Nepal - Public resource management in a resource scarce economy

Report No. 10324-NEP Nepal Public Resource Management in a Resource-Scarce Economy March 16, 1992 South Asia Country Department I Country Operations, Industry and Finance Division FOR OFFICIAL USE ONLY h~~~~~r - 1. R....... ~athsa iesttc d' 44ibuiton and may be used by recipients dOw--a---- --- -of t'r officialduties.Itcontentsmaynototherwise iAdwfoed wi0hout World Bank authorization.  CURRENCY EQUIVALENTS Since November 30, 1985, the Nepali rupee has been floating with respec to a basket of currencies in which the Indian rupee has high weight. The official exchange rate as of January 15, 1992 was NRs. 42.7 per US dollar. US$ 1 = NRs. 42.7 NRs. 1 - US$ 0.0234 In this report, US$ is sometimes abbreviated to $. Fiscal Year (FY) July 16 - July 15  FOR OMCIAL USE ONLY List of Abbreviations and Acronyms Used ADB - Asian Development Bank ADRI - Agricultural Development Bank of Neval AIC - Agricultural Inputs Corporation ARC - Administrative Reform Commission BPS - Basic and Primary Education CBPASS - Commercial Bank Problem Anal;sis and Strategy Study CBS - Central Bureau of Statistics CCD - Corporations Coordination Division CPI - Consumer Price Index DOI - Department of Irrigation DTO - District Treasury Office -FYP - Eighth Five Year Plan ESAF - Enhanced Structural Adjustment Facility FCGO - Financial Controller General's Office FY - Fiscal Year GDP - Gross Domestic Product HMG - His Majesty's Government IDA - International Development Association IEA - Industrial Enterprises Act IFC - International Finance Corporation IMF - International Monetary Fund LCB - Local Competitive Bidding MGA - Ministry of General Administration MIS - Management Information System MOP - Ministry of Finance MPE - Manufacturing Public Enterprises NEA - Nepal Electricity Authority NPC - Nepal Food Corporation NGO - Non-Governmenta'L Organization NIDC - Nepal Industrial Development Corporation NPC - National Planning Commission NOC - Nepal Oil Corporation NR - Nepalese Rupee NRB - Nepal Rastra Bank (Central Bank) NTC - Nepal Transport Corporation NWSC - Nepal Water Supply Corporation 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.  ODA - Overseas Development Adainibtration OGL - Open General License O&M - Operations and Maintenance PAR - Public Administration Reform PDLT - Panchayat Development and Land Tax PE - Public Enterprise POL - Petroleum, Oils and Lubri ants PRM - Public Resource Management PSC - Public Service Commission QR - Quantitative Restriction SA - Special Account SAP - Structural Adjustment Facility SAC - Structural Adjustment Credit SAP - Structural Adjustment Program TA - Technical Assistance T&T - Trade and Transit UNDP - United Nations Development Program UNCED - United Nations Conference on Environment and Development UPE - Universal Primary Education  TITLEs PUBLIC RESOURCE MANAGEMENT IN A RESOURCE-SCARCE ECONOMY COUNTRY. NEPAL REGIONs SOUTH ASIA COUNTRY DEPARTMENT I SZCTOR: COUNTRY ECONOMIC REPORT: TYPE CLASSIF MM/YY LANGUAGES CEM Restricted 03/92 English PUBDATZ: March 16, 1992 ABSTRACTs Nepal, one of the poorest countries in the world with an annual per capita income of only $170, is at an important stage of her political and economic development. On the political front, Nepal made the successful transition to a democratic system with the election of a majority government last May. On the economic front, the new government faces the unenviable challenge of accelerating economic growth and development in order to meet the increasing expectations of its large population, nearly half of which live in absolute poverty. This task, difficult at the best of times given the very limited resource endowments and serious structural weaknesses of the economy, has been complicated by a fiscal situation which of late has come under considerable pressure. In this context, the report argues that Nepal needs to focus on three critical areas in order to accelerate economic growth and development against a background of resource scarcity: (a) significantly improved macroeconomic and sectoral policies 'ncluding increased emphasis on human resource development and privatization); (b) increased mobilization and better management of limited public resources (including prioritization of the public expenditure program and public administration and enterprises reform); and (c) improved project implementation as the principal means of accelerating growth and development in the near-to-medium term. As a prelude to this discussion, the report also evaluates Nepal's progress in implementing structural adjustment programs since the mid-eighties, and the causes and consequences of the recent fiscal deterioration. The report concludes with aid recommendations for FY93.  IDAL PUBLIC 3ZSoU3l NAMNUIMET IN A URSOURCE-SCARC COUCKY TABLE OF CONTENTS Page Country Data Executive Summary ........................ ..... . I. PROGRESS IN ADJUSTMENT AND RECENT ECONOMIC PERFORMANCE ........... 1 Introduction and Background ................................. . 1 Overview of Recent Economic Performance ...................... 3 Economic Growth Performance ............. ..................... 7 Agricultural Polces.... l c....i ...e s... 13 Public Sector Polces........ c.i es.... ... 0.. 1C Trade and IndustrialPolicies................................ 18 Balance of Payments Developments.. 21 Progressi n Poverty Alleviation....................0........ 27 Short-Term Economic Prospects .........................29 II. EMERGING FISCAL PROBLEMS - CAUSES AND CONSEQUENCES .............. 34 A. Introduction ...................... 0.0............................... 34 B. Recent Trends in Public Resource Management ............### 35 C. Causes of Recent Fiscal Problems ............................ 42 III. ECONOMIC PROSPECTS AND ECONOMIC MANAGEMENT IN THE SHORT-TO-MEDIUM TERM ............ .. so#* ... s ......... .... .. 67 A. Intoutio r............................ 67 B. Medium-Term Prospectso.... ...... .... . . ... .0 .... .. 68 C. Development Strategy and Economic Management in a Resource-Scarce Situation.............................. 76 Promoting Economic Growth. ............................ 77 Public Resource Management............................ 78 Promotion of the Private Sector....................... 81 Human Resource Development and Poverty Alleviation.... 82 Envliroment .........rt...o..................... ..... 84 Public Administration Refom............... 8S  IV. POSSIBLZ ADJUSTMENTS IN THE PUItLIC EXPENDITURE PROGRAM .......... 91 Introduction .......... .......................... * ... **...** . *., 91 Agriculture, Irrigation and Forestry ........................ 92 Irrigation ...................................... 93 Agricultural Services r v i c es.......................... 99 Forestr y .................................................... 104 Indsr ............................. 106 Social Sector Expenditures.................................. 109 Education ....................................... 109 Health and Family Planning .................................. 113 Transport ....................................... 116 Power ........................................... ... ....... 119 V. IMPROVING PROJECT IMPLEMENTATION PERFORMANCE AND AID RECOMMENDATIONS FOR FY93 ............. ..... ......................... . 124 A. Improving Project Implementation Performance ................ 124 Introduction .............................. 124 Recent Performance ........... ............................. 124 Improving Implementation Performance ........ ................ 133 Procurement ........................ *...... t.....*..... 139 Institutional Development.* . .. .......... .... ...... . 140 Financial Performance .. . ........................... 142 B. Aid Recommendations ......... ......... ............ *-* .. .. ..-.. 143 Aid Recommendations for FY93 ............... ........... 146 STATISTICAL APPENDIX MAP This report was prepared by a team led by Para Suriyaarachchi and consisting of Albert Agbonyitor, Vidya Shetty, Neil Hughes, Linda Lowenstein, Tom Tsui, and Guozong Xie (World Bank) and Rajat Nag (Asian Development Bank). Inputs were also provided by Nigel Roberts and Bigyan Pradhan. Anju Sachdeva provided administrative and secretarial support. The report was discussed with the Government of Nepal during March, 1992.  List of Text Tablos Pse - *1 1.1 Structural Adjustment Program - Key Macroeconomic Targets, PY86-FY91 .... ...... 9-00.. , 0 .... ...... 4 .le 1.2 Indicators of Macro-Economic Performance .............. ....... 6 T e 1.3 Macroeconomic Balances, FY81 - FY91 .................. .......... 8 Table 1.4 GDP Growth, FY66-FY91 .... ....................................... . 10 Table 1.5 Growth in Agricultural Production ............................ 12 Table 1.6 Balance of Payments, FY81-FY92 ........ ........ ............ 22 Table 1.7 Composition of Exports, FY81-FY91............................ 23 Table 1.8 Imports by Major Commodity Groupings, FY81-FY91.............. 25 Table 1.9 Direction of Trade, FYl-FY9 8..........**...... ....... 26 Table 2.1 Government Expenditure and Its Financing, FY75-FY91 37 Table 2.2 Selected Revenue and Expenditure Ratios, 1985-89 39 Table 2.3 Financing Development Expenditures, FY75-FY92 - Summary 41 Table 2.4 Availability of Resources for the Development Budget, FY89-FY91 . .................. .... . 42 Table 2.5 Government Regular Expenditures, FY81 - FY92 ................. 46 Table 2.6 Composition of External Assistance, FY75-FY91 ................ 47 Table 2.7 Debt Service Payments, FY86 - F Y 9 2 ............ 49 Table 2.8 Sectoral Composition of Development Expenditure, FY80-FY92 . ............ 51 Table 2.9 Composition of Development Expenditures, FY80-FY92 - Summary ......................................... . 52 Table 2.10 Foreign Financing of Development Expenditures by Sector, FY80-FY90 ........................................ . 53 Table 2.11 Government Recurrent and Capital Expenditure, FY80-FY91 ...... 55 Table 2.12 Total Compensation of Government Employees, FY90 and FY91 .................................... . 56 Table 2.13 Central Government Employment, FY85 -PY91 ...................... 59 Table 2.14 Public Enterprises' Losses, FY86-FY91 ........................ 61 Table 2.15 Government Subsidies and Transfers to Public Enterprises, FY90-FY92 .... ...................... . 62 Table 2.16 Development Budget - Availability and Use of Resources, FY 89-FY9l.l.. ............ 65 Table 3.1 Key Economic Indicators and Projections, FY90-FY96 ........... 71 Table 3.2 Budgetary Outlook, FY90-FY96 ......................... 72 Table 3.3 Balance of Payments Sumnary, fY90-FY96 . ............... 74 Table 4.1 Government Expenditures on Agriculture (Re. Million), FY81-FY92 ....................................................... 94 Table 4.2 Government Expenditures on Agriculture (Percent), FY81-FY92 ......... ....0... .*.O... ... .......................... 95 Table 4.3 Budget Allocations for Agricultural Services, FY92 ........... 100 Table 4.4 Fertilizer Subsidies, FY89-FY92 .............................. 102 Table 4.5 Forestry Allocations, F Y9 0 - F YQ2 .........................*# 105 Table 4.6 Budget Allocations for and Expenditures on Industry, FY89-FY92 .......... . ........ ..... .. . 107 Table 4.7 Education Budget and Expenditures, FY88-FY92 ................. 110 Table 4.8 Budget Allocations and Expenditures on Health, FY89-FY92 . 114  Pans Table 4.9 Budget Allocations and Expenditures on Transport, PY80-FY92........................ *............ . 117 Table 4.10 Proposed Power Investment Costs ............................ 120 Table 4.11 Government Allocations & Expenditures on Power, FY88-FY92 .... 123 Table 5.1 Expected Average Economic Rates of Return, 1980-PY89... ...... 126 Table 5.2 Distribution of Problem Projects, FY88-FY91 ................. 128 Table 5.3 IDA Distribution, FY88-FY91..................... ............. 129 Table 5.4 As4an Development Bank's Disbursement Performance .........*6.. 130 Table 5.5 Total Aid Comuitments, Disbursements and Available Pipeline, FY89-FY92 . ... ....... ...** ....... ... .....*..... 131 Table 5.6 Foreign Financing Requirements for the Medium Term ........... 147 Figure 1 Nepal Exports .......... ............................... . 24 Figure 2 Government Expenditures & Its Financing a. 3............. 37  Page 1 $ 2 COUNTY DATA - NV'AL mm& POPULATION (1900) DENSITY 1U7r, 1 ka2 TEI.9FTfTlon 1U p r ka2 Rote of Crowth: 2.03 EOULAtION CHARAC ISTICS (1990) HEALTH (1967) Crum El mm Rto (per 40.0 FPo-pltion per Dhy.lciant 80,230 Crd. Deth Rote pr '000( 14.0 Popuirtion per hospital bed: 5,721 Infant Mortality (per '000 iIve births) 121 tNCOS D1RIM UtO DISTRIWTTON OF LhN OWNERSIP (1979) i of n oations nco, hlghet quintile .. X Own)d by top 17 of own ro U of national Income, lowest quinti lea . ownod by *aoI leet 10 of owners: ACC TO SA WATEt (1908) ACCESS TO ELECTRICITY (1961) SWor popiitlon - urban: 77.9 x of populatlon - rural: 27.2 NUWTII (1909) EDUCATION Calorio-Tntake per person 2,073 Ililteracy rate ( ot Per capita protein Intake (g/day): 58 population) 06.2 (1907) Prlimry school enroll mnt - (X of relevant age group) 66 (1986) ONP PER CAPITA IN 1900: USS170 !/ MMOSS DOMESTIC PRODUCT (FY90) US l Millon % MP at Market Price. 8,118 100.0 Gross Domestl_ Investment 666 18.2 Gross Natlonal Savings 249 8.7 Current Account Balance 816 10.2 Exporte of Goods, WFS 880 18.8 Imports of Goods, NFS 701 22.6 OUTPUT IN FY91 Valuo Added usir1T M AgrIculture 1,624 69.7 Industry 480 14.1 Services 600 26.2 Total -8,04 lOOO GOVERNMENT FINANCE Central Government Re. Million X Of GOP FY90 FY8 FY890 Current Revonue 9,288 6.4 10.5 Current Expendituro 11 671 11.6 18.4 Current Blane -2,UI -- 4 Capital Expenditure 7,798 8.7 8.8 W Calculated In accordance wlth Atlas methodology. Not aveilable.  Page 2 of 2 MWNVY CjRSDT AND PRIMC"ESvt 1 FY*7 FYfl FY69 FY90 FY91 l-ri I omv '7 - outanding, end of pe1oi) money Surply 10,455 2*,297 Wt., 17,49W 21,429 2",006 X1,562 37,708 Bank Crodit to Public Sector 5,904 7,654 14 10,200 10,761 14,51S 15,9W 19,015 Bank Credit to Privet. Sector S,042 4,89i . L2 7,285 9,244 12,071 13,694 15,6S2 (A0t.. 4A.a&ges or Inea Numbers) Money as 3 of 00P 2. 6 211 W0.0 80.2 31.6 $5.7 55.6 57.5 C.naemor Price Indx (1972f/P7100) 2694 I 4 5.5 366.7 409.1 435.2 485.4 582.8 Annuol Percentage Change. ins Consuwr Price Index J. ! . 15.9 13.5 11.0 6.5 11.5 9.7 Bank Credit to Publlc Secter 31.V Xo-- 10.5 11.5 5.7 $4.6 10.0 19.1 Sank Credit to Private Secor S1 ,t 27<k 24.0 16.0 27.6 30.6 0 15. 11.$ ALKE f ftAYMENTS MERCHANDISE EXPORTS (FY90} FY67 go FY6n FY90 FY01 USS Mlillon Percent Jute ow 2 Experts of GoodS Ws 449. SO9S. 2 82.0 379.8 461.5 Carpets 61.6 45.6 Imports of Qood., WFS 5669- 728.9 664.2 70*.V 619.4 arments 40.1 27.4 Resource Balance -249. -8.7 -801.3 -420.0 -364.1 Hide, and Shine 10.0 5.6 Other 57.9 21.2 Net Factor Income p -.86 -51.6 -56.1 -6.7 Total 1 7 1 Net Current Tronofrn ' 74.9 57.5 01.2 54.7 Balance on Current Account -.-i -94 -267.6 -295.6 -8165. -580.1 EXTERNAL DEBIT. June 80.1990 US$ Million Officiel