Nepal - Rural Development Project

TO BE RETURNED TO REPORTS DESil LE J'11j"PY Document of LE COPY The World Bank FOR OFFICIAL USE, ONLY Report No. P-760-NEP REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE D)IRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A RURAL DEVELOP'IENT ppO'JECT February 10, 1976 | This document h^s a restricted diStribUtOt and may be used by recipients only In the performsnce of their ocil duties. Its contents mAy not otherwise be disclosed withoot World Bank authorization.  CURRENCY EQUIVALENTS Before October 9, 1975 Currency Unit = Nepalese Rupee (NR) US$1 NRs 10.56 NRs 1 US$0.095 NRs 1,000 = US$94.70 NRs 1,000,000 = US$94,697 After October 9, 1975 US$1 = NRs 12.50 NRs 1 = US$0.0800 NRs 100,000 = US$8,000 NRs 1,000,000 = US$80,000 FISCAL YEAR Nepal Fiscal Year - July 16 to July 15  FOR OFFICIAL USE ONLY INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT ANI) RECOMMENDATION OF THE PRESIDENT 1O THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A RURAL DEVELOPMENT PROJECT 1. I submit the i-ollowing report and recommendation on a proposed development credit to the Kingdom of Nepal for the equivalent of US$8.0 mil- lion on standard IDA terms to help finance a rural development project in the 'ill districts of Nluwakot and Rasuwa. The UNDP is expected to provide about $500,000 for the technical assistance requirements of the project. About 4% of the credit ($359,000) will be on-lent to the Agricultural Develop- ment Bank of Nepal (ADBN4) (see paragraph 43). PART I - THE ECONOMY 2. The most recent economic report entitled "A Review of Mfajor Issues Related to Nepal's DeveLopment Prospects" (Report No. 677a-NEP) was distri- buted to the Executive Directors on June 10, 1975. The principal updated findings and conclusions of that report are summarized below. Country data are shown in Annex I. 3. Nepal has been classified by the United Nations as one of the least-developed countries in the world. Its per capita income in 1974 was estimated at $90-100 per year and the literacy rate at about 14%. Serious efforts toward development have been underway only since the 1960's. Develop- ment expenditures have increased rapidly from NRs 232 million in 1964/65 to NRs 926 million in 1974/75. About half of expenditures for development has been financed with external assistance, notably from India, the United States and the People's Republic of China. About 80% has been in the form of grants. 4. Nepal's economic growth over the last nine years has been slow. From 1965-67 to 1973-75, the average annual rate of growth of GDP was only 2.2% in real terms. During the same period population increased at a rate of over 2%. There was, therefore, hardly any impro,iement in GDP per capita. Agriculture accounts for about two-thirds of GDP and for 80% of export earn- ings and provides employment to 94% of the population. Foodgrain production has grown at less than 1% annually since the mid-1960's. If present trends in the growth of population and foodgrain production continue, Nepal may have a foodgrain deficit by the turn of the decade. Nepal is currently exporting over 200,000 tons of rice a year, accounting for about 60% of export earnings. Some progress was achieved in the organized manufacturing sector which, however, accounts for less than 3% of GDP. 5. This slow growth was largely due to the priority given to develop- ment of road infrastructure over the directly producing sectors. This priority was probably an inescapable necessity. When the country began to come out of its isolation in 1951, it had no transportation facilities and 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.  - 2 - hardly any trained people to man an administration oriented towards economic development. At least one generation was needed to build a minimal physical and administrative infrastructure without which a development policy is de- void of meaning. In that respect, substantial progress has been achieved. 6. In the past, only 20% of public sector investments was made in the directly producing sectors which largely benefited the Kathmandu Valley, and, to a lesser extent, the eastern Terai plains. The development of the Kathmandu Valley, where 4%0 of Nepal's population lives, has been a success story. New cultivation methods have been widely adopted and the farming counmunity is enjoying an improved standard of living. With the Fifth Five- Year Plan (1975/76-1979/80), Nepal is now attempting to shift its order of priorities and to focus on the productive sectors and the development of its very substantial hydroelectric potential. HIalf of planned development ex- penditures is tentatively allocated to these sectors; 30% of public sector capital expenditures are planned to be allocated to agricultural and rural development. The basic strategy of the Fifth Plan towards agriculture is to balance growth with income distribution and provide for regional development. Largely because of absorptive capacity problems, the country may experience serious difficulties in redirecting its investments along this new and very pertinent course. 7. Nepal's development is likely to be impaired seriously by the re- cent changes in world economic conditions. The country has to import prac- tically all capital and manufactured consumer goods. World price in- creases are, therefore, greatly affecting Nepal, at a time when export prospects are not encouraging. As the country is landlocked, it depends on India for most of its imports, but India has developed shortages of its own. This has forced Nepal to import from distant places at high prices together with very high freight and transit costs through India, particularly for bulky commodities such as cement. For the ten years ending in the latter part of 1974 the trade deficit was more than offset by invisible earnings, mainly from remittances and pensions, interest on external reserves and tourism. Over this period balance of payments surpluses amounted to about $10 million a year and foreign exchange reserves were at the very comfortable level of $139 million in November 1974 (more than 12 months of imports). However, and largely because of changes in world prices in late 1974, Nepal's foreign exchange reserves declined to $94 million by September 1975. This decline is expected to continue at a rate of $20-25 million a year, unless Nepal succeeds in obtaining increased foreign assistance (see paragraph 12). 8. If imports have to be curtailed, this would not only directly affect economic activity but also the potential for domestic resource mobilization, as nearly two-thirds of tax and non-tax revenue is col- lected on external transactions. Revenue potentials from other tax sources are limited, given the poverty of the country and the low degree of monetization of the economy. For years to come, dynamic export growth is likely to be one of the few potential avenues for increasing resource mobilization. Export potentials lie mostly in the development of agricul- ture, tourism and hydro-power.  - 3 - 9. On October 9, 1975 the Nepal Rupee was devalued against the U.S. dollar from Rs 10.56 to Rs 12.50 to the dollar. Rates for other foreign currencies will be established daily by the Nepal Rastra (Central) Bank on the basis of the parity rates between the U.S. dollar and such currencies. The parity rate with the Indian Rupee remains unchanged. This selective devaluation was addressed to the problems of increasing earnings of converti- ble foreign exchange and reducing the demand for such exchange, encouraging labor-intensive investments, reducing the diversion of trade through unof- ficial channels, restoring the profitability of jute exports and increasing revenues in Hill areas by enhancing the rupee value of pensions and remit- tances received mainly by retired Gurkhas who had served abroad. While it is difficult to fully assess the impact of the devaluation, there can be little doubt that it was a step in the right direction. 10. In April 1975, substantial changes were made in the pricing of resources to consumers and investors. Consumer subsidies on basic commodi- ties, such as rice and sugar which in the recent past were growing rapidly, have beeni almost entirely rescinded. In addition a major reform of the interest rate structure was introduced in April 1975 with a view to in- creasing mobilization of private savings and rationalizing resource allo- cation. This welcome and timely reform entails an increase of the two- year fixed savings deposit rate from 9-3/4 to 16% per annum. Lending rates of coimnercial banks have been raised to the level of 15-18% per annum and those of financial institutions to 10-16%. These rates were introduced when the rate of inflation was about 20% a year. Inflation has however, declined markedly since then; in the 12 month period ending October 1975, it was '%.. 11. Development expenditures, including foreign assistance, for the Fifth Plan (1975/76-1979/80) are estimated at about $670 million, i.e., twice as much in real terms as during the previous plan (1970/71-1974/75). The plan may be ambitious compared to the likely availability of resources and to the country's implementation capacity. Substantial additional foreign assistance above the present level would be required. Regular expenditures are likely to increase sharply on account of rapidly growing expenditures in social sectors, especially in education, increased maintenance and manage- inent cost of previous investments, and additional administrative costs re- quired to decentralize Government (HMG) services. As in the past, increase in IIG's recurrent expenditures is likely to outstrip growth of revenue so that the budget surplus is likely to fall sharply, possibly to a third of its current level in real terms. In view of this, an IDA economic mission visited Nepal in January to review the public sector investment program and the related resource requirements; their report is expected to be issued in June of this year. 12. In summary, an the one hand, the extreme poverty of the country points to its limited capacity to generate resources; on the other hand, urgent development needs and the expected gradual improvement in the coun- try's absorptive capacity will lead to an increasing demand for foreign ex- change. Consequently, Nepal's requirements for foreign assistance on soft  terms will rise rapidly. There is also a clear need for some local cost financing, as most projects with high development priority have a larger do- mestic cost component than can be mobilized from internal sources. 13. So far, Nepal's external debt has been very low. As mentioned in paragraph 2, the bulk of foreign aid has been in the form of grants. As of December 31, 1974 official foreign debt amounted to only $106.2 million of which $71.0 million remained undisbursed. This low utilization is largely due to the fact that 3/4 of foreign loans have been contracted after mid-1970. Consequently, debt service was about $1.5 million in 1974 or equivalent to about 1.9% of exports of goods and services. IDA's share in the debt service was negligible. However, future assistance may increasingly take the form of loans, albeit soft. In view of the accelerated development efforts, external public debt is expected to rise and, based on the trend in recent years, may well reach $250 million by 1980, of which approximately 2/3 could be in IDA credits. The debt service ratio by 1980 is, however forecast to remain below 10%, of which the Bank Group's share would be less than 1%. PART II - BANK GROUP OPERATIONS IN NEPAL 14. The first IDA credit to Nepal in the amount of $1.7 million equiva- lent was made in FY70 for a telecommunications project. This was followed by credits for highways ($2.5 million), tourism ($3.2 million), irrigation ($6 million), a second telecommunications project ($5.5 million) a water supply and sewerage project ($7.8 million), a settlement project ($6.0 mil- lion) and a power project ($26.0 million). The proposed credit would bring the total amount of IDA assistance to Nepal to $66.7 million equivalent net of cancellations. No Bank loan has been made to Nepal. IFC made its first investment in Nepal (US$3.2 million) in a hotel project in Kathmandu in FY75. Annex II contains a summary statement of Bank Group operations as of December 31, 1975 and notes on the execution of ongoing IDA projects. It shows certain delays in the implementation of these projects, particularly during the initial periods. These delays are largely due to Nepal's limited technical and managerial capabilities. In order to assist Nepal in coping with this constraint, considerable technical assistance is being given in the form of inputs of staff time in Washington, from our Resident Mission in Kathmandu, and during frequent missions to Nepal. As a result, tangible improvements in the rate of disbursements are being realized. During FY75, $1.7 million were disbursed, compared to $2.6 million disbursed during the previous five years. 15. Bank Group lending to Nepal has so far been at a modest level compared to the country's needs for, and total receipts of, external assis- tance. This is due to the country's limited absorptive capacity, affecting the rate of project preparation and implementation. The Bank has, therefore, agreed with HMG to assist it in project preparation, particularly by acting as Executing Agency for a number of technical assistance projects in the UNDP Five-Year Program, now under consideration.  16. Bank Group objectives in Nepal reflect the country's needs: (a) to place major emphasis upon directly productive sectors, particularly agricul- ture and increasing food production; and (b) to continue assistance for the development of complementary infrastructure -- including feeder roads to support other development expenditures, facilities to expedite communications (particularly between the Hills and the Terai), and additional hydroelectric capacity to meet the predicted increase in demand for energy for agricultural and industrial development. 17. Preparation work is being carried out for a number of projects, including a second irrigation project, a DFC project, a feeder roads project and a cement project. In view of the institutional constraints and shortage of trained personnel in Nepal, technical assistance and training would be an important element in the proposed project as well as in many future projects. PART III - AGRICULTURE IN NEPAL 18. Nepal's agriculture accounts for about two-thirds of GDP, 80% of export earnings and 94% of employment. Growth of agricultural GDP has been largely through opening up new lands in the Terai. Foodgrain produc- tion is the most important agricultural activity, but over the past decade, yields and per capita production have declined. Livestock accounts for 22% of the agricultural output, but productivity is low because of disease, poor genetic stock and inadequate feeding resulting from pressure of livestock on existing fodder resources. Nevertheless, livestock products contribute an important part of the subsistence diet in the form of milk, ghee, eggs and meat, and in many Hill areas provide the only source of cash income. The Dairy Development Corporation (DDC) is responsible for development of the dairy industry. It operates a milk plant in Kathmandu and manufactures cheese and butter from milk collected from smallholders. 19. Agricultural, extension is weak, reflecting inadequate staff and training, limited research and lack of facilities. Extension at farm level is carried out by Junior Technical Assistants (JTAs) who have one year's agri- cultural training. They are supervised by Junior Technicians (2 year dip- lomas) and District Agricultural Development Officers (university graduates). In Hill areas, there is about one JTA to every 7,000 farmers. 20. The Ministry of Food, Agriculture and Irrigation (MFAI) with a large research complex near Kathmandu and twelve small stations elsewhere, mainly carries out research in food crop production. USAID supports cereal improvement based on high-yielding wheat from India and rice from the Philippines (International Rice Research Institute). UNDP in conjunction with the International Maize and Wheat Improvement Center (CYIMMT) is helping a high protein maize program.  21. The Institute of Agriculture and Animal Science of Tribhuvan University is responsible for training JTs and JTAs. The Institute also provides vocational training for agricultural teachers and in-service training of extension workers and farmers. Most farmer training is undertaken by the Department of Agriculture but training facilities are generally lacking throughout Nepal. 22. Nepal, with an irrigable potential of 1.3 million ha (80% in the Terai), has some 250,000 ha presently irrigated, of which 150,000 ha are under small farmer owned and operated systems. Irrigation is generally supplementary and needed to extend the growing season beyond the four- month rainy period. Of the present area under farmer operated irriga- tion, the proportion of potential benefits realized is small because of poor water management and incomplete distribution systems. Government operated schemes are relatively new and the activities of the Department of Irrigation, Hydrology and Meteorology in this field are still at an early stage of development. 23. The Land Reform Act (1964) initiated a credit program, which provided sources of funds for village committees to lend to farmers. However these sources are presently suspended pending the completion of audits and the only source of credit is now through the Agricultural Development Bank (ADBN). ADBN either lends directly to large farmers or, in the case of small farmers, through guided cooperatives 1/ or guided village committees 1/. In- stitutional credit accounts for about 20% of all agricultural credit and reaches about 18% of all farmers, the rest is provided by money-lenders, friends and relatives. The Nepal Rastra (Central) Bank (NRB) supervises banking and provides refinance to ADBN and commercial banks for agricul- tural loans. ADBN, established in 1967, has authorized capital of NRS 75 million (US$6.0 million), of which HMG owns 84% and NRB 14%. Recovery of loans over the past five years has been 85%; major loan activities have been in the areas of farm production and improvement (80%) and marketing and agro-industry (19%). 24. Farmers are usually faced with shortages and late delivery of farming inputs as the Agricultural Inputs Corporation (AIC) has diffi- culties with procurement, transportation and distribution, brought about by limited resources and Nepal's landlocked position. 25. In spite of heavy investments in infrastructure, lack of accessi- bility and transportation are major constraints to Hill development as most districts still lack any road communication with markets. Movement of produce, inputs and goods is almost entirely by porterage. 26. Agricultural marketing is constrained by lack of market centers and a standardized measurement system, poor market information, inadequate storage and transportation and a small domestic market. Farm produce is sold to merchants and only retail prices of certain essential commodities are controlled. 1/ Those with managers trained and appointed by ADBN.  27. The past feudal land structure with its complex tenurial systems was abolished by two major pieces of legislation in 1959 and 1964. These Acts had the combined effect of fixing ceilings of 4.1 ha for tenants and 10 ha for landlords and providing for the sale of surplus land. The per- formance of land reform has not been up to expectations, as land ceilings have not released as much land as expected, but it- has reduced the farm size of large landlords. 28. The present forest area in Nepal is estimated at about 5 million lha. Due to accessibility the sub-tropical Terai forests have been the prin- cipal area of commercial. exploitation. However, much of the Hills forests have already been lost to settlement and over-exploitation for fuel wood and as loppings for animal fodder or green manure (estimated to be at the rate of 2% annually). In many areas, this denudation has led to increased ero- sion. The Department of Forestry has made little attempt to remedy the loss of forest stock, though some areas have been closed to permit natural regeneration. 29. Most families practice mixed cropping and keep some livestock; this helps provide a balanced diet, but surveys indicate malnutrition and protein deficiencies particularly in Hill areas. Although starvation is not apparent, significant numbers, especially in the upper Hills, live very close to the margin. As holdings are small, food production is sufficient to give a family about S to 9 months of its yearly subsistancc requirement. Wiierever possible, the gap is met from alternative eaploy- mient sources such as porterage. PART lV - THlL PROJECT Background 30. The proposed project would be the first Bank operation for rural developiaent undertaken in Nepal. The project was appraised in January/ February 1975, followed by an updating and review mission in September 1975. Negotiations took place from January 6 to 8, 1976. The Nepalese negotiating team was led by Dr. Devendra Raj Panday, Additional Secretary, Foreign Aid Division, Ministry of Finance. A report entitled "Appraisal of Rural Development Project" (Report No. 959a-NEP, dated February 2, 1975) is being circulated separately to the Executive Directors. A credit and project summary is attached as Annex III. Project Description 31. This project proposes to support a comprehensive development of the rural Hill districts of Nuwakot and Rasuwa located north of Kathmandu. It would support the development strategy of 11MC whichi seeks to balance eco- nomiic growth with improved income distribution, provide for more equitable regional development and ensure procluctive benefits from previous road developments.  - 8 - 32. Some 29,000 families reside in the project area, 96% of whom farm less than 1.0 ha with holdings averaging about 0.3 ha (among the smallest in the world). A major goal of the project is to increase farm productivity for approximately 85% of the families in the area to the point where they are able to meet their full yearly family subsistence requirements instead of the eight to nine months as at present; attainment of this objective would assist in controlling the spontaneous settlement in lowland forests by large numbers of marginal farmers from the Hills. In addition, imple- mentation of the project will provide or improve health services, water supplies, tracks and trails and erosion control affecting all families living in the project area. Productivity of cottage industries and the administrative infrastructure would also be improved and strengthened within the districts. 33. Technical assistance would be provided under the project to develop programs for monitoring and evaluating the effects of this project and to prepare a further rural development project. An irrigation engineer and administrative support for overall project management would also be provided. 34. With the exception of cottage industry outputs, almost all in- creased production from the project area would be consumed on the farm to meet subsistence needs, or sold or bartered in nearby villages for other essential ingredients of family diet. However, some grain surpluses, winter vegetables and dairy products would be available for marketing. Approximately 48% of the total project cost would be addressed to components directly or indirectly affecting the increased farm and cottage industry production and 40% to social and infrastructure components. The remaining 12% would be applied to project administration, evaluation and technical assistance. Spe- cifically, the proposed project consists of the following production, social, and infrastructure components: Farm Production Support (a) Provide for the construction, staffing and equipping of eight administrative sub-centers in the project area to provide agricultural extension and livestock support services, construction of a livestock market in Nuwakot and, through the Agriculture Input Corpora- tion, provide for the construction, staffing and supplying of 16 farm input warehouses in the project area. (b) Extend the reach of farming information services through the provision of equipment for production of special programs by Radio Nepal and of about 500 radios for use by groups of farmers in the project area. (c) Introduce improved varieties of crops and stock by estab- lishing seed and livestock exchange programs together with an annual program for the inoculation and dosing of buffaloes, cattle, sheep and goats.  -9- (d) Provide for the construction, equipping and operation by the Dairy Development Corporation of a cheese and butter factory with a capacity of about 1,000 liters at Trisuli Bazaar. (e) Provide for the planting of about 2,500 ha of fodder and fuel trees, regeneration of about 1,000 ha of fodder trees, and the increased protection of an additional 5,000 ha of forest. (Before beginning implementation of this component, a 'forest resource and land use study will be completed; see paragraph 56.) (f) Provide for strengthening and expansion of agricultural training and research through the construction of training centers and upgrading the research facilities at Kakani, Dhunche, and Trisuli Bazaar Research Stations. (g) Establish a district organization for irrigation in Nuwakot and develop or improve the irrigation of about 1,900 ha through a variety of approaches including small gravity-fed schemes, hil.l terrace irrigation and high and low lift pumping schemes. (h) Ensure provision of credit to farmers by the Agricultural Development 13ank of Nepal (ADBN) through cooperative societies and provide Eor the establishment, supervision' and auditing of about 25 such societies to ensure 'speedy and efficient provision of the credit. (i) In order to strengthen and expand cottage industries, provide credit, training and additional administrative support, together with construction of wool related processing facilities. Social and Infrastructure Support (a) Construct, staff and supply 15 health posts in the project area. (b) Provide for construction and maintenance of 100 village drinking water supply systems, together with the necessary training for village technical,staff and maintenance workers. (c) Provide for construction of offices and' facilities, together with appropriate staff training for about 60 village elected bodies or Painchayats, and for the construction and equipping of a district assembly hall in Nuwakot and in Rasuwa Districts.  - 10 - (d) Establish a Divisional Office of the Government's Department of Soil and Water Conservation at Trisuli Bazaar to carry out soil erosion control programs in the project area. (e) Construct about 50 km of dry weather tracks and 12 small suspension foot bridges, and improve about 100 km of major trails and 75 km of minor trails. Organization and Implementation 35. While responsibility for implementation of specific components of the project rests with designated Project Officers from the ministries and agencies involved, 1/ overall responsibility for the coordination of project planning and implementation will be vested in the Ministry of Panchayat (MOP, the Ministry responsible for the working of an integrated village,district, zonal and national system of administration) and will be exercisea by a Project Coordinating Committee (PCC), chaired by the Secretary, Ministry ot Panchayat. The PCC, which will be comprised of the designated Project Officers, will set guidelines for implementation of the project, will be entrusted with ensuring proper coordination among participating ministries and agencies, and will review and monitor the progress of the project on a regular basis. The Chief District Officers (see paragraph 37) from Rasuwa and Nuwakot will also be members of the Project Coordinating Cormittee. 36. There will be a Project Coordinator (PC) appointed from the Ministry of Panchayat who will be a member of and secretary to the Project Coordinating Committee. The Project Coordinator will advise and assist the Districts and coordinate with the various ministries in developing detailed plans and implementation schedules within the framework of the project proposals. He will also assure the timely presentation of these plans to the PCC for its consideration. The Project Coordinator will coordinate and monitor the provision and use of project funds by the various ministries and agencies and will assure that procedures required by the Association for withdrawal of funds are complied with. 1/ The ministries participating in the project would be the Ministry of Finance, Ministry of Food and Agriculture and Irrigation (agricultural extension, research, training, irrigation and livestock development), Ministry of Forests (reafforestation, regeneration and erosion control), Ministry of Panchayat (project implementation, village water supplies, trails, small footbridges, fuel and fodder plantations), Ministry of Health (health posts), Ministry of Works and Transport (tracks, sus- pension bridges), Ministry of Land Reform (guided cooperatives), and the Ministry of Industry (cottage industries). In addition, the Agri- cultural Development Bank of Nepal (ADBN) (farm credit), the Dairy De- velopment Corporation (butter and cheese plant), and the Agricultural Input Corporation (farm inputs) will be represented on the Project Coordination Committee.  37. Execution of individual project components in the field will be undertaken by local staff of participating ministries in coordination with t.he village and district elected bodies (Panchayats) and under the guidance of district administrative officers. This is in consonance with a recently implemented reorganization in which HMG has created, in each district, a District Secretariat headed by the Chief District Officer (CDO) and composed of the local offices cf the various ministries associated with development and administration. The development wing of the Secretariat is headed by a Panchayat and Development Officer (PDO) who is primarily responsible for the planning and impleamentation of programs by the district offices of the ministries. 38. Annual district planning begins with each concerned ministry or agency providing the CDO of each district with appropriate technical guidance and the amount of funds available for development within the project guide- lines. The District Secretariat, with assistance from the Project Coordinator, will prepare a district development plan in consultation with the district Panchayat. Individual. components of the plan will then be implemented under the direct supervision of the technical functionaries of the concerned minis- tries, but under the-overall guidance of the CDO and with the support and cooperation of the District Panchayat. 39. Execution of a number of components of the Project, such as small irrigation schemes, drinking water and track and trail development, will be performed by the villages themselves with technical advice and support from the district staff. 1Ministries, in providing budget and planning guidelines to the CDO for their respective components of the project, will delineate the roles of the district administration and village Panchayats. 40. Monitoring of project implementation will be conducted on a day- to-day basis by the PDO, under the. guidance of CDO. The Project Officers from HMG ministries wLll ensure that the various project components under their purview are being satisfactorily implemented. Quarterly and annual evaluation reports submitted by the CDO to the District Panchayats and the Project Coordinator will provide the basic monitoring documents. The Project Coordinator will, in addition to the CDO's reports, obtain and compile information from all.concerned ministries and agencies into quarterly reports for submission to the PCC and IDA. 41. An internati.onally recruited assistant to the Project Coordinator would be provided under the technical assistance component to help to develop procedures and expertise at district level in planning, budgeting and project implementation. He will also assist in setting up systems tor project monitoring, disbursement and accounting. Cost and Financing 42. Total project cost is estimated at $10.9 million equivalent (in- cluding taxes and duties of about $312,000) consisting of foreign costs of $4.9 million and local costs of $6.0 million. The proposed IDA credit of  - 12 - $8.0 million would finance a foreign exchange component of $4.3 million ($0.5 million of foreign exchange to be financed under technical assistance) and $3.7 million of local currency costs, or about 76% of total project cost excluding taxes. Local currency financing is justified in Nepal for the reasons cited in paragraph 12. UNDP is expected to finance $500,000 of the technical assistance with the remaining $100,000 financed out of the IDA credit. Technical assistance for this Rural Development Project is included in the UNDP Country Programme for Nepal and has been given a high priority by the Government. Signing of the UNDP Project Document or completion of some equivalent arrangement would be a condition of effectiveness. The Government would finance local costs amounting to 20% of total project costs excluding taxes and farmers would contribute the remaining 2% through the seed and livestock exchange program. 43. IDA funds would be channelled to participating Ministries through the MIinistry of Finance. The portion of the credit proceeds allocated to agricultural credit (about 4% of the IDA Credit) will be on-lent to ADBN at 7% for short term loans and 5% for medium term loans, equivalent to the rediscount rate of the Central bank. ADEN would, In line with present policy, lend to cooperatives at 11% and 8%; the cooperatives would in turn lend to farmers for short and medium term at 15% and 12%, respectively. Loan spreads are considered adequate to meet the administrative costs of ADBN and cooperatives. Procurement and Disbursement 44. Procurement of equipment, piping and vehicles involving contracts above $50,000 would be by international competitive bidding in accordance with IDA guidelines. Wvherever possible orders would be bulked. Orders of less than $50,000 would be placed in accordance with 7-MG procurement proce- dures which are satisfactory. Because of the remoteness of the project area and small size of individual schemes it would not be practical to bulk con- tracts for roads, tracks and bridges, erosion control, and irrigation devel- opment and consequently these would be undertaken by the Ministry concerned using local labor. 45. The credit would be disbursed against 100% of the foreign exchange costs of vehicles, pipes, equipment and mechanical plant or 63% of actual cost if purchased locally; 63% of the cost of other locally provided equipment and supplies, of local consultant services, of civil works, either performed by local contractors or by government agencies, and of all loans made to farmers; and 100% of the technical assistance costs covered by the credit. The disbursement period would be five years. 46. To expedite the initial detailed planning phase of the project, retroactive financing not to exceed US$20,000 will be allowed for the forest inventory and land use study to be undertaken by the Forestry Department.  - 13 - Benefits and Justification 47. The integrated approach of the project in providing production and social services to a. remote and rural area will help develop a replicable framework for further development in the Hill areas of Nepal. 48. About 25,000 farm families, or about 85% of the families in the Project Area, would directly benefit from agricultural, irrigation and live- stock development under the project. The principal direct benefit to farm- ers is increased food production which would enable them to meet their full yearly family subsistence requirements instead of 8-9 months as at present. Agriculture and irrigat'ion development would increase net crop incomes by some 50% from about NR 630 to NR 960 per family on an average farm size of 0.4 ha. 1/ Annual production of paddy would increase 8,400 tons; maize 5,300 tons; wheat 1,600 tons; millet 200 tons; vegetables and potatoes 2,000 tons. Total increased value for local consumption would be NR 22.5 million (US$1.8 million) annualLy at full development. Increased fodder production and inoculation and dosing programs would result in increased milk, meat, wool, hair and dung production by NR 900,000 annually. Annual production of butter (10 tons), cheese (80 tons) and milk (160,000 liters) would bring ,1R 220,000 on local markets. 43. In addition to direct production increases, adoption oE improved agricultural practices throughcut the project area wculd help reduce pres- sures in the Hills to extend cultivation to marginal slopes and would re- versa the present trend of declining crop yields. Such action would result in ;ains of NR 115,000 annually from grain production which lwould otherwise be lost. Soil erosion control through prevention of landslides would hlelp reduce the loss of agricultural land and the resultant production loss which is estimated at NR 350,000 annually. 50. On-farm development during the project period is expected to reduce underemployment on farms but little additional hired labor would be required. Project development of irrigation and erosion control, reforest- ation, construction of water supply, tracks, trails and suspension bridges would provide 30,000 MELn-months of unskilled and semi-skilled work. This total is equivalent to 500 full time jobs over the total project period. 51. Improved rural water supply would reduce the incidence of dysentery and other water-borne diseases (estimated to presently affect nearly 30% of children in the project: area). Improvement of tracks and new suspension bridges would enhance the communications and accessibility of the Project Area. Furthermore, improvement of living conditions in the project area would reduce migration and thus would help slow down spontaneous and uncontrolled exploitation of lowland Terai forest. 1/ Incremental produce is valued at farm gate prices less incremental fieancial costs.  - 14 - 52. The Hll1 areas are food deficient with farms among the smallest in the world. Although the project would raise agricultural production to full subsistence levels, it would not generate substantial marketable sur- pluses. Recovery of project investment costs in these circumstances would not be practical, except in the Batar Irrigation scheme where water charges will be imposed. The project must be regarded, in general, as a more systematic redistribution of income by HMG as a contribution to the welfare of the poorest section of the country. However, there would be savings to HMG. When completed, erosion control activities in conjunction with the Kathmandu-Trisuli Road would save an estimated NR 320,000 in annual road maintenance costs. Increased foodgrain production from the project would also save government subsidy and handling expenses presently involved in shipping 200 tons of rice annually to Rasuwa and Nuwakot districts. All maintenance costs of irrigation and village water supplies would be borne by farmers. 53. Economic rates of return for the productive components of the e project are 29% for agricultural development; 27% for minor irrigatlon development; 16% for the Batar Irrigation scheme; 15% for livestock develop- ment and 22% for erosion control and soil conservation. Taking into account the cost of management and other investments which are not directly revenue generating (i.e. Panchayat development, and track and trail and bridge development), the economic rate of return to the project as a whole is 14%. In developing this estimate, the costs of social services (health and water supply), technical assistance studies and the land use study have been ex- cluded. A 10% increase in costs would reduce ROR to 11%; and a 10% decline in benefits combined with 10% cost increases would result in an ROR of 8%. PART V - LEGAL INSTRUMENTS AND AUTHORITY 54. The draft Development Credit Agreement between the Kingdom of Nepal and the Association, the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement and the text of a resolution approving the proposed credit are being distributed to the Executive Directors separately. 55. A condition of effectiveness would be that the Government of Nepal had made arrangements satisfactory to the Association for the employment of consultants and technical experts required to provide the necessary technical assistance (reference Article V, Section 5.01, of the Credit Agreement). 56. There are two conditions of disbursement. (1) Prior to disburse- ment of project funds for construction of irrigation facilities for the Batar Plains, the Department of Irrigation, Hydrology and Meteorology would form  - 15 - water user associations based on cadastral and sociological surveys; complete the final design for this component; and establish to the satisfaction of IDA the amount of and procedures for levying water charges (reference Schedule 1, paragraph 3(b) of the Credit Agreement). (2) Until completion of the Forestry Departmsent forest resource and land use study, project funds for forestry would be dlisbursed only for purposes of that study (reference Schedule 1, paragraph 3(a) of the Credit Agreement). 57. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 58. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments February 10, 1976   a I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ C i...n -tn-a ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. .... N- - -N Z~~~~~~~~~~~~~~~~~~$j. JJJj. Z -i! 1:1: Z.: 44: -4:14.; ;.;, _,Z a. 9.aa.. -.i vb: l & P0;.jI1 [ % -~~~~~ -V. N..:--- .. c - - a - a~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ E- E i ::5 L ''A U E~~~~~~~~~.-~a.~* 4i I I P~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I-t:- 10 ly I~I 13'SIt St . p~~~~~~~~~~~~~~~~~~~~~~~~~~~p q~~~~-E e at. a, aaato. -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ s ; a. .N~~~~~~~~~~~~~~~~~~~~~~~9Z. a ieilu ...... zr: ?v,,- ZZ.,~~~~~~~~~~~~~~~~~~~..~R~ * .r .. ~~~~~ ~~~~~~~~~~~~... - -,: lbOe .1 Z ZZ. Z a2.t-0 . Hs - Oak,..-II -,..a .....fl. V..-  ANNEX I Page 2 of 3 pages NEPAL ECONOMIC INDICATORS GNP PER CAPITA in 1974: 2 us $90-100 GROSS NATIONAL PROIXWCT IN 1974/75 ANNUAL RATE OF GROWTH (% constant prices) US $ Mln. % Approximately 2.2 (1965-67 to 1973-75) GNP at Market Prices' 1,584 100.0 Gross Domestic Investment Gross National Saving Current Account Balance Exports of Goods, NFS Imports of Goods, NFS OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1973/74 Value Added US $ Mln. % Agriculture 889 69.1 Industry 127 9.9 Services 271 21.0 Total/Average 1,287 100.0 GOVERNMENT FINANCE Central Government (1974/75) (Rs Mln.) % of GDP Current Receipts 998 6.0 Current Expenditure 551 _3- Current Surplus 447 2.7 Capital Expenditures 926 External Assistance (net) 366 2.2 I/ Calculated by the same conversion technique as used in the 1974 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered .. not available  ANNEX I Page 3 of 3 pages COUNTRY DATA - NEPAL MONEY, CREDIT and PRICE'; 1965 1972 1973 1974 1975 (Million Rs outstanding mid-Ju7T Money and Quasi-Money 554 1,240 1,493 1,850 2,250 Bank Credit to Public Sector (net) -149 - 39 117 251 490 Bank Credit to Private Sector 136 400 459 652 934 Money and Quasi-Money as % of GDP 8.0 11.9 13.2 13.7 13.5 BALANCE OF PAYMENTS SUMMARY (US $ millions) 1974 1975 Exports f.o.b. 78.8 Imports c.i.f. 126.0 161.2 Trade Balance - 47.2 0.3 Transfers and Services(net) 72.6 80.5 Current Acc.Balance 25 0.2 Official capital (net) 7.9 8.3 Private non-bank capital (net) - 26.8 - 49.2 Surplus(+) or + 6.5 - 40.7 Deficit (-) EXTERNAL DEBT, DECEMBER 31, 1974 Gross Official Reserves - ~~~~~~~~~~~~~ ~~~~US$ Mln. July 1973 July 19711 Sep.1975 Public Debt, incl.Guaranteed 35.2 (US$ milli.ons) Non-Guaranteed Private Debt __.. 128.6 135.7 94.