Nepal - Community Forestry Development and Training Project

Document of The World Bank FOR OFFMCIAL USE ONLY Report No. P-2763-NEP REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR THE COMMUNITY FORESTRY DEVELOPMENT AND TRAINING PROJECT April 2, 1980 This document has a restricted distribution and may be used by recipients onty in the performance of their official duties. Its contents my not otherwise be disclosed without World Bank authorirtion.  CURRENCY EQUIVALENTS Currency Unit - Nepalese Rupee (NR) Since March 20, 1978 US$1.00 = NRs 12.00 NR 1.00 = US$0.08 NRs 100 = US$8.33 METRIC SYSTEM FINANCIAL YEAR July 16 - July 15 ACRONYMS CFAD - Community Forestry and Afforestation Division CFU - Community Forestry Unit ICB - International Competitive Bidding MEU - Monitoring and Evaluation Unit MPU - Motivation and Publicity Unit PF - Panchayat Forest PPF - Panchayat Protected Forest SIU - Stove Improvement Unit UNDP - United Nations Development Programme USAID - United States Agency for International Development ABBREVIATIONS ha - hectare  FOR OFFICIAL USE ONLY NEPAL COMMUNITY FORESTRY DEVELOPMENT AND TRAINING PROJECT Credit and Project Summary Borrower: Kingdom of Nepal Amount: US$17.0 million Terms: Standard Project Description: The proposed project would be the first phase of a twenty year national forestry program aiming to develop community forestry in the Hills and to establish training facilities in Nepal to satisfy needs for qualified forestry and soil and water conservation personnel. The proposed project would increase supplies of fuelwood in Hill areas through establishment of new plantations and rehabilitation of degraded forests. The Ministry of Forest would be reor- ganized and strengthened through the provision of support- ing services and training facilities. Technical assistance would be provided to assist in execution of field planting programs, in organization and administration of the new Community Forestry and Afforestation Division, and in establishment of the training and research programs. Production from project plantings would reach a peak in year 20 of the project when timber from the Panchayat Forests is clear-felled; total production in that year would provide about one-third of the total fuelwood requirements of the 1.9 million people in the 340 pancha- yats participating in the project. The annual sustainable yield of fuelwood from Panchayat Protected Forests and private plantings would be sufficient to provide the full requirements of 10% of the project area population. The project is designed to minimize the risks of inadequate community participation, through the work of the monitor- ing and evaluation and the motivation and publicity units, as well as the retraining and upgrading of forestry staff in a methodology for successful implementation of such programs. Furthermore, the project provides for a midterm review to evaluate the progress of the program and recommend adjustments if needed. 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.  Estimated Cost US$ Million Equivalent of Project: 1/ Component Local Foreign Total I. Village Forestry Program Panchayat Forests 0.73 0.08 0.81 Panchayat Protected Forests 0.36 0.04 0.40 Private Plantings 0.01 - 0.01 Nursery & Forestry Development 2.95 0.33 3.28 Subtotal 4.05 0.45 4.50 II. Project Administration Project Organization 4.50 1.29 5.79 Stove Improvement 0.16 0.08 0.24 Subtotal 4.66 1.37 6.03 III. Training 2.12 2.26 4.38 IV. Technical Assistance 0.41 3.69 4.10 V. Midterm Review and Studies 0.05 0.22 0.27 Base Cost 11.29 7.99 19.28 IV. Contingencies Physical 0.67 0.14 0.81 Price 3.08 1.61 4.69 Subtotal 3.75 1.75 5.50 TOTAL PROJECT COST 15.04 9.74 24.78 Financing Plan: US$ Million Equivalent Local Foreign Total IDA 12.7 4.3 17.0 Government 1.7 - 1.7 UNDP 0.3 2.5 2.8 USAID 0.4 2.9 3.3 Total 15.1 9.7 24.8 Estimated IDA US$ Million Equivalent Disbursements: IDA FY 1981 1982 1983 1984 1985 1986 Annual 1.5 3.5 4.5 4.0 2.0 1.5 Cumulative 1.5 5.0 9.5 13.5 15.5 17.0 Rate of Return: 16% Staff Appraisal Report: No. 2663-NEP dated March 25, 1980. Map: IBRD No. 14534 1/ Includes a negligible amount of taxes and duties.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A COMMUNITY FORESTRY DEVELOPMENT AND TRAINING PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Kingdom of Nepal for the equivalent of US$17.0 million on standard IDA terms to help finance a Community Forestry Develop- ment and Training Project. The United Nations Development Programme (UNDP) and the United States Agency for International Development (USAID) are expected to provide about US$6.1 million equivalent on a grant basis for technical assistance and training requirements of the project (para 42). PART I - THE ECONOMY 2. The most recent economic report entitled "Nepal-Development Perform- ance and Prospects" (Report No. 2692-NEP) was distributed to the Executive Directors on December 14, 1979. The principal findings of the Report are described below. Country data are shown in Annex I. 3. Nepal is one of the least developed countries in the world. Per capita income is estimated at $110 (1977), and health and education standards are well below the average of South Asia: life expectancy at birth is about 45 years, infant mortality 150 per thousand, and adult literacy 19%. The population, growing at the rate of 2.6% a year, is estimated at 13.3 million (1978). Over 90% of the population live in rural areas. 4. The economy of Nepal centers around agriculture. It accounts for 68% of GDP and 75% of merchandise exports, and provides a livelihood to over 90% of the population. In addition, most of the industrial sector, which comprises about 9% of GDP, processes agricultural raw materials. About 25% of total rural incomes are estimated to arise from non-agricultural activities. Cottage industries are one of the most important of these, engaging over 1 million people and comprising about 7% of GDP. They provide basic consumer goods in the many small, isolated markets where such goods 4 would otherwise not be available. 5. As a small open economy, Nepal is highly susceptible to developments in India. The Terai, which lies along the Indian border, has close and virtually free trading links with India, and accounts for about 60% of the country's GDP, and about 40% of the population. The Kathmandu Valley, the administrative and commercial center, is closely linked with the Terai, but at significant transportation costs. The rest of the country, the Hills and Mountains, is almost inaccessible and consists of a large number of fragmented markets.  -2- 6. When Nepal adopted economic and social development as major govern- ment objectives in the early 1950s, there was virtually no economic or administrative infrastructure. :[nitial development efforts were necessarily concentrated on establishing a foundation for future development. During these early stages, it was inevitable that growth would remain slow and that there would be little if any increase in per capita income. However, the Fifth Development Plan (1975/76-1979/80) was to be a turning point; it was believed that the country was poised for more rapid growth on the order of 4- 5% annually. The level of investment was to increase substantially and its focus to shift towards the more dlirectly productive sectors and the social services. 7. Public investment performance has been excellent; development expenditures have grown at over 15% annually in real terms and the Government has been relatively successful in reorienting investment away from the trans- port sector towards agriculture and the social services. However, few of the other Fifth Plan objectives have been achieved. The GDP growth rate is likely to average only 2.4% per year, mainly because of poor agricultural performance. Little progress has been made in increasing agricultural productivity and agricultural production increased at an annual rate of only 0.7% during the first four years of the Fifth Plan. Growth in other sectors has been mixed, with the poor agricultural performance limiting the growth of agro-related industries. Production in several large industries including jute goods, sugar, leather goods, and cement have increased but most Fifth Plan targets will go unmet. In the services sector, tourism has been dynamic, but it still only contributes about 1% of GDP. 8. The economic situation deteriorated markedly in 1979/80 and is now worse than it has been in many years. The poor monsoon in South Asia in 1979 has had a severe impact on Nepal's foodgrain production in 1979/80. Both the maize and rice crops suffered major losses, and as a result, agricultural production is likely to decline by 4%. The non-agricultural sector continues to be constrained by supply bottleneck problems and delays in the preparation of new development projects in the! public sector. This sector's growth is expected to be only about 4% in 1S979/80, which when combined with the decline in agriculture, gives a 1% decline in GDP. 9. The disappointing overall performance of the domestic economy during the Fifth Plan period has been accompanied by a widening trade deficit. Imports have grown under the impetus of the Government's development program while the trend in export earnings has been sluggish due to declining rice exports. The deterioration on the trade account has been partly covered by increased tourism receipts and remittances from Gurkhas (soldiers from Nepal serving in the British or Indian armies). Foreign assistance in the form of grants and concessionary financing have generally ensured that the overall balance remained in surplus. Foreign exchange reserves in July 1979 were equivalent to nearly nine months of imports. However, the shortfall in food- grain production in 1979/80 could have a serious impact on Nepal's external position, since not only will rice exports further decline, but foodgrains will have to be imported, this all coming at a time when Nepal's oil bill is rising steeply. The Government has therefore appealed to the international community for emergency assistance in obtaining foodgrains and for help in  3- distributing food to the shortfall areas; so far donors have committed 33,000 tons of foodgrains. 10. On March 31, 1978, the authorities replaced a complex system of multiple exchange rates and exchange and trade restrictions with a dual ex- change system. Transactions with India, which were virtually free from restrictions, were unaffected by these changes. New treaties on trade and transit with India were also concluded in March 1978. Under the dual exchange rate system, Nepal maintains a basic rate of Rs 12.00 per dollar, with a second, premium rate applying for all merchandise trade with third countries except for imports of certain development goods. On February 21, 1980, the premium rate was changed from Rs 16.00 per dollar to Rs 14.00 per dollar, but the exemption from the second rate was restricted to only imports of petrol and petroleum products, cement and chemical fertilizers. These exchange rate adjustments involved an appreciation of about 14% for exports to third coun- tries and an overall appreciation of about 2% for imports from third countries. But this was partly offset by (i) withdrawing the 12% duty on exports of raw jute; and (ii) raising import duties on a wide range of imports from third countries. However, with the exception of raw jute exports, earnings in domestic currency from exports to third countries will decline, leading to a possible shift of some exports to India. The overall trade balance is likely to be adversely affected by the recent measures. 11. The poor long-run performance of the economy is chiefly due to the failure of agricultural production to keep pace with population growth. Over the period 1967-77, foodgrain production grew at an average annual rate of only 1.5%. Increases in the area under cultivation account for almost all of this, since average yields rose by only 0.1% annually. Although poor monsoons have adversely affected agricultural production, the more fundamental reason is the failure to exploit more fully the irrigation infrastructure. In the past, insufficient attention has been paid to bringing water down to the farm level and this has been compounded by inadequate support services such as extension and research, timely supplies of improved seed and fertilizer and other inputs, credit and farm-to-market roads. However, recent major irrigation projects financed by IDA and the Asian Development Bank are addres- sing these problems by taking more comprehensive and integrated approaches. 12. In the Hills and Mountains, which contain only one-third of the country's agricultural land and yet have nearly two-thirds of the population, population pressures have pushed cultivation up steep hillsides and onto marginal land; average yields have actually declined. Population density on agricultural land in these areas is higher than in Bangladesh. Malnutrition is acute; food production meets only two-thirds of minimum subsistence needs. Because they have little to trade except their labor, one-third of the inhab- itants of these Hill areas migrate seasonally to the Terai plains and northern India for food and work. Since the early sixties, an estimated 400,000 have migrated permanently, and there are signs that this exodus is accelerating.  -4- 13. The seriousness of the economic and social problems confronting Nepal calls for a well focused development strategy that directly addresses the difficult choices to be made. The revised Fundamental Principles of the Sixth Plan recently adopted by the Government and endorsed by members of the Nepal Aid Group at its January 31, 1980 meeting, is an important milestone in the Government's efforts to evolve a program that meets Nepal's needs. The highest priority is placed on developing agriculture, including revitalization of Hill food production to meet local requirements since significant agro- climatic specialization between the Hills and Terai is feasible only in the longer run. At the same time, since land holdings in the Hills are too small to generate much more than subsistence needs, programs will be started to encourage diversification into other activities such as small-scale and cottage industries to supplement Hill incomes. For the Terai, the strategy is to continue efforts to realize the Terai's considerable potential for increas- ing production of foodgrains and cash crops. The irrigation infrastructure is to be more fully utilized and improvements to extension services and asso- ciated inputs concentrated on those areas with irrigation facilities. Rural electrification through mini-hydel is seen as an important element in provid- ing for increased production in rural areas. Reafforestation programs are given priority in order to provide fuelwood and fodder as well as to reduce soil erosion. 14. While these efforts in the directly productive sectors merit urgent attention, Nepal faces similar challenges in developing its human resources. Although curbing population growth requires major actions, selective programs in education and health can greatly assist population planning as well as alleviate human suffering and lay the basis for future increases in produc- tivity. The Government's strategy recognises that the approach must be selective since programs for meeting basic needs generally have only a long- term impact on manpower development but divert resources away from activities more directly and immediately relat(ed to production. Increasing foodgrains production will meet the major need of improved nutrition. Better and more readily available supplies of drinking water and fuelwood will meet other needs, while also freeing labor currently spent in their collection. Basic health facilities are to be expanded through integrated community health posts, while in education, stress is placed on improving the quality of primary and adult vocational education. Family planning programs are to be stepped up. The other basic need to be met in rural areas is improved trans- port, and the Sixth Plan will include programs to improve trails, tracks, and suspension bridges. 15. For Nepal to establish a basis for more rapid and sustained growth, the structure of its economy will need to change since its present dependence on agriculture limits the economy's overall growth potential to about 4% per year. Tourism offers perhaps the best near-term potential for increased foreign exchange earnings; however, efforts are needed to reduce its capital intensity, strengthen linkage with other local industries and extend its benefits beyond the Kathmandu Valley. Hydropower also offers some possibil- ities, but neither it nor tourism will solve Nepal's increasing unemployment problems. In the long run, Nepal must diversify and develop its industrial sector. Obviously, efforts in this sector must be on a highly selective basis. The multiplicity and complexity of the constraints to industrial  - 5- development, including the lack of natural resources and a skilled labor force, as well as Nepal's small domestic market and landlocked position will nullify any generalized approach. Public enterprises need to operate more efficiently, village and cottage industries should be promoted. Beyond this, joint ventures with India, for example, as in cement production, may be attractive. The preconditions for industrialization must be established in the near future or there is a danger that Nepal will always be struggling to move its economy beyond subsistence. These include providing financial incentives, research and extension services on the technical, financial and marketing aspects of enterprise, and the upgrading of manpower skills in the areas where Nepal may have a comparative advantage. 16. Nepal has made significant progress in mobilizing domestic resources to support its development efforts, considering the extreme poverty, low degree of monetization, and fragmented nature of the economy. Revenue grew at 16% a year in current terms between 1969/70 and 1978/79, while as a percentage of GDP it increased from 5% in 1969/70 to about 9% in 1978/79. Over the same period, the Government was able to maintain savings on current account in excess of 2% of GDP, a good achievement for a country in Nepal's economic position. However, this excellent record is now in jeopardy. Revenues from income and land taxes declined in 1978/79 and, although total revenues grew by 14%, the bulk of the increase came from taxes on international trade as a result of higher imports. No real growth in total revenues is expected during 1979/80, after allowing for inflation. This slowdown reflects not only the weak economy in 1979/80, but also the impact on the tax system of the political difficulties facing Nepal. While only limited scope exists for discretionary tax measures, there is potential for increased tax revenues from agriculture, particularly in the Terai. Revenues could be increased through improving the tax machinery, and the government has approved, in principle, various admin- istrative reforms in this direction, including the formation of a Special Revenue Service. 17. Foreign assistance has been a decisive factor in Nepal's development. During the Fifth Plan, foreign financing equalled about 45% of development expenditures. In view of the limited prospects for increased domestic resource mobilization, foreign financing requirements may be about 60% of planned Sixth Plan development expenditures, which amount to about Rs 10 billion or over $800 million at 1979/80 prices. Aid commitments need to average about $225 million annually during 1980-82 compared with $160 million during 1977-79. However, even this level of foreign assistance would not provide the Government with sufficient resources to meet increasing consumption demands. Additional aid, either through financing a higher proportion of total project costs or in the form of commodity assistance, could provide budgetary support to meet pressing recurrent expenditure requirements, particularly in the social sectors. 18. Although foreign aid commitments and disbursements grew by over 25% annually during the Fifth Plan period, only 40% of disbursements included in the Government's budget were from foreign borrowing, the remainder being grants. As of December 31, 1978, official foreign debt outstanding was only US$88 million, of which US$75 million was due to multilateral agencies.  -6- These loans were obtained on a highly concessional basis and the grant element of total aid remains in excess of 90%. As a result, debt service payments were only US$3.1 million during 1978/79, equivalent to less than 2% of exports of goods and services. Medium-term prospects are also good; by 1981/82 total service on existing debt is expected to amount to only US$5.1 million, still less than 2% of projected goods and services exports. PART II - BANK GROUP OPERATIONS IN NEPAL 19. Bank Group operations in Nepal began in FY70 with an IDA credit of US$1.7 million equivalent for a t:elecommunications project. In the fol- lowing nine years, 18 additional credits were approved, bringing total IDA assistance to Nepal to US$201.4 million equivalent, net of cancellations. In view of Nepal's many development needs, this assistance has been for projects in a wide variety of sectors. Six of these sectors account for 89% of IDA credits by amount: irrigation (29% for 4 projects); power (20% for 1 project); telecommunications (11% for 3 projects); highways (10% for 2 projects); water supply and sewerage (10% for 2 projects), and rural development (9% for 2 projects). The remaining 11% of IDA assistance has been for one project in each of the areas of settlement (3%), technical education (3%), tourism (2%), technical assistance (1%), and industrial development financing (2%). The proposed credit would be the first in FY80, bringing the total amount of IDA assistance to Nepal to US$218.4 million equivalent, net of cancellations. No Bank loans have been made to Nepal. IFC made its first investment in Nepal ($3.1 million) in a hotel project in Kathmandu in FY75. Annex II contains a summary statement of Bank Group operations as of February 29, 1980, and notes on the execution of ongoing IDA projects. It show