RESTR I CTED Report No. SA-7a Inis reporT was prepared for use witnin Tne Bank and irs amiiaTea organizOtions. They do not accept responsibility for its accuracy or completeness. The report may a no be publishedl nor may it be quoted as representing tneir views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERINATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION ANTD PROP ECTS7rl OF NEPAL (in two volumnes) VOLUME I MAIN REPORT June 26, 1969 South Asia Departrrient Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
RESTR I CTED
Report No. SA-7a
Inis reporT was prepared for use witnin Tne Bank and irs amiiaTea organizOtions.They do not accept responsibility for its accuracy or completeness. The report maya no be publishedl nor may it be quoted as representing tneir views.
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
INTERINATIONAL DEVELOPMENT ASSOCIATION
CURRENT ECONOMIC POSITION
ANTD PROP ECTS7rl
OF
NEPAL
(in two volumnes)
VOLUME I
MAIN REPORT
June 26, 1969
South Asia Departrrient
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GRTTRPENGYV EUTTTVALT.rNTS
1 Nepalese rupee = U.S. $0. 1O1 U.S. dollar = NRs 10. 1251 Nepalese rupee = . 74 Indian rupee (IR)1 IR = NRs 1.35
This report is based on the findings of a missionthat' visited Nepal from Mlarch 15 to April 6, 1969.The mission consisted of the following members:
King, Benjamin B. - Chief
Browin, Dorris D. - Agricultural Economist (Consultant.)
Erkmen, Esref Power Engineer(part time)
Hardy, S. Clifford - Transport Engineer(part time)
Kavalskvy Basil rf. - Gen-ral Economist
Mark:gren Olle J. - Education Specialist
Wilhelm., Rolf E. - Ger,eral Economlst
CONTENTS
BASIC DATA page(and Note on the Nepal Calendar and Fiscal Year)
SUMI4?ARY A.ND CONCLUSIONS i -
I. THE STATE OF THE ECONOMY 1
The Hills and the Terai 1
The Meaning of Development 2
The Agricultural Economy 5
The Pattern of Trade 8
II. RAISING RESOURCES FOR PUBLIC INVESTMENT 11
The Resource. Potential 12
Expenditure 15
III. PUTTDIG RESOURCES TO WORK 19
The Short Run: The Need for Concentration of Effort 20
1 This does not take into account the loss of US$ 1.85 million as a conse-quence of the British devaluation. The actual rise in reserves was 5.8million.
Not. on the 4 e- a 1aea ar. ?ITca Yea:r± UUL U±l UII INUPcL_ ~aJe±1IULtd± d±±U L'Lc- 1UCd±J
buatiustics are given by years according to the GregorianL caLendarqNepal's fiscal. year begins with the month of Shrawan by mid-July(usually on July 1i or 16) and ends with the month of Ashad.Nepal's calendar year starts three months earlier, in mid-Aprilwith the month of Baisakn. The Nepal fiscal or calendar yearscorresponding to the years of the Gregorian calendar are givenbelow.:
i. Only twenty years ago Nepal was an isolated, feudal kingdom.Since the revolution in which King Tribhuvan displaced the Ranas, thecountry has in some ways made impressive progress. A number of youngNepalis have been trained abroad and have ioined the civil service: manymore trained people are needed. A sense of national unity is being fosteredthrough an ind-irect system of representation in the Rastra (national) Pan-chayat. Although still limited in quality and quantity and unbalanced atthe variniiet levelsj edl-r.atjn0 ex.ists l¶.There there T T,as vi'rta1lly none before=The green revolution has arrived on a small scale and an attempt has beenmade at land reform.
ii. h network of main roads is urder way. The first, from the Tndianborder to the capital, Kathmandu, was built with Indian aid and has sincebeen prolonged to the Tibetan border w-th Chinese aid. .A East- West high-way has been planned along the length of the southern, flat part of thecountry known as the Terai -whlere about one third of the people live. Theeastern half is nearing completion with American, Russian and Indian aid.,4o be u follwed by e!-ension westward with Brit's' and indain aid.
iii. E'enetration of the hills is more difficult. In addition to theroad through Kathmandu, one has been built from the Terai to Pokhara (westof Katm-nancdu) with Indian aid and a start has been made on a lateral roadfrom Pokhara to Kathmandu with Chinese aid. Two other north-south penetra-tion roads are planned in the far west with American and Indian aid, withothers to f'ollow once a study by UNDP on priorities has been completed.
iv. N'Ievertheless, much remains the same. Economic growth, which Eub-stantially means agricultural growth, has been very localized, mainly ccn-fined to the Kathmandu valley and scattered parts of the Terai such as therecently developed Rapti Valley. Nepal is still a loosely linked series ofmini-economies. Most of the hill area is only accessible on foot and infra-structure means trails and footbridges; growth has probably taken placeunder population pressure by the extension of cultivation to progressivelyless productive land with only the safety-valve of emigration to slow thisprocess down. Population growth as a whole can only be roughly estimatedat 2 percent per annum. It is unlikely that output per head has grown anyfaster in recent years. It is hard to say what the level of income perhead is; three quarters that of India would be a reasonable guess.
v. The possibilities for raising government revenue are limited bythe lack of growth in disposable income per head, by the very low level ofincome in much of the country and its inaccessibility, by the difficultiesof defining and administering (in an equitable waay) the traditional formsof Land tax and by the existence of a virtually open border with India.Revenue is still only of the order of L percent of Gle. but even this isa great advance on the very low level of a few years ago. Though thegovernment has done well to do even this much, it has been helped by therapid increase in rice prices. Most of Nepal's trade is with India and ricefrom the Terai is the Principal export With the improvement in the terms
of trade, imports and customs duties have increased. This windfall toNepal and to its exchequer willp however, not continue; on the contrary,the terms of trade are beginning to shift the other way.
vi. Roads are not the only infrastructure being built, though the;yaccount for half the public investment expenditure. Two large irrigatiOnprojects are under construction, while power capacity will soon be greatlyin excess of demand. In fact, capital expenditure in excess of demand hasalready appeared in some fashion in almost every sector, while ancillaryexpenditure is starved.
vii. The investment in roads, and with other types of infrastructure,is necessary in a broad sense, if the country is to be opened up at all, butat this juncture, it carries severe growing pains along with it. With allthe infrastructure now being built, there is a crying need to use it to thefull for development. This will mean traininR of people, organization ofagricultural services, construction of feeder roads and distributary canals.But here the government is caught in a squeeze. Its own revenue just aboutcovers current expenditure; development expenditure (according to the latestdefinition) is financed by foreign aid. The things which are financed byforeign aid are, however, determined by bilateral negotiations. Collectively,they do not alwavs represent the best use of all the available resources.
viii. The government is also concnrn-ed3 cuite understandably,with uni-fication of a country which has so long been isolated not only from theoutside world but also within itself. MarIrina this obientive urith thatof growth in income is not going to be easy. There is a shortage of peopleable to formulate pronects and to put them into some kind of framework;nor is respect for coordination of related activities very widespread.
ix. The immediate task in the next five years is to concentratefinanncial resources and human effort on getting higher return- f-o.m theroads and from other new investments like the Chatra canal, which will soOilbe comr.pl e.4 with. + Tn 4n d .A s y e ct, ) J thr ULs b e e n littl prearati
for it. Beyond this, agricultural research, which has had its successesalready, needs to be strengt."hened by making it more responsive to theeconomics of farming and to the need for diversification. The main hopefor d;- rs-iication, however, will come from tourism, a small growth- sectoalready, and from forestry and forest industries. Nepal has valuableforests an,d already exports timber, but this national asset - literally,since it is national property - is now being wastefully and illegallyexpviU Leu.
x. Diversification of the origin and destination of trade is alsoa matter of concern to Nepal. At present, the principal exports tocountries other than India are jute and jute products, artificially encour-aged by an import entitlement scheme. To the extent that this has enabledNepal to build up its reserves of convertible currency, the scheme may beaccounted a success. However, its success rests on re-exports to India,which do not necessarily have a long-term future. The long-term diversi-fication of trade depends on greater liberalization of transit rights to
asb tPakistan aid of shipping facilities through ports other I hia Calcutta.These various aspects of relations between India and Nepal art governed bya Treaty which is to be renegotiated in 1970.
xi. The preliminary draft of Nepalis Fourth Plan (1970/i to I1974/)
envisages a step u) of only 30 percent in development expenditure over theThird Plan. All this really means is that the rate of expenditure of thlelast year or two will be maintained over the next Plan period. Given thelow level of per capita income and its slow growth during the recent past,a more reasonable goal would be to double the level during the next fiveyears. The additional investment would be largely ancillary expenditureto ensure that existing infrastructure yields an adequate return. Givensome economies in current expenditure, a modicum of deficit financing,some external borrowing and some additional grant or grant-type aid, atotal program of the order of NRs 2,500 million, over five years, financedabout one third by Nepal and two thirds through external assistance seernsboth a desirable and feasible provisional target, with the proviso thatthe funds are efficiently allocated and utilized.
CHAPTER I
THE STATE OF THE ECONOMY
The Hills and the Terai
1. From Kathmandu, the capital, northeast to Jiri, where there is aSwiss-aided proJect, is about 35 minutes in a STOL plane. By road, if therewere one, it might be three hours. On foot, it is six days' march. As diis-tances co in Nenal. this is not verv far.
2. The hills and mountains of Neps.l constitute three nuarters of thecountry and nearly two thirds of the people live there. Communication isstill rudimentsrv- There were no roads at all until 1956 and penetration isonly just beginning (Map 4). There are only two commercial airfields in t'hehills besideG Kathrnnndu! aattprpd STOL RtrinR nervr An sdministrative npr.-pose, but their economic value is limited.
3. With few exceptions, everything that has to be carried in or outmust go hy peak animal or headload If one talks of infrastructure in thehills, it means trails and small suspension bridges. Despite the fact thatonly h4gh-value goAa ncan to anA the cost, +here i8 a fair oTn off +traffic,
especially in ghee, but also in other products such as foodgrains, medicinalherbs and seed=potatoess; salt and cotton textiles are essential imports.
i4. Men are an equally important expor. Work in India or in the British
army overseas has been a traditional occupation for the hil:L people and stilli8s. `The 191census recorded J300,00 peopl asI absnt or ix nts or more.While this would be only of the order of 5 percent of the hill population, itrepresenls a much higher proportCJion of younger men. ln ar, extreme case, tUheSyangJa district in the western hills, there were only seven men to ten womenir. the 20-3n age bracket.
S. IT 4 not A 4 -PP4 -I1 + t- * r -,.. Tv o'd censuses are to be
believed, the population, hitherto stable, has doubled in the last forty years.Al--St the only way of p-ro-idig ne susistence income to more people 'asbeen to cultivate more land. Consequently it is not only the valleys whichar CU.1+4-vte 'k .4-_wA -^ 41, of _tAe * m; Is_de__ ___ _____-2 s W J..VL 'LU U 4. A_ LCZJ VJ U" " U w.L L%L %IV LLU .LC.I.I1 IL_= -- =Val-,Y
few feet in strips often a few yards wide. It may be assumed that extensionofe cuOUtivatICion up or dow th -e hills has -tn the4 tak'r, up1.- -v -0 t,uul'45.'~I.4.G'.L~.lI A~ J.L ALYWLI% U A4.L A "MDa 1U=O.LI. IULL tUL&.U~LL& "Y .U l UU U U.
less productive land at a high cost in human labor. Pressure on the land hasbkeen comipounde-d bDy e-ro0sio.-0.
6. Until there sre chesper mesns o, trAnsportiUL gUudZ, there i8 littlepossibility of more than marginal improvement. Considering the limitations,yields are '-re S" quite high, as far as one knows. Improved seed can help,but the cost of transporting fertilizer is prohibitive. Potential exports,.likAe IXosU jr-UtsU65 or IruIL, are not yet a practical consideration.
7. Wai;er is there in abundance. The three great rivers or Nepal, theKarnali, the Gandaki-Narayani and the Kosi have tremendous reserves of hydropower and irrigation water. But the scale is large and the market for power
is principally in India; and India has, so far, shown little interest in de-velopment upstream. As far as the hills are concerned, smaller schemes arethe only possibility.
8. The Kathmandu valley is an example, perhaps a peculiarly favorablysituated one, of what can happen. It is a small valiey oI- no more tnan 220square miles with half a million people in it. Since 1956, there has been aroad to India; a long and tortuous one, but still a road. In spite of thedensity of population, the valley has recently become nearly self-sufficientin wheat and potatoes in addition to producing quantities of vegetables forthe relatively affluent local market. The familiar inputs of fertilizer,water and improved seed have been responsible, aided perhaps by the imponder-able elements of education and contact with modernization, including a goodresearch station.
9. Immediately south of the Mahabharat Lekh, the main range below thehigh Himalayas, is the area known as the Inner Terai. This is a series ofeast-west valleys between the main range and the lower Siwalik range (Maps 1and 2). This is a rather lightly populated area with much hardwood forestor jungle and, until eradication started, malaria. The jungle, which is beingcleared, is the main reserve of cultivable land. The forest, which extendsin places southward into the main Terai is a valuable resource whose dimen-sions are only beginning to be realized. It has so far been exploited hap-hazardly and in large measure illegally.
10. The main Terai, which is part of the Gangetic plain geographically,has high densities of population except in the Far West where rainfall is low.Close to one third of the people live in one sixth of the total area of Nepal.But this is in terms of area alone. In terms of cropland, the proportionsare quite different, since the Terai includes over 60 percent of the total.Over 40 percent of the total is in the Eastern Terai 1/ alone, where arounda quarter of the population lives. Up to now, the Terai has been economicallyas well as geographically part of the Ganges basin. There are a number ofsmall towns with processing industries, which also act as collection and dis-tribution points for the limited traffic from the hills. The Terai is a sur-plus grain producing area, plus some other products like oilseeds, jute,sugarcane, and hardwood. The surplus goes directly to India and the proceedsare spent on Indian goods. Trade takes place across a virtually open borderand its size is a matter of guesswork.
The Meaning of Development
11. Certainly in Nepal, as elsewhere, development connotes growth ofincome. Income per head is at present very low. Converting official figuresinto dollars per head is not a very satisfactory approach to saying how low;in default of some easily understandable measure of poverty, a comparison withIndia is probably as much as one can do.
1/ In common usage, Eastern means east of Kathmandu. The remaining twothirds of the country is divided into "Western" and "Far Western" (Map 2).
12. Agricultural income per head in Nepal is about the same as Ind:la's,perhaps a little higher. The surplus rice of the Terai and livestock productsof the hills about make up for the varied production of cash crops, pulses andoilseeds in India. So if Indian income per head is put at 100 and agricutura.income at 45 to 50 out of the 100, Nepal starts with a base of 45 to 50. Butthere is not very munch to add. in the 1961/2 census o8 percent of househIoldswere recorded as agricultural and one can hardly expect much change since.Industry is still very small outside the usual run of rice miils. Servicesare an unknown quantity but certainly on nothing like the Indian scale. In-come from forestry is certainly much larger per head, but how much is unc:er-tain. To say that Nepalese income per head is of the order of three quartersof the Indian, is to make a wild guess, but it is hardly possible to do betterin our present state of ignorance. 1/
13. National product has grown during the sixties but probably notfaster than population by any but a small margin, if at all. On the otherhand, Nepal has reaped same advantage from the improvement of its terms oftrade, as have Indian farmers for the same reason. This may be part of thereason for the successful effort in recent years to raise public revenue andfor the increase in private savings. Though additional opportunities exist,they are limited. At present government revenue just about covers currerntexpenditure. For some time to come, most of the financial resources fordevelopment must comwe from abroad.
14. Platitudinous as it may be, one cannot escape from the observationthat, in such circumstances, the husbanding of its resources and their effi-cient use is of peculiar importance to Nepal - much more so than in richercountries. But here two difficult, though not insuperable, problems have tobe faced. One is that, in the last twenty years, Nepal has had to make a.great effort; to create a single economy - indeed a country - out of many smallmini-economies whose connections, such as they are, are often as much withneighboring countries as with each other; nor is this effort by any means over.The second is that funds for development come almost exclusively from foreignaid and this leaves little room for manoeuver. The pattern of development issimply the sum of the projects and the services provided by the donors, whosedifferent attitudes, special interests and administrative processes presentNepal with an additional complication in the allocation of the resourcesavailable to them.
15. In practice, most of the larger projects so far undertaken centeraround the Kathmandu valley, the Eastern Terai and, most recently, the WesternTerai. The east-west highway (Mahendra-Rajmarg), which is planned for thewhole length of the Terai, is already-under construction eastward from theBirganj-Kathmandu road to the Indian border. Westward there is already oneextension through the Rapti valley (part of the Inner Terai) and a start isbeing made on a further extension as far as Butwal.
1/ See Annex I for further discussion.
16. The Chatra canal, a major irrigation project by Nepalese standardsis under construction in connection with a much larger Indian project, on theKosi in the Eastern Terai and should be finished in one or twv years. Thereis a similar project in the Western Terai on the Narayani (or Gandak), but itis RoinR very slowly. Besides these there are other irrigation projects forsurface and groundwater under consideration in the Eastern Terai.
17. The only important infrastructure in the hills outside of Kathmanduconsists of three roads. Two of them will end up in Pokhara, in the Westernhills. Pokhara is an offshoot of the small but budding tourist industry andhas a commercial airfield. One road- which connects Pokhara to Butwal in theTerai and Sunauli on the Indian border, is almost finished; the other, recentlystarted- will connect it to Ksthmandu. The third road- already finished- goesfrom Kathmandu to the Tibetan border. The last two projects are financed andeonstrunted with Chinese aid-
18. Thus, there has not been much investment aetivity in the Eagternhills and virtually nothing in any of the Far West. Pressure to redress thisis virtuallv inevitable. Develonment in Nenal is not only a matter of rais-ing incomes but of unifying the country. The problem is to marry these twonhi&ntives in the most oynpditious And ThAst costly wavy not to nut sn arbi-
trary priority on one of them nor to consider them in isolation from eachother
19. Sinee 1951 when the regime 0f the Rana family eAme to An end, Nena1
has made great efforts to repair its century-long isolation. A nationwidestructure of political arndr Ptonnmin institutions has bhen cresateA .hiph is
already a force for making the needs and aspirations of each part of thecountry heard. In 1962 a system of panchayats + ns satabis4qhed. These pan-chayats, which are elected in the villages and the 75 new districts, havebeer. created no+ only as a form of -olitical system buit in order to generat,e
initiative for development on the local level. On top of these is the RastraPancheyat, or not+4^noel nchayat AA4"n4l+-+ 4 velr, tbhe A4.+.4^+ are dlA4
vided into 114 zones, each with its zonal commissioner (Map 3). Many newgover-ment departments, a number of public corporations, a nationwide systemof cooperatives and a university have also been created.
20. All this, coupled with the administrative inexperience especially.Ln the ear'LiLer yFeara, '"as evidently created prVo.LeL." VI, incrna.l cuurudinatiouand administrative effectiveness. Criticism of the weaknesses of this struc-ture as an instrument of development 's frank and not -_un-Cmm[on Iin Nepa, butit is a little unfair, even if it is true. Recently, the government has takensteps to remedy the situatioU. Panchayat training sehools have been openeaand courses given to panchayat leaders; but it is too much to expect thatinsig'ht into the complexities of development and adaptation to new institu-tions would take place quickly. A panchayat, which builds a road that iswashed out by the monsoon, is not to be blamed if it has no technical guid-ance. Superimposing newer institutions on the existing new structure in thehope that they will do better is not necessarily the answer - and there is atendency to do this.
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21. Real unification can only come tnrough the creation O0 cheaper a.nuquicker transportation for goods and men. In Nepal this substantially meansthe conservation of the few existing roads and the building of new roads,tracks and porter trails; these can also serve the purpose of growth of income.The critical questions and the difficult ones will be first where to buildthem and to what standards; and, secondly, what steps to take to get themaximum advantage out of them, once they are built.
22. Given the meager level of Nepalts resources, a nice balance has tobe kept between the creation of infrastructure and expenditure to reap thebenefits from it. At present, the balance is weighted on the side of creationof infrastructure, in some cases to standards of capacity which are not strictlynecessary. Measures to make full use of it, such as the construction of feederroads or the preparation for use of water from the canals to come, have notbeen taken.
23. It is here that the nature of foreign aid impinges on the problem.It is in the nature of foreign donors to prefer infrastructure as a channelof aid and, perhaps with the laudable motive of "doing the job properly", tooverdo it. Nepal has a difficult task ahead, first in making its own deci-sions as to where resources should be allocated and seconduly, in persuadingthe donors to go along with the priorities.
The Agricultural Economy
24. Agriculture and forestry provide employment to about 93 percent ofthe total labor force at the average rate of 2.3 agricultural workers perhectare on the 1.84 million hectares of net cropland. At Indian 1960/1 whole-sale prices the gross value of output from crops and livestock was approxi-mately IRs 1,200 per year per agricultural holding during the past three years.The per capita income was IRs 143, about the same as in India or a littlehigher. Over 8.6 million hectares is in forest land, alpine pastures andwasteland of which perhaps 400,000 hectares in the Terai would be productivecropland if cleared and converted. Forest land products include fuel, fodderand grazing for livestock, building materials, sawlogs, pulpwood and medicinalherbs. The gross value of forest products harvested is very uncertain but thevolume probably is in the range of 30 to 40 million cubic feet each of sawlogs,mostly sal, and of fuelwood. At these harvest rates the value would exceedthat for any other crop except rice; the potential harvest, no doubt, exceedsthat of rice.
25. Since 1960, a number of institutions have been expanded or estab-lished to help stimulate a more rapid growth in agriculture, including for-estry and fisheries. The Ministry of Agriculture and Food established de-partments for education and research, horticulture, livestock, fisheries, andagricultural extension to perform research and service functions on farmingproblems and to extend this information to farmers. Eight research stationsfor cereals and cash crops and 17 stations for fruit and vegetable reseexchhave been established since 1963. More responsive wheat and potato varietieshave been identified and the seed multiplied and distributed to farmers. TheExtension ])epartment has posted a District Agricultural Development Officer(DADO) in 43 districts and from 1 to 40 Junior Technieal AaaiRtantR (JTA) ineach district.
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26. A- Agr4-ic+ur,al Supply or ieH, woo e%vfrfaniiqaf in 19I6 as a public
sector business firm to import or procure locally the agricultural production._A_t Ites nee 1b.y f arm rOs;Ou iag 10 nnn +-r"a ,4 Pa.+414,nma 1 Rnnre quLsO.L O X L, *j -J l1a- -.J - -- ----- , -- -4 a .,% _
tons of the improved cereal seeds and NRs 600,000 worth of agricultural imple-ments had been distributed th-ough a system of 4 ^-ooperatives and 219 priratedealers licensed as retail distributors.
27. Government funds were loaned to farmers through the Central Coop-erattive Bcani and the system ofL local cooperative societies, startir.g i 1963.More than half the growth in the Cooperative Bank's services occurred in
KaXmduV le. 11-11 e-r.- 80 ------- Af the ioans were use' fPor cons-1ptonKathmand1u va.ll.y . 'VV.L VV~ P=Z I.;= U .k VI IIAW AU.UO W1 b. L JL I .W u1541..JJI
purposes, and the majority were not paid when due. This led to the functionsof this organization being transferred to a new institution, the AgriculturalDevelopment Bank in January 1968. Functions of the ADB were expanded to in-clude providing loans and banking services to individuals, cooperative soci-eties and agribusiness firms for agricultural development purposes. Branchbanks were set up in i4. locations. From 1963 to March 1969, the Central Co-operative Bank and its successor the ADB had extended NRs 16 million in loans.Lending procedures require each farmer to get the approval of the JTA, thelocal panchayat and the local cooperative for the amount and use to be made ofthe loan, but in February 1969 overdue loans amounted to 24 percent oI theloans outstanding and 17 percent of loans due.
28. Two additional new public sector corporations serving agricultureshould be mentioned. The Food Management Corporation functions only wnendirected by government to purchase and distribute scarce consumer goods atsuDsidized prices. The Resettlement Corporation provides iand and developmentplanning services to refugees and surplus hill families who settle in theTerai and convert forested land to farmland.
29. Technical and financial services for minor irrigation are admin-istered by the Ministry of Agriculture and Food. Projects with a capitalcost of over NRs 300,000 are the responsibility of the Ministry of Power andWater. Since 1960 the cropland area with irrigation resources has doubledand now stands at about 9 percent of the gross cropped area. A major projectis under construction on the Sapt Kosi. Economic feasibility studies are inprogress for projects on the Sun Kosi, Kamla, Bagmati, Trisuli, Gandak, Karnaliand Sarda rivers. Groundwater resources are being tested at Birganj andJanakpur and will be surveyed in the Western Terai.
30. All forest land areas in excess of 3.4 hectares are, by law, a partof the national forest and subject to management control by the government.These resources are administered by the Ministry of Forests with its stafforganized by area and by function. The Ministry contracts for the sale ofmarketable timber and forest grazing rights, but revenues from these productsaccruing to the national treasury have, if anything, declined in the last fiveyears and would appear to be far lover than they should be. Much of the har-vesting is the consequence of encroachment on the forest or theft.
31. The Land Reform Ministry (formerly a part of the Ministry of Agri-culture and Food) is responsible for land revenue and compulsory savings col-lections, the identification and recording of land ownership rights, land
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ceiling laws, protecting the rights of tenants, regulating interest rateschared hbv moneyv lendpr smAd for reaigterina and develoning eonneratives.These functions of government have developed as Nepal has changed from afeudaliAt14 to R private onerah4p ennnrnv Rinne 195O0 And montlv sinee 1962.By 1969, ownership had been identified and registered for over half of theestimated -rea of cultivated ltnd. A ne414na varving from 2.8 hectares inKathmandu Valley to 16 hectares in the Terai had been established as the maxi-mum araea of cultivable land any indtvjAnal d-an nYn_ UnTir the Tenancy Act,the maximum rent due the landowner is calculated at 50 percent of the normal,,ield forv. the. -4- n~r ,v,A i^A ljullall hr r,aAAu ~P1i maov4i ~im 1ffah .1n*ta ofyield f +ea cr produc- --- p y The imum r t interest has been set at ten percent per annum.
32. Under the law establishing the Compulsory Saving Corporation each1 der is re-4uireA to Aepom+ AA klor-4 mma Of food_Aqa4va o4a isash aniiiv-
alent of NRs 58 per hectare of cropland operated. 1/ Collections for 1967/84in 34 districtsA were valued -a VD. II mi114o 4v i4A *."A ? NRs 9.5mllion
*IA T %~*~ *. -o w~, - V .. n. .- o 7 . 7" aA... .. . k.&n.. -- t NRs -- - -
in cash. An additional amount estimated at NRs 93 million had not been col-lectedA by the loccall panCkaya+ WardA C--Ittees 'because ofP lack, -- A equate sta-Pet. D ~ hDJ Iyf~ at. .u Ot.LO ~ W " =" %fl.JIUM V A ~ it.t s .L%. IJ WA 14~ A
or storage space, inept management and in some cases malpractice. The Ward£Pa,nchALJa.yst C4.- 1MJLl0ILee-L reloaned. *NR8 80 illiO in skind andU NRs 10 million ir.
cash, mostly for consumption purposes, of which only 76 percent had been re-p aid.. Ope rati ors of the Corporat.ion. w-ere susperdedA iLL. Apr..il. L79J7 perdi-g.L1e IAr
investigation of alleged malpractices.
33. Most of the growth in output in recent years may be ascribed to theactivities O0' these agencies. A comparison OI production in the periou 1965/6to 1967/8 with that in the period 1961/2 to 1963/4 shows no change for rice,maize and pulse; a 0.9 linear growth rate for roodgrains and a 1.8 percentgrowth rate f'or all crops. Growth in potato (18.2 percent), wheat (10.5 per-cent) and millet (4.2 percent) was responsible for most of tne overail gain.A "best guess" is that 10-15 percent of the overall gain came from a shift offorest land to cropland, 40-45 percent from added irrigation, 20-25 percentfrom added fertilizer and the balance from other inputs incLuding new varietiesof wheat and potato seed.
34. Most of the growth of wheat and potato occurred in the KathmanduValley and Central Inner Terai, while most of the growth in jute, tobacco andsugarcane output was in the Eastern Terai. Most of the infrastructure addedsince 1960 is in these regions. The new roads, intensive land reform, agri-cultural credit, distribution of agricultural supplies, agricultural researchand agricultural extension efforts each were concentrated here through specialprograms such as the Coordinated Agricultural Development Program and theSpecial Land Reforms District Program.
35. Nepal's leadership is fully aware that the "growing pains" of shift-ing from feudal stagnation to the beginning stages of growth and developmenthave been severe. They have demonstrated their ability to identify errors and
l/ Absentee landlords pay NRs 38 and tenants pay NRs 20 per hectare. Thisis roughly 5 percent of crop value.
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.o adJust resource -'locationr s and procedures +tar- a mo eff i aonA,U U. LL %I... OJL I C n.A.L JGaJA.. -. ~ a --- , - -v --
efficient approach. Despite this, many serious problems persist such as the.Low .LeveYL of coor%duinLation between dAepartM O Cmnt And .Lm Vi.Les WJWAt AblW
ties for agricultural development; the weakness of technical and managerialaubilities of- sta11 mefmbers in Jkey positions; thei -ULracLti.cs L LU.ti. aJea
where major changes in the rights to money and land are involved; and the im-maturity of the rank and flle of staff. These difficulties are recogn'ized andacknowledged by the government.
36. One must remember that twenty years ago most of the people with theability to read, write and handle the arithmetic of administrative procedureswere located in Kathmandu, isolated from the rest of the country and the out-side world. By now, the new, young and relatively inexperienced staff hasbuilt an institutional framework that could facilitate the achievement of morerapid agricultural development. weaker elements have been or are being changedor eliminated. The need is for guidance and time to solve the more pressingadministrative problems and to achieve a more efficient use of available re-sources and additional capital to add resources where deemed feasible.
The Pattern of Trade
37. Unlike the Himalayas in the North, the southern border of Nepal isnot a natural one. The Nepalese Terai is a continuation of the Indian Teraiand the historic lines of communication run from the Indian Terai towns tothe Nepalese Terai towns. In most parts the quickest route from one town inthe Nepalese Terai to another is through India. For practical purposes Nepal'saccess to all its markets except China, is through India. The vast proportionof trade (about 90 percent) is with India. Indian rupees, which were formerlya legal medium of exchange in Nepal, are still freely convertible into and outof Nepalese rupees, and are used concurrently with Nepalese rupees in the Terai.
38. While there are certain trade regulations, these are frequently cir-cumvented by smuggling along a border which is both difficult to police andeven by these standards, inadequately policed. Trade arrangements between thecountries are governed by the 'Treaty of Trade and Transit', drawn up in 1960,subsequently amended and due to be re-negotiated in 1970. Nepal is permittedto levy duties on imports and exports to India. It may also impose quotas orbans on the import of goods which are produced locally. India in turn doesnot impose general customs duties on import from Nepal in principle, but doeslevy a duty equivalent to Indian excise on particular products. For Nepaleseimports from India a refund of excise duties is given, provided the goods havebeen purchased from a recognized Indian manufacturer or wholesaler.
39. There is an almost complete absence of data on trade between Indiaand Nepal. The most recent published figures are for the year 1963/4. In1963/4 the trade statistics show Nepalese imports from India of NRs 600 mil-lion of which about NRs 350 million was manufactures and the balance primaryproducts. Textiles are not separately enumerated, but amounted to perhapsNRs 200-250 million. In the same year, total recorded exports to India wereonly NRs 300 million. Presumably the balance was paid for mainly through re-mittances and unrecorded exports.
40. It is generally estimated that Nepal exports between 200,000 and.400,00VO tvons of fooidgrains (mainly rLice)l Xo j.dls -i tehihe4iapplying to the most recent years. A rough valuation of this would be abcutlNRs 450) mil.l.ion. ILn idul.U.on thilere are a In-Umber ofO ot'her prOAAUCts1- eXported,of which timber, mustard seed and ghee would be the most important. Total re-
_4_ _ J_ z; n. .LJ.UILL a yL'L&LLLlwb WIJLLJ.I._ un VocLJ _:ILL~,LA.Ly ±lflD Li'.' V A_.L.A. LX- A .m
of imports from third. countries which are then transported either legally orJ. L C .L I A.LLU.I.La. LSLLI.v AUJW. LJ . 1U1. 0 LX ... J k...LL. I mue.L 4 0.cl-ilegal to Inia -i-' amount to 88- muach as NT R 150% milon / The Atotl%
estimate for Nepal's exports to India might be around NRs 850 million.
41. Allowing for net remittances 2/, miscellaneous exports and someacc-um-ulation of Indian rupees, the order of magnitude oi imports might beNRs 1 billion. This would imply an increase of NRs 400 million during theperiod since 1963/4, assuming that the figures for that year are correct. Ofthis NRs 250 million could be the amount by which the value of foodgrain ex-ports have risen. Prices of the goods India exports have remained relativelystable, whereas the prices of Nepalese exports, i.e. foodgrains have risenvery rapidly in the intervening period. The Indian index of wholesale pricesfor foodgrains has nearly doubled between 1963/4 and 1967/8, while that formanufactures has risen by only 25 percent. Nepal has thus derived a very con-siderable advantage from movements in the terms of trade. The same quantityof foodgrains nov buys 60 percent more manufactured goods. The balance of theincrease in imports, NRs 150 million, is probably the consequence of othersources of exchange earnings such as re-exporting.
42. Although holdings of Indian currency of the Rastra Bank are likelyto be only a small part of the total holdings of Indian rupees in Nepal,amounting as they do at present to about NRs 100 million, they form the keyto Nepal's exchange situation and for policy purposes are perhaps one of themost important indicators in the economy. In June 1966, prior to the Indiandevaluation and thus implicitly the Nepalese revaluation, Nepal had Indianrupee reserves of NRa 240 million. The devaluation loss was3 NRs 87 million,and the price advantage of Indian commodities led to a steady drain of Indianrupees despite the high tariff rates which were imposed. By November 1967,the Rastra Bank's holdings of Indian rupees had fallen to Nlis 41 million andfree convertibility was very clearly threatened - the fall of free convert-ibility on the Nepalese side would have precipitated a flight into Indian
1/ It may seem strange to suggest this value when total Nepalese imports from+h4 ~ lv'daV+~
4O a~o ,^,i1 r irc
1iiA a+ ak.,ii4 N!Po 1o MA.41 1 4 'n '.l.+ +It.)'.n ,,,1DrAo-t r- ae valued a+ abu R 0 milli, b
carry a very high premium in India.
2/ At the time of the census (1961) there were about 300,000 Nepalese livingin, IndiAaAA. If 150 - 200 -er sir.gle men in thIi..ow…
ing as 'chowkidars' (watchmen) in the cities - a figure for remittancesofL ab-ou-t l8Tn 1,0-200n million Ai A serFfe to indicate A.he possible dimejasion8.110.UILL8~i~an A.);U aVU MA1.J..L.L±on mIg1±l ~ 0 6V L. ±Ul.U CL L.i USlI UIRel.L
of these remittances. While there are a large number of Indians workingin Nepal many have their families with them aLd most are in very unskiLledand low-paid jobs, e.g. agricultural labor and construction. Remittancesmight be perhaps lERs 50-100 million.
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commodities and very rapidly a de facto devaluation. In December 1967, theNepalese Government devalued and there has been a subsequent gain of Indianrupees with reserves coming back to about NRs 120 million in January 1969.
43. Except for border trade with Tibet, data concerning Nepal's tradewith third countries is more readily available than that concerning tradewith India. Nepal's recorded exports to third countries have grown at a pro-digious rate since 1964/5 - rising from $1.5 million in that year to almost$10 million in 1967/8. This is still only about 10 percent of total exportsbut the proportion is steadily increasing. Of these exports (to third coun-tries unless otherwise stated), nearly 90 percent consists of jute and juteproducts; the proportion between the two is about equal though there are year-to-year variations. The remaining items making up the total are very smallbut have fairly good growth prospects e.g. bristle, mica, curios, carpets, etc.
44. The reason why exports in general and jute exports in particularhave grown so substantially is the import entitlement scheme introduced in1962/3 for exporters to countries other than India. The present rates formanufacturers are 40 percent for raw jute, 55 percent for hessian and 65 per-cent for other Jute products. For almost all other exports the percentage is60. Manufacturers get a higher entitlement than traders from their exports,but their exports need not have anything to do with what they manufacture.Thus a stainless steel utensil manufacturer can buy raw Aute on the market,export it and receive an import entitlement for 40 percent of the export value,while a general trader would only receive 20 percent of the export value ifhe does the exporting.
45. The import entitlement itself is divided into two parts. Say anexporter sells lute goods worth NRs 100; he then receives an import entitle-ment of NRs 65. Of this amount 60 percent (NRs 39) can be spent on whateverhe likes. The remaining 40 percent (NRs 26) however; must be snent on so-called 'development goods'. There is a schedule of development goods, so lib-eral as to defeat the oblect of the exercise. which is nresumablv to channelimports into high priority fields. The import entitlement scheme works, be-cause the imnorts obtained thereby can then be re-exnorted to Tndia, eitherillegally if they are small high-value goods such as cameras, watches etc.,or leaalIv after some nominal nro -rcinz ic donp in Npr-1l A - .tAihn1PQ ct.4lutensils and synthetic fibers. The premium on import entitlements, which arenot off'i4iallv negotiable, enn be as hiah as 100 pPrcent. Some of the Juteon which the import entitlements are earned is smuggled across in the firstnlaee frcrnom Tnfiis Np-rnl- of o-iiv,z derives n nat. gain in ha-d currency and
for that matter in Indian currency as well from these transactions.
46. There has now been an amendment to the Treaty between Nepal and Indiato deal -with thish4a saituation+ . TI bas been agred tbat Nepa1 shou'd 4i- 44-is
exports of stainless steel and synthetic textiles to the level of 1967/8.This will not e;- +h soesibi4tJy _of -u 5gling g ta4idthrug
the entitlement, into India. The Treaty is due to be re-negotiated in 1970,n.d hopefully some y car. b A f .n which. Nepal can earn ber legi .tiUte
convertible currency requirements in some manner which contributes to themutual b .enef1it. of U U b.othL India anA Nepal.
fU A WV' IT
RAISING RESOURCES FOR PUBLIC INVESTMENT
. ~~~ t q ST - s_ % x _ - ttt__ -__ 47[. rublic investment in nepal is probably betweeu enR 20 anu lanu 25 percapita. This is less than half of the comparable Indian figure. Private in-vestment is certainly less per capita being confined to building, land cLiear-ing and terracing, and a small amount of industrial investment, mainly in theprocessing of agricultural products. In an economy such as Nepal, puDlic in-vestment in infrastructure is a pre-condition to the development of the pri-vate sector. It seems reasonable to approach the subject of resources fromthe viewpoint of the constraint they represent on Nepal's capacity to raiaethe level of public investment. in the Nepalese context, financial resourcesare not the only limitation on growth; there are problems of topography, ad-ministrative capacity and manpower availability which in the case of part:Lc-ular projects may reduce returns to uneconomic levels. The preliminary draftof Nepalis Fourth Plan (1970/i to 1974/5) envisages a step up of only 30 per-cent in public investment over the Third Plan. All this really means is thatthe rate of investment of the last year or two will be maintained over thenext Plan period. In this decision, the shortage of financial resources hasbeen the dominant factor.
48. This is not an acceptable level of public investment, given the lovlevel of per capita income and its slow growth during the recent past. A morereasonable goal would be to double the level of investment during the next;five years. Moreover, the additional investment would be largely ancillaryinvestment to ensure that existing infrastructure yields an adequate return.This is because much of the investment is financed by foreign aid which iEi com-mitted to the carrying out of certain basic projects such as the major ronLdsand main irrigation canals. The increased level of investment would provideresources for the feeder roads, the on-farm irrigation works, and, using in-vestment in the broadest sense, the administrative support for these activrities.This has been the major lacuna in Nepal's investment program to date. An in-creased quantum of public investment could go a long way to improving the effi-ciency of exLsting and new major projects.
49. The question, therefore, is how to generate the resources to permita rise in the five-year total of public investment from about $125 million forthe period from 1965/6 to 1969/70, to $250 million for the Fourth Plan period.Government revenues in Nepal (excluding external assistance) are about $3 to$4 per capita. This is among the lowest for any country. The comparable figurefor India for example would be $11 to $12. Nepal's low level of per capitaincome is a major part of the explanation. In some lov-income countries, wherethe mass of the population still engage in subsistence agriculture, a modernenclave (usually plantations or mines) exists which can generate a surplus forinvestment. Nepal has no such advantage and additional disadvantages as well.The long border with India makes smuggling activities hard to check and effec-tively reduces the possible yield from customs duties. In addition. certs.inparts of the country are only accessible at a much higher cost, given the
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inadequncy of- the t'ra8nspol't system, thau th ei.r ta ot=. tle& ' hshort run would warrant. Finally, many observers have pointed out the lack ofa general acceptance of tne lunction of taxation in a context where nationalintegration is far from complete. All this has to be said because tax ratesin Nepal are comparable with those 'i India and PaWistan nud do not in them-selves provide an explanation for the overall low revenue collection.
The Resource Potential
50. The structure of the Nepalese tax system has been the subject of adetailed examination by the DIF 1/, and it seems more appropriate to focus onthe question of the scope for mobilizing additional resources. About 40 per-cent of government revenues are derived from customs duties, 25 percent comesfrom land revenue, and 8-12 percent each from excise tax, sales tax and non-taxrevenues. Income tax, which includes companies as well as individuals, accountsfor only 4 percent of the total. During the past five years tax revenues havebeen exceedingly buoyant, rising by about 20 percent a year. The main growthhas been in customs revenues. The increased exports to India have yieldeddirect benefits through export duties, but, much more important, have encour-aged the import of a wide range of consumer goods which are taxed at threepoints - first, an excise refund is obtained from the Indian government; sec-ondly, import duties are collected; thirdly, these items are covered by salestax. Moreover, Nepal' s import entitlement scheme has led to a revenue benefitthrough increased import duty receipts.
51. It is difficult to see the rate of growth of revenues being main-tained in the future without substantial tax increases. The draft Plan esti-mates revenue at current rates over the next Plan period at about NRs 2,400million. While this is only an increase of 6 1/2 percent per annum, such anestimate, at constant prices, must be considered optimistic. The food pricerise in India represented a tremendous windfall gain for Nepal. The terms oftrade shifted substantially in her favor, given a pattern of trade vhich in-volved exporting food and importing manufactures. The green revolution inIndia has already contributed to some weakening of the relative prices of agri-cultural commodities, however, with prices of manufactured goods and particu-larly textiles rising steadily. Although the market for rice which is Nepal'smajor export remains firm and current levels of trade may be maintained intothe first years of the next Plan, it is clear that this is not going to provea major source of revenue growth over the period. Nepal's trade with thirdcountries may also prove a declining source of revenue if adjustments are madein the system of import entitlements in terms of making it more efficient. Onthe other side of the balance, there is a possibility of some increase in theexcise refund from India if proper arrangements can be worked out, though thenet increase in revenue from this source would be small since goods subject toan excise refund are charged import duty at lower rates.
52. One other item for consideration is the behavior of the tax systemin a situation of rising prices. For practical administrative purposes! many
1/ Survev of Nenal's tax structure- Julv 18- 1968.
tariff rates in Nepal are specific and not ad valorem, s0 that in such a situ-ation the tax system Lmay; not pic -" p itvs .^_ share of the increase. ornthe past few years there have been frequent changes so that the tax system hasremained Ir.ly. elastic. The MLInJist,Ly OfL FiaJsce s , admaitar, +ha hi
is becoming increasingly difficult. At this stage Nepal would have great diffi-CULLJeS opertiuLK t1 wL.L v&.LzurIm m, aCLas Uer-inVoicig U.iguh -v eA-. IeWd.J to
a net tax loss.
53. The major hope for the tax system at current rates is from adminis-trative improvements. Better communications will in itself make a great dif-ference to the effectiveness of control. This is provided that there is agenuine will to make such an improvement. Thus, for example, Nepal has as yetmounted no effective drive against the smuggling along her borders for thegood reason that at least in the short run the procedure yields distinct netadvantages. Better control of smuggling on both sides of the border mightwell have as its first effect a reduction in revenues, but in the longer runit provides a key to growth in revenues. 1/ There are many other areas ofadministration which require attention. A recent report by a tax adviserseconded to the government by the IMF mentioned among others: the 'target'system of collections, which provides no incentive once the target has beellmet; the frequent personnel changes; the absence of an organized training pro-gram for revenue officials; the lack of an internal body for detection of mal-practices; a shortage of modern equipment including adequate transport andaccommodation; the lack of cross-information and cooperation among the fourrevenue departments and between them and other government departments; thefailure to verify the accuracy of traders! returns; the railure on the partof headquarters to disseminate instructions and information to the districtoffices. In part, these problems are due to the general lack of experience inrevenue matters and have to be put in perspective. The improvements durinjg avery short time have been substantial and give hope for a successful tacklingof many of the remaining problems during the next few years..
54. On balance, the tax system at current rates cannot be expected tomake a very substantial contribution to the needs of an expanded investmentprogram. The Plan estimate of NRs 2,400 million for 1970/1 to 1974/5, eveaimplying as it does an increase of only 6.5 percent per annim, seems optimistic.A more realistic figure might be a 5 percent annual increase and a total ofNRs 2,300 million at current tax rates. What could the government add to thisthrough changes in the tax rates? The draft Plan estimates a total of NRs 285million from all tax changes. Of this amount NRs 100 million is conditional
1/ IT+ bas to be recognized t4hat there oa-e different kinds Of ging-1.4
Technically, much of the rice and timber which moves over the shortestr0utoe across.a th*ke b.order. is4 =Uggliang. The loss of4 rev,enue fa sa sesof timber, which may well be large, is, however, more a matter for inter-na ' enfo;-cement t-han for bworder controll. Al+), -3, there iz a 'loss Ofrevenue flrom rice exports, it would be impracticable to enforce movementover longer routes to existing checkints, ii thi mv4ent - eo
nomic. More checkpoints and better control are quite dependent on betterro.- communications.
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on increasaed land revenue rat-es. A Narther -i R. in milioin in f.rom intpreAt -nAdividends so that the residual figure is NRs 155 million. This is divided be-tveen customs, excise and sales taxes (NRs 40m411n each! ) isn,'enm tax (NRa 15million) and other items (ERs 20 million). As already explained, rates arefairly hig.h oadA tVha only c+a4egory v,hi4eh ,,ffersa ,nvuh hopa e,, aorA a-hd%wa theamounts projected by the government is customs where, given an effective driveagainst4 - uggling, t-1 hea _iai A h a smrm 1%" a^mthew , - + 4 r e -ca TI +the
longer run there are certainly many structural and rate changes which are re-quired too a en.s.re a- elas*ic t - system, bn+ 4 4-he n1.-r+ t yearsa fhe aM nuei
yield from these would be small. With the exception of adding a small amountto the potential from customs rate cbhages, there i48 little reafon to quarrelwith the government's assessment of likely revenue. The total estimated avail-
zbilit4y is, therefore , a bou Rs260 milin fo v nt re,eMue durigCLU.LJ.J..LJ I , 1AL .J , DIJ'JSU J111 ~ i1J.W U .L %Pi" 6rYs%j L U"U"A £V a %- 0 '%IS LIsL
the period from 1970/1 to 1974/5. In projecting this amount there is theass-UUt.ion thLaC-t t%he goverm=ent vwil21 1ind=eed& t Swe act'ion vu l&Nnd reven-=e.DDC I IJ dLI .U IV A1U1 L.J LPLrLU a A'..J J L. -~L.L3.2
55. h r r i- te old revenue in N1ep.l iJs a fairly low OUe. Ln LMA L.L 1 WU
to the land revenue the government has also levied compulsory savings at about15 pereent of laund revenue, wh'ich is supposed to be kept' in the villages tomeet local credit needs. Even the existing levels of land revenue and compul-sory savings have Met with extreme locUl Upposition sad 'v 's uuiair 'o 'gnorethe political difficulties in increasing the rates. Indeed, the governmenthas shown some courage in doing so av fairly regular intervals. Thne tax islevied as a flat rate per land unit, according to its quality and the ratedoes not vary with size of holdings. The government has found it impossiDieto make any exemption for smaller holdings or even to introduce an element ofprogression due to the fragmentation of holdings wnich would take place.Another serious weakness is that many holdings are not covered, especiallythose on newly cleared land. A considerable tax loss occurs on this account. 1/The Plan envisages an increase of 30 percent in the rates which would yield anextra ifKs 100 million over the Plan period. hnis is perhaps the most whichcould be done with the system as it operates at present. A related area wherethe potential appears much greater than the amounts at present realized isforestry. Proper management and control of forest areas could substantiallyincrease earnings from their present level of NRs 20 million a year.
56. There is a need to review the whole basis of flows within and intothe agricultural sector. There may well be scope on the resource side relatedto loan repayments and irrigation rates and the government should not neglect
I/ This hs of toulrse been reeognized for a long time. Land surveyors hate
been trained since 1960 and cadastral survey work started in 1962, but ithiaAd to be redone from 1965 on accordng to the new deAini+ions give- inthe Lands Act of 1964. The survey will be completed by this summer in 18districts. All the Terai distric+s will be campleted in the next season;work in the Hill districts will start in autumn of this year. One sourceot -con 4 ra-lbe 'oss of revenue has -'rea-Ay been closed: 4thbe aDepA *artu.ent.
of Land Administration which prepares the tax rolls and follows up onregisration, transfers, sales of lanrd and4 -revnuae collection Js now UC62kingoverit immediateLy afhter.L h.L JcLst s h et i s .
over immediately after the cadastral survey has been completed in a district.
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these aiternative avenues. The wvo'Le problem i8 re.LMUCU t0 Cl.eUUnig -u the
confusion which the various agricultural credit institutions are in at present.The question of how the Nepalese government can best tap the substantial in-crease in agricultural income which the rural sector has enjoyed through thehigh relative prices is one vhich must dominate the planning for the futurestructure of the tax system.
Expenditure
57. The first call on the NRs 2,600 million of revenues is current ex-penditures. The inadequacy of the budgetary presentation has led to a re-analysis of the data in the preliminary draft of the Fourth Plan. On the basisof this document it appears that current expenditures rose by an average 11-12percent per annum during the Third Plan period (1965/6 to 1969/70). A similarincrease is projected over the next Plan period which would bring the total upto NRa 2,200 million. This would leave only a very small surplus of revenues(NRs 400 million) for financing investment. By any standards, however, 12percent per annum, both for the past and the future represents a very high rateof increase of current expenditures. For the past, it might be argued thatthis is as a result of price increases. Prices have certainly risen substan-tially due to the Indian foodgrain price rise and the devaluation, but in Nepalthere is no automatic linking device as with the dearness allowance in India.There has been a general salary increase but salaries of government officialsfor any given grade have almost certainly fallen in real terms over the pastfew years. The price rise has affected the non-salary part of current expendi-tures, but all in all the price changes cannot be considered the major factor.It is very difficult to say exactly where the 12 percent increase has gone.Much of it seems to be in the form of additional recruitment. The governmentnow has 40,000 employees and officials consider that about 25 percent are re-dundant. Debt service is another category which has risen. It does appearthat resources have not been very efficiently used, but given the inadequacyof the government accounting system, this is difficult to identify. Fortu-nately, a start is being made with program budgeting which will make it pcos-sible to analyze future increases and comment on their usefulness.
58. As a projection for the future, at constant prices, 12 percent perannum seems aL very high rate of increase, and yet it is a rate which the Nepal-ese themselves consider to be rather low and one which will be difficult tohold over the next Plan period. In the context of heavy overstaffing it isscarcely credible that the increase should be of such a dimension. Taking forexample the sector in which the increase in current expenditure would be atits maximum -- education - the Fourth Plan requirement is at about 12 percentper annum. All other sectors should be well below this figure. A figure of8 percent per annum would seem to allow an adequate margin after meeting theneed for additional staff recruitment in various specialized categories; someincrease in real income for government personnel and the reauirement forregional concentration of staff and the provision of additional benefits andfacilities for those outside Kathmandu. This would reduce the total require-ment for current expenditures during the Fourth Plan from NRs 2,200 million toNRs 2.000 million and add a further NRs 200 million to the surnlua available.
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59. A revenue surplus Of NRs 00 n mi llinn eslearly does not go very ar- inmeeting an investment target of NRs 2,500 million (i.e. double the previousPlan level). The possibility of ra4aTng aditAoAna1 revov-ur- +4tunh the ,i=nancial institutions is something which does not seem to figure in governmentpoli4y or pronnou,ncents.The senior 4ns+i+u+ion 4V- 1h ^on+r ls the Danal
Bank Ltd. which was established in 1937 and now has 49 branches. It is 51percent governmentC ownedd, bMut the go,e 4et- has +_edbo ,e w>rst
avoid too much direction and to maintain its commercial viability. The secondcommercia LGJ. b8anLLi , t ha.e 1Rastri.ya JJU.&A..JJ C B L)C4L, Was sUet uLp : e.Ly 1966. It Ls
100 percent government owned and the rationale seems to have been that itShoUl. uamc aL .LLeLa in t lt«st p.LU± b a reas.L partic ULL?U.L3 LLL in LAh ll.L.
It has opened 27 branches of which 16 are in areas not served by the Nepal Bank.Tile uau±ng system as cons it-uted at present does not begin to reflect hneneeds of the country. While it is useful to have banks in some of the remotehill areas and this should certainly be part of th e program, the urgent needis for the commercial banks to move more actively into the agricultural sector.Many Terai villages have weekly markets and usually a Rastra Bank representa-tive is on hand at the market to provide facilities for changing Indian cur-rency l/. Witn improved road communications it would not be a major difficultyto send out a representative of the banks, to undertake ordinary banking busi-ness aus well at these times. The banks are liquid due to the limited demandfor advances and have made no serious attempt to increase deposits as a result.This offers a short-term opportunity for the government in borrowing a consid-erably greater amount from the banking system than the NRs 40 million utilizedduring the Third Plan. About NRs 100 million is feasible for the next fiveyears.
60. The last remaining possibility on the internal resource front is thatof deficit financing through net credit to the government. Since 1961/2 Nepa.l:smoney supply has increased at the rate of 14 percent per year 2/. Despitethis, it was only about NKB 55 per capita in 1967/8 as against an Indian equiv-alent of about NRs 140. Quite clearly the monetization of the economy stillhas a very long way to go, and insofar as monetary expansion goes to meet thisdemand it will not affect the price level or the payments deficit. Of thisincrease, very little has been through net credit extension to the government.The last two fiscal years have both shown surpluses and though the previousthree were deficit, over the five years the total deficit on balance onlyamounted to NRs 30 million which is less than 10 percent of the increase inmoney supply over the same period. The main reason for the expansion of themoney supply has been Nepal's payments surplus, both with third countries andpresumably with India since the Rastra Bank's Indian currency reserves havealso risen. The constraint on deficit financing in Nepal is the country'sholdings of Indian currency. In order to maintain the convertibility of theNepalese and Indian rupees at the official exchange rate, it is necessary forNepal's holding to be stable or only moving very gradually in either direction.
_ The~ He~j9n.pal Rastra Bank is the cuetA.L UaUk.
2/ ThereA i8 also a cndable amu.t of IUi.L±a currunci.y in pi-va.Ye hauds,
which is not recorded as part of the money supply.
-17-
A mOre flexb.Le approacVOLh tU tUh pjUZo.LfdLc.L.LV.Y VI A.U.eS Ii .i.Md M .
increasing public investment is needed in two situations: first, when Indianrupee ho''ldng-sare rii.ug ; unU 5couulyJ, When C =&peUdUitXLe -L.L. L
to increase the volume of exports e.g. fertilizer imports, etc. The scope forsuch expenditures may be i; the region of NRs 100 million over the next fiveyears. In summary, the position would then be as follows (in NRs million):
Revenue Expenditure
At existing tax rates 2,300 Current 2,000Through tax changes 300 Development 2,500Borrowing, deficit financing 200Gap 1,700
4,500 4,500
61. There is thus a balance of NRs 1,700 million to be met from externalsources during the period 1970/1 to 1974/5. At present Nepal receives aboutlNRs 200 million a year in foreign grant aid. Most of this comes in the fonrof Indian rupees, spent either by the Indian Co-operation mission (about NRT3100 million), or USAID (NRs 50 million). Of the remainder, about NRs 10 miL-lion comes from convertible currency expenditures by USAID 1/. The Chineseprovide about NRs 30 million, the U.S.S.R. about NRs 5 million and a largenumber of smaller donors including the U.K., Germany, Switzerland, Israel, etc.,a total of about NRs 5 million. About half of the total of foreign assistancegoes into the road program, a quarter into agriculture and irrigation, and therest is spread over a number of sectors. Most of the aid so far received haLsbeen grant aid. Such aid is free in the sense that no repayment obligation isincurred, but it often necessitates the provision by the Nepalese of financialresources for staffing and maintenance. With so very large a proportion ofNepal's investment being financed from external sources another frequent prob-lem has been that of relating the donor country's predilections to Nepalesepriorities. The serious neglect of ancillary investment iB as much a productof this, as it is of the absence of adequate project planning and preparationon the Nepalese side.
62. Nepal has made very little use of loan assistance to date. Totaldebt outstanding for repayment in foreign currency amounts to about NRB 110million or $11.3 million at present. Average terms are generous and while debtservice is $1.8 million in 1969 and $1.3 million in 1970, it never rises abc,ve$700,000 thereafter. This has to be measured against exports to third coun-tries of about $10 million with a further $7 million in invisible receipts.Reserves are $46 million at present, equal to five years of imports, and aregrowing at the rate of $4-7 million a year. Given the present circumstancesthere is no reason to think that Nepal cannot support a debt service burden ofabout $2 million a year. Depending on the average terms, Nepal might well
1/ This does not include an additional NRs 20 million. being the dollar portionof salaries of personnel and technical advisers which is spent outsideNepal.
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consider borrowing from $10 to $20 million during the Plan period. There isone exception to this. Experience with suppliers credits to private borrowershas not been satisfactory over the past few years. There has been default orthe threat of default, imposing an actual or potential repayment burden on thepublic exchequer. In any case borrowing on such hard terms severely restrictsthe total. A maximum level for suppliers credits over the next Plan periodwould appear to be $2.5 million.
63. Taking a figure of $15 million or NRs 150 million for foreign borrow-ing and adding this to the Nepalese estimate of aid which is already in thepipeline, or seems likely to materialize, of NRs 1,250 million during the nextPlan brings us to a figure of NRs 1,400 million for external resources andleaves a gap of NRs 300 million to be met from additional grant aid during thecourse of the Plan. A total investment program of the order of NRs 2,500 mil-lion, over five years, financed about one third by Nepal and two thirds throughexternal assistance seems both a desirable and feasible target, with the pro-viso that the funds are efficiently allocated and utilized.
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CHATERH III
PUTTING RESOURCES TO WORK
64. There is no series of national income in Nepal for more than a 1'evyears and what data there are have serious flaws. Agricultural output at con-stant prices would appear to have grown at something less than two percent;per annum from 1961/2 to 1967/8; so, within the limits of our knowledge, haspopulation. From this major source, therefore, the growth in output per capitacan only have been fractionally higher or lower than zero. Other sources ofincome such as manufacturing and tourism, which have grown faster than pop%ula-tion, are still so small that the additions are, in absolute terms, negligible.Important as they may be as embryonic sources of growth, they can hardly havecontributed much in the past.
65. Nepal has however enjoyed the fruits of rising export prices. As aconsequence, real inc:ome per head as opposed to real output, may well have grownat one or more percent per annum. This is no more than a guess; margins Oferror in such estimates are very high. Simultaneously, Nepal has enjoyed areasonably large inflow of foreign aid (about $1-2 per capita). These twothings have, undoubtedly, given rise to an appearance of prosperity, which ispartly illusory.
66. There have been some fundamental changes in the economy, of whichthe most important is probably the outlook of a number of people in authorityand the exposure to modernization of more and more people as a consequence.But much remains the same. The internal market in Nepal is still rudimentary.The only major center is the Katbmandu valley, while the logical markets f'orthe Terai towns lie in India.
67. A second fumdamental change is the coming of the roads. While Nepalis still a long way from being politically and economically integrated, tbeeastern portion of the East-West highway which is due to be completed in twoyears' time will open up a market extending from the eastern border with India.along the Terai to the Tribhuvan Rajpath; the latter in turn runs from Indiato Kathmandu and continues along the Chinese road into Tibet. The full ecm-pletion of the Kathmandu-Pokhara and Pokhara-Sunauli roads added to the roadup the Rapti vallev vill add an additional network. For the first time, theinternal market will mean something more than the Kathmandu valley.
68. Roads are not the only infrastructure being built in Nepal, thoughthey are the most imnortant in financial terms. Half of the investmnt eypen-diture in the 1968/9 budget was taken up by roads and the proportion is rising.Irrigation and nover nroiects take up another quarter. The roads and otherinvestments present an opportunity for further changes in output, largely,however; of a traAitionnl kind in the first instan&e Thnogh the groundworkfor diversification needs to be laid, the benefits will only come later. Mean-while full advantnage needn to he taken of assets in hand, and provision madefor their satisfactory maintenance.
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69. Already there is under-used capacity in some sectors and the likeli-hood of more to come, but the reasons and the remedies vary. Electric povercapacity, which is mostly along the Kathmandu-Birganj axis, is already doublepeak demand and may be expected to double again within three or four years.There is little remedy for this but time. In a very different field, teachers;training colleges are under-used because there is not much demand for thetraining: salaries are too low. If we stretch the meaning of under-utilizationa little, one could say that the University is another case; it turns out grad-uates for many of whom there is no market. In the short run, the quickest re-turns will come from seeing that there is fuller utilization wherever possible,and that scarce financial resources are not wasted.
The Short Run: The Need for Concentration of Effort
70. The need to create a sense of national unity will surely make forpressure to spread government money all over the country. Some token alloca-tion to each district or panchayat cannot do much harm, but, beyond this, thecost of spreading resources thinly or ineffectively will have to be carefullyweighed. The need now is to concentrate resources. By so doing, not only canthe national welfare be better served but many districts will receive indirectbenefits, even if they receive little in the way of direct expenditure. Theneed for concentration applies almost everywhere, but it will be illustratedin two specific sectors, roads and irrigation.
71. There are two problems associated with the roads. One is that theymay be built to excessively high standards for the potential traffic. Forexample, the East-West highway is being built to Asian highway standards. Towhat extent this is justified for the eastern sections already being built isuncertain, but there seems to be good reason to doubt the necessity Of usingthe same standards for the newer sections to be built west of Butwal. If moneycould be saved by building, say, an all-weather gravel road and if the moneycould be transferred to other uses, Nepal might well be better off. But thesecond proviso is the critical one since this is an aid project.
72. Secondly, once a road is completed, it can be said to be underusedas long as reasonable efforts to develop traffic have not been taken. The twoquestions have a financial link. The more overspending there is for unneces-sary standards, the less money there is for the ancillary services and invest-ments. The availability of money is not a sufficient condition that these willbe provided, but it is certainly a necessary one. Whether shortaze of fundsis the reason or not is uncertain but there seems to have been little activepromotion of develonment along the road north from Kathmandu to Kodari on theTibetan border, which has been open since 1967. Yet this was the only new roadfor a number of years until the qunauli-Pokhara road, which, though isnable is
still not complete.
73. The question will gain importance during the next five years or so,beca-ise several ne North-South roads ill be built, 4n add4t4onto prolongingthe East-West highway westward. The choice of the roads will, in part, bedetermined bya TMDp study due to start in September, 1969. We say in p4 tbecause, in fact, the choice has already been made for two new roads in the
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far west (Dhangari-Dandeldhura and Nepalganj-Surkhet) to be financed by Americanand Indian aid. On the face of it, the principal reason for this choice wa3a desire to do something for the neglected far west.
74. The choice of roads is not easy. The lack of data, the difficultyin interpreting what there is and the hazards of predicting future developmentmake any choice vulnerable to armchair criticism. The information base couldand should be improved, but selection cannot wait for ever. It can hardly bebased on the existence of so-called surplus and deficit areas for severalreasons. First, the existing study of these areas was based on assumed pro.-duction and consumption of certain, but not all, cereal crops in a droughtyear 1/. A subsequent study of a specific area throws doubt on its reliability.In any case, even if this study indicates in a general way where cereal pro.-duction is below some assumed level of consumption, this is not the whole story.At the cost of stating the obvious, every small region has its own balance ofpayments, whether one knows what it is or not. If there are to be imports,there must be exports (or subsidies) to pay for them. Under existing condi--tions very few exports are possible and the efforts to increase productivityin isolated areas have mainly been directed at the traditional products andhave been inhibited by the high cost of the inputs. Even if there are importsof food now, the development of cheaper transport may initially induce a pat-tern of greater self-sufficiency in food; imports of cereals would be replacedby imports of fertilizer.
75. What scattered information there is suggests that the principal ini-tial result of building a road in the hills is a substantial fall in the pricesof heavy consumer goods such as salt. A less dramatized, but possibly as im-portant, result is similar in effect: bus traffic develops because consumersvisit the nearest major market (e.g. Kathmandu in the case of the Kodari-Kathmandu road) where goods are cheaper and in areater variety. Such changesin mobility and the development of bigger market centers are, of course, not;foreign to the earlier history of developed countries.
76. Existing porter traffic does not appear to be automatically displacedby vehicle traffic along a new road, though some estimates put the cost perton-mile many times higher. 2/ There is some evidence that porters from thehinterland use the bus service, which is provided by private enterprise, foxpart of their Journey. In this way, by saving time, they may earn more. Thefact is that there is a dearth of facts about existing traffic and the changesin it and, secondly, there is considerable doubt about how to internret whatis known.
77. All this suggests that, whatever the difficulty in choosing and iri-deed iustif'ving a new road- onee the deci8ion htst been made, An Pffn-rt shoiuledbe made to study what changes occur in order to gain experience and, secondly,
I/ Cereal Grain Production, Consumptrion and M1rketing Patterns, 1965,Ministry of Economic Planning.
2/ See, for example, detailed estimates in A National Transport System forNV-..1 T11T2 T,,.. I r 7nAY1 TTT fl'..I v i I*-waV~ s -W Vz . =t TWAL. LJ.L, a:ws~ X- L. .
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to take whatever stens are feasible to influence and to stimulate change. Ifefficient use of the road is to be made, concentration is needed. Not all thenecessarY stenP-r t an hp nutlinpd herpe hbut some illustrative examnles ean begiven.
T8. The first example is the construction of feeder roads. This is arather vague term, which needs to be explained. It does not, here, imply shot+roads from farm to market or from farm to main road. The opportunity cost of^.r,ng haar= ngoodAs short dist4 ces i8 probably, not very high. W.hoat i4 meLa
is somewhat longer roads - of the order of 5 to 20 miles - over relativelydiafi4ul, CU +terrain Pr- tbe " r V'A,V oa anA Aastribution ce terin a nearby valley. Such roads need not be all-weather; they need not be two-l-ane; they neeA not be pass0abl aoe.+ by loon .-A --a4r; anu they --- A no+~ , mn.~ ~ ..~r v~ b'
0 0 5 ~ ~ I/ JtW.Fr .VSa a., V *S.Y aa *L AJ
be expensive. They can be upgraded as traffic develops, if it does. But theywould oper. the possib4lity fo -h 4 ariag of- --- II quntities- of-e-PieW.J0A.A. 'JJ~A ~ ~'J W.L±.&.LU % 1.LOL VA41 WIJ. L~ kJJ. O&IAQ.J..J. J.L L~L I..ZU
and cement inward and possibly of surplus grain, forest products and othergoods outtiwvaOd. TLLhe economy 'Ls not going to be bn"itU togeUtheL br ma.in roads
alone.
79. Identification of promising areas for development by feeder roadsought-t to tske place 4i- goodd t'UA-e. 'DI -- h,a,e to be made to 1-41A 4them -nd V., VVJ ~ PJGV. .LM LJA.L0. X LWV VW UIU LuM%L~ VUJ WU0.&L.0 V.L1~_L1 CLLV. C
number of decisions made, e.g. whether they could be included in bilateral aidprograms, whether they sLLUo-U' Ub Ui.L.Lt. Uy the= l.lU' -u.L lcUUJ.J.U WurLguIo
with equipment and organized local labor and whether they can be undertaken bytLe local panchayats with suome asstance. It iS importVan, howevCr , atLthis new construction is not done at the expense of maintenance of existing
J.L gh-L-oys, so AllhatU ae qsdequte proviL si'Lon ra s'L. ael so bue m-adWe LUr thiLs.L purpoSe. rur-
thermore, if the areas are promising, additional small investments may benecessary. Small and very cheap irrigation works have been successful in theKathmandu valley and similar development may be possible elsewhere. To takeanother example, soils vary greatly in Nepal. In some areas they are acidicand this could be corrected, where limestone is available, by installing smallcrushers and arranging for distribution. It goes without saying that theavailability and the development of other inputs, especially high-yieldingseed varieties, will be necessary, too.
80. It can hardly be emphasized too much that time is of the essence andthis means a coordinated effort, something which is not always easy to achievein Nepal. Given the shortage of resources, human and financial, it might beworth considering the selection of one North-South road for some kind of "model"development, in which all departments concerned have their tasks outlined anda "micro-plan" prepared. At this stage, this may pay higher dividends thanany "macro-plan". Such plans run the risk of setting national targets, whichare then automatically divided by 75 (the number of districts in Nepal). Itis necessary in Nepal to conceive of a main road as an instrument for thecreation of market centers; a market center will not develop without a hinter-land and without stimuli to develop that hinterland 1/.
1/ It is worth noting that a German-aided project on the Seti river south-east of P..kc a has 4ut st art-. Th.is could provide v , * J'le ±maV.',un
once the Pokhara-Kathmandu road is completed, since it passes throught ys' project area.
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81. Two of the irrigation projects referred to are connected with muchlarger Indian proiects on the Kosi and the Narayani-Gandak but they are stillfar larger than anything Nepal has experienced in the past. The Chatra canelon the Koai will irrigate 74;000 hectares and it should be completed in one ortwo years. If full use is to be made of it, the necessary steps must be takento nrpnare the land and the minor distribution savtem to ensure deliverv ofwater to farmers' fields and to provide ancillary agricultural services.Little, if anvthinw.. has been done in this resneet and it is verv late in the
day to start. This is a clear case where concentration of effort to reducethe time fsetnrn in nhtstininv resiilts in of' great importane.. This is esneei-
ally so, since other plans are in train for further use of water resources.The Gand.ak canal, though i.t seems to be proceeding rahe slojl, vi.T 1 naeedsimilar development. Moreover, there are plans to develop the Kamla, where abhaxra-e is to be built, andt tubevells av the Eastern Terai. A lar,ge part of'the Eastern Terai is currently under study as part of a UNDP project.
82. The difficulty in all this, as we have already stated, is that the8"J.'. lo Jation of resources; s not& b een Jw.olly a mmatteAr of .Pchoice D.JorJ the JN epallese
government. However, if plans are put forward vigorously to take more advan--t- age of t1he .aui. being p,rovi(ied, f0or-Mieign donors -i "L.L bu e more .Li'elAy tGo fJinan.e it.
IncreasinL AgricultaUra.L ZProduct.i-tV.Luy
. L agricult-ur al o-utp-ut gro-wth rate of 2 to 2.5 percent per year forthe next five to ten years is needed to equate domestic demand resultingfrom t;he expect;ed gro-W,h iLn population if there iS to be no reduction inL percapita consumption and volume of exports. An annual growth rate of 3 percentor more J.i needed If per - capa ±ncmes zrto be s-ubstantally iprc-ved.
Potential domestic and export demand for agricultural output will probablyabsorb a 3 to 3.5 percent growth rate, so long as India, the major buyer of'exported foodgrains, ghee and forestry products, is not self-sufficient inthese commodities, which does not appear likely in the near future. It isprobable that China would purchase foodgrains, ghee and livestock products,when there are uet ter transport condiLti0ons. rrouuale domestic and forelgndemand for fruits, jute, forestry products, tobacco and sugar further supportgrowt6h rates of' at least this magnitude without seriously disturbing price re-lationships.
84. Resources readily available to help achieve a 3 to 3.5 percent rateof growth include an abundance of underemployed agricultural labor, untappedwater for irrigation and the possibility of transferring Terai land now usedfor timber production to cultivated crop production. With irrigation and im-proved cultural. practices available for much of the cultivated land, croppingpatterns can be adjusted and yields per hectare and per unit of labor or capi-tal increased. However, relatively low crop and livestock biological responsesand low economic incentives appear to be restraining the average farmer,especially the share tenant farmer, from using additional inputs of irrigatedland and fertilizers, and new crop varieties and livestock improvement prac-tices at this time.
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85. In the short run, the most important need is to take full advantageof the infrastructure at known levels of technology. But growth in the futureis going to depend on a better understanding of the country's resources andadaptation of technology to those resources. Research cannot be neglected andindeed needs to be intensified for the ensuing stage of development. Althoughindustry and tourism hold promise as growth sectors for the future, agricultureis still the base of the economy. To obtain a higher growth rate for the econ-omv as a whole, it is for the present a necessary condition to have a highergrowth rate for agricultural output and a more rational development of fores-try. Given the resources available, the oblective has to be a continuouseffort to increase the return on investment and other development expenditure.
86. Nepal deserves considerable credit for the progress it has made in acomparatively short time in the collection of data and the development of agri-cultural research, but more could and should be done - in three closely con-nected ways. The first of these is to collect and analyze data from a smallsample of farmers. Though, eventually, this activity could be extended to eachmaior tvpe of farming area; initially efforts should be dirented at those areaswhere growth is already taking place or appears likely. Such studies, whichhave hardly been made in Nenal should. if carried out intensivelyv heln toidentify many of the preconditions for successful development.
87. As yet, little is known about farm economics. But knowledge of thiskind in vital to the ehoiep and preparAtion of tntir invpYtment proJects andagricultural programs and to the guidance of price policy. Knowledge of phys-innl rspnsnltes to inniipts is almoqt useless wi.thoit sn iinprtnndin, of the
economic relationships for the farmer. In order to make full and continuoususe of such nnvstigtions, price series need to be developed at both the fa-rm-gate and wholesale level for the commodities produced. Market efficiencystudies fo the min wkora mntkee co rill ant 8h b n1aed for.
88. Information obtair.e in ths hould assist the AgriculturalSupply Corporation to evaluate demand and to procure, transport, store and re-tail v&a.-ious kinds of inputs at each outlet. This info .tn sho.'d also help
the Agricultural Development Bank and local credit agencies estimate probabledemand byr subure-giwons and g-uidie t1he use of scarce lending capyitcal into ninan,cing
the more productive scarce inputs in selected regions. As a further example,opportunities~.~ apjJCear toU ex±ist0 4u _-% . %JUL. Lq-Is..LLLW LUUM UL 1=L_J.L.Li'.Crb tLiroUgL6L abarter deal with India, under which imported fertilizer paid for by Nepal anddelivered at an Indian port, could be "exchanged" for Indian fertilizer ex-factory at a source near Nepal.
89. The second leg of the agricultural research program is to describethe availabilit-y and cost of uVtlizing natural resources; i.e. forests, surfaceand groundwater, soils, limestone, etc. in selected subregions. Surveys com-pleted or no-w in progress will provide au inventory oI the forest resources,groundwater resources and cropland area of the Terai. Information regardingthe volume, seasonality and other technical facts for surface water, and thewater-consumption needs of crops under the heterogeneous evapo-transpirationconditions in each important crop-producing region would be very helpful to
- 25 -
the planner. A survey of soil resources has been completed in only one dis-trict. Rainfall and temperature data are unreliable or simply not availablein most of the major production areas.
90. The third leg of the agricultural research program is, of course,adaptive research, particularly in the development of varieties suitable to thevarious Nepalese conditions and in research into their response to various com-binations of inputs. For this purpose. the economics of input-output relation-ships is essential, if a rational choice of research projects is to be made.Nepal has had considerable success already with two crops. Considerable workhas been done on wheat and Mexican wheat varieties now cover most of theKathmandu valley. The identification of a high-yielding disease-resistantvariety of potato has been very successful. Potato is an important market cropin Kathmandu Valley and the Eastern Hills. where it has become in recent yearssomething of a growtb industry. The good work already done needs to be exten-ded to other crons and to the develonment of suitable nasture and fodder forruminants, and concentrate feeds, especially for commercial poultry, which isstill on a very small scale, buit growing ranidlvy. The lint Of possibilitiesis long, since Nepal's varied climate is such that there are many as yet un-tested -ossibilities for hortrc-ltur.l vl in nnr. On word of cau+t4n il,
however, necessary. Results will not come by simply multiplying the number ofresearch stations. Alreaeduy the ones that exist are of very vneven quality.Second-rate research stations are a poor use of resources.
91. Market facilities and marketing systems now in use result in rela-4irel- high helnRi 4 "- sa+n-e- o A professing losses X-A higbh -e,-ti4g ^oslts
Also, to compete in an expanded export market, it may be essential to improve'the quality of such i te.ms as rice, 4utea ndR ghee 5 Stud- e r-o - p.rgresa for
rice should help identify where and how these improvements can be made. TheinAicateA needs fJor foodgralS s includAe meCh4C. 'cal -yers, storage sOt0uctu rV&J *sand practices that minimize losses from insects, rodents and moisture, andmilling equipment that reZcovers all ofP 4the edible- prouct Cod w acl
ities for potato could expand the demand for seed potato and the market ser,sonfor food potato. -p-rovement 4in qali+y and --antity of ghee marketed, as- F - 131 w. e... - qu -ty **d 1_ . wt ghee At -
with most fruits and potato, depends in part on the extension of the roadtransport system.
92 Thfl,a ..a..e general strastegy, -ut1,ned abo 4o increase substa4.tiLn41y
agricultural research studies that help identify subregions where the avaiLablenatu.al. resources, wh1en combined -ith. scarce movable resou ces, resu lt in 1;h.L .ehighest increases in output. Once these subregions are defined, scarce re--sources may, then b-e alc-10CatCed 4A- mn… rt ua, aiie ret-lurn to~- L- t I;,u
of production. As progress is made in these more responsive regions, savingscan be transferred to the development of other prozmising regions anu resourcecombinations. Nepal's Coordinated Agricultural Development Program launchedin nine districts in 1L965/6 represents a partial application oI this principle.With improved information a more intensive approach could be adopted.
93. In putting emphasis on the collection of data at the "micro" level,there is no suggestion that nationwide statistics of output, area and yielcishould be neglected. Improvement is necessary but, if a choice has to be made
- 26 -
with limited human resources, some doubt must be expressed whether priorityshould be given at this stage to improving the accuracy of reporting in iso-lated and comparatively static areas. Wnere change appears to be happening,more intensive study may be called for. Ultimately, for nationwide statisticsof output and crop areas for example, it may be preferable to move toward nevertechniques of estimation by aerial - or even satellite - photography.
94. The reason for setting these kinds of priority is the real need atthe moment in Nepal for the creation of an improved capacity for project prep-aration and evaluation and implementation. For this purpose, national statis-tics of doubtful validity are not much use and there is little advantage inhaving slightly better ones. If a capacity for project preparation can bebuilt up, then the ground will be laid for a better presentation to foreigndonors and thus a better allocation of aid. This is true of the whole economy,not just of agriculture. In planning for agricultural growth and estimatingthe possible consequences of certain projects and programs, "macro" techniquesare likely to be very misleading. Output estimates - at the margin, at anyrate - should be based on the expected effects of planned inputs, whether inthe form of investment or not, rather than generalized targets.
Diversifying the Economy
95. With the possible exception of the Kathmandu valley, Nepal's non-subsistence economy is very largely an extension of the Indian economy. Exportsto India constitute between 15 and 20 percent of GDP. A recent edition of theNepal Industrial Digest gave as one of the 'special' reasons for investing inNepal, the access to the 'combined Nepali and Indian market of 480,000,00o'.The more fertile soils and the relative underpopulation of the Terai as com-pared to India has contributed to a large marketable surplus of foodgrains,while the limited market, the absence of basic raw materials and the lack ofmanagerial and industrial skills have led to a pattern of importing even thesimplest types of consumer goods. This has been the basic structure of theNepalese economy and until now there has been little reason or opportunity tochange it - individual markets were still small and isolated; the skills andcapacity to engineer changes were in very short supply. Moreover in recentyears. rice prices in India were rising verv rapidly in both absolute andrelative terms. Now, however, circumstances make it both possible and neces-sary to consider alternatives to this pattern, in the short and the long run.
96. The first of these, the widening of the internal market through newroads, has already been discussed. The second major factor is the anticipatedchange in relative prices in India. As a result of the green revolutionn im-provements in the terms of trade will no longer be an addition to productivityimprovement in Nepal. On the contrary, in the event of a fall in relativeprices productivity per head will have to grow rapidly, merely to avoid a fallin real income. In the longer run; grovth in the Nenalese enonomv is unlikelyto take the form of producing more and more foodgrains for home consumption orsale abroad. A more diversified economic strueture based to an increasingextent on the internal market and on new exports will have to emerge. At thisstage one ean do little more thnn identify particular areas within the as-ioussectors where the initial growth might be expected to take place. These will
- 27 -
form only a small part of the total economy during the next five and perhapseven ten years, but increasingly, economic growth would be dependent on theirrate of development.
97. There are two areas of obvious potential. The first is in terms ofimport substitution. A start has been made, especially with the productionand processing of agricultural commodities such as sugar and tobacco. So far,a comparative advantage in producing cotton and oilseeds has not been demon-strated. In terms of volume, the greatest potential is in the textile industrywhich accounts for a significant proportion of Nepal's imports from India. Theproblems here, in addition to the lack of raw material, would be the lack ofmanagerial and technical skills and secondly the competition from Indian tex-tiles. Both these would be surmountable, given in the first case the importfor a period of a certain amount of foreign capital, management and labor, un-til Nepalis can be adequately trained; and in the second case, modest but ef-fective tariff protection which implies a rather more wholehearted control ofsmuggling than hitherto. Developments of this kind are also important for thebalance of trade with India and promise a much sounder economic base in thelonger run. Other possibilities for import substitution are cement, which isplanned for the near future, and various processed foods.
98. The second possibility for industrial growth is the development ofindustries making use of indigenous raw materials. For most of these themarket would have to be mainly outside the country. The list is not a verylong one, comprising mainly forest products, grain milling, jute, some animalproducts and more speculatively some minerals, though surveys undertaken sofar are not very optimistic on this last point. Various studies are beingconducted and more need to be undertaken on the potential of Nepal's forestresources. In the longer run the development of forest-based industries sup.-Dlying plywood, paperboard- paner. etc. in addition to sawn timber- and sleein-ers which are already exported to the Indian market, is a very real possibilLty,but will require a set of government nolicies and nersonnel innut verv diffe-r-ent from the present ones. Many of these industries seem to present possibiL-ities for foreign private capital either from India or third countries whichcould supply Nepal with the scarce managerial and technical inputs. The set-ting up of the NIDC (National Industrial Development Corporation), allied tothe lines of credit it has received from a number of countries, has more orLess removed the local or foreian curreney constraint on these develonments.
The major constraints are still roads and communications both in getting theraw materials to the production noint and then in distributing the nroduetsboth internally in Nepal and for export. The government has a very liberalset of incentives desianed to attract both local and foreign canital into the.
industrial sector. These incentives, including a ten-year tax holiday, areindeed arguably too liberal snd more might he achiveid by a direet attacrk onthe physical constraints to development.
99. Two nfrther possibilities need to be mentioned, outside the manu-facturino seetor= The first i8 tunriism- Th4a rtanl4y1r eaems the likeliest
prospect of all; indeed, given Nepal's natural beauty and cultural interest,the developm.1ent of tourism ai 8 virtually an inevitability. The number of t-'
ists from countries other than India is rising by about 30 percent a year and
- 28 -
reached 24,000 in 1968. This is still only between 10 and 15 percent or tour-ists visiting Thailand or India who could therefore visit Nepal at littleadditional expense. With improved telecommunications, the major constraintwill be the need for an airport close to the capital which can accommodate jetaircraft. This is at present the subject of a study for the Asian DevelopmentBank by a team from ICAO. The alternatives are either to extend Kathmanduairport or to build a new airport in the Terai and a new road to Kathmandufrom it. A second area of concentration will be to adequately maintain exist-ing tourist attractions such as the temples and to provide facilities in afairly limited number of places which are attractive to the average touristand accessible from Kathmandu. Pokhara is the most obvious example, and per-haps in addition facilities along the Kathmandu-Kodari road and, when it iscompleted, the Kathmandu-Pokhara road. In Kathmandu, private capital and per-haps private foreign capital would seem able to take care of the investmentrequirements. The danger is that efforts will be scattered instead of confinedto areas which have already demonstrated a real tourist potential in the shortand medium term.
100. The final large-scale industrial development is very much more spec-ulative. Nepal has vast hydro potential; hugely in excess of her needs evenin the distant future. The possibility of developing this potential for saleto India has been under discussion for some time, in relation to the Karnalischeme. The main Karnali project as prepared now has a potential of 1.8 mil-lion kilowatts. This compares with present generation capacity in the wholeof Nepal of 25,000 kilowatts, and even this is underutilized. Almost all theKarnali power would thus have to be sold to India. The project has been undertechnical review by various consultants, but would hinge entirely on the agree-ment of the Indian government to purchase the power, as would other majorprojects such as the Sun Kosi which is also currently being investigated. Evenif a long term contract is negotiated, there would still be great difficulty inproviding financing. Needless to say, however, the impact of the project ingenerating resources for budgetary use could be very considerable.
101. So far Nepal has been more successful in diversifvina the directionof its exports than their composition. It has done this through bilateraltrade agreements with the oblect of encouraging exnorts other than lute. butwithout very much success and apparently at considerable cost. It has alsoused the imnort entitlement scheme referred to earlier_ a hv-nroduet of whiehhas been the establishment of stainless steel and synthetic fibre processingnTpnts; which can sell very profitably in the Tndian market - now within thelimits set by agreement.
102. It is uncertain what advantages this scheme has brought to Nepal.Reserves of convertihlea ciurreanc-vy have v ,risaen -rani4Alr which Nora' has invested
overseas so that it now earns a substantial interest and has increased itscapacityr + srvi external debt. Without much more informat4on than is pres-ently available, it is impossible to say whether Nepal could not have accumu-lated subst+artial revserves ever. in thne absenocei of +the scee. That '.1 epen
on the extent to which the "development" goods imported under the scheme werec,nv.i 4nol., ,aneesary in te- of -al4+ty .A cot fPor dewe'l--n+ T It is -1
true that the trade has yielded some additional revenue. It has also been
- 29 -
highly profitable to the businessmen concerned, Nepali or Indian, but whetherthese nrofits have remained in or been used in Nepal is very much open toquestion. Moreover, industrial investment of this kind has no long-term fu-ture and has already made for friction. Whatever one can sav about the scheme,however, it must be recognized how limited the alternatives are.
103. The problem is a delicate and difficult one. Nepal has legitimat;eneeda for foreign rtyhsnsg to bhnv oocAs not wwkilpbleb in Tndis at Fill (e=
most types of aircraft), or available only at a considerable premium. Yetsome of the meanR for eArning this exchange are deniAd for rea-sons which arebeyond the hard facts of geography. For example Nepal is separated from EestP1kistan by a 15-mile npek of Tndian West Bengal= Tndin does not grant trainsitfacilities to Nepal over this area, with the result that commodities whichNepanil -niiuIA tsell to Esi t P-kimtan tnrii1A have to hp rPoynrte f.A freym Clmitfa I
Transit rights to East Pakistan would also give a landlocked country the ac-vantage of access to -orts other than Calecutta, where aonditions a-e often farfrom ideal. Facilities for shipping goods through other Indian ports such asBombay ot uld -ive wa Na- the so-e advant+e.
104. Tbere is v-. ittle profit in trying to add up bow mauch each country"saves" the other in foreign exchange by exporting to it products which other-wise wou.ld nave to ble pai"d for i4n convert-ib&le- curr~enc;y. This -i. _O execishas no end. It is in the interest of both India and Nepal to come to someunderstvading on .NepEa"'s legii-at needs for &o,eril curecy.dto io-- ~~ 1. =K.1J J..4..LL11 IVI04A u .s.I
for ways in which these needs can be met at the lowest cost. Some give andL.tje wi.LL be necessary-, b u IuI co-LL±L Ub aUchiVCU by reCUU.LzkLng L.Ua there
is a wide area of common interest in this respect - perhaps more than is real-izedu at a tiM wt'hlen the Udi ufferences have inevitably received prominence onboth sides.
Developing Institutions and Manpower Resources
105. In Nlepal the literacy rate probably does not exceed 10 percent 2/.D__ 1_ _ __1_____ ___ __n On ___ _n av_ _- __ _ 77 XnrollUent in pri-mary- shool %UV=u- VULy 3C P=r;Ut of the ageC group (6-LVyears) and only 6 percent at the level of secondary education (11-15 years).Even this lo- degree of education could be greatly improved. SnLce only 25percent of the primary and secondary school teachers are trained, the qualityof teaching is low. Together with an unsuitable curriculum and examinationsystem, the usefulness of much of the education provided can be questioned.she wasu u " the preaent system i8 probably best snown by the high raiiurerate at examinations. These were 51.5 percent for SLC (School Leaving Certif-icate) gradduates in 1967 (after the tenth grade at the end oI secondary scnool),60 percent for the intermediate examination (after two years of college), andabout 50 percent for Bachelor's degrees.
1/ Part of the difficulty arises because Pakistan has not granted Indiatransit rights for trade with Afghanistan.
2/ At the time of the 1961/2 census the percentage of literates to thepopulation over 10 was 9 percent (16 percent for men and 2 percent forwomen).
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106. But the picture is not all black. Great progress has been made incomparison with 1951 when enrollment in primary education was only 0.9 percentof the age group, and 0.3 percent in secondary education. This means that inprimary education enrollment has grown from 8,970 pupils for the whole countryin 1951 to almost 442,000. If the percentage of the age group in school canbe raised - by, say, one percentage point each year - there will be nearly550,000 pupils in primary schools in 1974/5.
107. It is almost impossible to provide an accurate breakdown of totalexpenditure on education, since there is no single year for which one canassemble the various elements. In 1965/6 the government budget was NRs 35million 1/ and income of primary schools, secondary schools and colleges fromfees and other sources was of the order of NRs 20 million. If all this wasspent, total expenditure would have been about NRs 50-60 million, not includ-ing perhaps some capital expenditure financed by the panchayats themselves.Of this, perhaps 25 percent was spent on primary schooling (mainly privatelyfinanced), 35 percent on secondary schooling and 25 percent on higher educa-tion. the balance being for miscellaneous purposes.
108. The structure of the entire education system is out of balance, how-ever, and this will have to be remedied as far as is possible. Enrollment inhigher education is 15 percent of all students in secondary schools 2/, com-pared to only about 2 percent for vocational and medium-level technical train-ing. The Nepal Education Planning Commission had recommended in 1954 thathigher education should be limited to 5 percent of secondary enrollment, andin 1962 a UNESCO mission recommended a reduction in higher education. Thiswas at a time when enrollment in higher education was only half of what it isnovw.
109. The prFesent sunrpnlus of' impmnlnvedcol tnlege grdute rnblvy hot
its origin in the opportunities for government employment. Now that oppor-tnities do not exist on the scale n PPQQP-v to _hQsrb them, the mnaketplacewill with time have its effect on the choice of careers and should bring a,-reater n"llber of them. i-into thee more pprooductive Mand seilzdtc-io
fields. Wage incentives work even in the highly traditional society of Nepal.A-pli-on+s for +raininrg Jobs in mechanical tork for ---ole have greatly 4-
creased, since it has become apparent that trainees can find jobs that pay
11. Tn the met n how r m
yield a very low return on investment. Of the total number of students en-rled i n lhi gh1 er edu-caMt ion in 1967/81, '.-ost h-alf were art's studen's -it
I .J.LV .L. ±I1~L ~.V.~J1 .414 I .d .J.MJI LIa.L.L WV%V a %, ~IUA Ub LI &.u
very poor prospects of finding suitable employment. A look at the manpowersi tl-u ati4Lon in the country- as_ P__ fa 4s it is I~- - -- -prvie an indica'-iorl of~.A~.~.L6JkL LI UI V .JUU6.Lj - .MO GL M.O .Lk,L M~.. D.UWWL& - IUV-LU.VO MU LUUL(..U.,±UVLL UI
the areas where investment in education might pay better dividends. Thenuzmber of people w`ho have had or are havng higher professional training
1/ About half of the educational budget was financed by foreign aid, mostlyfrom USAID.
2/ Secondary school enrollment is 1T percent of the primary enrollment.
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seems Ito iriuica te tha.; thiCer-e wil.l. be enoVugh t.U cv-VVL the nee%ds of,J the F1A o -a r'urthPlan. They are mainly trained abroad and normally sufficient scholarships fortnhis puarpose aLre prov,d±ed u-der -_ -_iaral. .nd m. ± _.&l - _J. . -aid progr, -4ou1gh
in a number of cases the acquired knowledge is too specialized to be used inNepal. Secondlary school teachers are au exceptionl to the likely 8-uf iic,encyof trained personnel. By the end of the Fourth Plan (1974/5) about 3,000 addi-tional trained teachers will be needed. The demand could be met without evenenlarging the capacity of the present School of Education at Tribhuvan Univer-sity in Katemandu if the school were used exclusively for giving degree ho].UCrsone-year courses to become secondary teachers. But in order to get a sufficientnumDer of candidates for these courses, the salary scale will have to be raiseu.
il1. The great requirement for training in Nepal is for middle-leveltechnicians. This is illustrated by the ratio of professionals to technicians.in Nepal there are about 2 to 3 doctors for each trained nurse and there are2 civil engineers for 3 trained overseers. With such a low proportion oftrained supporting staff, the work of professionals cannot be very efficient.Projections of future manpower needs are not yet available, but from the pro-visional estimates macle by different departments one can see a large additionalneed for overseers (particularly for road construction and irrigation projects),for para-medical personnel (especially for the family planning program), arndfor agricultural technicians (for the extension service and the ASC and ADBservice agencies). Then there is a need for land surveyors and other landadministration staff. Training institutions in all these fields exist al-ready 1/, but in many cases the salaries need to be adjusted to make thesemiddle-level jobs attractive. Training in these skills normally lasts fromi 1to 3 years. Since these technicians are in immediate need, they can be pro-ductively employed at once after training. There is an almost complete dearthof accountants and no specialized training institution exists in this field.
112. A reservoir of manpower, with a variety of skills which are litt3eused, is the Gurkhas who have left the British army. A reintegration trainingscheme has recently been started by the British government which will givelonger training for civilian life than hitherto; the scheme will be open toex-Gurkhas as well as those leaving the army in the future. A complete cardindex of ex-Gurkhas with details of their skills has been given to the Nepalesegoverrment. One obstacle to the employment of the Gurkhas in government jobs,which should be removed, is the fact that they have no formal academic quali-fications; their training and overseas experience may for many purposes be abetter qualification. As roads are built into the Eastern and Western hil:Lareas, the opportunity to use their skills will be all the greater, since theymay be more eager to take up employment near the villages to which they havre
1/ A College of Agriculture has been proposed which would offer coursesleading to a diplo-ma for s5uQessul completion Of two years' study anda BSc degree in agriculture for four years' study. The two-year trainiLngfor technicians in agriculture would certainly be an improvement over theexisting system for training JTA's. However, the quality of training en-visaged at the proposed college would not replace the need for foreigntraining of agricultural scientists.
- 32 -
returned than in Kathmandu or elsewhere. This is a particular advantage whenthe problem is usually to get people to take up positions outside Kathmandu.
113. As far back as 1962 UNESCO experts pointed out that 20.7 percent ofthe age group in Kathmandu Valley was in secondary schools but the comparablefigure in an Eastern Hill district (East No. 2) was only 0.9 percent. Thisregional imbalance could create problems for development work in the more re-mote areas. It is difficult for technical departments to recruit a sufficientnumber of candidates for technical training and employment in those areas wherethe SLC graduates are relatively scarce.
114. The government, as the biggest employer in the country. offers themost scope for improvements. Some inconsistencies existing in the governmentpay scale will have to be ironed out if people were to be attracted into Jobswhich are important for development. To find enough highly motivated peoplefor this task, the adJustment of government pay scales is one thing, but themain incentive lies in an educational system which stresses achievement, andin a more healthy public administration svstem that encourages initiative.There are many other fields where the government is now trying to remedy pasterrors. Allowances for personnel working in remote areas have been given, anew job classification system for all government services has been proposedand even the techniaue of performance rating of aovernment officials is beingintroduced to provide a better basis for promotion of qualified officers. Itis also beginning to be recognized that transfers of staff to entirelv differ-ent tasks and too frequent changes from one Job to another substantially re-duce the effectiveness of government administration- esneciallv where contin-uity and specialization are needed.
115. It has sometimes been said - and with good reason - that the lack ofa sound, continunus; merit-based administrative system has probably been thegreatest single obstacle to the modernization and development of Nepal. Someprnoress haR been aehieved, hut the government still hnsa .t-rpmpndAo1 task totackle. The redefinition of the regular and development budgets and the adop-tion of program budgeting will help to promote more efficiency in the use ofresources. Some attempts have been made to achieve some sorely needed coor-dination between the variouss ministries and departments. P'l ning ,ts arebeing introduced in the ministries. This is a good step. There is at themoment, for example, no place 4n the Ministry, of Va ingovernment where information on the present situation of education, let aloneon future plas.s, can bDe fou.d.
1. TIP invesrm.en deci.sions and sdmints4ratige actions are to .ecJme.A.SJ 4.1 ±L VOJIA " ±I.L .L.J ~u U.LILL.aJ .LW,.LA. a.V ULULba.L I- Li~U1L
less dependent on purely personal or political influences, it is essential tohave--- units ta' car mazke a- proper calculation an' evalustion tebnisLIa.V~ UL4.LL-0 UL&1I ;,aL UI.uva JU~~V~ A .aL.IL a.1I. ?A.U,I.LU1I Ul ICU UULA1V1L,5
and impact of government projects. The overall shortage of resources makesuett'ver projec't; prenaratVLon au pianin - a 'u v.i mtu wis prujecut preparationwhich takes into account the difficulties of implementation in Nepal - a bigpriority for economic development. The introduction of the concept oI returnon investment would help in allocating scarce resources, and give Nepal ahigher ret-urn for each rupee spent. nHovever, before one reaches this rathersophisticated state, there is a prior need to obtain accounting data; to dothis, reliable accountants are greatly needed.
- 33 -
117. Considerable cost is involved when programs are carried out bygovernment without adequate preparation. A well-planned pilot project couldshow weak points at a much earlier stage, before going into large and expen-sive country-ride programs. Such pilot projects could also be used moresystematically as training grounds for government personnel. And they wouldbe especially important where the cooperation of different agencies is re-quired. The experience which the administration had with many thousands ofcomplaints after the land cadastral survey was completed but not followed-u.pimmediately by the land administration department, has now served as a lesson.However, the cost of employing a temporary work force to clean up all the mis-takes is considerable.
118. Muchi progress has been made since the first economic mission of theIBRD which visited Nepal in 1963 and came to the following conclusion:
"Economic development in Nepal is first and foremost a matterof f'inding individuals with a real desire to get things done,and with the! political skill and drive required to overcomethe built-in obstacles to action."
This conclusion is no longer so true as it was. Such individuals have been.found, but there are still too few of them.
ANEX 1
I%TArPATMTAT DPCnvTtf!
1. The gross domestic product of Nepal in 1966/7 was officially givenas Tm. 7 .65 r-':o. whic wuul --vr o at -bout --- I -er bead ever a- -A+ theiCD LULS ~ I .) ULJ.L -ILVJI, WIJ.±%..LJ WWU±.U WUIJ±fL VIJU L V CIJ L.JVJLA W4j . kJ'1& IJK;CL%, -~~A
exchange rate after the devaluation of December 1967 V. This figure isalmHost useless, it merely daemonstrates that Nepal is a poor country * To cometo any more useful conclusion than that, it is necessary to examine thestatistics more closely. In order tO do tbis a comparison with India hasLbeen made. Although a great deal of guesstirnating hbd to be done, it vnO'dappear that gross national product- per nead in Nepai i3 nearer three-quar-ersthat in India. At present exchange rates, the two figures would be aboutequal.
Sectors Others than Agriculture
2. Table I-A compares the product per caput of Nepal and india in1966/7 at current prices. A conversion from Nepalese to Indian rupees hasbeen used correspondting to the rate of exchange after the Nepalese devalua-tion of December 1967. Actually, India devalued in June 1966, so that duringmuch of the period in question the tw7o rupees were practically at par. l3utto use this conversion rate would be wholly unrealistic.
3. We shall come to the agricultural sector later. First, looking atthe other sectors, two things stand out: the enormous discrepancy in incomeper head in cottage industries and owmership of dwellings - in favor of Nlepal.In neither case is this realistic; a first approximation would be equalityin each case.
4. Cottage industry in Nepal was estimated at a flat 15 percent ofagricultural output, which means 10 percent of GDP; the comparable figuresfor India are 5 percent and 2-1/2 percent. Nearly half of the Indian fipyureis accounted for by textiles, tailoring and leather footwear, i.e. a shadeover 1 percent of GDP. Such a percentage of village output in this householdsector does not appear too far wrong. An estimate at the same level inNepal and India per head would no doubt do violence to the truth, but inwhich direction there is really no way of saying without further enquiry.
5. The figures for ownership of d>wellings fall into much the sameategoryr One might wpell armle in this case that t,he Indian figure is too
high for Nepal, since it includes a large proportion of urban income aturban re-nts three tis +.t'hat of' Iru1 Th. fi wouldc beTni I-I'M cl osr to 13 than18, if India were all rural, which is not so far from the case in Nepal. Alli;n anll, ee +.taing in+.n aont+ the +.ps it +. rthh t d ;ellingc ar m_r_
substantial in Nepal (because of the weeather), an estimate about the sameaS Ant;a' te Srat peaig und gapp/itwear tood be geneerouto$.
At the rate prevailing during 1966/7 it would be close to $100.
- 35 -
Table I-A
U1CLwCodO1UiL0IC PRODuC-U 1966/7
Nepal Ind-iaTotal Per Caput Total Per Caput
(NR mill1on) (IR) (TI crores) (IR)
Agriculture 5,069 364 12,071 240
Non-agricult;ure
Cottage Industry 760 55 (600) 12
Other Industry 128 9 (3,354) 67
Construction 155 11 1,097 22
Transport, Public Utilities 105 8 1,475 29
Ownership of Dwellings 744 53 914 18
Trade 303 22 2,702 54
Finance 86 6 358 7
Public s,dministration and Defense 109 8 1,109 23
Other Services 191 14 .1,574 31
Subtotal. 2,581 186 1L3,183 263
Total 7,650 550 25,254 503
Notes: (i) A population of 10.3 million and an exchange rate of 1.35were used for conversion to Nepnalese GDP per caput.
(i:i) A population of 502 million wn,as used for ronvarsion toIndian GDP per caput.
(iii) Indian small-scale industry was divided into household andn^+.h_r" cmn I -cz r:Ila i n t.hn : cAm -nrrr.^n-r+.;^n)c- An.'{ in QlQfn/l ; r 1.1-w ~~1-u2c -n .hs -- - [ 1-lh -
about 44 percent household.
(iv) Agriculture includes forestry and fishing.
Source: Nepal: Central Bureau of Statistics (quoted in INF, Survey of14J^jJalQ Tax StuctU eU, Jul L1, 1S68), ±aUlV 2).
±n1 a.1ULI. * IJIJ', J;ji.ULI'JItL-L U U UtUi.o Ulan dCiu I I VDcs of i In.di. (SA-3)7 J/,
April 8, 1969, Table 3.
6. The figure for finance is clearly on the high side, but absolutelyit is small. Moreover, if industrial output is based on the 1964/5 samplecensus, it too would appear overestimated, since value added per worker wasput at about NRs 4,000 or, at the present conversion rate, IRs 3,000 perheadl/. This is comparable to productivity in Indian large-scale industry.In Indiansmall-scale non-household industry, which is more comparable toNepal's industry, the figure is only about a third as high. Generally speaking,a. downward adjustment to something like IRs 100 for non-agriculture would seemto be in orcler - or slightly less than 40 percent of the comparable Indianfigure.
Agriculture and Forestry
7. Because output figures are available for major crops, a differe!ntapproach has been aclopted for agriculture. In Table 3, the output of Nepaleseagriculture has been revalued at 1960/1 Indian prices, which are availablein detail, so as to make it comparable to the Indian constant price series.It must be emphasized that, since there are no figures for livestock outputin Nepal, there is El large element of auesswork in these estimates. Theresult is to give a figure of IRs 143 for agricultural output per head inNepal (ecluiing forestry and fishing) against TRs 13) in Tndia. Thesefigures are for the period 1965/6 to 1967/8 in Indian 1960/1 rupees. ThEtexcess comes frnm n sulhbstntia+llyr higher .ct;m in+.c0 of 1i niitnnt. rpr
head, which may be justified, but is certainly the weakest link. Thus, inatrieo of years,~ t.Trar ofr Anicb Te=ra poor%y fr TIndla andr cno-meT1^hat les o c
Nepal, agricultural output was, within the limits of this sort of estimate,about the sam.e - if MnVything, sligh- hi-gher for Nepal.
8. The above figures do not include forestry (which is presumablyincluded un(der agriculture in Table I-A). In India forestry output is very
~ '~~I&J O~J'JLUU J '.) U ± dCLr.L.L%U.L LUI dL_L. 0LLUJU U -L1U 1 J L,.L U .L~ .AH
pletely unknown; unfortunately, it seems to be a large unknown and promisesto becom,e la-rrger. et-l 4.he -4-.4t -P fue-_'1___ and3 foag 4in, 1h hi:sU'~~ UV!.AJAII~ * l.i~.L'UCL.L IJ.J U11.Z UU 4U Up A L ± V .L I LPJ_LV 0VU d I IU ±0 VI LU, v.1 UIJO, 1I±.L4.L-
is substantially larger than it is in India, replacing kerosene and dungused± for f±ue±l andl r.uch of tLbJe aniUal foUdder consu,,med in India iUU±. TsiJ.O UJU IAU
together with whatever is used for construction might well constitute some-thing of the order of Rs 10 per head (stbi'' at Iniaun 1960/l prlces).
9.* The really large unknown, however, is the outTput of logs or rough-hewn timber from the hardwood forests of the Terai. The annual incrementalgroWth of tne forest could well amount to something of the order of 25-30million cubic feet. Nothing like this is marketed systematically. To beginwith, much of the forest is in the Inner Terai, separated from India, theprincipal market, by a mountain range. Much of the annual increment is,therefore, simply lost. On the other hand, about the same vo-lumemay be harvested through indiscriminate clearing, the "'harvest" being thewhole forest rather than mature trees.
21 Value added by 14 thousand workers was said to be NRs 60 million.
- 37 -
0.r u T i * a vus t impossi to put a value -s--I1 -
volume and a suitable price at the stump are both virtual unknowns.Moreover, a V CJt .L II L,J. UrI Wet-ween tlhe contriutin toUU UaV tIodnaLLJ. dLiu Uand I. ;SGIC
product has to be made. Most of the timber finds its way across the border,so that Inulan factors of production claim a good part Of the product; therecorded volume of production is only 6 million cubic feet, half of it forexport. Takking this into account and making what can only be described asa. wild but conservatively biased guess, national product per hea.d from theTerai forest (including fueiwooda mignt be of the order of !Rs i5-20. Lhie
figure for domestic product would be higher.
Conclusion
11. Putting all these various dubious conclusions together, one cancompare Nepalese GNP per head with Indian in the three years 1965i6 to1967/8 in the following table (at Indian 1960/1 prices):
This very rough guesstimate works out at 70-75 percent in an unfavorableperiod for India.. It is, hmoever, valued at 1960/1 prices. At currentprices, especially for rice and timber, the percentage woulcd be nearer80 percent. Since the price relationship for rice camnot be expected topersist, three quarters would seem the best guess one could give now forthe right proportion.
1j/ Including deduction of 3 for external transactions in the case of India.
ANNEX 2
POPULATION AND FAMILY PLANNING
1. The 1961 census reported births and deaths during the previousyear at rates of 33 and 13 per thousand, which are clearly far too low.Infant mortality must have been omitted on both sides of the ledger on asubstantial scale. The estimated number of infant deaths per thousand wasonly six; in a country where there is practically no medical service out-side Kathmandu, this must have been wrong.
2. The actual rate of growth is not really known. The CentralBureau of Statistics, from internal evidence from the census with adjust-ments for underestimation in various age groups, estimates a crude birthrate of around L0, a crude death rate of 22, and a growth rate of 18 perthousand during 1961-1971 /. Mviuch higher estimates have been publicized,on the basis of the National Health Survev carried out in 1965/6. Figuresof 54, 27 and 27 are given for the birth, death and growth rate per thou-sand. Painstaking efforts were made by interviews in sample villages tocheck on the birth rate by various methods, but the results cannot beaccepted as solid evidence without further analysis of the samples. Thevillages were not representative; it wiould be necessary to check theresults in each one rather than globallv. since some of the results donot appear credible; and the way in which samples of women interviewedin the villages were chosen would also need examination_
3. There was a previous censu-s in 19A2/h, whose qualitv is unknown.The growth rate between the two would be of the order of 1-1/2 percent peryear, if the f irst nernSuS was not a gross overenrmrprftion and the second agross underenumeration or both. The difficulties are compounded by thelarge migration, Tn 1Q(1/2 over 300,000 npennple frm t.he hills Tire outsidethe country, mostly in India. Over 300,000 people then in the Terai wereborn in India. It is perhaps safest to speak in terms of roil-nd filcures of40, 20 and 20 per thousand for birth, death and growth rates for the timebe in .
4. The incidence of smallpox, cholera, tubercu.losis ann m2laria isrelatively high; life expectancy is less than in India and Pakistan. Withimprovements in health, the death rate cann be expected to fa-ll. The n --tional health program has concentrated on malaria eradication, establishiinghealth centers to provide vaccination and medical serices anrd the impro-vement of drinking water with the help of U.N., India, USAID and otheragencies. Br 1969, Q al1Qia had been eradicated or reduced to practical
control in most of the infested areas except the Western and Far -esternTerai and nearbmy HJil1 reg-ions.
5.. a LFamily planning was started in L958 bya voluntarJ orga.ization.Subsequently the government officially assumed responsibility for a program
and handed it over in 1968 to a semi-autonomous board, the Family Planningand Mliat4ernal and tiil Healt Board;, Lhe cha rmnsse AN- ns. r of Hea th.The number of married couples treated in 1967/8 -w-as about 5,000, between2) a ,. 3,4 per mil of' 4the total nmef Ter. M'- -.- ls inceas and there
are ambitious plans to expand the program, now confined largely to Kath--manLdu except flor an-± occasior.al a -J"IL Jorne vasect om-.y ILeamo r vh -'Ee programintends to use all the 50 hospitals and 100 health centers existing in the
o'L UIIury as We'"' db a--" U l.Ic' ib U. U.LJU.LVe Vil t-±i L Ul 6;2V iVed4. uuu uo crs andthe para-medical personnel, government services and voluntary organizations,schools and colleges and commercial distribution of contraceptives. Thelatter is already subsidized and doctors are paid an incentive fee forvasectomies and IUD insertions. The program receives financial and tech-nical assistance from numerous national and international agencies i/,
6. A country like Nepal faces formidable difficulties in control:Lingits population even given the fact that there is said to be ample demandfor the program's services in the overpopulated hills. First there is 1;hebarrier common to many developing countries that the "!ideal"! size oIfamily is still large, almost certainly in excess of 4; family planning.,even if universal, would still not be synonymous with population contro;.'.The number of doctors outside Kathmandu is very low and of nurses stilllower j. Until there are basic health services for living children,the incentive to limit a family to 2 or 3 is not very great. Even wherehealth facilities (do exist in some form or other, distance is stll aproblem. It is said that many deaths follow illegal abortion. Someresponsible opinion favors legalization, not only on health grounds, butalso on the grounds that the present state of communications makesregular conltact with "acceptors" almost impossible. Finally, as alreadypointed out, Nepal's population is still determined to a large but un-known extent by migration. Nepal has a long way to go and the need forconcesntration of effort is just as great in this field as in the others,
/ WI-HOi, IPPF, UNICEF, USAID, SIDA., Population Council.
In the Economic Affairs Report of the Ministry of Economic Planning,,August 1967, Table 5 records 230 doctors and 112 nurses, of which102 and 26 respectively were located outside the Bagmati zone, whiciincludes Kathmandu.
i
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STATTOSTTIlT. A-PPP \T)TY
Table No. Page
1 1961 Population 41L tL .AJ LU ± J 1± . iIT 4U rJ' JJL ± .L2 I"reav Pop""a"ion "Iensit ya e roln
Tenural Status by Regions 42
3 Value of Crop and Livestock Output 434 Production ofI Principal Industries 44
5 Budgetary Position 456 Government Revenues 467 Government Expenditure 478 Foreign Grant Aid 48
9 Money Supply 4910 Nepal Bank Ltd: Deposits and Loans 5011 Rastriya Banijya Bank: Deposits and Loans 5112 Agricultural Development Bank: Basic Data 5213 Nepal Industrial Development Corporation 53
14 Exports and Imports of Goods to and from Third Countries 5415 Balance of Payments with Third Countries 5516 Foreign Exchange Reserves and Exchange Rates 5617 External Public Debt 5718 Estimated Future Service Payments
on External Public Debt 5819 External Public Debt Repayable in Local Currency 64
20 Nepal Electricity Corporation 6521 Growth of the Education System 6622 Primary and Secondary Education 1964/5-1968/9 6723 Income and Expenditure of Educational
Establishments - 1965/6 6824 Salary Scale of Nepal Government 69
41 -
Table 1
I e^.1 D( OTIT A MT..thTL7v0 4. '-'4. U4i"J . J±M4
Population Population Sex Rationegion nr-esLu J9 T.' M:F
(OuOJ . (000) All Ages ,'0-49
Eastern Hills 1,887 iO00 914 87
Eastern inner Terai i94 5 94 89
Eastern Terai 2,2i3 i4 102 i(02
Kathmandu Valley 1460 1.5 103 i3
Central Inner Terai 244 4 103 10i3
Western Hills / 1,947 1.67 92 81
Far Western Hills 1,628 79 96 837
Western Terai 400 3 104 106
Western Inner Teral 99 1 100 101
Far Western Terai 272 1 109 1L14
NEPAL 9 ,413 389 i 97 92
Of the 167,000 absentees) about 81,000 came from the two heavilypopulated districts (old) of Syangja and Gulmi with a combinedpopulation of 631,000 (sex ratios 88 and 90 ).
g/ Of which 329 outside the country and 302 in India.
Source: 1961 Census (Part 2 Table 4 and Part . Tables 11 ff).
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Table 2
AREA. POPULATION DENSITY. NET CROPPED LANDAND TENURAL STATUS BY FUEGIONS
Net Croplnnnd PernentageHa. per Cropland
Region Area eNnsity ae -t ne. acvri T-n nHpr Rpnte-r frn-m
(sq.miles) (per sq.m.) (000) Holding Person Others
Eastern Hills 10,114 187 192 .63 .10 23.8
Eastern InnerTera- 1,829 106 50 1.62 .26 21.3
Ka-thm. n-du VJallwy 218 21 10r 29 .50 .06 3L.7
Central Irner Ter. 2,176 112 6 1.63 .2 ir'
TWTe St,'n. Hills Ii II.). 17C5 02 .61 .10''.4
Hills j 18,902 90 109 .42 .o6 13.1
Western Terai 1,307 306 179 2.49 .45 41.7
Western Inner Terai 714 138 61 4.44 .62 42.2
Far Western Terai 2,843 96 180 5.64 .66 332.6
NEPAL 54.,362 173 1,841 1.23 .20 27.8
g/ This table is reproduced in more detail in Volume II of this report.
2/ Jumla district is not included in agricultural census. Area, populationand density without Jumia were 11,384, 1,513 and 132 respectively9
Source: Population Census 1961 and Sample Survey of Agriculture 1962(including ratios calculated by mission).
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Table 3
VAlUE OF CROP AND LIVESTOCK OUTPUT IN NE?AL /(Average of 1965/6 to 1967/8 at Indian 1960/1 Prices)
Foodgrains and Pulses per capita Output per Agricultural Holding ([Rs)Quantity 236 kgs Crops 937Value 108 IRs Livestock 263
Gross Agricultural 1;,200
* Less than IRs 500,000.1/ More details are shown in Table 4 of Volume II of this report.2/ Output data for these items were estimated by ad hoc techniques and
should be considered only as rough guides. Fruits and vegetableswere estimated at 10% of the value of foodgrain production.
Source: See Volume II, Table 4.
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Table 4
.nD__Tr'rr'TTTnAT n\D D TM h TTDA , T TNT n T MTr
.L IWA.J JVJ~ .L LJAJJ4 ~-J±. L U I .L- L .-A11L.L .L'~JLN L.LJ J
For 1967/8 and 1968/9 a breakdown is not available for the most recentfigures. Earlier estimates are therefore used for the tables onRevenue and Expenditure.
Source: MLinistry of Finance.
Table 6
GOVERNMENT REVENUES7~Rs %_m=_o_nT_ 7-o Increase 1967/8
1961/2 1962/3 1963/4 1964/5 1965/5 1966/7 1967/8 1968/9 over 1962/3
1/ Although the Nepalese budget provides a breakdown between current and capital expenditures, this distinctionhas lost all meaning over the years. For example, permanent staff menbers are handled under the current(regular) budget and temporary under the capital (development) budget, regardless of function. Also, manygovernment departments, finding it easier to get new expenditures approved under the development budget haveincreasingly resorted to its use for current expenditures. The Ministry of Finance is instituting a systenwhereby only those expenditures directly related to production and prcductivity will enter the developmentbudget. The difference betweern the old and the new classification is considerable as can be seen from are-working of the figures for 3965/6 and 1966/7 contained in the Plan draft (in NRs rnillion):
1965/6 1966/7Regular Development Regular Development
2/ Budgeted figuwes only. In earlier years the budget figures did notcover a' aid recei-ved, bu from 1965/6 they do.
Sou-rce: Ministry of Finance.
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Table 9
MONEY SUPPLY V/
(NRs million)
Total Currency Deposits
July 1961 205 142 63
1962 244 156 88
1963 265 162 103
1964 366 235 131
:1965 1L6 296 150
1966 507 3h6 161
1967 554 369 18$
1968 618 h19 199
1/ No analysis is available of the causes of variations in themoney supply.
Source: Nepal Rastra Bank, Quarterly Economic Bulletin.
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Table 10
NEPAL BANK LTDt DEPO3iTS 1U14D LQ-JNS
Deposits Loans and Advances/Foreign Ag;ri-
Fixed & Trade cultural Gold &Total Current Sayings Total CrediCt Products Silver Other
Jil-r19629 83.6A L A lo8 A 3,1 207. ]7. 7.
I oAi l, lA A lA t. I,o 1. 71. 0 300 iA . i 1 n II !.ioA _ ' - - av_ 4r-o Lc I L, o -. r'o- _ P - --
1964). -1 7 9 72.9 n .0 91¢5n- 2o 1, 30(, 12, 18.
, 04ct I Ili I o 70o r) en n -I A -3e en -I ilE Q ,-I n oIn n,1,c7v v -.)ea 17e )7 o - -W). , - 2?7 a - xVuou -L-? -vov
196eZ7 139X 7 '77 6 12 'I I n P r'Q r% el -I I-nt
1968p 'I1 pi or- - Q8Z4 I. 61-I (In e IL .0 4t-L 7 .ju .IJ.u 7-)* UU*L4 JL., 'J U..L L -) .v ±L4 V L4-)*u
2/ Classified b-y tyVe of secur ity. For 1962, 1963, anld 196h figur es arefor hpril month, for subsequent years for July.
T-ne Niepal Bank imited was established in i937. it now has 49 branches inthe country, of which about 10 are in or around the Kathmandu Valley, about30 in the Terai or Inner Terai and the balance in the hills. The bank is51 percent government owned. On its lending operations the following ratesare charged: 070 for exports to Tridia and 7-1/27% for exports to Third coun-tries; 9-1/2% against gold and silver; 10% against imported commodities;and 11% for overdrafts, The import-export business nas been a major sourreof demand and Biratnagar is the most important center from the lending pointof view. For deposits the bank offers 4-1/27o on savings deposits; 5% forcall deposits; and 7% for fixed deposits (minimum of 5 years). This lastrate has elicited a very favorable response over the past few years. TheNepal Bank appears to be experienced and competent though somewhatconservative in its operations.
Source: Nepal Rastra Bank, Quarterly Economic Bulletin.
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Table 11
IRSTRIA B.ANIJYk_ BiadK: DEFOSITS a\ID LOANS
(NRs million)
Deposits LoansFixed &
Total Current Savings Total
July 1966 309 2.8 1.1 2.7
1967 42.4 31.1 11.3 27.2
1968 41.2 18.9 22.3 50.1
The Rastriya Banijya Bank was set up in early 1966 because the Nepal B.-nkLtd. operating along strictly commercial lines was not able to expand ata rate consistent with government policy. The RBB is 100 percent govern-ment owned and has so far set uD 27 branches of which 11 were taken overfrom the Rastra Bank, mainly in the hill areas. Of the total the RBB has16 branches which are in DIhoes not served bv the NeDal BRnk. Tn itsfirst year of operation the bank suffered a loss but by the second yearwas showing a profit- There is no competition between the RBB and theNepal Bank, either for loans or advances. Most of the advances are forthe export and import trade= Advances ag7ainst the security of gold andsilver go mainly to money-lenders who re-lend at considerably higher rates(estimated to be around 25) The hbnk has not vet got involved inlending to the agricultural sector. At this stage the general level ofDersonnel does not comopre fqvorablv wuith the Nepal Bank. The bqnk Dro-vides special allowances to employees stationed outside Kathmandu whichare verv miinh more generois thnn the government. in JIumln for example(more or less the maximum hardship station) the bank provides l1O0/ ofsalary against 50% from the government- Thus the hranc-h mnnnger ofJumla would receive his basic salary of NRs 4h0 a month, but with theallownnce wouild receive nltogether I\s 1jos6, wT,Thich iS .a good salaryby Nepalese standards.
Source: r% Nepa Ras tra B a'nr Qatel _ cn cB'Y+
Table 12
AGRICULTURL DEVELOPUIENT BhJK: BDSIC DhTI,
(NRs 000)
IncreaseLoan in Loans
Disbursements Outstanding Expenditure Income Profit
1963/4 908 886 76 15 61
1964/5 683 267 85 176 + 91
1965/,6 2,666 1,502 421 213 - 28
1966/7 3,990 1.9L9 L7L 312 .162
1967/8 3 ,588 158 612 h79 -13h
1968/9 * 3.987 2.h65 n.a n-a na.
* Seven months to Februarv 11 1969_
Prior to 1961 funds were Drovided to thA cooperatives by direct govetrnmnmftlending at a rate of 2%. In 1963 the Co-operative Bank was set up. Theweakness of conoerAtive management led to the funGtinnOS of the R!4nk beitransferred to the Agricultural Development Bank set up in January 1968.The ADD mny lenrl to cooperativesj individual farmers and agricnlturalbusiness firms. The Bank sees the two major problems facing it as, firstly.that the Da.nk is unahle to take any action. agancns delinquent borrow.oers aflCsecondly, the lack of trained personnel. With respect to the first, evenwhen the f'qrmprq -rpayn the fnnrds are f-rvquntly misused by c-ooperntiveand village officials. Despite a concentrated effort to improve the situa-tion, it has not bhen possble to red-ce the volulme of delinqu]en-t loansoutstanding, which were still about 24 percent of loans in February, 19659.The ADB has a total o h branches of which 7 have graduate managers. The
Asian.Development Bank is contemplating a project with the Bank.
Source: Report of the Asian Development Bank Technical Assistance Nission,-1. 'I Qy O 1969 A Ad ,,^-l P2ports ' +of the I 1 Ald--inl +til Dvlop-
ment Bank.
- 53 -
T1' hie 13
%flrfPA TIMU T S A L 1 nDEV,-r nLnt,`r Dm"vL A P rN10
NIDC was set up in 1959 with two objectives: firstly to provide equity aridloan capital for industrial development and secondly as a general industrialpromotion organization. The difficulties it has encountered are not a reflec-tion of the organization which seems quite competent, but of the inherentdifficulties facing industralization in Nepal some of which are discussed inthe body of the report. The Corporation has never suffered from a shortage ofresources, having access to a number of lines of credit from India, US AID,the German Kreditanstalt, etc. The desire to encourage industrial investmentappears however to have led it into a number of sectors where a little morecaution would have been justified. Doubtless. however. if it had been morecautious it would have been accused of conservatism so that one can at leastsay that the faults are on +he rightf sidp. The prohlemn is that arrears of
repayment are mounting steadily and are at 27 percent at present (up from 23nernent lnst yvear) 70 npernpnt of these arrpars are ae.c.ounted for hv theCorporation's four largest borrowers. The Corporation has various projectson its books which sond interestinvg fori the near future. These iner.e alivestock project, a brewery, a plywood factory and modernization of an
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- 61 -
Table 18 continued
ITEPA,. - E3TITAT$> FUTURE SERVICE PAY1-BNTS ON EXTL AL PUBLIC DEBT 0L7ST.41TDIS'IN1CLUDIMG UMDISBURSED AS OF JA.NUARY 15, 1969 (Co!NT.)
Debt Repayable in Foreign Currency
(In thousands of U.S. doiiars) Page 4
DEBT OUTSTI_._1 _____JU _ ILi1iN ,__ PERIOD) PA=4TS DUR11G PERIODYEAR REGNNI19I k' N OFPE-A-101J"
JANUARY 16 INCLUDING AMORTI-U111DISBIuSE ZATION I n ZL EST TOTAL
% Increase over previous year - 42.5% 25.7% 22.0% 29.1% 32.60%
* Units sold are only a proportion of units sent out, since there are largelossesz due to theft. Losses of all kinds cru 6h percent of uinitssent out in 1962/3 and 41 percent in 1967/8, steps having been taken tocolziteract thi-s ev.il.
Nepal Electricity Corporation (NEC) was established 1963 to operinate gov-vernment-owned installations which had hitherto been under the ElectricityDepartment. The INE operates n,ow the power nproduction (with n, installedcapacity of 12,500 kw hydropower and 5,000 kw diesel power) and distribution
1/ Actual figures, Ministry of' EducatiLon.2/ Figures from USAID, Kathmarndu.
If the percentage of the age group enrolled in primary education can be raised at the rate of one percentage point eachyear, there would be about 550,000 pupils in primary schools by 1974/5<. At a teacher-pupil ratio of 1:35 there would be15,500 primary teachers needed. If 18% of the pupils enrolled in primary education will be in secondary education bythe same year, then 4,C0CO seconrdary teachers would be needed if one assumes a teacher-pupil ratio of' 1:24.
Salary and Allowances 6.2 5.5 2.7Other Expenditure 1.7 2.3 1.6Capital Expenditure y ....
Total 7.9 7.8 5.2
% of Reporting Schools 68.6 66.5 n.a.
_/ Not included or not given separately for primary and secondaryschools. If the former, this may explain the difference betweenincome and expenditure.
