Nepal - Agricultural sector review

Report No. 7693-NEP Nepal Agricultural Sector Review March 20, 1990 Agricukure Operations Division Asia Country Departnent I FOR OFFICIAL USE ONLY Document of the World Bank 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.  CURRENCY AND EQUIVALENT UNITS Nepali Rupee (NR) * US$0.035 (February 1990) US81.00 - NRi 28.50 WEIGHTS AND MEASURES 1 meter (m) 3.261 feot 1 kilometer (km) 0.621 mile 1 square kilometer (k2) - 0.386 equare mile 1 hectare (ha) - 2.471 acres 1 millimeter (me) - 0.039 inch 1 kilogram (kg) 2.205 -ounds 1 metric ton (t) - 1.102 short tons - 2,205 pounds Degree Celsius (OC) - (9/51C + 32) degrees Fahrenheit ABBREViA,IONS ADB - Asian Development Bank ADBN - Agricultural Development Bank of Nepal AIC - Agricultu-al Inputs Corporation ASC - Agricultural Services Center BNP - Basic Needs Program CIMKYT - International Center for Maize and Wheat luiprovement DFAMS - Department of Food and Agricultural Marketing Services DOA - Department of Agriculture DOI - Department of Irrigation DSCWM - Department of Soil Conservation and Watershed Management DTW - Deep Tubewell FAO - Food and Agriculture Organization of the United Nations GDP - Gross Domestic Product HMGN - His Majesty's Government of Nepal HYV - High-yielding varieties IDA - International Development Association IFAD - International Fund for Agricultural Development JT - Junior Technician JTA - Junior Technical Assistant MOA - Ministry of Agriculture NARCC - National Agricultural Research CoordinLtion Committee NARSC - National Agricultural Research Services Center NBL - Nepal Bank Limited NFC - Nepal Food Corporation NGO - Non-governmental organization NRB - Nepal Rastra Bank ODA - Overseas Development Administration of the United Kingdom O&M - Operation and maintenance PLAA - Panchayat-level Agricultural Assistant RBB - Rashtriya Banijya Bank SAL - Structural Adjustment Credit SFDP - Small Farmer Development Program SMS - Subject Matter Specialist STW - Shallow Tubewell T&V - Training and Visit system of agricultural extension USAID - United States Agency for International Development UNDP - United Nations Development Programme WECS - Water and Energy Commission Secretariat FISCAL YEAR  NEPAL FOR OMCIAL USE ONLY AGRICULTURAL SECTOR REVIEW Table of Contents Page '.0. EXECUTIVE SUMMARY ....................... . iv ATTA.PIMENT: SUMMARY OF ISSUES AND RECOMMENDATIONS . . . . . . . xvi I. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . 1 Objectives and Scope of the Report . . . . . . . . . . . 1 Structure of the Report .. 1 The Setting . . . . . . . . . . . . . . . . . . . . . . 1 Difficult Physical Environment . . . . . . . . . . . . . 2 Natural Regions ... . . . . .. 3 Limited Access to Rural Areas . . . . . . . . . . . . 5 Population Pressure on Land Resources . . . . . . . . . 6 Population Growth ... . . . . .. 6 Land Use .... . . . . . . . . . . . . . . . . . . 7 Effects of the Pressure on Land Use . . . . . . . . . 10 .I. SOTCRA TRENDS, C-D CSO'STa.NTZ .HAnD OPPORTTNITIES . . . 12 General . . . . . . . . . . . i . . . . . . . . . . . . 12 Contribution of the Agricultural Sector to the Economy . 13 Production Trends .................. 17 Population and Food ...... . 20 Growthi Constraints and Opportunities . . . . . . . . . . 21 Crop Agriculture . . . . . . . . . . . . . . . . . . 23 Food Crops.. ........... 4 Cash Crops.. . ........ 28 Livestock Production . . . . . . . . . . . . . . . . 33 III. PUBLIC SECTOR PERFORMANCE TO DATE . . . . . . . . . . . . . 36 Agriculture in National Planning and Structural Adjustment 36 Government Performance in Key Subsectors . . . . . . . . 40 Irrigation. .............. 40 At the origin of this report is a mission which visited Nepal in March/April 1987. The mission consisted of Messrs. G. Schreiber, G.S. Kalkat, P. Ram, and H. Singh (Bank), J. Weatherhogg (FAO/CP), and D.R. Bhumbla, C. Gibbs, S. Gunetilleke, R.C. Mishra and L. Rijk (consultants). The report has been prepared by Messrs. H.J. van Wersch and R. Siy taking into account contributions by the 1987 mission but is mainly based on information obtained in conjunction with operational missions during 1988 and 1989. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. It contents may not otherwise be disclosed without World Bank authorization.  - ii - Agricultural Inputs . . . . . . . . . . . . . u . . . 0 Agricultural Research and Extension . . . . . . . . . 54 Agricultural Credit .... . . . . . . . . . . .. 59 FoodgrainPolicy .... . . . . . . . . . . . .. .64 IV. AGRICULTURAL DEVELOPMENT AND THE BASIC NVEDS PROGRAM . . . . 66 The Basic Needs Program in the Agrizultural Sector . . . 66 Assessment of the Agricultural Strategy in the BNP . . . 67 Development Planning: Target.Setting vs. Catalytic Approach . . . . . . . . . . . . . . . 67 Investment Strategy .... . . . . . . . . . . . . 68 Growth vs. Equity .... . . . . . . . . . . . . . 70 Food Self-Sufficiency vs. Food Security . . . . . . 70 Neglect of Natural Resource Conservation . . . . . . 71 Conclusion .... . . . . . . . . . . . . . . . . . 71 V. ACHIEVING HMGN'S AGRICL'ZTURAL STRATEGY OBJECTIVES: IMPLICATIONS FOR POLICY AND INSTITUTIONAL ADJUSTMENT . . . . . . . . . 72 General . . . . . . . . . . . . . . . . . . . . . . . . 72 Irrigation Development . . . . . . . . . . . . . . . . . 73 Expanding Irrigated Area ...... . ...... . 73 Improving System Management and Cost Recovery . . . . 77 Government Support Services . . . . . . . . . . . . . . 80 Input Supply . . . . . . . . . . . . . . . . . . a Agricultural Research and Extension . . . . . . . . . 84 Agricultural Credit ........ ......... 90 Decentralization and Private Sector Involvement . . . . 92 Foodgrain Policy . . . . . . . . . . . . . . . . . . . . 95 Natural Resource Management . . . . . . . . . . . . . . 95 Implications for Sectoral Planning and Analysis . . . . 99 Role of the Donors .... . . . . . . ....... . . 101 BOXES Box 1: Two Profiles: A Terai Farmer and a Hill Farmer . 9 Box 2: Benefits Lost from Poor Performance of Public Irrigation Schemes . . . . . . . . . . . . . . . . 43 Box 3: Bhairawa Lumbini Groundwater II Project . . . . . . 7A Box 4: Priorities for Further Study of Groundwater Development . . . . . . . . . . . . . . . . . . . 76 Box 5: Potential Production Impact of Increased Fertilizer Supply. .... . . . . . . . . . . . . . . . . 80 Box 6: Vetiver Grass KHUS' ... . . . . . . . . . . . . . 99 TABLES Table 1: Area Population and Population Density . . . . . 4 Table 2: Distribution of Gross Cropped Area . . . . . . . . 4 Table 3: Recorded and Projected Population . . . . . . . . 7 Table 4: Land Use by Ecological Belt . . . . . . . . . . . 8 Table 5: Gross Domestic Product . . . . . . . . . . . . . . 14  - iii - Table 6: Area, Production and Yield of Principal Foodcrops 15 Table 7: Area, Production and Yield of Principal Cash Crops 16 Table 8: Potential and Attainable Yields for Major Crops 24 Table 9: Development Expenditures in the Agricultural Sector by Major Category and as Percentages of Tot:l Development Budget 38 Table 10: Net Irrigation Coomand Area .41 Table ll Comparison of Water Charge Revenues and O&M Expenditures .44 Table 12: Comparison of Irrigation Investment Alternatives 46 MAP: NEPAL - Agricultural Sector Review - IBRD 21440  - iv - NEPAL AGRICULTURAL SECTOR REVIEW EXECUTIVE SUMARY Introduction 1. Nepal is one of the poorest countries in the world, with a per capita GDP of US$170 and an estimated 402 of its populat'.on living in absolute poverty. Agriculture dominates the economy and over 902 of the population depend on it. Since the mid-1970's, however, yields of the most important crops have stagnated and growth in food production has, on average, been less than population increase. To reverse these trends, a strategy is required for the agricultural sector, and by implication the national economy, that takes adequate account of the major constrain,.s facing agricultural development, i.e. the difficult physical environment, high population pressure, limited productive land resources, and a weak implementation capacity in the public sector. 2. 4Nepa--'D eAtrernc1y ruggcd topcgraphy andA v4iA Q cpAttprpd settlement pattern pose enormous difficulties for building basic infrastructure and providing essential services and education. Controlling the rapid population growth (2.6Z) is today the single most serious long-term challenge faced by Nepalese policy makers. With some 932 of Nepalis living in rural areas, the rural population density exceeds that of all other South Asian countries, whose land is generally much more fertile. The Terai, the country's primary agricultural resource and originally the most sparsely inhabited region, is now the most densely populated, having attracted large numbers of migrants from the Hills and Mountains due to worsening food deficits in these areas. 3. Faced with rapidly expanding population, the government has placed a high priority on raising agricultural performance. With this background, the objectives of this report are: (a) to analyze the potential for growth and the main constraints on the development of Nepal's agricultural sector, (b) to assess the implications for agricultural development of HMGN's Basic Needs program in the light of growth opportunities and major constraints, and (c) to formulate recommendations for policy and institutional adjustments necessary to achieve the objectives of HMGN's strategy for the agricultural sector. Sectoral Performance 4. Over the past decade and a half, agricultural production has not kept pace with population growth. The area under major crops has been increasing, but overall productivity has remained stagnant. Although Terai crop yields have slowly improved as a resilt of irrigation development and increased  availability of inputs, average yields in the Hills have declined due to excessive cultivation of traditional terrace and valley bottom land. and incrcased dependence on marginal land on the higher slopes. Moreover, agricultural production remains largely dependent on the vagaries of the monsoon leading to wide swings in year-to-year real agricultural growth rates which have ranged from -4.8Z to 10.42 over the period 1974/75 to 1988/89. The trend growth rate over this period has been 2.41 against a population growth rate of 2.72. Production of foodgrains, which account for some 85 of the value of crop production and 60? of agricultural production, has grown by only 2.22 and, as a result, consumption has cut into foodgrain exports and agriculture's contribution to foreign exchange earnings has declined. Meanwhile, the food deficit in the Hills has been growing and is likely to grow further. Cash crops accoant for about 102 of agricultural GDP but generate a quarter of total export earnings. The acreage under cash crops has been more responsive to prices than that of foodgrains, and at least during the 1970. growth of cash crops outpaced that of foodgrain production. The Terai, where most of the cash crops are grown, is considered to have a comparative advantage in the production of a variety of cash crops which have been regularly exported to India. 5. The unsatisfactory performance of the agricultural sector has persisted despite the important share given to the sector in the HMGN's development budget, averaging 27Z since the beginning of the Fifth Plan in 1975. Also, the sector has not been adversely affected by major macro-economic policy distortions. Price and trade policies have been generally favorable or neutral to agrici.ltural producers. The sector has been favored by subsidies on fertilizer (bot.h price and transport subsidies), irrigation water charges, and institutional interest rates. The government also intended to provide incentives to foodgrain producers through a price support program, but this program was largely ineffective because of lack of funding and absence of a suitable procurement mechanism. In any case, the open border with India has made implementation of ar independent price policy for tradeables impractical and has placed severe restrictions on Nepal's oppor.uniti?s for using price and subsidy incentives. Other factors must therefore b,! held accountable for the poor performance of the sector. In this connection, the report identifies the following three main problem. areas: (a) poor performance of public irrigation schemes which have absorbed much of the public sector investment in agriculture, (b) shortcomings of the government's delivery systems for inputs and services, and (c) failure to come to grips witlh the problems of natural resource degradation. 6. Putlic Investments in I.rigation. The public irrigation subsector has been the single largest beneficiary of investments in agriculture in the expectation that, by providing assured water supplies during the monsoon and full irrigation during the dry season, crop yields and cropping intensities could be greatly improved. Government-managed irrigation systems have been constructed to serve a net command area of 265,000 ha, but only 65? of this area is being irrigated in summer and 25 in winter. This figure includes about 30,000 ha under public deep tubewell irrigation. Private schemes account for about 668,000 he of command area or nearly 70? of the net command area in Nepal; this includes 83,000 ha under private shallow tubewell irrigation. The major causes for poor performance, in the case of public  - vi - surface irrigation, are (a) deficient system design neglecting the tertiary and farm-level irrigation networks, and often rel-ing un vulnerable sources of water, and as a result, a water supply inadequate for the nominal comnand area, (b) lacK of beneficiary involvement in design, construction and opera- tion, and (c) unsatisfactory system management reflecting the preoccupation of management with -- and c ncentration of resources on -- construction ac- tivities. Consequently, on-farm water deliveries are unreliable and irriga- tion facilities break down, leading to further deterioration of service to farmers, who thus fail to achieve the expected prod_;ctivity gains. In contrast to public surface irrigation, groundwater development, through private shallow tubewells and public deep tubewells, has produced encouraging results. Groundwater schemes offer higher levels of service to the farmer, thereby promoting use of high-yielding technology and diversification to higher-value crops. 7. Delivery Systems for Inputs and Technology. Another major cause of poor sector performance has been the inability of farmers to obtain the inputs and technical advice needed to substantially improve -- and in the Hills to even maintain -- their crop productivity. Although the sales of chemical fertilizer have more than tripled during the last fifteen yeaxs, use per hectare (16 kg/ha in the Terai and 9 kg/ha in the Hills) remains extremely small, even in compar'son with other poor countries of the region. Moreover, the distribution of supplies is very uneven, with farms in the Kathmandu valley receiving six times as muLh fertilizer per hectare than those in the Terai. Since fertilizer response is small at low levels of application, yield gains achieved under the existing low applicatiuon rates are small. The key prnblbmR in the fertilizer subsector are: (a) supply constraints, (b) pricing policies that have encouraged supply deflection to India, (c) inefficient supply management, (d) a restrictive distribution system which has discrimi- nated against the private sector, and (e) the high fiscal burden of subsidies. 8. HMGN has restricted fertilizer inmports due to foreign exchange and fiscal constraints and has depended largely on aid funding for supplies. The government has set a uniform national retail price for each type of fer- tilizer, with transport subsidies to the Hills to be provided out of the national budget. The Agricultural Inputs Corporation (AIC) has suffered continuous operational losses which acted as a disincentive to increase sup- plies. Moreover, in periods when prices have fallen below those prevailing in the Indian border states, domestic availability has been further reduced due to smuggling, HMGN's past pricing and inconsistent subsidy policies have exacerbated AIC's inherent inefficiency in supply management, leading to local shortages and late deliveries. Restrictions on private dealer entry and on dealers' freedom to recover transport costs have created local monopolies in certain areas. This, together with the serious financial and management difficulties of most sajhas, is responsible for the poor level of service to farmers. 9. Inadequate development and dissemination of appropriate improvements in production technology have also constrained agricultural growth. Underfunding and misallocation of research budgets along with a general lack of responsiveness tc, actual conditions faced by farmers in the design of research programs, e.g. by failing to take into account sub-optimal conditirns  - vii - faced by producers due to unreliable and insufficient availability of fertilizer and irrigation water, have been the main problems in this area. Also, the needs of rainfed agriculture and Hill farmers in particular have been neglected. In part as a result of this, the capability of extension workers to provide useful advice haz 'en iimited. Moreover, an effective extension system had to be built from the ground up and a unified national extension se ice is yet to be established. Extension coverage is still largely limited to the Terai and nas ignored the importance of including female farmers in its clientele. Its usefulness is further restricted by the lack of integration of extension on field crops, fodder and livestock produc- tion, horticulture, farm forestry and soil conservation. 10. Land Use Management. Deterioration of the land resource base has also contributed to the poor agricultural performance. Continued population pressure on the already intensively-used lands of the Hills and MountAins has raised the ratio of humans and livestock to land to a dangerously high level. The resulting pressure on forests and grazing lands by local people has curtailed the supply of animal and mineral nutrients required to maintain the productivity of the intensive farming system on the scarce good-quality crop land. Diminishing yields have driven farmers tc expand their crop area into marginal lands not suited for continuous cropping, thus reducing further the forest and grazing lands. This environmental degradation has not only eaten away at the resource base of Hill farmers, through loss of soil nutrients, it has also, together with construction of roads and trails, contributed to the erosion problem. It is increasingly recognized, however, that it is natural forces that are by far the most important source of rock and land slides, r4riar4ank cutting and downstream sedimentation. Government efforts to arre,t these processes have not had a significant impact because they have not been coordinated and generally not designed from the perspective of the local beneficiaries. Recent Government Init4atives 11. The 'Sector Program" Approach in Agriculture. One of the recent HMGN policy initiatires is the establishment of a framework for sector lending in order to avoid the weaknesses of the traditional project-by-project approach which had been unsuccessful at strengthening institutional capacities and transferring needed skills and expertise. The irrigation and forestry subsectors are the first subsectors to adopt the "sector program" approach. By establishing a sound overall strategy, clear supporting policies, and specific criteria for investment decisions, the sector program approach aims to correct earlier deficiencies and provide a strong basis for coordinating the programs of various line agencies and donors within a particular sector or subsector framework. The secLor program approach emphasizes institutional development to draw lessons from pilot projects, refine project cycle proce- dures, expand skills and capacities within the line agency, and gradually replicate successful field interventions. 12. The Structural Adjustment Program. In order to gradually align agricultural policies and institutions with sector development objectives, HMGN adopted in 1987, as part of its Structural Adjustment Program, reforms to improve resourcc utilization and productivity in agriculture inter alia  - viii - through encouraging private sector initiatives. These reform measures, supported under IDA's First Structural Adjustment Credit (SAL I), focused on (a) improving the performance of public sector agencies (fertilizer and seed supply, foodgrain distribution, and agricultural research), (b) rationalizing prices of both inputs and outputs (fertilizer and foodgrains), and (c) establishing adequate incentives for private sector participation (fertilizer distribution, seeds production and distribution, and community forest manage- ment). Under the Second Structural Adjustment Credit (SAL U1), additional reforms are being supported in fertilizer supply and implementation of the new irrigation strategy. Specifically, fertilizer supplies will be augmented, stock management improved, pricing adjustments made automatic, and distribu- tion further liberalized and privatized. Features of the new irrigation strategy supported under SAL II include strengthening the legal status of water users associations, shifting the orientation of the Department of Irrigation from construction of new large schemes to increased emphasis on management of existing schemes and cooperation with users' associations, handing over management and ownership of small- and medium-sized public schemes to water users' associations, establishing improved mechanisms for the collection of water charges, ensuring adequate budgetary provision for operation and maintenance of government-managed schemes, and improving coordination between irrigation and agricultural service agencies. 13. The Basic Needs Program. Recognizing that past strategies had been disappointing in meeting their growth-with-equity objectives, HMGN launched in 1987 the Basic Needs Program (BNP), a long-term action plan focusing on a subset of existing development objectives and aimed at eradicating absolute poverty by the year 2000. While covering a basket of basic needs in several sectors, BNP's emphasis on increasing food production reflects the government's grave concern about the worsening food crisis. The production targets, and the investment and service-level implementation targets derived from them, call for growth rates which, on a sustained basis, are unprecedented in Nepal. Notably, the increase in foodgrain production would have to be 4.82 per year, compared to the actual rate of 2.22 over the period 1975/76-1988/89. Similarly, substantial production increases are called for in other food and non-food commodities. BNP aims at full national self-sufficiency in staple foods (foodgrains, potatoes and pulses). 14. The BNP correctly recognizes that significant increases in agricultural production can only come from concentrating efforts on the so-called "intensive" and 'pocket' areas of development, i.e. those w.th irrigation capabilities. Thus, it calls for a vastly accelerated effort in creating new irrigation command areas and increasing the availability of inputs, technical services and credit. Changes are also planned in agricul- tural policies and institutions. Greater reliance would be placed on the private sector, such as in production and distribution of seeds and seedlings and through farm-level demonstration trials of improved technical packages. BNP also aims at making the Hill areas self-sufficient in foodgrains by stepping up rainfed crops research, extension activities and expansion of credit facilities in these areas. It further mentions the need for specific redistribution policies, in particular agrarian reform, and the use of employment-intensive technologies but does not provide specifics on how these are to be implemented.  - ix - 15. Since they have been derived from the program's self-sufficiency objective and a set of fixed input-output coefficients, the BNP's investment targets bear little relationship to actual demand and implementation capacity. Most investment targets are highly ambitious vhen viewed against achievements of the recent past, such as the rote of expansion of irrigated areas. Also, historic returns on public investments have been mediocre, as evidenced by the poor sector performance in the light of massive expenditures on public irrigation schemes, fertilizer subsidies and the development of agricultural extension systems. The focus of the BNP on creating new irrigation command areas, at twice the rate achieved in recent years. harbors the risk of large-scale supply-driven surface irrigation development with little, if any, farmers' involvement as the latter process may require more time and careful planning than the fast development required co meet BNP targets. This is also likely to result in overlooking investment options which may be superior to construction of new schemes, such as improvements in system management or increases in irrigation intensity. Other areas where the priority or the timing of BNP investments may need to be scrutinized are the substantial expenditures for construction of agricultural service centers and planned expansion of agricultural field staff. 16. Other questions raised by the top-down planning approach of BNP relate to the respective roles of the public and private sectors in pursuing growth objectives. GovernmenL's role in agricultural production can only be one of encouragement and facilitation, and imposing accountability for achieving agricultural output targets on extension staff appears inappropriate and counterproductive. In many areas active involvement of local benefi- ciaries is critical for the success of government initiatives; for example, in irrigation development, design of location-specific agricultural research, improved seed multiplication and distribution, community forestry, watershed management, and small-farmer credit programs. 17. An important premise of the agricultural strategy in the BNP is that Nepal's food requirements must be domestically produced. The traditional open trade with India and poor people's limited purchasing power for food suggest that Nepal should aim at a policy of food security rather than food self-sufficiency. Moreover, for reasons of transport cost alone, trade between the Terai and the Indian border states is far more attractive than between the Terai and the Sills. Until access to the Hills is much improved, the majority of Hill farmers will continue to grow the foodstuffs needed for home consumption, and food surpluses from the Terai will be sold to the Kathmandu valley and to India as long as this is profitable. The Terai and parts of the lower Hills where transport and marketing facilities exist are also believed to have a comparative advantage in producing cash crops. Rigid pursuit of a self-sufficiency policy would contradict existir.g market signals and therefore have limited success. 18. The BNP document makes reference to the need to address the problem of Nepal's environmental degradation, especially the losses in soil fertility and the flooding and sedimentation of downstream crop areas. The detailed implementation plans only provide for an agroforestry program in the Hills and for changes in selected environmental policies. These actions are  not commensurate with the severity and complexity of the environmental problem, and the planned agricultural growth is unlikely to be sustained unless adequate measures are taken to arrest environmental degradation both in the Hills and the Siwaliks. 19. The BNP for agriculture is correctly based on the premise that significant increases in production can only come from expansion of irriQated cropping and improved delivery of inputs and services, concentrating on areas with high production potential. However, the ambitious targets appear to have been formulated with the implicit assumption that long-standing policy and institutional constraints can be resolved rapidly and that technical and administrative implementation capacities can, in some cases, be doubled within the span of a few years. In order to be successful, thereiore, major invest- ment programs m'st be preceued t- a strengthening of the policy and institu- tional framework. It may be useful to think of the next few years as a staging period for focusing on such policy changes and institutional measures. This would also provide an opportunity for verification of the targets in the light of a reassessment of institutional delivery capabilities, local development potential and related demand for government services, and for devising alternatives to public sector approaches. Policy and Institutional Adjustments for an Effective Agricultural Strategy 20. To generate the necessary growth which is a prerequisite for the success of Nepal's agricultural strategy, the sector will have to grow by 3-4Z on a sustained basis. The major sectoral development efforts being mobilized through the BNP will make this a realistic possibility. provided action is taken in the following policy and institutional areas. First, irrigation development must be pursued primarily through quick-yielding investments in new irrigation areas, such as groundwater schemes and completion/rehabilita- tion of existing schemes, and through improved management of DOI systems and increasing devolution of responsibilities to farner groups. Second, major improvements must be made in farmer support services, notably by increasing the supply of chemical fertilizer and improved seed and liberalizing their distribution to ensure wider and more timely availability to farmers; by institutional reforms in the agricultural research and extension systems to make them more responsive to farmers' needs; and by providing a more adequate flow of credit for high-priority investments such as tubewells and for farmers' production needs while taking simultaneous steps to protect the long-term viability of the credit institutions. Third, the existing policy of decentralization must be energetically pursued, where possible in conjunction with a devolution of public sector responsibilities to the private sector. Fourth, foodgrain distribution policies should be revised in order to permit more effective targeting of food supplies to the truly needy without distorting market prices and producer incentives. Fifth, considerably more needs to be done to devise and implement a set of coherent policy and institutional measures to relieve the pressures on natural resources and thereby arrest environmental degradation which threatens the sustainability of agricultural growth. Sixth, sectoral planning and analysis capabilities will have to be strengthened to ensure more appropriate implementation planning. And last, more effective coordination of donor assistance, both among the donors and by HMGN, will be a vital element in a successful sector strategy.  - xi - Specific recommendations are shown in ALtachment I. The key recommendations in the mix areas mentioned ahove are su-arized below. 21. Irrigation Development. The Irrigation Master Plan, under preparation, is designed to ensure consistency with the BNP. Regional experience indicates that bringing under effective irrigation an additional 2.0-2.5Z of a country's net cultivable area every year should result in a growth rate of the order envisaged by the BNP, provided that supporting services and modern inputs are readilv available. This translate. to some 40-50,000 ha per annum. This does not have to consist exclusively of area developed under new schemes. Improving performance of existing inefficient schemes should also qualify. It is estimated that improved system management alone, with current levels of technology, could generate productivity gains of 1.7 t of foodgrain per hectare or some 85,000 t of foodgrain per year, assuming only one half of the presently unserved command area is covered. Irrigation development should distinguish between investments in the short to medium term which would contribute to achievement of BNP targets and long-term investments which are unlikely to effect production before the turn of the century. The former would be a mix of quick-yielding, high-return investments that would not increase the government burden for operation and maintenance. Highest priority would be accorded to groundwater development through shallow and deep tubewells. The abundant groundwatet rescurces on the Terai are amolig Nepal's important natural resources. The cost of their development is relatively low, and returns are quick. The objective should be to substantially complete development of groundwater resources by the year 2000. In order to achieve that, the potential for increasing the incentives for private sector investment in groundwater development and equating them with the incentives provided for surface irrigation development should be urgently explored. At the same time, assistance to farmer-managed surface schemes and completion and rehabilitation of existing public schemes should continue to be pursued in the medium term. In order to focus limited government resources on these three priority investment types, it is recommended that construction starts on new public schemes be deferred until these priority investment opportunities are substantially exhausted, which is expected by around the end of this century. It would also be important to set a ceiling on the allowable cost per hectare for any type of irrigation investment in order to immediately eliminate projects of marginal viability. Meanwhile, planning and preliminary studies should begin now for long-term investments in medium and large schemes that have a gestation period of 10 years or more in order to generate additional irrigated area in the early part of the next century when much of the earlier mentioned irrigation investment opportunities will have already been exploited. 22. It is clear from the review of past performance that in irrigation development a better balance should be achieved between expansion of irrigated area and the provision of reliable and sustainable water irrigation services. Every effort must therefore be mace to implement the new strategy of developing the capability of water user groups to (a) assume ownership of small and medium schemes, and (b) assume joint management responsibility with the Department of Irrigation for larger public schemes, under which farmers would fully handle operation and maintenance as well as water charge collec- tions within well-defined parts of an irrigation system. Action plans have  - xii - been drawn up to implement this strategy. These include provisions for adequate incentives to farmers and to government staff to take improvements in system operation and maintenance and cost recovery seriously. 23. Chemical Fertilizer Supply. In order to realize Nepal's agricul- tural production potential and to relieve some of the pressure on land resources, chemical fertilizer will need to be used more widely. Fertilizer procurement should be stepped up and arrangements made for timely delivery. HMGN substantially raised the FY89 level of imports over the previous year, by nearly 50Z to 191,300 t, and plans to import a similar quantity in FY90. These are steps in the right direction provided that the distribution and timeliness of supply are significantly improved. At the same t' , reserve levels should be increased to reduce the effects of possible irt gular deliveries. Studies are planned to provide the basis for a medium-term investment plan to improve fertilizer supply management. By conservative estimates, a moderate increase in fertilizer supply (18,000 t, i.e. about 132 over 1987/88 sales) can achieve a 102 increase in main-season paddy production by making additional fertilizer available to the majority of Terai irrigation farmers who already use fertilizer on their paddy crop and to one half of those who at present do not have access to it because supplies are insufficient. With regard to fertilizer marketing and distribution, HMGN should forcefully pursue its policy for expanding retail distribution channels and encourage distributors to handle higher volumes and serve more remote areas. This requires further relaxation of the lingering de facto government controls on market entry and avoidance of other non-competitive trade prac- tices. Retail price controls should also be lifted thus allowing distributors to recover transport costs fully and earn a reasonable profit. A program of dealer training covering both agronomic and business aspects should assist dealers in increasing the profitability of their business while providing better service to their customers. Furthermore, allowing private wholesale distribution could relieve the administrative and financial burdens of the Agricultural Inputs Corporation. As the private sector takes over a larger share of distribution and marketing activities, AIC would be able to con- centrate on proper public sector responsibilities. 24. In the area of fertilizer pricing, the government has adopted the principle of maintaining fertilizer prices at levels slightly above those prevailing in Indian border areas in order to prevent supply deflection across the border when Indian prices are lower. The effectiveness of this policy depends on systematic monitoring of Indian fertilizer price movements and on related automatic adjustments in Nepali wholesale prices. HMGN needs to establish implementation procedures to carry out this policy. Finally, the question of the Hill transport subsidy requires further study. Exhaustion of the fertility of Hill crop lands and the resulting increased food deficits make tne use of chemical fertilizer a vital instrument of the agricultural and hence environmental strategies for the Hills. To increase fertilizer availability a subsidy is required to offset the large transport costs. The problem is to find a way to resolve the conflict between the obje-tive of this subsidy, which is to increase fertilizer availability in the Hills, and its administration, which has the unintended result of restricting fertilizer supply to the Hills because of the financial burden to the government.  - xiii - 25. Agricultural Research and Extension. The recent reorganization of the research system has started to address the three main problem areas of research orientation, funding, and management and organizational structure. But further changes are required to create a truly dynamic system of techno- logy generation focused on meeting the needs of Nepali farmers. Not only should research be freed from unrelated government responsibilities, such as seed production, and better funded in respect of appropriate staffing, equipment and recurrent expenditures, it must also have greater flexibility in srending its operating funds and shift its emphasis toward outreach programs that will generate location-specific technology that responds to farmers' needs. This implies a further shift from the prevailing concentration on experiment station-based research to on-farm research under the recently adopted research outreach program. This, in turn, calls for: (a) stronger linkages between the work program of the central and regional stations and the outreach sites, (b) much closer collaboration between research workers and extension personnel, and (c) coordination among various agencies conducting research in the broader farming environment each of which has an impact on the farming system. The implementation of the basic needs strategy requires a sharper program focus on the broader productivity issues of rainfed farming systems and on selected problems with irrigated crops. At the same time, work must be initiated on longer-term research projects to exploit Nepal's comparative advantage in cash crops, particularly crops suitable to the Hills. In all of this it should be borne in mind that Nepal cannot afford to duplicate a research system appropriate for a large country. Efforts should be doubled to import readily adaptable technology from relevant source countries, especially India, ani to arrange for permanent formal linkages with relevant foreign research institutes. 26. At the time when the creation of a national, unified extension system is being considered, a reassessment of the mission of the extension service seems to be justified and every effort should be made to build on the experience with the various extension systems that have been in existence side by side over the past decade or so. For agricultural extension to make an effective contribution under the proposed sector strategy it must shift its focus from a preoccupation with government-fixed targets to assisting farmers in meeting their needs. This places the burden of the extension agent's success on his effective role as broker between farmers and research and other agricultural support services. While basic technical packages are available to irrigation farmers and some i,iformation exists for major crops grown under rainfed conditions, the relevance of both must be improved by farmers' field trials aimed at formulating variations that take into account suboptimal conditions such as shortages and untimely delivery of fertilizer and irrigation water as well as major differences in soil characteristics. In rainfed agriculture, and particularly in the Hills, extension and re*tarch should take into acr.ount the total needs of the farming system which includes a variety of crop and livestock enterprises which are intimately tie' to the use of forest and grazing resources. Extension programs need also to be revised to explicitly target the needs of female farmers and farmers' wives whose important role has been largely ignored. Consideration should also be given to devising ways of involving local communities to a greater extent than is the case at present in planning, implementing and assessing the performance of extension and research work with a view to (a) increase the relevance of  - xiv - technical support services and their effectiveness, and (b) encourage cost-sharing of extension and research expenditures between the government and the beneficiaries. 27. Natural Resource Management. Improved natural resource management is a necessary condition for sustaining and improving the productivity of farming systems that depend on crop agriculture, livestock and forestry. Indeed, efforts aimed at arresting environmental degradation and those aimed at increasing agricultural production must be coordinated for each to be successful. The intimate relationship between agricultural development and natural resource management needs to be more explicitly recognized in sectoral plrr"-:., formulation of work programs of agencies concerned with agriculture, forestry and watershed management, and institutional development. Land use changes need to be promoted that encourage protection and controlled use of accessible public lands by (a) emphasizing rehabilitation over plantation, (b) fostering local management of these resources, (c) limiting uncontrolled livestock grazing, and (d) intensifying energy conservation measures in rural areas. HMGN's new Forestry Sector Policy is an important step in the right direction. It endorses the key proposal of the recently adopted Forestry Master Plan for a phased handing over by government of all accessible Hill forests to the local communities which are willing and able to protect and manage them while the Department of Forest will provide technical support. Implementation of this program requires legislative changes and a massive institutional development effort. 28. Given the population growth rate and the likelihood that Nepal's population will reach 40-45 million by the year 2025, pressures will continue to mount to bring under cultivation all potentially cultivable land, including that presently under forest, as well as lands unsuitable for sustained cropping. Since this pressure is increasingly felt in the Terai and the Siwalik foothills through the inflow of Hill migrants seeking farm land, a study should therefore be undertaken promptly to examine the optimal use of the Terai and Siwalik forest resources. The study should take into account: (a) the need to protect the Siwalik forest, (b) the need to develop well-managed forests for the supply of fuelwood and other forest products to meet both local and national requirements, and (c) the need to create income opportunities for excess Hill population. Substantial damage has already been done to delicate soils on the slopes of the Siwalik foothills, while much of the Terai forest has been unproductive due to poor forest management. The study should produce a set of criteria for the allocation of these forest areas to different categories of uses and users, giving full weight to environmental considerations. Decisions involving further major investments for Terai forest development should not be made before the findings and policy implications of the above study have been examined. 29. Finally, attention is called to the need to increase the effectiveneso of watershed management and soil conservation programs. While a number of watershed plans have been prepared, they are biased towards building erosion control structures on public lands mostly to stem existing damage. In the future, priority should be given by the agency concerned, the Department of Soil Conservation and Watershed Management, to prepare and implement watershed management plans based on an integrated land use approach involving  - xv - forest &nd grazing land management as well as agricultural soil and water conservation measures. These will permit DSCWM to develop a work program that provides a better balance between preventive and curative interventions. More attention should be given to vegetative soil and water conservation measures which have been largely ignored in Nepal despite their proven high cost- effectiveness elsewhere. In that respect, the testing of suitable vegetative conservation technologies should be accelerated which, if proven suitable, could substantially accelerate efforts to control environmental damage. Nepal should take more advantage of international experience of natural resource management in mountain environments. Sectoral Planning and Analysis 30. Nepal's development efforts are handicapped by the virtual absence of a detailed implementation planning capability. As a result, annual development plans and budgets of line agencies do not sufficiently reflect local realities and other implementation constraints. An apparent need exists for district-level planning based on assessments of local resources and potentials and of the local implementation capacity of line agencies. 31. Equally important for meaningful development planning is the government's ability to understand the factors affecting agricultural performance and to predict confidently the outcome of its policy initiatives. In view of the inadequacy of present efforts, which appear to be generally of an ad-hoc nature, it appears desirable that HMGN establish a unit that will carry out, on a regular basis, an assessment of agricultural sector performance and related policy analyses for use by government agencies and donors. The increased emphasis on agricultural sector performance under the Basic Needs Program add to the justification of such a function. Role of Donors 32. In providing development assistance to HMGN, donors have not always acted in Nepal's best interest. Projects by different donors in a particular subsector have occasionally been inconsistent with HMGN subsector strategy, or have had divergent policy and institutional objectives. The government's BNP provides a major opportunity for HMGN and donors alike to put donor assistance on a more rational and coordinated footing. This can be achieved through increased consultations between HMGN and donors to ensure complementarity and consistency for the total assistance package within each subsector. At the same time, it will be important for HMGN to set clear policy directions and strategy for each subsector and to accept only project assistance that fits within the overall strategy. To assist in this effort, donors could, on a regular basis, circulate and jointly discuss their respective 3-5 year programs for investments, projects and studies. Controversial or conflicting proposals could then be reviewed at an early stage, and deficient proposals could be improved or withdrawn after consultation with government and other donors.  SUMMARY OF ISSUES AND RECOMMENDATIONS Aren OLjectivoo/Stratogy Status/Issue Recoem ndotien Pare No. Irrigation Development In the short to medium term, Performance of many govornment Provide highest priority to 6.06 to pursue quick-yielding surface irrigation sch me is groundwater develop men t investments that would not disappointing. Investment through shallow and dep add to the CAM burden of cost is high. OAM increasing tubewello. government, burden on HIMGN. Continue ssietence te 6.09 f armer-managed schemes and completion of existing public schemes. Defer construction starts en new public surface schemes; 6.10 set ceiling on the allowable cost/hectare for Irrigation investmnt. Proceed with planning and 5.10 design for new large-scale surface schems. Install *aster planning 5.10 capability in DOI as a continuous process. Focus scarce government Lack of a formal unit at Establish Irrigation 6.12 resource on tasks that user central level to manage Maonageent Division. groups are unable to handla, critical tasks of O M and developing capability of Improvement, farmer organi- Prepare and Implement action 6.13 such groups to assume larger zation, cost recovery and plans for: responsibilles for O0MW water users association (a) handing over *ma l/ licensing and registration medium DOI schemes to far r groups, and (b) developing participatory or joint modes of operation for larger DOI schemes. Promote active participation Need for appropriate policies Specify policies for phase- 6.17 of fr_mrs, particularly in and incentives to encourage out of government OhN subsidy taking over 0AM responsi- farmers to assume greater 0AM within a specified time- bility. responsibility. period for all DOI schemee. Permit sit*-specific setting 5.17 of water charge based on actual OhM costs.  SUMMARY OF ISSUES AND RECOMMENDATIONS _ ===zz=3= . >=== ====_== ==__==_ Area Objectivoo/Strategy Status/Issue Recommendation Par, No. Water charge discount. (water 5.17 wholesaling) offered to faormrero illing to fully manage OiM within their service areas. Permit water char" revenue 5.17 to be rt Ined or earmarked for O0M of the systm wbhre revonus were collected. Input Supply--Fertlli zr To Increae supply and Procuremant increased to over Increase supply reerve. S.19 timely availability of 60 of previous levels. fertilizers. Schedule procurme_t In time 5.19 to ensure availability well In advance of crop e*-eoe. To liberalize and expand No fertilizer delership New dealership rg"ulatioo .20 fortillizr distribution, regulations Issued. should be further s*asda to lift all controlo on application and approval of dealers. Allow both * Jhoe *ad privat 5.21 dealers to fully recvr traonport cost and earn a reasonable profit. Encourage wholoesle 5.22 distribution throuh advance purchase and bu1k purchuje discounts. Implement dealer training T.28 programs. To ensure quick price Price changes still under Adopt automtic price 5.24 adjustmnts so as to reduce discrotion of AIC Board. Slow adjustment mechanlsm based on incentive for smuggling of re-ponse to movements in systematic and Improved supplios scrous border. Indian border prices, monitoring of border wholesale and retall prices.  SUMMARY OF ISSUES AND RECOMMENDATIONS Area Obj ctiv s/Strategy Status/Issue Recomendation Pare No. InD4t SuD_ly--I_ rov_ d To expond private sector Seed Board established and new AIC, In the madil term, 5.27 involvemet In Improved seed Seed Act ratified, should phase out of the seeds production and markting subsetor, or privatise Its seeds operations. S28 Expand Private Producer- Soillrn Program In the Hills. 5.26 Establish a pilot program for group-owned private seed enterprises in the Tersl. Agricultural Reserch and To gnerate reserch that is Key problems are improper Increase emphasis on outrech 6.50 Extension mre responsive to *-rmrr' roserch orientation, insufti- progrm in clen requiree_nte and problems. clnt funding, weak management collaboration with estension. and Institutional structure, and inadequate links with related research Institutions In Nepal and abroad. Emphasiz research on needs .S22 of Hill formers, especially In compnennt technolegies, low-input farming, biofertility, variotal Improvements, and linkges betwenn cropping, livetoeck and forestry. Develop technical peckes S."8 that take Into account contingonclee uch as untimly availability of fortilizer or lrrition, and differences In *oil m6olture retention.  SUMMARY OF ISSUES AND RECOMMENDATIONS Area Objctiv.es/Stratogy Status/Issue Recommendation Par. No. Establish collaborative 5.60 research progress with other agencies working In the broader farm1n9 envIronomet (Forostry, soiT conservatlon, irrigation, Institute of Agriculture). Review opportunities for 5.55 importing relevant agricultural technology from India and other countries wIth large resorch establishmon t and for developing formal linkage to facilitat, sucb transfers. To develop a unified Absence of a unified servico Integration of various *.56 national extension service with a clearly defined ongoing extension system that can respond to the mission. into a unified national noeds of farmers in a extension service comprehensive manner. Lack of effective farmer Focus on extension agent as 5.57 assistance especially to two-way link betoeen farmer. rainfed farmersr those in the and agriculture support Hills, and ft-ole farmers services. throughout. Reviso extension program to 5.58 more explicitly target f m le formers and farmers ives. Develop mechanism for better 5.40 coordination between crop aod 5.63 live tock exten ion (epecially feed and fodder production).  SUMMARY OF ISSUES AND RECOMMENDATIONS Area Oblectivo./Strat.,y Statue/Issuo R eco_ndatioe Pars %O. Inodequate staffing ancl Reduce cost of Hill extenslon *.44 funding for fiold expenses. aorviteo through careful planning of agricultural serveic centers, vse of farmere groupe as point of contact, better deegn of fiold demonstrations, and ue of tel eoeunt Ieaations. Natural Rosource To arrest environmntol Govornmnt efforts have beon Promote land ue- change thot. S." Management degradation and, at the same largely limited to planning oncourage protctlton and time, promote tncreoasd oxorciso- with excoption of controlled use of aessiblo agricultural production. comunity forestry programs public lands, through: and supply of foodgraino ends chemical fortilizor In Hl4llo. (a) fostering local Prossuro on renewablo natural mnagoemnt of couon property esourcos expectod to lands; continuo. (b) providing incentives to indue switch from fre grazing of livostock to contro l l d grox I ng asad tal l feeding; and (c) roevaluating rural enrgy conservation measures. Study options for use of 5.65 remaining Torsi and Siwalik for-st lands. Progras of the Department of Devolop integrated watershed 66" Soil Conservation and management plans Involving Watershed Management have ben sIlI and water coneervation aimed at curative moro than at easures on foroet, grazing proventive msuros, and agricultural lands, focusing on prevontivo as much as on curative aspects. Take moro advantage of 5.63 international experience in naturi resource mnag nt in mountain environmente.  SUMMARY OF ISSUES AND RECOMMENDATIONS Area Objectives/Strategy Status/lxrse RcOendtlon Pro No SectoraI Planning and To achieve greater con- Weak policy analysis caps- Establish with donorse C.70 AnalyaEe sistency betwen planning bility within HMQN. Ned to support Independent objectives and strategies, explain trends In agricultural agricultural policy *mlysls oa one hand, and Investment sector. Sector investmnt and performno asese programs polsiies and program are often loosely unit that would preere Institutional structures, on connected collection of budget annual reporto on the other. Items of line anocies. agricultural sector performnce. Role of Donors To achlee compl_mentarity 9N provides opportunity to Increase donor and NMU 5.73 and consistency botween HMON rationalize and coordinate consultation to enure strategy and donor efforts of various donors. eomplemantbrity betwee aselsincs and policies, adjustment and proj ct leding In total aid p*cikge.  I. BACKGROUND Objectives and Scope of the Report 1.01 This report has three major objectivest (a) to analyze the potential for growth and the main constraints on the development of Nepal's agricultural sector; (b) to assess the implications for agricultural development of HHGN's Basic Needs Strategy in the light of growth opportunities and major constraints; and (c) to formulate recommendations for policy and institutional adjustments necessary to achieve the objectives of HKGN's agricultural sector strategy. 1.02 Given its purpose, the report does not address in depth every major issue of relevance to Nepal's agricultural sector, but it focuses on selected priority concerns that have a direct bearing on the effectiveness of development strategy. Several issues, such as poverty alleviation, administrative decentralization, fiscal and financial constraints, and the role and potential of the private sector have therefore been taken into account only indirectly. Structure of the Report 1.03 The report starts out with a characterization of the formidable challenge faced by the country in pursuing agricultural development (Chapter I). This is followed by a review of recent trends in the sector starting with its contribution to the national economy, an overview of the growth constraints faced, and an assessment of opportunities (Chapter II). Next, the report reviews the performance of the key public sector agencies that share the responsibility for agricultural development (Chapter III). The following chapter assesses whether the govermnent's basic Needs Program provides the necessary elements for a successful agricultural development strategy (Chapter IV). Drawing on this assessment and on the earlier analysis of recent public sector performance, the final chapter then formulates the policy and institutional requirements for such a strategy (Chapter V). The SettinR 1.04 The Kingdom of Nepal is one of the poorest countries in the world, with an estimated per capita gross domestic product (GDP) of US$170 (1987/88) and roughly 401 of the population living in absolute poverty. If the poor are defined as as those who spend at least 702 of their income on food and fuel, then about two third of the population are poor. Nepal lags behind other Asian countries in almost all indicators of economic and social welfare. Population growth has been rapid, about 2.71 per annum, and more than 90? of its population of over 18 million live in rural areas.  - 2 - 1.05 Economic growth has been ezratic but has averaged 4? since 1975/76. However, agriculture, which dominates the economy, has grown by a modest 2.4? p.a. over this period, less than the rate of population increase. More significantly, foodgrain production which is critical for the country's food balance, has increascd only 1.92 p.a. over this period. This disappointing performance is explained in part by Nepal's geographic location, meager natural resource base in relation to a rapidly growing population, difficult topography, and in part by the limited capacity of His Majesty's Government of Nepal (HMGN) to manage the economy and administer the country's expanding development programs. 1.06 The Bank's last agricultural sector review is ten years old.l/ It focused on the strategy options available to HHGN in the face of the apparent drawbacks of concentrating development efforts on the Terai, thereby effec- tively bypassing the two-thirds of the Nepalis living in the Hills and Mountains where increasing human a.id animal population, falling agricultural productivity, overexploitation of forest and grazing areas had all led to deteriorating economic conditions and increasing human migration from these areas. Meanwhile, production in the Terai had stagnated and exportable surpluses of rice had dwindled. The report advocated a strategy which would redress the imbalance between the development efforts aimed at the Hills relative to the Terai while pursuing increased productivity of the investments already made in the Terai. 1.07 While the objectives and strategy of HMGN's Sixth and Seventh Development Plans strongly imply the government's agreement with the diagnosis and prescriptions of the 1978/79 Bank review, today's situation is, if anything, worse than that of a decade ago. Despite continuing migration from the Fills to the Terai, pressure on Hill land resturces has not abated while Terai farm land is coming under increasing pressure. The major challenges facing the agricultural sector continue to be: (a) supplying adequate amounts of food, fodder and fuel to the growing human and livestock populations, (b) expanding employment opportunities to reduce widespread underemployment, (c) improving the distribution of income, nationally and among regions, and (d) arresting the process of environmental degradation in the Hills. 1.08 Nepal's agricultural economy and way of life are conditioned to a large extent by its difficult physical environment and the high pressure of its population on limited productive land resources. Together these con- stitute formidable obstacles to the country's economic and social development. Difficult Physical Environment 1.09 Nepal's physical environment is characterized by its landlocked position and the extremes of its physiographic and ecological features. It is bounded by China to the North and India to the east, south and west, and occupies an area of some 147,000 km2. The country has a rectangular shape, 1/ Nepal Agricultural Sector Review. Report No.2205-NEP, April 27, 1979. Based on the findings of a mission that visited Nepal in February 1978.  with an east-west axis of 880 km long and a north-south axis that varies between 130 and 240 km. The country's extremely wide range of physiographic and ecological features reaches from the sub-tropical lowlands at 60 m above sea level to the high Himalayas stretching along the full length of the country with approximately 1,300 snowy peaks of more than 6,000 m in height and culminating in the world's highest mountain, Mount Everest, at 8,848 m. Besides altitude, rainfall is a most critical factor for agriculture; it is dominated bv the southwesterly monsoon with its seasonal characteristics and moisture gradient decreasing from east to west. The quality of the soils also varies greatly. 1.10 Nepal's remoteness from world markets and its geographic and topographic features constitute a major handicap in the form of costly and often unreliable overland transportation, almost all through India, of both imported and exported goods. Despite efforts to diversify the direction of trade as well as the traditional product mix, Nepal has historically been highly dependent on India as a supplier as well as a market for its surplus products. Its location and physiographic features call for a vastly more complex and expensive development effort. Natural Regions 1.11 The country is most commonly divided into three broad ecological belts, Terai, Hills and Mountains, which differ greatly from one another in altitude, topograph-, climate, agricultural productivity and population density. They account for 14Z, 432 and 43Z, respectively, of the country's total area (Table 1). The Terai, part of the Gangetic plain, is a narrow strip of land, never more than 50 km wide, stretching for about 800 km in east-west direction along the southern side of the Siwalik range which constitute the foothills of the Himalayas. Elevation ranges from 60 m near the Indian border to 275 m near the Hills. The Terai has a humid subtropical climate with rainfall averaging about 1,600 mm per year, most of it concentrated during the June-September monsoon. Average maximum summer temperatures are over 40 degrees C, with May being the warmest month, while average minimum and maximum winter temperatures are 7 and 23 degrees C, respectively. This is an area that has in most part only recently been settled because of the prevalence of endemic malaria until the late 1950s. Soils are among the best in the country, generally of medium or better fertility. The four major river systems draining the country all flow through the Terai into the Ganges. More than one half of the cultivated area in the Terai receives some form of irrigation. This is the major agricultural production area accounting fo. about 53Z of the country's gross ctopped area (Table 2). Since its long southern boundary does not constitute a natural frontier, movement across the Indo-Nepal under normal conditions is essentially unrestricted. The Terai economy is therefore crucially affected by the virtually free flow of people and commodities between the two countries.  - 4 - Table 1: Area, Population and Population Density, by Ecological Belt, 1985 Population Density Cultivated Population Per Total Area a/ Land (1981' a/ (1985) b/ Cultivated ('000 ha) ('000 ha) ('000) Per Ha Ha Mountains 6,308.5 252.5 1,344.5 0.2 5.3 Hills 6,329.4 1,481.2 7,842.6 1.2 5.3 Terai 2,110.4 1,234.3 7,500.0 3.6 6.; Total 14,748.3 2,968.0 16,687.1 1.1 5.6 a! Land Resources Mapping Project, Draft Economic Report, 1985 b/ Central Bureau of Statistics Table 2: Distribution of Gross Cropped Area by Ecological Belt Foodcrops a/ Cashcrops b/ Others Total '000 ha Z '000 ha Z '000 ha Z '000 ha z Mountains 1,620.9 76 455.5 21 46.1 2 2,122.55 3.1 Hills 1,404.6 92 72.8 5 52.3 3 1,529.7 38.3 Terai 325.9 95 9.4 3 8.8 3 344.1 8.6 Total 3,351.4 84 537.7 13 113.2 3 3,s,6.3 100 a/ Foodgrains and potatoes b/ Mainly pulses, oilseeds, sugarcane, jute, tolacco 1.12 The Hills form the central and also largest of the three ecological belts. They are made up of high ridges and steep valleys embracing numerous streams and rivers. The Hills are intersected by four main river systems, running from north to south, the Mahakali in the far West, the Karnali in the west, the Gandaki-Narayani in the center and the Kosi in the east. The deep gorges of these major and many smaller rivers have an important effect on the economy of the Hills, in limiting transport and communication and in contributing to the creation of the numerous microenvironments that are  characteristic of this belt. Elevation ranges from 275 to 4,000 m. Average maximum suamer temperature in the Hills is 27 degrees C and average minimum and maximum winter temperatures range from below freezing to 12 degrees C. Soils are of medium-to-coarse texture on the flood plains and terraces while the hillside soils are also medium in texture and well drained. Fertility is low to medium, with soils being low in nitrogen and organic matter and commonly acidic in the higher rainfall areas. The hill slopes are generally carved into terraces which have been built over hundreds of years. Each Hill area is a micro environment with varying conditions for plant growth depending inter alia on elevation, direction and steepness of slope, solar radiation and cloud cover. Farms are small and heavily subsistence oriented. A typical farmer operates four to five plots which usually differ in agro-ecological characteristics. While making for more difficult farm management, this provides the farmer with virtually all of his diverse requirements and spreads crop risk. The rugged topography and the resulting poor accessibility of these areas limit availability of modern inputs and farmer support services. Irrigated land is mainly in the valley bottoms, in small patches along river banks, or on small terraces where stream diversion provides some seasona! irrigation during or after the rains. The Hills account for 38Z of gross cropped area. The Kathmandu valley Is one of the largest valleys in this belt and, owing to its proxbmity to the capital and a good toad network, it is one of the most-developed parts of the country. For all intents and purposes, it may be considered a separate geographic entity. 1.13 The Mountain belt, comprising the high Himalayas, parallels the northern border. It is characterized by high peaks, steep slopes and narrow valleys. Mountain agriculture is livestock oriented, as neither climate nor terrain provide much opportunity for cropping outside the valley floors and the lower slopes which account for less than 1OZ of the country's gross cropped area. Limited Access to Rural Areas 1.14 The combination of Nepal's extremely rugged topography and the widely scattered settlement pattern of its population poses enormous difficulties in the building of basic infrastructure and the provision of essential services, both of which are still at a rudimentary stage. Only about a quarter of the 10 million inhabitants of the Hills and Mountains have effective access to roads capable of delivering inputs and carrying produce to markets, and several million people live from one to five days' walk from such roads. In the early 1950s, the country had virtually no roads. By 1986, the road network consisted of 6,015 km, of which 2,750 km were asphalted, 940 km were graveled and 2,325 km were fair-weather roads, serving only 41 out of 75 districts. The main features of this network are the main East-West Highway which passes through the northern part of the Terai and is yet to be completed in the Far-Western region, and some North-South roads linking various Hill districts and the Kathmandu Valley with several points in the Terai and leading from there to railheads across the border. Since virtually all of Nepal's foreign trade is with or passes through India, the few North-South connections are the country's lifeline.  1.15 About three quarters of the road network is located In the Terai, but even there the shortage of feeder roads constitutes a serious impediment to agricultural development. In the Hills and Mountains, where road construc- tion and maintenance are very difficult and costly, the road system is extremely thin and porter trails normally provide the only access. In these areas, the standard modes of transport are porters and pack animals making transport costs significantly higher than elsewhere. During the monsoon season, when rivers are swollen, travel comes to a virtual standstill in areas where there are no all-weather roads and bridges. The total length of transport trails in the Hills is in the neighborhood of 15,000-20,000 km. Extension and improvement of this network, including the construction of suspension bridges, are crucial to facilitate increased movement of persons and goods and, hence, to promote development in the Hills. In the absence of motorable tracks and roads, air travel is the only convenient means to reach many of the major settlements in the Hills. Twenty-six out of Nepal's 39 airports are 4in the riills and Mountains. Population Pressure on Land Resources pu laLt i_n Growth 1.16 Controlling rapid population growth is the most serious challenge faced by Nepalese policy makers. The population totals about 18.4 million (1989), of which some 93Z live in rural areas. Under a medium-growth assumption, population is projected to reach 24.4 million in the year 2000, and 31.2 million in the year 2010 (Table 3). Population growth has accelerated during each of the last three inter-censal decades (1951-81) and has averaged about 2.5Z per annum since 1970. The Hills and the Terai are about equal in population (42Z each), the Mountains have 8Z, and the urban areas 7Z. The Terai, originally the most sparsely populated region, is now the most densely populated with 3.6 persons per ha in 1985. The Hills and Mountains have densities of 1.2 and 0.2 perscns per ha, respectively. In terms of the more meaningful statistic of overall population density with respect to cultivable land, Nepal with 5.6 persons per ha approaches that of the other poor countries of region, but these have better soils and higher cropping intensities. Population growth is thus the dominant source of pressure on the natural resource base. 1.17 The Hills, which contain 50% of the cultivated land, used to be the most densely populated of the ecological belts but has been surpassed by the Terai. The Hills average 5.3 persons per cultivated hectare. The Terai, with only 14Z of the country's land mass but 42Z of total cultivated land, had a population density of 6.1 persons per cultivated hectare. It has been the n-jor recipient of both domestic and Indian migrants; and over the last two decades its annual rate of population growth has been more than twice that of the Hills. To escape the consequences of worsening food deficits, an estimated 686,000 persons migrated to the Terai from the Hills and Mountains between 1971 and 1981. In addition, the Terai receives immigrants from India. Migration from the Hills to India is also believed to be significant. Annual treks in search of seasonal employment, which for some may lead all the way to India, are also an important part of the coping strategy of Hill and Mountain people.  Table 3: Recorded and Projected Population Recorded/ Average Projected Annual Year Population Growth (%) 1. Census years 1911 5,638,749 - 1920 5,573,788 -0.1 1930 5,532,574 -0.1 1942 6,283,649 1.1 1961 9,412,996 2.1 1971 11,555,983 2.1 1981 15,833,104 2.7 1. 1985 (estimate) 16,687,124 2.6 1967 (estimate) 17,557,355 2.5 1989 (estimate) 18,437,621 2.6 liC9 (r.e.1iwn proj.) 18,900,000 2.6 2000 (medium proi.' 24,400,000 2.6 2010 (medium proj.) 31,200,000 2.4 Source: Central 'ureau of Statistics; IDA estimates Land Use 1.18 The resource base for crop production is severely limited by the nature of the terrain. Only about 202 of the total land area is cultivated, without any scope for significant expansion. The remainder consists of forest land (in large part severely deteriorated) accounting for 38% of total area, grazing land (12Z), shrubs (52), and barren land, settlements and water bodies (Table 4). 1.19 The production of foodgrains dominates the crop sector. Paddy, maize, wheat and millet are the principal cereal crops; together, they account for nearly 85Z of _he gross cropped area. Next in importance are non-cereal grains, notably pulses (esp. lentils and peas) and oilLeeds (mustard, rape and linseed) which are the principal category of cash crops. Potatoes are the principal non-grain food crop. Sugarcane, jute, cotton, tea, and fruits and vegetables are the lesser cash crops. The production of cash crops has grown relatively faster than that of food crops during the past decade. Nepal has a comparative advantage in these as evidenced by a ready market, particularly across the border. With the exception of tea and some fruits, cash crops are produced in the Terai. Over 75Z of the rice is produced in the Terai, while about 70% of maize is grown in the Hills. The Terai's share of wheat production has increased over the past 15 years from 42% to over 60%. Millet and barley are mostly grown in the Hills.  - 8 - Table 4: Land Us. by Eeologieal Belt Land Use Mountains ; l ls Tersi Total Category ( 00E22- 2mTh) m v00h) ( ha) Cultivated 252.2 4.0 1461.3 23.4 1254.6 U.6 29N8.1 20.1 Grazing 1394.1 22.1 511.5 4.9 ; .7. 2.4 1767.1 11.9 Forest a/ 1786.7 2U.S 8238.0 51.2 691.3 29.0 5616.6 36.1 Shrub 247.9 5.9 440.6 7.0 1.4 0.1 669.9 4.7 Non-Cultivated Inclusions b/ 149.1 2.4 720.7 11.4 117.1 S.b 996.9 6.7 Othere ./ 2473.6 59.3 134.9 2.1 116.1 C.C 2729.6 16..; Total 6306.6 100.0 6329.6 100.0 2110.2 100.0 14743.4 100.0 a/ Land which is at least 10X covered by trese b Arse, Individually too smal l to be sapped but enclosed by cultivated land c/ barren lamd, *ttlemnts, watir cowusas 1.20 Officia: statistiLS iDdicate that the gross cropped area has increased by some 13% over the past 15 years, mostly by the widespread introduction of wheat in thie crrppivg patte7-r, 1:cth ir the Terai a.ad in the HilIS Estimates of croppiing intensities differ, with the Natioral Sample CensLus of Agriculture showing a decline from 166 in 1972 to 135 in 1982 (less likely) and the Land Resources Mapping Project (1985) indicating a range of 171-181 (more likely) for the average national cropping intensity. Hill agriculture is more intensive than Terai agriculture, and small farms more than large farms. There remains scope for further increases in average cropping intensity, particularly in the Terai and on the nearly 1 million ha that benefit from some kind of irrigation. Farming in the Terai is vastly different from that in the Hills and this difference may be best illustrated by two farmer profiles (see Box 1). 1.21 About 5.6 million ha, oL 38Z of Nepal, is under forest with at least 10% crown cover. Forests contribute lOZ of agricultural GDP and supply some 902 of household energy needs, and particularly in the Hills, they provide about 85Z of livestock fodder which in turn assures the supply of animal manure which is the basic source of fertilizer for Hill farming. Historically, government policies encouraged deforestation in the Hills, from the mid-18th century till the 1950s, while in the Terai forest cover was being favored. By 1930, however, Hill forest cover had declined to a critical level which endangered the sustainability of subsistence farming, thus leading to a virtual slowdown of further deforestation. Meanwhile, colonization of the Terai which had become possible because of the control of malaria led to massive losses of forest cover. Over the period 1964-77, the Hills suffered a loss in forest cover of only 1.52 (0.11X p.a.) while the Terai and Siwalik forest was reduced by 27.5Z (10.2% p.a.). More serious than deforestation as such is forest deterioration. As much as 68Z of the forest and grazing land in the Hills, and 182 of that in the Terai can now be classified as degraded. In the Hills, the primary cause of forest crown cover is the relentless pressure by humans and animals for subsistence. In the Terai, degradation is mostly the result of easy access for commercial timber extraction.  -9- BOX 1 Two Profil.s: A Torsi Farmer *nd a hTII Farmer The typical Tersi formr cultivates two to three he of which the alier part Is rented from larger londowners on a SOX cropeharing basis. He owns two bul locks, an unproductive tow and perhaps an additional milking buffalo. Taking the Eastern Toral an an example, rainied rice Is grown on the former'. own 1.6 ha and jute on the one ha of rented land In the monsoon seaon. In the winter seacon, wheat or misze Is grown along with possibly so" olls de or pule". The form fmily of six provides labor for about 60 of the farm .ork and hired labor Is engaged for planting and harvesting. The former borrows for his farm credit needs fro the local sajha (cooperative) or directly from the branch office of the Agricultural Development Bank (ADEN). His personal credit needs are met by borrowing from relative. or oneylenders. Purchased Inputs are modest; chemical fertilIzer Io used on the cash crops only, and *ven then at low levela becaus de liverIe are often insufficient or late. Improved sed Is usd primarily for wheat and also Increosingly for rice. His main source of cash Income Is from the s le of about 200 kg of surplus rice, most of his wheat and Jute. The latter crop accounts only for about a fifth of his net incom since It is grown on rented land and 50 of the crop's gross revenue is shared but not the costs. Although milk yields are very low, due to poor feed and Animal d4sease, *lk is the main source of animal protein. Apart from payment in kln-i for work orn other foras, family ncome may sometmes be Supplemented by a s*ael butinscu or a famiy membper who worka in Kachmandu. A typical Hil! farmer lives with his family of six in a hoalot (of sbovt ao ar, household*) an terraced clooes in the iowor Hills. He is usually the owner-operator. farming about 0.6 ha frzgmented in 7-P plotn located at d:ff*"ent elevations and at le&st half an hour walk *part from one another. He ownus smp* hoandtools, one draft hu' lock, one milking cow or buffalo and an old unproductive tow. Tho part of the milk not directly consumed by the farm household will be converted to ghoo. After foaily consumption, about 10 kg are left for eventual usls. Women play a key role in field work and participate activoly in agricultural decision making. In addition to this and the inevitable housohold chores, they and the children spend much time searching for gross and other fodder to be cut for foeding the milk and draft animals. If the family is fortunate, it may havo access 'o forest pastures nearby whore they can lot their animls graze or where they can lop young growth off the troes for fodder, but these pastures are invariably overgrazed. More comonly, the women must walk for hours every day, paoticulorly in winter, in search for fodder and fuelwood. Maize and upland rice are the main crops grown in the oonsoon soeson. Intensive farming is practiced, particularly in manure application and handwoeding. Even with this the former produces only the equivalent of 700 kg of maize (compared to the family's annual maize equivalent need of 1,000 kg) from his *sml farm in a norml yoor. He is thereforo forced to expand to Steeper areas of morginal fertility in an attempt to increase production. Besides manuro, littlef frtilizer or posticides are applied. Becouse of low cash inputs, littlo credit isused. Generally a Hill farm is considered not creditworthy for crop loans, even by private moneylenders. When he must borrow, generally for non-farming purposes, he borrows from relatives, or failing this, from moneylenders at interest rates of l5-1601 per annum. If weather and soed availability permit, a winter crop of wheat, millet or potato may be planted in September. Since the form operations generate little marketable surplus and foodgrains produced do not cover tha family's needeothe formr and, usually, his oldest son leave hom in October for about four months to find supplementary incom. During this period the wife must, in addition to her traditional roles, take on tho responsibility for forming decisions. In a drought year, the whole family my bo obliged to leave. Former and son tako along what little farm surpluses they have (mainly ghe-,and Some potatoes or wheat, spiccs and fruit) and some livestock (for which there is not enough fodder in winter) which they will s el on tholr journey. They first try to find casual jobs in the larger valleys, failing which they trek for about a week to the Torsi or even to India, where the opportunities of finding work are groater. If they are lucky, they may be employed as porters en route. On the average they may find employment for about 40 days, before they return for tho monsoon season planting, which affords them to buy slt, kerosene, clothing and other necessities for the next year. Additional income may come from pensions or remittances from family members in Curkho regiments of the British and India" armies.  - 10 - Effects of the Pressure on Land Use 1.22 Continued population pressure on an already intensively-used land resource base has increased the man-land ratio in the Hills to a precarious level. In many areas the population density per cultivated hectare exceeds 10, thus presenting a state where the average farm has shrunk to the point where it can no longer support a typical family at subsistence level. Farmers have coped with this condition primarily in two ways: by seeking to expand their farms onto marginal cultivable land, and by searching for off-farm employment. Even with continuing significant emigration, the population of the Hills and Mountains will probably grow at an annual rate of 1.5Z (i.e. an additional 2.5 million) between 1981 and 2001. To ensure that this incremental population receives the current per capita calorie supply, which by all standards is inadequate, would require an increase in food production cf 23Z, i.e. twice the rate achieved over the previous 20-year period and with virtually no sc%pe ~;or further expans