of expanding food grain production over the medium term. During the current five-year plan period (1970-75), the Government's original target was to bring about 180,000 ha of additional land under irrigation. This has now been recognized as far too ambitious in terms of financing,, planning and management and the target has, therefore, been reduced to roughly 56,000 ha. 7. Over-population, in the Hills and uncontrolled migration to the Terai poses a serious threat to future develonment. A greatly expanded land clearance and resettlement program in the Terai would help to absorb part of the eYxcess population and, if carefully planned and controlled, could substantially reduce wasteful destruction of forests and severe erosion of arable land. Intensive farmiing of new7 irrigated land would also provide a 17velihood for migrant farmers as would a program for systematic and efficient util:i.zation of Nepal's forest resources. 8. The bulk of Nepal's rmerchandise trade is with India and, because of the relatively open border, much of this is unrecorded. Total recorded merchandise exports to all countries have averaged about $40 million over t;ie past several years. Of exports to India, about 50 percent has been rice. J.ute and jute products account for about 70 percent of exports to third countries. Th'e possibilities for export diversification are limited. The most prorisiAn; opportunities appear to be in the exploitation of 'Nepal's forest andi water resources with a view toward developing exports of timber and energv to India. The principal constraint is inadequiate capacity to plan ai%m nmanage. Tourism has expanded very rapidly in recent years and continued h is quite possible provided a program for increasing hotel accommodations arm otner facilities is implemented.  - 3 -