Nepal - Economic situation and prospects (Vol. 2 of 2) : Sector annexes

Fl-LE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use 125 Vol. 2 Report No. 125a-NEP ECONOMIC SITUATION AND PROSPECTS OF. NEPAL SECTOR ANNEXES I - AGRICULTURE II - EDUCATION III - INDUSTRY IV - POPULATION AND FAMILY PLANNING V - POWER VI - TRANSPORT August 15, 1973 Aia Region South Asia Department This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS Currency Unit - Nepalese Rupee (NR) Effective Febru.ary 20, 1973 US$1 = Nrs 10.56 NR 1 = US$0.095 NRs 1,000 = US494.70 NRs l,OOO,000 = US$94,697 Prior to February 20, 1973 US$1 = NRs 10.125 NR 1 = US$0.099 NRs 1,000 = US$98.77 NRs 1,000,000 = US$98,765 NOTE: All calculations in this Report are made on the basis of the rates of exchange in force prior to February 20, 1973. On that date the Nepalese rupee was devalued in terms of the US$ by 4.12 percent. Nepal Fiscal Year - July 16 to July 15 Nepal Calendar Year - April 16 to April 15 This report is based upon the findings of a mission which visited Nepal between May 1 and May 25, 1972. The mission consisted of: Messrs. A. Cleveland (Chief of Mission), N. Reynolds (General Economist), Z. Samad (Agricultural Economist, FAO), W. Wyatt (Irrigation Specialist, FAO), A. Tarnawiecki (Industry Specialist), M. Heitner (Industry Specialist), K. Clare (Transportation Economist), B. Newbry (Education Specialist), E. Erkmen (Electric Power Specialist), H. Jones (Population Specialist), C. Xenos (Population Specialist, consultant), H. Granados (Fiscal Specialist, IMF), and Miss M. Hill (Secretary).  TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ............ . .............i- I. CHARACTERISTICS OF THE SECTOR ........................ 1 The Role of Agriculture in the Economy and Recent Performance ..... .......................... 1 The Structure of Production and Production Practices ........... . 4 Land Use ................................... 6 Farm Size and Tenancy ..................... . 7 II. NAJOR POLICY ISSUES ....................... 9 Land Reform .............. .......................... 9 Agricultural Extension ...i.......................... 11 Agricultural Credit ................................ 13 Irrigation .... ..................................... 19 Supply of Agricultural Inputs .............. . .. . 21 Markets and Prices ....................... . .. . 23 Agricultural Research .................................. 24 III. THE HILLS AND THE TERAI .............................. 29 The Hills - A Deteriorating Economy ..... ........... 30 The Terai - Declining Agricultural Surpluses ....... 37 ILvestment Priorities ..................... . 41 Investment Allocation ... ........................... 44 STATISTICAL ANNEX MAP,: Geophysical   SMHARY AND CONCLUSIONS i. Agriculture (including forestry) directly accounts for about 70 percent of GDP, 80 percent of Nepal's export earnings, and provides employ- ment for about 90 percent of the labor force. Land anad forest revenues account for about 20 percent of total domestic Government revenues. Accord- ing to the most recent available data, based on no more than informed guesses, agricultural GDP grew at a compound rate of about 1.8 percent per year in real terms between 1965-70, which is a little more than half that of the non-agricultural sectors and was less than the average growth of population of about 2 percent. Predominantly agricultural, and with limited possibi- lities for diversification, Nepal's economic development will, for a long time to come, be largely dependent on its ability to iacrease agricultural production. Moreover, Nepal's development will depend heavily on its ability to create surpluses in agriculture to pay for its large and growing import requirements. ii. While tenant cultivation is relatively unimportant in the Hills, the land tenure system and the rent practices in the Eastern Terai, where most of the surpluses are produced, act as a serious disincentive to improved cultural practices. The government hias not been inactive in the realm of land reform, but much more needs to be achieved. Nonetheless, the weakest link in the agricultural development effort is the inadequacy of agricultural extension services. Tne staffing has been generally poor, both in quantity and quality; moreover the staff has rarely at its disposal the minimum quantity and variety of agricultural irnputs necessary for demonstration. iii. Institutional agricultural credit was introduced in the country only 10 years ago. It has made rapid progress but still does not provide more than 20 percent of She credit needs. Large farmers benefitted much more from this source of credit than small farmers. Similarly, institutio,-al credit has favoured the Terai to the detriment of the Hills. iv. At present, probably no more than 15 percent of the land 's irrigated. During the last decade, the government has provided fo- a command area of 120,000 ha. (about 6.6 percent of cultivated area), bul_ this increased irrigation capacity has been translated only partially into actual utilization, since the construction of field channels has beein partLy neglected. It is only recently that new irrigation projects have been designed to provide for multiple cropping and for an integrated approach to development. v. Use of modern inputs is li..'ted by supply s1hrrages and the lack of an integrated product-ion program. Nonetheless, area under aroved cultural practices is reported to have increased from about 4 per.ent in 1968/69 to 7 percent in 1970/71. This small scale green revollution has, however, been mostly concentrated in the Kathmandu Valley. hdoptave agri- cultural research, still limited in scope, has been successful in introducing new wheat and potato var-.eties.  vti. In a ser~se, Nepa has two agriculture sectors - that of the Hills ane that of the Terai. While the two share certain comzuon features, they are quite distinct in others requiring therefore different approaches to remedial action. vii. The Hills have a deteriorating economy. The major reason for this is a growing population pressure which has gradually disturbed the former people/resources near-equilibrium. To sustain a growing population, marginal lands, forests aric grazing grounds had to be reclaimed, which accelerated erosion. In turn, this affected the produc:ivity of the land. .?oreover, except for the Kathmandu Valley, little public investment was directed to the Hills. viii. The consequences of such a situation are the uxtreme 3overty of many Hill people, who are both short of food and short of cash to finance minimum purchases of salt, _loth, etc. >ore than a fou7-th of tae Hil1l population is reported to migrate to the south during the winter months in search of employment. Due to population pressure a growing flow of season- al migrants becomes by force that of permanent migrants trying to find an uncertain living as landless laborers or as illegal settlers in the T-ai. ix. Clearly, the objectives o'f a developmenz policy for the hijlls should be to provide a decent income to peopie, so as tc 9'ow down out- migration. Achieving such an objective would mea,i -he slifting of che present production pattern to a new one along the If nas of comoarative advantages. This would ideally call foz use of yiediG-in,creasiny techlniques, restructuring of present land-use patterns by meana of substitution of land from low value to hiigh value crops and from field crop production to norticulture. x. But since Hill farmers canrot be axpected to nurrn to "ong maturitg crops * such as fruit trees, %irithout a tran3siional per i, an I ntermediate strategy is called first. Host of the XHil farmers e-xperience .oodgrain deficit and before they s-art speciallZing thneir production 'or export to the Terai and to India, the - would need first to be as near as possible to a situation of self-sufficie,:cy in food. 'What is required n.o is the introduction o_ intensive foodgrain production techniques in bottom valleys and the i=bedia.e slopes a ibove Cnem. Quick yielding horticulture production, such as potatc and vegetab'le, could be extended to moderately sLoping 'Land, while steep land and need aforestation. Coupled with proper crop rotation for cattle feed and laad regeneration, the income increment of the Hills could be quite substantial. xi. Such a policy to be successful requires the bt. lding of 7o:`h- south roads penetrating dens sly populated areas and secving OO;LC: valleys, oc0 break the viciouz circc., o- "ro aconomic activizy - ro .oac - ._coaomic _. # zty.~ Az the same t he huever, it would be erroneous to presume zhat trs:n.sport facaii:es done iill "automatically"