A national transport system for Nepal : including an investment program for the third plan, 1965-66 / 1969-70 (Vol. 2 of 3) : Supporting technical papers and discussions

A NATIONAL TRANSPORT SYSTEM FOR NEPAL Including an Investment Program for the Third Plan 1965/66-1969/70 (In three volumes) U N N-38 VOL. 2 VOLUME II SUPPORTING TECHNICAL PAPERS AND DISCUSSIONS Used as Background In Preparing the Transport Plan Report of a Mission organized by the INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT at the request of THE GOVERNMENT OF NEPAL Washington, D. C. June 1965  CURRENCY EQUIVALENTS U.S. $1 NRs 7.619 NRs 1 = U.S. $. 131Z5  TABLE CF CONTENTS Volume II. Supporting TechnJical-lPapers and Discussions Page No. Chapter 4 Background and Trends in the Economy 82 A. Geographical Features and Climate 82 B. Population 83 C. National Income 83 D. Agriculture 85 Present Pattern 85 Future Potentials 86 E. Forestry 92 F. Industry 95 G. Power 96 H. Tourism 97 I. Minerals 98 J. Direction of Trade and Location of Markets 99 K. Internal and External Finance 101 Public Finance 101 External Trade and Payments 102 External Reserves and Debt Position 103 Chapter 5 A Summary of Economic Activity, Transport Needs and Transport Plans by Geographical- Engineering Areas 105 A. The Ilam Area 105 Economic Features 105 Communications 105 Objectives 107 Master Plan 107 Five-Year Plan 107 B. The Arun-Tamar Basins 108 Economic Features 108 Communications 109 Objectives 109 Master Plan 109 Five-Year Plan 110 C. The Sun Kosi Basin 110 Economic Features 110 Communications ill Objectives 111 Master Plan 111 Five-Year Plan 112  Page No. D. The Far Eastern Terai 112 Economic Features 112 Communications 113 Objectives 114 Master Plan 114 Five-Year Plan 115 E. The Central Network 116 Economic Features 116 Communications 118 Objectives 119 Master Plan 119 Five-Year Plan 120 F. The Eastern Terai 121 Economic Features 121 Communications 122 Objectives 123 Master Plan 123 Five-Year Plan 124 G. The Gandak Area 125 Economic Features 125 Communications 126 Master Plan 127 Five-Year Plan 128 H. The Western Terai 128 Economic Features 128 Cormmunications 130 Objectives 131 Master Plan 131 Five-Year Plan 131 I. The Piuthan-Sallyan Area 132 Economic Features 132 Communications 134 Objectives 134 Master Plan 135 Five-Year Plan 135 J. The Karnali Area 135 Economic Features 135 Communications 137 Objectives 137 Master Plan 138 Five-Year Plan 138 K. The Dandeldhura-Doti Area 138 Economic Features 138 Communications 140 Objectives 140 Master Plan 141 Five-Year Plan 141  Page No. L. The Far Western Terai 141 Econoriic Features 141 Communications 143 Objectives 144 Master Plan 144 Five-Year Plan 145 Chapter 6 Technical and Economic Paers in of Road Plan 146 A. Definitions 146 B. Various Types and Construction Cost of Roads to be Built in Nepal 146 General 146 Specific 147 (a) Low Terai Area 148 (b) Foothill Area 149 (c) Midd'Le Terai Area 151 (d) Kathmandu Valley 151 (e) Hill Area 152 C. Cost of Road Maintenance 154 Unit Cost of Road Maintenance 154 Maintenance Cost of the National Highway System during and after the Third Plan 154 D. The Kinds and Costs of Road Studies 156 Feasibility Studies 156 Engineering Design and Tender Documents 156 E. Detailed Program for Feasibility Studies and Construction Projects within the Third Plan Period 157 F. Consequences of Construction of Highways on the Total Cost of Transportation 159 Roads in the Terai 159 Roads in the Hills 161 (a) Dhankuta to the Dharan Road 161 (b) Narayanghat-Bandipur-Cheppeghat Road 162 (c) Bhairawa to Pokhara 163 (d) Krishnagar-Piuthar. Road 164 G. Impact of Road Construction on the Budget and Foreign Exchange Situation 165 Consequence on the Budget 165 Consequence on the Foreign Exchange Position 166  - iv - Page No. Chapter 7 Proposals for Strengthlening of the Road Department 167 A. General Organization of the Proposed Road Authority 167 B. Investment Required for the Strengthening of the Road Department 173 C. Annual Operating Costs of Road. Authority 176 Chapter 8 Technical and Economic Papers in Support of the Railway Plan 177 The Birganj.-Hitaura Corridor 178 The Basic Problem 179 Chapter 9 Technical Papers in Support of the Air Tralsport Plan 188 A. Airports 188 B. Airport Design Considerations 189 C. A Master Plan for Airports 191 Bhairawa 191 Bhadrapur 192 Bharatpur 192 Biratnagar 193 Dang 195 Dhangarhi 196 Gurkha 196 Janakpur 197 Kathmandu (Gaucher Field) 197 Nepalganj 199 Pokhara 201 Silgarhi-Doti 201 Simra 201 Tumlingtar 202 D. Navigation Aids 204 E. Mleteorology 205 F. Summary 207 Chapter 10 Details of the Strengthening of the Organization of Royal Nepal Air Lines 208 A. Organization 208 B. Flight Operations 212 Flight Staff 213  Page No. C. RNAC Operating Costs 214 D. Aircraft Maintenance 218 E. Traffic and Sales 220 Routes 223 Scheduling 225 Reservations and Space Control 227 Fares and Charges 228 Advertising Promotion 229 F. Financial Needs and Accounting Practices 231 Financial Needs 231 Accounting Practices 235 G. Aircraft Selection 236  Chapter 4 BACKGROUND AND TRENDS IN THE ECONOMY A. Geographical Features and Climate 1. Taking all factors into consideration it is apparent that nature has interposed some major obstacles to the provision of an adequate trans- portation network in Nepal. 2. Some of the geographical and climatic features which have impli- cations for the development of transport in Nepal are the following: Nepal is a land-locked country, with some of the most rugged and difficult mountainous terrain in the world. Topographically the country divides into three principal river basins: 1) the Kosi, 2) the Gandak, and 3) the Karnali. There are also a few lesser basins. Generally these basins run north and south. Crossing these basins are five main longitudinal belts: 1) the "Terai," which is low, flat, fertile land adjacent to the border of India; 2) the forested foothills ranging from the Terai to about 1,000 ft. eleva- tion; 3) the rugged Siwalik and Mahabarat mountain ranges, rising up to 10,000 ft., referred to as "the Hills" between which are some valleys, called the "Inner Terai"; 4) the mountainous area between the Mahabarat range and the Himalayas which is formed by the valleys of the great Himalayan rivers and their tributaries which are often narrow with steep slopes; and 5) the main Himalayan mountain range, rising to 29,000 ft. In the Terai, due to the low slope of the land and heavy water flow during the wet season, some rivers have a tendency to shift their beds. There is wide variation in water depth during flood season. The climate ranges from the sub-tropical in the Terai to arctic in the Himalayas. More than 80 per cent of the rainfall occurs during the monsoon season (see Table A-4). The monsoon season extends for a four-month period from June to early October and is a dominating factor from the point of view of air and road transportation.  - 83 - B. Population 3. A census in 1961 estimated total population at 9.4 million (Table A-1). The population is almost entirely rural, with only 3 per cent living in urban areas (Table A-2). 4. Principal population concentrations are shown by the shaded areas on Map No. 3 which has been abstracted from information on the Indian survey maps. Some 59 per cent of the population lives in the Hills with 27 per cent of the cultivated land, 15 per cent lives in the Kathmandu Valley with 2 per cent of the cultivated land, and 36 per cent lives in the Terai with 62 per cent of the cultivated land. 5. These concentrations reflect historic conditions and will change gradually with the developments in malaria eradication, industrializa- tion, and irrigation. Outside of Kathmandu itself, there are no major cities, though there are several smaller urban centers located in the Terai along the Indian border, and a few townships are beginning to emerge in the foothills and hill areas, where there is some concentration of new economic activity. 6. The 1961 census put the current rate of population growth at 1.6 per cent per annum. For the purpose of this report the rate of population growth 1965-69 is assumed to be 1.9 per cent, giving a 1970 population of 10.9 million, and a 2.2 per cent rate of growth from 1970-74 giving a 1975 population of 12.2 million (see Table A-3). These assumptions give a total growth of 1 million in the span of the Second Plan period, and 1.3 million in the subsequent five-year period. It is assumed that a large part of the 1965-69 population increase will be absorbed in the rural areas. C. National Income 7. A very tentative official estimate placed the 1961/62 Gross Do- mestic Product (based on market prices) at NRs 3,680 million, giving a per capita income of NRs 390.4 or U.S.$51.37 (see Table B-1). The agri- cultural and forestry sectors were estimated to have contributed 63.5 per cent of the total product. Observation and comparison with neighbor- ing countries based on personal judgments indicate that even at the date of the estimate the absolute level of income may have been higher than implied by these figures. Housing standards in Nepal are generaIly better than in neighboring countries and the abject misery evident in countries with similar income levels is largely absent. It seems probable that the method of computation used, coupled with incomplete data, might have re- sulted in too low a figure for the incomes, particularly by imputing too low a value for output in the subsistence sector.  - 84 - 8e There is no estimate for GNP for a more recent year. It is sig- nificant that the available indirect indicators imply some expansion in the economy during the last three years. It appears there may have been some increase in productivity in some of the older areas under cultiva- tion. New areas of development are visible in Biratnagar, the Chatra- Kosi project area, the Birganj-Hitaura corridor, the Rapti Valley, the Kathmandu Valley, and in several towns such as Janakpur, Bhairawa, Pokhara, and Nepalganj. In these developing areas there has been some expansion of industrial and agricultural output, though the full impact of recent investment is yet to come. Building construction has increased. Schooling and medical facilities have expanded. Further, the people are increasingly availing themselves of these facilities (and paying part of the cost) while at the same time paying higher taxes, and making voluntary contributions for Panchayat development works. 9. There also are indications of expansion in the foreign trade and government sectors of the economy (see Tables B-2 to B-5, and B-ll to B-16). There has been a marked increase in the availability of imported textiles and other consumer goods. The actual level of exports appears substantially higher than recorded information indicates (perhaps 30 per cent or more over recorded levels) and is increasing. The Government's development expenditures, supported to a very large extent by foreign grant aid, have increased considerably. It is also significant that during this period, while national development efforts have been expanding, the reserves of the Rastra Bank have been rising as have savings deposits in commercial banks (Table B-7). 10. There are no adequate price deflators to adjust the income figures, even if reliable income estimates were available. After a period of comparative price stability, in the first months of the fiscal year 1963/64, compared with the corresponding period of 1962/63, there were marked increases in prices in many parts of the country (Tables B-9 and B-10). The largest price increases were in domestic food grains. A measure of continuing inflation can be traced to the effect of increased development expenditures, and effects of import price increases. There has, however, been a levelling off of general prices in the latter part of 1964 due to steps being taken to deal with some of the causes of the in- flationary pressure, including attempts to increase domestic food produc- tion and ease transport and distribution bottlenecks. The situation needsto be watched carefully and perhaps some monetary correctives may also have to be applied. 11. On the basis of observable evidence, there is need for a careful reappraisal of the national income estimates. This will provide a more realistic measure of present economic activity and performance upon which to base more precise projections for the future.  - 85 - D. Agriculture Present Pattern 12. Less than one-eighth of Nepal's total land area, or less than 2.0 million hectares, is under cultivation (Table C-1). A very crude estimate indicates that there is a land reserve for cultivation equalling about 8 per cent of the presently cultivated land and mainly located in the Eastern and Far Western Terai. 13. Grain is the principal crop produced in Nepal. More than 60 per cent of the cultivated land is under paddy, primarily in the Terai, and 24 per cent under maize, mainly in the Hills (Table C-2). It is estimated that wheat accounts for about 7 per cent and millet for about 6 per cent of the cultivated land. Wheat is a major crop in the Western Terai. Barley and buckwheat represent traditional crops at higher elevations. Substantial quantities of paddy and some surplus maize are sold by the cultivators in the Terai. Only small amounts of the food grain produced in the Hills are marketed. 1h. Oilseeds with an estimated area of 90,000 hectares are important as a commercial crop for the Inner Terai and to some extent for the Terai. Jute (27,000 hectares), sugar cane (7,000 hectares) and tobacco (about 2,000 hectares) are grown as cash crops in the Terai. In the Hills sugar cane is cultivated for local consumption as ghur. It is estimated that about 15,000 tons of jute are processed in Nepalese jute mills and 14,000 tons exported for processing in India. The major part of sugar cane is presently transported to Indian sugar mills located along the border. Until the completion of the Janakpur factory tobacco was sold by the cultivators to Indian factories (Table C-10). 15. Potatoes are grown in most of the regions for local consumption. On a commercial basis potatoes are cultivated in some areas of the Eastern Hills and in the Kathmandu Valley. It is estimated that about 20,000 tons are exported to India annually. Vegetables are cultivated on a larger scale for marketing in the Kathmandu Valley. In some areas of the Hills citrus fruits are produced, and about 800 tons exported to India annually. A few tea plantations exist in the easternmost part of Nepal. Many species of valuable herbs are collected in the mountain forests. Their annual export value is estimated at NRs 10 million. 16. Cattle are raised in all parts of the country (about 1.3 million in 1962). In the Terai cattle raising contributes little to agricultural production; the number of cattle kept is often excessively high in rela- tion to the fodder available. In the higher elevations where livestock raising is a main objective, more favorable fodder conditions prevail and milk production is of importance.  - 86 - 17. The main livestock product is ghee (clarified butter) ranking second to food grains in the export value of agricultural products. It is estimated that about 3,000 tons of ghee are annually exported to India. A small-scale cheese-producing project has been initiated in some valleys yielding about 15 tons in 1964 out of which 40 per cent is exported to India. The only existing dairy located in Kathmandu was supplied with about 370,000 kg of milk in 1963/64 (Table C-9). 18. The sheep population of Nepal is estimated at about 1.8 million and is mainly concentrated in the mountainous regions. Sheep, wool, woolen products, goats, yak products and horses are marketed by the people of the mountains. The poultry industry on a commercial basis is at present con- fined to the Kathmandu Valley. 19. Most of the cultivated land is customarily tilled on a family basis. The average size of the family holdings in the Hills is very small ranging between 0.4 and 0.6 hectares. In the Terai the farms are larger and the size of the holdings generally increases from east to west (Table C-ll). Most of the cultivators are tenants. While tenancy appears to be pre- dominant in the Terai, the proportion of ownership in the Hills is higher. It is common practice for the tenant and the landlord to share the crop on a fifty-fifty basis. 20. In the Hills subsistence farming is predominant. In the Terai the surplus in food grains and mustard is substantial. On the whole, Nepal has at present a surplus in food grains. Production of paddy and maize was estimated at 2.9 million tons in 1961/62 (Table C-6). Including wheat and millet total food grain production is reported to be in the order of 3.2 million tons. It is assumed that approximately 2.0 million tons were available in edible form in 1961/62. Total domestic demand has been cal- culated at about 1.75 million tons. This leaves an exportable surplus of about 250,000 tons. Total export of food grain in 1960/61 was approxi- mately 175,000 tons. 21. However, there are major dislocations as to supply and demand. Periods of shortage between the harvest of the various crops occur in the Hills. At the same time substantial amounts of food grain are moved to India from the Terai. For providing the people of Nepal with a uniform diet it has been calculated that about 360,000 tons of food grain would have to be moved from surplus to deficit areas. Some food grains move northward from the Terai and the Hills into Tibet (Mainland China) despite shortages in the Hills. Future Potentials 22. The greatest potential for future increases in agricultural produc- tion are in the Terai and investments made in this region will yield fast- est and highest benefits. The Eastern Terai and the Western Terai (Lumbini  - 87 - Zone) appear to offer the best possibilities for immediate development, and the Far Western Terai, with its difficualt problems of access is more suitable for later development. 23. Within the Terai, production increases can be achieved both by in- creasing yields of land now under cultivation and by cultivating land which is at present under low-value forests. Means for increasing the yields are irrigation, double cropping, application of improved seed and ferti- lizer. Furthermore, higher returns per land unit can be obtained by in- tensified cropping and introducing commercial crops. 24. The Agricultural Census 1960/61 shows that about one-third of the cultivated land in the Terai is irrigated in some manner (o04 million hectares). Irrigation projects constructed for permanent use exist on about 20,000 hectares and most of these are seasonal and not well main- tained, It can be assumed that Nepal will have additional irrigation facilities for about 100,000 hectares at the end of the next Five-Year Plan (Table C-16). This will result in an additional annual food grain production of about 65,ooo tons (including 15 per cent rabi crop on the irrigated area) provided efficient operation and sound maintenance of the projects can be assured. For the subsequent planning period it can be expected that it will be possible to accelerate the pace of construction of large-scale and perennial irrigation projects. A major precondition for carrying out irrigation projects is provision of transport facilities to Indian railway heads for getting the needed material to the project areas. The expected increment in agricultural produce will have either to be moved to the deficit areas in the Hills or to be exported. 25. The newly initiated wheat campaign is estimated to yield an annual increase of about 4,0oo tons at the end of the next Plan period. It is not likely to have substantial impact on transport needs since the addi- tional wheat will be consumed locaIly. Application of improved seed of food grain has shown yield increases of 20 to 25 per cent in field trials. It can be assumed that production of improved seed estimated at 300 tons at present will be tripled until the end of the next Five-Year Plan re- sulting in an additional food grain production of about 3,500 tons. A major part of this quantity is likely to be surplus which will have to be shipped. 26. Fertilizer supply is limited under the present Indian quota (plus some quantities from USSR). About 3,000 tons of ammonium sulphate equiva- lent to 600 tons pure nitrogen are shipped to Nepal. The projected area of commercial crops will require about five times of this quantity. It cannot be expected therefore that fertilizer will be available for food grain although field trials have resulted in yield increases of 20 to 25 per cent. Fertilizer application on a large scale in the Terai depends, apart from supply, on the provision of transport facilities from Indian railway heads to the cultivators.  - 88 - 27. A major expansion in sugar mills is just now being completed which is increasing the country's daily crushing capacity from 200 tons to about 2,000 tons (Table C-10). Further extension by about 1,750 tons daily crushing capacity is being contemplated. This development creates urgent transport needs for moving the substantial quantities of sugar cane to the factories (about 3,700 tons per day) and the sugar to the consumer places (about 370 tons per day). 28. There are plans for expanding the jute processing capacity in Nepal. As 50 per cent of the jute produced is exported at present in unprocessed form to India the necessary jute could probably be supplied without ex- tending the area under cultivation. This shift in development is not likely to have major consequences on transport needs unless the existing potential for increasing jute production in the easternmost Terai is realized. 29. The opening of a large cigarette factory at Janakpur has created a new market for locally produced tobacco. It is estimated that a major part of the raw material needed will have to be imported from India at the initial stage of operation. 30. The Government plans to settle about 2,500 families in the Terai and Inner Terai within the next Plan period, which will result in the cul- tivation of approximately 61,500 hectares of new land, with an estimated additional food grain and mustard production of about 8,500 tons and 1,000 tons respectively. 31. In the Hill area the potentials for increasing agricultural produc- tion are much more limited. Due to the high population concentration in this region almost all land capable of cultivation is tilled. The only opportunity for increasing the cultivated land area is by cutting into standing forests, thereby aggravating erosion. 32. The most vital problem confronting the Hills is progressive de- forestation caused by overfelling due to increasing demand for cultivated land and fuel wood and by uncontrolled forest grazing because of the over- population of cattle. Devastation is aggravated by the widespread practice of forest burning and shifting cultivation. All this leads to erosion resulting in reduced yields and land losses by landslides. Thereby the food situation of the most densely populated area of Nepal becomes even more severe. This calls for proper soil conservation measures which cannot be carried out without provision of adequate transport facilities. 33. Experience proves that there is a potential for increasing yields of the main crops in the Hills. This can be accomplished by means of im- proved seed, use of minor irrigation projects, extension of double cropping and application of fertilizer. However, the means for translating these findings into widespread practice are not yet well in hand. The rough  - 89 - terrain and poor transport facilities together with high transport costs restrict improved seed and fertilizer application and the movement of material for irrigation works. The inaccessibility of the region also limits agricultural extension work. 34. It can be expected that no major changes in the cropping pattern of the Hill area will take place in the near future. The increasing population pressure combined with limited possibilities of obtaining earnings outside agriculture and lack of transportation facilities, will result in a continued maximum effort to produce as much food grain as possible for subsistence. The plans of the Government to intensify agri- culture in the Hills, by extending dairying and fruit growing, will there- fore be confined to limited areas. 35. Some areas in the Hills offer favorable possibilities for extending the dairy industry. Progress has already been made in establishing the dairy enterprise in a few valleys of the Hills. The demand for dairy products on the domestic markcet and outside Nepal is high. An increase in cheese production from 15 tons at present to about 25 tons at the end of the next Five-Year Plan period is considered possible. Transport again presents a major obstacle for moving the cheese to Kathmandu and for bring- ing farm supplies into the pasture areas. 36. Physical conditions for the extension of potato cultivation, particu- larly for zeed purposes, appear also to be very favorable in some Hill areas. If adequatLe transport facilities can be provided for securing regular food grain supply at r,3asonable cost to the potato producing areas and for marketing the potatoes, a considerable expansion of potato production can be anticipated. It is estimated that the present annual export of about 20,000 tons can be increased to 25,000 tons by 1969/70. 37. There are also opportunities to grow more citrus and deciduous fruits of -iLrrovsE: quality in the Hills. The demand on the lcc>al market and in India is high. The successful development of such a soheme depends equally uporn the establishment of horticultural farms for experimentation, the production of seed stock, a sustained agricultural extension service program, and the provision of reasonably fast, low-cost transport. A rapidly inc.r.sasing fruit production is not to be expected. 38. It is asslmed that most of the increases in agricultvral production which can be achieved in the Hills will be consumed locally by the steadily growing population. Exceptions will be potatoes, fruits, cheese and ghee which will be maintained as important export products providing the people of the Hills with some income for meeting their essential needs. 39. There are several other' preconditions which apply to all of Nepal and would contribute substantially to increasing agricultural production and to improving the quality of the produce marketed. Establishing  - 90 - organized markets, combined with provision of adequate storage facilities and setting up of quality standards will result in' a) higher producer prices, giving the cultivators increased incentive; b) reducing the ex- cessively high profits of the middlemen in trade; c) decreasing the ex- traordinarily high seasonal price fluctuations; d) providing a more con- tinuous and stable supply for the domestic market; and e) taking advantage of price margins on the export market. Organization of the markets de- pends primarily on provision of transport facilities for moving large quantities of the same commodity to well-established markets and from there to consumer places. Also construction of warehouses will be facilitated by adequate transport means. In organizing the foodgrains market the position of the landlords will have to be taken into considera- tion as they presently are a principal source of the surplus which is readily available for export or sale elsewhere. 40. In particular, it is expected that establishment of an organized market for ghee, combined with setting up refineries, has great potential for yielding high and fast returns on relatively low investments. Thereby the quality of Nepalese ghee (presently very low) could be considerably improved resulting in increased foreign exchange earnings. The demand for good quality ghee in India is very high. Ghee market places require both accessibility to the Hill area and adequate communications to India. 41. Appropriate marketing procedures will assist in improving the fresh milk supply in Kathmandu Valley where most of the milk is still sold, unprocessed and diluted, directly from producer to consumer. Ex- tension of the road network in the Valley will open up new production areas, and improvement of existing roads will accelerate transport of this perishable product. 42. Relatively small investments are needed to set up an organized market for herbs, including establishment of some central collection points and extraction laboratories which have to be provided with transport fa- cilities to the export market. It is estimated that the income of the Hill people, from collecting herbs, could be raised by NRs 10 million (i.e., by 100 per cent) within a short period. 43. Establishment of agricultural processing industries is also a means for increasing output by volume and value. The needed extension of processing capacity of rice and oil mills and the modernization of the existing obsolete mills will require transport facilities both for shipping construction material and for supplying the mills with raw material. 44. Nepal is in a very favorable position inasmuch as it can dispose of almost all its surplus agricultural produce on the Indian market. Particularly the State of West Bengal with its vast Calcutta market offers good possibilities for export. It is assumed that for the fore-  - 91 - seeable future any surplus quantities of paddy, rice, oilseeds and oil, potatoes, herbs, fruit, ghee, cheese and hides can be marketed in one of the adjacent Indian states at reasonable prices provided that good quality of the products can be secured. Taking into account that with the general economic development within Nepal the domestic demand will grow, no diffi- culties in marketing of the main agricultural products are to be expected. 45. Lack of adequate credit facilities presents a main obstacle to in- creasing agricultural production in Nepal. Local merchants and landlords are the only source of credit for the majority of the cultivators. Most of them are heavily indebted and have to pay exorbitant interest rates. With the establishment of the Cooperative Bank in 1963 a promising co- operative credit program has been initiated on a pilot basis. It is geared to provide the cultivators with adequate credit thereby making them independent from the traditional money-lenders and giving them in- centive to make investments for purposes which will increase agricultural production. It is intended to extend this project on the basis of super- vised farm credit. The success of this scheme will depend on the avail- ability of well-trained staff, sound administration, efficient organiza- tion and on the accessibility of the areas involved in this program. 46. Implementation of land reform has been actively started on a pilot basis in 1963 after the Agricultural Reorganization Act was enforced. Land reform under the new Land Reform Act of 1964 is planned to be extended to 16 districts and the Government apparently intends to make major efforts for carrying out this program. One of the crucial problems for implement- ing land reform in Nepal is the establishment of an efficient organization staffed with competent personnel. The efficiency of this program will also depend on the transport facilities in the areas where land reform is to be carried out. 47. The Agricultural Exrtension Service is still in its initial stage and the staff lacks experience, particularly in preparation and operation of projects which appear to be too numerous and dispersed all over the country. The efficiency of the present staff is very much restricted by lack of transport facilities. Higher benefits will be obtained from ex- tension work if Panchayat activities can be directly harnessed for this purpose. 48. It is estimated that with the expected population growth of 12.2 million in 1975 the theoretical calculated domestic food grain demand will increase from about 1.75 million tons in 1961/62 to 2.45 million tons in 1975/76, i.e., by 40 per cent. To do no more than maintain the recorded volume of exports in 1961/62 it will be necessary for food grain production in 1975/76 to increase by about 50 per cent or by 3.57 per cent annually. The Governmentts target for the next Plan period is to increase food grain production by 15 per cent and production of commercial crops by 20 per cent. It is obvious that these increases cannot be obtained by small-scale  - 92 - projects, such as the present wheat campaign, or by the simple cultivation of several thousands of hectares of new land. Meeting the food require- ments of Nepal in about 10 years will require major production increases in major crops such as paddy and maize, where even a small yield increase per land unit will result in a substantial increment of total output. All efforts will be needed to enable a major technical breakthrough for in- creasing agricultural production in the future, unless the pace of Nepal's economic development is going to be reduced. Adequate transport facilities will be indispensable to enable construction of large-scale irrigation schemes, to move substantial quantities of seed and fertilizer and to facilitate an efficient extension work. 49. The Mission's assessment of the agricultural sector in Nepal is that there are substantial opportunities for growth in output. A techno- logical breakthrough appears to have been made and research and field trials give an indication of what can be done. What is called for is a more direct attack on the problems of agriculture by the planning agency and the formulation of a sectoral plan which sets the limits within which the Central Government, the Panchayats and the individual farmers can work. E. Forestry 50. About one-third of Nepal's total area is under forest, i.e., 4.6 million hectares. In spite of overfelling and poor management, this represents one of the country's most valuable resources. Being mainly government-owned it also is a major source of potential revenue. The distribution of the forests over the regions of the country is estimated to be about as follows (million hectares): Terai and "foothills"(below 1,000 feet) 1,295 Siwaliks and lower valleys of Mahabharat range 777 (up to 4,000 feet) "Hills" (up to 8,000 feet) 2,072 Himalayan forests (8,000 to 12,000 feet) 518 Total 4 51. The forests of the Terai and "foothills" are the main source of supply of hardwood, both for domestic use and for export. This area is relatively easily accessible and transportation problems are at a minimum. The Siwaliks forests are until now of limited productive value principally because of transport difficulties in the extremely rugged terrain. In the Hill zone the remaining forests are generally restricted to small, scattered patches except in the Far Western Hills where large areas are still under valuable forests. The Himalayan forest belt, predominantly consisting of coniferous species, has a high commercial potential once it can be reached by roads. These forests are widely being destroyed by shifting cultivation and uncontrolled cutting.  - 93 - 52. At present commercial felling, mainly consisting of sal wood, takes place predominantly in the Terai, Mid Inner Terai and in some parts of the "foothills." Because of lack of sawmills, the Government auctions a great portion of its timber on a stumpage basis (Table C_4). In areas where sawmills are available, the Government sells the timber on a con- tract basis. Allocations to sawmills were somewhat less than 1 million cu.ft. in 1963/64 (Table C-5). Revenues from timber sales to sawmills are estimated at about NRs 3.4 million in 1963/64. In addition, the Government is providing timber to development projects under construction. The value of these quantities in 1963/64 is estimated at NRs 5 million equivalent to about 1.0 million cu.ft. 53. Exports of forest products constitute an important source of Indian Rupees. Almost all timber sold at auctions is exported to India mostly in the form of round logs. Most of the timber sawn by mills located along the border goes directly into India. The domestic demand is generally confined to some urban areas. The sawmills of the TCN area supply the Kathmandu Valley with construction and furniture wood; reportedly 80 per cent of their output is transported into the Valley. 54. Supply of fuel wood is a crucial problem for the most densely popu- lated areas in the Hills, and is particularly serious in the Kathmandu Valley. The Government has recently organized supply and truck transport of firewood and charcoal from the TCN area to Kathmandu. The volume is rapidly increasing and amounted to about 46,ooo tons in 1963. 55. A Forest Inventory is being carried out with U.S. AID assistance, with completion scheduled for 1967/68. The results of the inventory will provide the necessary data: (i) for assessing the future possibilities for forest exploitation; (ii) for establishing a land utilization plan on the basis of which the areas in the Terai suitable for conversion into cultivated land can be determined; and (iii) for setting up management plans on the basis of a sustained yield principle (including planning forest roads). 56. Although supporting data about the potential for exploitation are still missing, there are indications that output of industrial timber can be increased substantially provided further encroachment of the forests is prevented and proper management carried out. At present this is im- peded by lack of transport facilities and experienced staff.  - 94 - 57. Until the results of the Forest Inventory are available, a sub- stantial increase in annual output of industrial wood is not projected. However, it is contemplated, and some plans are already at an advanced stage, to extend the capacity of the processing industry for forest products. The price margin between unsawn and sawn timber is high. An increase in the export portion of sawn timber will represent a consider- able increase in export value. 58. At present only nine sawmills exist in Nepal out of which one is of major importance (Table C-5). The present capacity is inadequate. Highest priority in developing the forest industry will be given to the TCN area. The annual capacity of the Hitaura sawmill, having been ex- panded by about 300 per cent to 240,000 cu.ft. from 1963 to 1964, is planned to be finally increased to 1 million cu.ft. Establishment of three or four additional sawmill centers with a capacity in the order of 700,000 cu.ft. each and setting up plywood factories with a total ca- pacity of about 1.5 million sq.ft. are under consideration for the near future. As a target for the next 8 to 10 years it is proposed that Nepal should have 7 forest industry units covering all of the Terai, the Mid- Inner Terai and the "foothill" forests. 59. The areas of the easterrmost Jhapa district, the Karnali River Basin and the westernmost district of Kanchanpur, including the rich forests of the M4ahakali River Valley appear to offer good prospects for exploitation in the near future. The location of the planned processing industries is projected to be close to Indian railway heads for facili- tating the export of forest products. 60. In the Indian states adjacent to Nepal there is a good market for forest products, both for round logs and sawn timber. The demand is in- creasing. Particularly sal wood, for the production of sleepers, can be disposed of in any quantity. It is assumed that consumption on the domestic market will also grow. 61. The hauling of round logs and sawn timber in the Terai to the Indian railway heads and sawmills is still mainly by bullock carts, though trucking is being gradually introduced. In the TCN area, trucks are used for hauling the logs to the Hitaura mill on the Rapti Valley Road and transporting the sawn timber to Kathmandu and Raxaul. A great portion of the firewood consumed in Kathmandu is moved by trucks over the Rajpath. However, firewood is still brought into the Kathmandu Valley by porters from distances of up to 10 to 12 miles. It is assumed that the Kodari Road will open up potential forest areas for exploitation. 62. Poor transport facilities are still a major obstacle to the ex- ploitation of the forests. Construction of suitable roads will con- tribute to extending considerably the radius of exploitation and enable improvement in forest management. However, it is not expected that the  - 95 - valuable forest belt along the Himalayan range can be tapped within the next Plan period due to the technical difficulties and high costs in- volved in constructing roads to these areas. 63. Proper forest access roads will result in substantial increases in the value of standing timber in the accessible areas of the southern forest belt by lowering transport costs. East-west communications in the Terai or along the "foothills" will facilitate the movement of timber to processing industries and Indian railway heads. The Government plans to supplement the east-west roads by low-cost forest access roads in a north- south direction. 64. Very little is known so far about the possibilities of using water transport for timber. It is assumed that some of the major rivers such as the Rapti in the Far Western Terai, the Karnali and the Mahakali offer good potential for floating. However, careful investigations in this respect are needed. 65. Reforestation and afforestation of the Hill region is another matter calling for urgent solution. At present the Government's target is con- fined to the reforestation of about 1,500 acres in the Kathmandu Valley annually with quick growing species. The projected pace is much too slow to have any effect on the rapidly progressing erosion and to meet the future demand in fuel wood of the densely populated areas. Lack of ex- perienced staff, efficient organization, funds and transport facilities hamper the implementation of a large-scale reforestation program at present. Roads opening up the Hill area will greatly contribute to facilitating an efficient reforestation program. F. Industry 66. Industrial production is a small but growing segment of economic activity in Nepal. Although there are many industries in the country (Table D-1) most of these are small localized operations representing an average investment of less than NRs 100,000 each. The majority are based on the processing of agricultural products. 67. The four major instances in which there are larger units operating are in sugar mills, jute mills, woolen mill, and a cigarette factory. Output during the past three years is given in Table D-2. 68. The principal sugar factories are in Biratnagar, 200 tons/day crushing capacity; Birganj, 1,000 tons/day crushing capacity; and Bhairawa (under construction), with 750 tons/day crushing capacity. A fourth plant, with a capacity of 750 tons/day is being considered for Nepalganj. 69. There are two jute mills, both in Biratnagar, one of 36 tons/day output capacity, and the other of 16 tons/day output capacity. Both mills have tentative plans for increasing their capacity.  - 96 - 70. There is one cigarette factory at Janakpur which has just started production. 71. Of thLe six larger factories listed, three are privately operated and tihree are operated by the Government. 72. There are nine operating sawmills, with five new mills plannied (Table 0-5). There are plans tio expand the capacity of the sawmill at Hitaura up to 300 per cent. There are long-range plans to increase total annual sawing capacity to 3.15 million cubic feet as compared with present capacity of about 90 million. There are also long-range plans for construction of two or more plywood factories in the Third Plan. 73. Over the whole industrial scene the larger number of enterprises are in the private rather than in the public sector. Although a large number of these are rice and oil mills, a new group of industries has come into production in recent years based on producing import-substitutes for domestic consumption. These include a textile mill, several match factor- ies, a nylon button factory, and a steel utensil factory. Others are under construction (see Table D-1). 74. A pattern of selective industrial development is taking place based on the limited capital and managerial resources available within the country. The main areas of concentration are: Biratnagar, the Birganj- Hitaura corridor, and the Kathmandu Valley. Smaller concentrations exist at Janakpur, Bhairawa and Nepalganj. With the gradual expansion in the functions of the Nepal Industrial Development Corporation, an expansion in the industrial base may be expected to occur slowly. The NIDC has hitherto been primarily screening applications and assisting existing enterprises. The number of new enterprises promoted is still small, with a concentration of investment in a few projects. The Government is exploring the possibility of promoting additional industrial enterprises, particularly cement and paper. The expectation that there would be a sizeable inflow of new private foreign capital and a repatriation of Nepalese capital invested abroad has not yet materialized, though small inflows of foreign capital have come in, primarily from India. Two pre- conditions for a further push in industrial development are availability of cheap power and trained managers and technicians. Until these pre- conditions are met, it will not be possible to force the pace of in- dustrial development. In any event, with so much else that needs to be done, it is the Mission's view that in the Government's Plan itself in- dustrial investment should be given a later priority. G. Power 75. Presently installed and operating capacity for electric power generation is of the order of 10,000 kw., all based on diesel generator plants. Kathmandu and Biratnagar have approximately 4,000 kw. each with  - 97 - the balance generated mainly in Hitaura, Birganj and Dharan. Capacity in Kathmandu will increase by another 6,800 kw. during 1965. 76. In the coming Five-Year Plan there should be increases in power availability, principally from the following new hydroelectric projects now under construction: Trisuli Project, 1st stage (1966/67) 12,000 kw. Panauti Project, (1965) 2,400 kw. Kosi Project, (1966) 1st stage 4,000 kw. Kosi Project, (1969) 2nd stage 6,000 kw. Gandak Project (1970) 10,000 kw. There exist several other major areas for potential future hydroelectric power development: three locations on the Karnali, the Bagmati, and at least one additional dam on the Kosi. 77. Early and incomplete reports from the preinvestment survey of power- generating potentials in the Karnali River Basin indicate three possible sites with a total generating potential of 3,000 mw. The principal market for most of the power generated would be in India, and so much depends upon the future course of negotiations with the Indian Government. For the purpose of this report, it is assumed that the Karnali Project will not get into the heavy construction phase during the Third Plan. It is also assumed that work will not start on the second Kosi River Dam until about the end of the Plan period. H. Tourism 78. Tourism represents a small but rapidly expanding industry in Nepal. Large economic returns can be gained from comparatively modest expendi- tures. 79. At present foreign tourism is primarily confined to the Kathmandu Valley, the only area in Nepal having the necessary hotels, food supplies, roads, and international transport needed for its support. Another im- portant area of tourism is centered in Lumbini and Janakpur, which cater to religious pilgrims from India. 80. Nineteen sixty-four was a most successful year in tourism. Over 9,500 foreign tourists visited the Kathmandu Valley (Table D-3). There has been a steady increase in the number of foreign tourists and in the recorded receipts of convertible currency from them. There are no records as to the volume of tourism in Janakpur and Lumbini. 81. In the past there have been two major bottlenecks to the full de- velopment of foreign tourist travel: 1) the shortage of suitable hotel accommodations in Kathmandu, and 2) inadequate transport capacity to and  - 98 - from the outside world. The hotel problem in Kathmandu will be eased some- what as the result of the construction of two new hotels and the expansion of others (Table D-4). The principal remaining bottleneck is air trans- port, though this has been eased by the recent addition of more RNAC flights to New Delhi. 82. Despite the realistic and relatively easy-to-obtain potentials of an expanded tourist industry, there has been no systematic effort directed toward this end. There are many areas outside the Kathmandu Valley ripe for the development of tourism - Pokhara, the Mt. Everest area, and the Narayani area where big game exist. By concentrating on these three areas, plus Kathmandu Valley, large benefits could be gained from small invest- ments. 83. Apart from the provision of physical facilities, the successful and sustained development of tourism requires close liaison with the tourist industry in neighboring countries and in principal source countries. De- velopment of this potential also requires a simplification of the regula- tions governing tourist travel, plus greater autonomy and support for the Department of Tourism. 84. For the purpose of this report, the Mission assumes that tourist travel in the Kathmandu Valley will be double the present level by 1969. This is considered a conservative estimate in relation to the potential readily available. I. Minerals 85. There are many reports as to the existence of a wide range of minerals in Nepal. It is known, for example, that iron ore is available in the Kathmandu Valley, in Narayani, in the Bhojpur and those areas (to the east) and in the Bajang area (to the west). It is believed there may be deposits of oil and natural gas in the west. Deposits of copper, zinc, lead, nickel, and cobalt are known to be spread throughout Nepal. There are known deposits of limestone near Hitaura and in the lower Karnali basin. 86. Traces of feldspar and mica are also known to exist. Good quality marble is available in Godvari and Dashinkali, both in the Kathmandu Valley. Too little, however, is known concerning the extent or value of these mineral deposits to make specific provision for mineral development in the Third Plan. The only practical possibility presently in sight is in the cement industry. 87. The Transport Mission has assumed that the Bureau of Mines will continue its evaluation of known deposits of all minerals, seeking trained professional assistance as necessary. Should any deposits turn out to be commercially valuable, the Mission assumes that the basic Transport Plan  - 99 - presented herewith can be suitably altered to accommodate their development without serious dislocations. It is recognized that difficulties in trans- portation may present special problems in establishing the commercial value of mineral resources. This is a problem which cannot be fully met until more is known about the extent of these mineral deposits and their uses. J. Direction of Trade and Location of Markets 88. Data on both the volume and pattern of trade in Nepal is far from satisfactory. However, some broad trends can be identified. The main flow of trade is in a north-south direction along traditional trade routes following topographical conditions. The main commodities entering the trade are agricultural commodities, including those processed in varying degrees and imported manufactured goods, salt and kerosene. The tra- ditional method of transport is by porters and pack animals in the Hills and by bullock carts in the Terai. Modern transport takes over at the three railheads on the Indian border or along the two main roads. 89. It can be assumed that at least 80 per cent of the agricultural produce is domestically consumed, the balance being exported. (The export magnitude includes unrecorded quantities.) 90. From the forests in the Terai, the foothills and the Siwalik Range forest products are exported to India. From the Terai paddy, rice, mustard, jute and jute products, small quantities of pulses, sugar cane and tobacco are exported to India. Because of lack of milling facilities in the Terai, some quantities of paddy and mustard merely move across the border for processing and are reimported into Nepal. Ghee, potatoes, oranges, herbs, hides and skins are some of the main products which move from the Hills to India. Wool, woolen products, chillies, horses, sheep, goats, and ghee are brought from the mountainous areas to the Terai and are partially exported to India. Kathmandu is an important consumer center for cheese, woolen products, sheep and goats coming from the mountains. Over 90 per cent of Nepal's imports are from India, mainly textiles, manufactured consumer goods, salt, and kerosene which are distributed to the main market centers and from there throughout the country. 91. The scale of trade with Tibet is small. The border is officially sealed and exports of food grains are officially declared illegal. De- spite these restrictions, small quantities of food grains and dairy products are transported from the Hills into Tibet and bartered for salt. It is also known that some food grains are moving from the Eastern Terai through the Hills into Tibet. Sheep and goats are also brought in from Tibet, mostly on a barter basis. 92. Very little is known about the internal trade in food grains and the information available is contradictory. Transport difficulties, high  - 100 - costs of transport and lower incomes in the Hill areas, have resulted in only a small flow of food grains from surplus areas in the Terai to the Hills, other than Kathmandu. In the last two years, however, food shortages in the Hills have resulted in greater government intervention in the mar- keting of food grains and movement to the Hills. For supplying Kathmandu, the Government has been purchasing rice, both from the Far Eastern and Far Western Terai. This rice is shipped through India by rail and brought into Kathmandu by road and ropeway. There are smaller movements of food grains within the Hills from surplus to deficit areas, mainly carried by porters. 93. Market places (see Table C-15) being of special importance for agricultural products of the Hills, appear to be Baitadi in the far west, Palpa and Bandipur in the Western Hills, Hitaura and Chisapani in the Eastern Hills and Sanischari and Pashupati Nagar in the far east. Pokhara is of importance for supplying imported consumer goods to surrounding districts up to the far north. Other market centers are Bhutwal in the west, Narayan Ghat in the Rapti Valley and Dharan in the east, all of them located at the "foothills" of the Hill region and each having a large hinterland. These serve as important collection points for agricultural commodities and also are essential for supplying the people with imported consumer goods. Along the Indian border in the plain there are many im- portant market centers which are in most cases close to an Indian railway head. Some of them are not only of importance for collection and export of surplus products from the Terai, but for products brought down from the Hills as well. Mahendranagar in the far west, Dhangari, Rajapur, Nepalganj, Koilawas, Krishnagar and Bhairawa in the west, Birganj in the middle, Jankapur, Rajbiraj, Hanumannager and Biratnagar in the east and Bhadrapur in the far east are among the larger centers. 94. Organized markets for the various products are still non-existent, and adequate credit and storage facilities for producers are still lack- ing. Some commodities, such as ghee, are sold by producers on a barter basis. Sugar cane is either delivered by the growers to Indian mill collection points or directly to the sugar mills in Nepal. In other cases middlemen of various kinds and numbers play a predominant role in the trade chain of agricultural products. Traders provide cultivators with needed credit and frequently with consumer goods. This dependence of the cultivators on the merchants results in lower prices for the producer and higher profits for the middlemen. The widespread lack of market information, coupled with the almost complete absence of grading and standardization procedures benefits the traders and hurts the producer. 95. The available information does not permit the construction of a reliable composite picture of traffic flow. All evidence suggests that the trends in the pattern of trade apparent at present will continue and perhaps become more pronounced in the next five years. Those commodities other than the food grains entering into trade will continue to be highly  - 101 - diversified and will not be confined to a small number of commodities out- standingly important in terms of volume. The main areas of agricultural development will continue to be in the Terai, particularly the region lying between the eastern extremity and the Gandak Basin. Manufacturing activity will grow slowly and be confined primarily around Biratnagar, the Birganj-Hitaura corridor and Kathmandu Valley. The prospects for any major development in minerals in the immediate future appear unlikely. The main movement of petroleum products is from India into Kathmandu along the Rajpath. A new area of economic activity will be around the Gandak Project, with Bhairawa growing in importance. One of the few developments at present in sight which might alter the structure of the economy would be the Karnali Project and it is not expected that developments in this project will affect the economy during the coming five-year period. K. Internal and External Finance Public Finance 96. The establishment of formal budgetary procedures in Nepal is only of five years' duration. A conservative fiscal policy is being followed and there is evidence of a conscious effort toward financial discipline. This is being accomplished by means of expenditure economies, improved budgetary controls, increased collections from existing revenue sources, and the imposition of new taxes. 97. The current (or regular) budgets for 1961/62 to 1964/65 indicate that revenue exceeded current expenditures in each of these years. (See Tables B-2 and B-4.) The revenue surpluses were as follows: Three-Year Plan (NRS million) 196%1/62 1962/63 1963/64 j 1964i65 (revised estimate) Revenue 106.7 119.5 151.7 170.0 Expenditures 104.5 116.2 120.0 122.9 Surplus 2.2 3.3 31.7 56.1 98. It should be noted, however, that while most recurring expenditures are included in the current budget, some expenditures connected with the operation of new projects are put into the development budget. In 1963/64 and 1964/65, while revenue increases were of the order of 26 per cent and 18 per cent respectively, expenditure increases were held at 5 per cent each year. The main sources of revenue are land taxes and customs re- ceipts. A major portion of customs revenue comes from the Indian central excise taxes which are levied on articles exported to Nepal, and which are refunded by India to Nepal. To augment revenue receipts, the following  - 102 - newr taxes have been introduced in the past three years - an income tax, an urban property tax, an embarkation tax on travel abroad, a vehicle registra- tion tax, and documentary stamp duty. In 1962 the most fundamental change was wrought in the tax structure by the abolition of the Birta System under which revenue from old land grants went to the Birta holder and not to the Government. The rates on land taxes have also been raised. The regular budget supports some of the public utilities and industries operated by the Government. Public utilities have been showing small losses but with improved administration there should be increased receipts. Increased sale of power with expanding supplies, receipts from excise duties levied on local industries, and higher profits from the Rastra Bank, are expected to make increasing contributions to revenue receipts. The Mission is of the view that the economy has additional taxable capacity and, along with better tax administration, revenue receipts could be increased substantially in the coming years. A discussion of the development budget is contained in Chapter 1. External Trade and Payments 99. The most recent date for which published statistics of the recorded external trade of Nepal are available is 1961/62 (see Tables B-11 and B-12). During the years 1957/58 to 1961/62 the value of recorded trade more than trebled. The trend is as follows (in NRs million): Fiscal Year Imports Exports Gap 1957/58 155.4 73.3 -82.1 1958/59 223.4 117.9 -105.5 1959/60 287.5 131.7 -155.8 1960/61 393.0 209.7 -188.3 1961/62 454.1 281.7 -172.4 100. Part of the increase shown no doubt reflects improved coverage of the statistics. But the statistics remain deficient in several respects. Because of the open border with neighboring countries, particularly India, a substantial amount of the trade goes unrecorded, mainly on the export side. Further, trade in timber is not recorded in the customs registers, and there is an undervaluation of exports to avoid customs duties. There is also some smuggling across the border. Available information indicates that on balance the distortion mainly concerns exports rather than imports. It is estimated that recorded exports are understated by more than 30 per cent, and imports by less than 10 per cent. 101. An average of 95 per cent of the recorded volume of imports, in the years for which data are available, were from India and 99 per cent of ex- ports were to India. Trade diversification is a major objective of Nepal Government policy. With the opening of the Kodari road, the execution of a trade agreement with Pakistan coupled with transit rights through India,  - 103 - and the establishment of a National Trading Ltd., some diversification will take place. It is unlikely, however, that all these together would bring more than a 5-10 per cent shift in trade direction in the immediately fore- seeable future. Such change as does occur will be mainly in relation to imports through Pakistan and possibly increased trade with Tibet. 102. The major component of the import trade is manufactured products, primarily cotton textile products and food items such as sugar and salt. Food items, particularly rice, constitute the major export. The greater part of other exports are agricultural commodities from the Terai, either in raw or processed form. The natural markets for exports from Nepal lie in Northern India in the states of Uttar Pradesh, Bihar, and West Bengal. There are highly profitable markets in Tibet, but as yet this trade has not assumed significant proportions. The building of the Kodari Road could result in some of the surplus in the Terai being diverted northward. 103. There is no complete balance of payments estimate for Nepal. On the basis of the trade picture, which includes unrecorded trade, it is apparent that a trade gap may not be as unfavorable to Nepal as was thought based on the recorded figures alone. Invisible receipts are a positive contributor to the payments situation. The principal sources of receipts in the invisible account are the salaries and pensions of Gurkha soldiers, tourist income, and expenditures of foreign missions in Nepal, all of which have been increasing (see Table B-19). There are many gaps in the recorded information on invisibles, particularly in relation to receipts and pay- ments in Indian currency. Short-term capital flight from Nepal is still a negative factor. The service payment on external debt is still very small. External grant assistance permits Nepal to sustain an overall favorable balance of payments. 104. No par value for the Nepalese rupee has been established with the I.M.F. In the absence of more definitive information on the balance of payments and a clearer picture of the money supply position, it has not been possible to determine a true rate of exchange for the Nepalese rupee. It should be noted, however, that the official rate of exchange established by unilateral Nepalese action at NRs 160= Rs. 100 Indian currency, has been sustained since 1963. As of December 1963, the rate for U.S. dollars has been NRs 7.60 per $1.00 and NRs 21.30 per L sterling. External Reserves and Debt Position 105. Foreign assets of the Nepal Rastra Bank have increased in recent years, and in July 1964 stood at NRs 352.5 million, consisting of NRs 193.0 million in Indian rupees, NRs 136.3 million in other foreign currencies (mainly convertible) and NRs 32.2 million in gold (see Table B-20). These figures do not include small amounts of foreign exchange held by the Govern- ment, the Nepal Bank and by private individuals. The present level of re- serves of the Rastra Bank are in excess of the amount required as cover for  - 104 - the note issue. Leaving an additional cushion to insulate the payments position, there is still a small margin to cover urgent development ex- penditure. Negotiations currently being conducted with the Indian Govern- ment for reimbursement of sterling payments made from 1948 to 1960 on ac- count of British Gurkha troops could result in a reduction of the Indian rupee component and an increase in the convertible currency component of these reserves. 106. Nepal's external debt is still small. The direct debt consists only of three lines of credit, from the U.K., India, and the U.S.S.R. The Government has also guaranteed credits raised in the Federal Republic of Germany and the U.S.A. by the NIDC (see Table B-23). As the greater part of these are on easy terms, the servicing of this level of debt should not present too great a difficulty. However, the capacity of the economy to service external debt even on easy terms is small and its creditworthiness in this respect should be very carefully drawn on and reserved for projects of highest priority.  - 105 - Chapter 5 A SUMMARY OF ECONOMIC ACTIVITY, TRANSPORT NEEDS AND TRANSPORT PLANS BY GEOGRAPHICAL-ENGINEERING AREAS Note: A map showing the districts and zones used in the following description appears on the following page. A. The Ilam Area Economic Features 1. This area is mainly comprised of the Ilam district in the Mechi zone. It has a population of 125,000 inhabitants. 2. Agricultural activities. Food grains, extensive potato growing, cardamon, tea, vegetables and oranges. One of the Government's pilot projects on land reform is located in the Gram Panchayat of Budhbari. While it is still too early to evaluate the program fully, in the first year of operation a 5 per cent increase in production was expected. Indian Aid Mission has plans for establishing a research station at Ilam for promoting potato cultivation. Potential for orange growing is good. Present production of tea is 22 tons annually; there are plans to in- crease it to 300 tons. Sanichare is an important market center for this region. 3. Export traffic. From 7,000 to 11,000 tons of potatoes are shipped to India annually, mainly by way of Darjeeling. Minor quantities of ghee, maize, paddy, mustard, tobacco, oranges, hides and skins are also exported to India. Opening of the area by highway may stimulate potato growing in the present potato-producing areas along the border and further to the north of Ilam, in the vicinity of Phidim, now restricted because of high transport costs. b. Industrial activities. There are small local water-powered grain mills, and a pineapple canning factory. Any significant industrial ac- tivities will be lower down in the Terai towards Jhapa, in the region adjoining the one under consideration. Communications 5. An old road linked Ilam with Darjeeling but this road crosses very difficult mountains and is no longer jeepable. Normally most coxmmodities go to the south, by human transport. 6. The issues from the Ilam area are:  /RIbulo v "5t :_ > U M t ^ ,I.' L N E P A L v _J;j/8a@eANGi v v 1itPOLITICAL AND GEOGRAPHIC DIVISIONS z I D I \ _ DolMno . Z p , G