Document of

The World Bank

FOR OFFICIAL USE CINLY

Report No. P-3467-NEP

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

IN AN AMOUNT EQUIVALENT TO US$6.0 MILLION (SDRs 5.6 MILLION

TO THE

KINGDOM OF NEPAL

FOR A

CASH CROP DEVELOPMENT PROJECT

March 3, 1983

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit - Nepalese Rupee (NR)

Since December 17, 1982

US$1.00 = NRs 14.3

ABBREVIATIONS AND ACRONYMS

ADBN - Agricultural Development Bank of NepalAIC - Agricultural Inputs CorporationBSF - Birganj Sugar FactoryDOA - Department of AgricultureFAMSD - Food and Marketing Services DivisionFCV - Flue Cured VirginiaHMGN - His Majesty's Government of NepalJCF - Janakpur Cigarette FactoryMOA - Ministry of AgricultureNVGI - Nepal Vanaspati Ghee IndustriesPCC - Project Coordinating CommitteeSMS - Subject Matter SpecialistTDC - Tobacco Development CorporationT&V - Training and Visit

NEPAL FINANCIAL YEAR

July 16 - July 15

FOR OFFICIAL USE ONLYKINGDOM OF NEI'AL

CASH CROP DEVELOPMENT PROJECT

Credit and Project Summary

Borrower: Kingdom of Nepal

Beneficiary: Agricultural Development Bank of Nepal

Amount: Special Drawing Rights (SDRs) 5.6 million(US$6.0 million equivalent)

Terms: Standard

Reiending Terms: An amount of US$214 million would be on-lent to ADkiXoni terms equivalent to present rediscount facilitiesof the Central Bank which allow ADBN to have a 4% interestmargin. In line with present policy, ADBN would lend tocooperatives at 11% and 8%. who in turn would on-lend tofarmers at 15% and 12% for short and medium-term loans,respectively. ADBN would also lend directly to farmersat 15% and 12% for short and medium-term loans respectiv&-ILy.

Project Objectivesand Description: The project -h-ould pro-o_e cash crop production.

Specifically it aims to inlcrease produ^tion ofsugarcane, tobacco and oilseeds (mustard andrapeseed). Pilot development of sericulture andgroundnuts would also be initiated and existingginger research facilities strengthened. Theproject would improve support services for thesecrops and would build on existing efforts toupgrade agricultural extension and research inNepal. The project would also provide for creditto match the increased input requirements. Inaddition, to facilitate the movement of cane tothe sugar factory, the project would provide forupgrading of about 59 kms of feeder roads, construc-tion of about 5 kms of new roads, and construction oftwo small bridges.

The major benefits from the project would be (a)incraased agr cultural production (cash crops); (b'lsavings 1n r ofeigrn eKchange, primarily through im.portsubstitution; and (c) increased net farm income. Theproject faces no special risks. The sugar andcigarette factories that will process the increasedproduction are performirng well and the Government hastaken action to deal with the Tobacco DevelopmentCompany's financial problems. No marketing problemsare expected for the other crops.

This document has sa restrictd distribution and may be used by recipients only in the performanceof their ofBiaW duties. Its contents may not otherwise be disclosed, without World Bank authorization.

Estimated Cost: US$ MillionLocal Foreign Total

Civil Works 1.28 0.93 2.21Vehicles - 0.08 0.08Equipment and Furniture 0.03 0.15 0.18Credit 2.43 - 2.43Monitoring and Evaluation 0.09 - 0.09Incremental Staff Costs 0.18 - 0.18Incremental Operating Costs 0.18 0.07 0.25Training and Technical Services 0.05 0.09 0.14

Base Costs 4.24 1.32 5.56

Physical Contingencies 0.25 0.18 0.43Price Contingencies 1.04 0.33 1.37

Total Project Costs 5.53 1/ 1.83 7.36

Financing Plan:

IDA 4.17 1.83 6.00HMG 1.36 - 1.36Total 5.53 1.83 7.36

Estimated IDA FY FY84 FY85 FY86 FY87 FY88 FY89Disbursements:

Annual 0.2 0.8 1.5 1.6 1.2 0.7Cumulative 0.2 1.0 2.5 4.1 5.3 6.0

Economic Rate of Return: 62%

Staff Appraisal Report: No. 4073-NEP, dated January 28, 1983

Map: IBRD 16603IBRD 16604

1/ Inc:ludes US$0.03 of duties and taxes.

INTERNATIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE

KINGDOM OF NEPAL FOR A CASH CROP DEVELOPMENT PROJECT

1. I submit the following report and recommendation on a proposeddevelopment credit to the Kingdom of Nepal in an amount of Special DrawingRights (SDRs) 5.6 million (US$6.0 million equivalent) on standard IDA termsto help finance a Cash Crop Development Project. Of the proceeds of thecredit, about US$2.4 million would be onlent to the Agricultural DevelopmentBank of Nepal (ADBN) to provide short and medium-term credit under the

* project.

PART I - THE ECONOMY 1/

2. The most recent economic report, "Nepal - Policies and Prospects forAccelerated Growth" (Report No. 3577-NEP) was distributed to the ExecutiveDirectors on October 15, 1981. The principal findings of the report andrecent developments are described below. Country data are shown in Annex I,

3. Nepal is one of the least developed countries in the world. Percapita income is estimar-ed at US$156 (1981) and health and education stand-ards are well below the average for South Asia: life expectancy at birth isonly about 44 years, infant mortality is 150 per thousand, and adult literacyis only about 20%, The population, estimated to be 15.0 million (1981), grewat a rate of about 2.6% per year during 11)71 to 1981. About 95% of thepopulation live in rural areas.

4. Population density with respect to arable land has reached alarminglevels and is threatening to overwhelm the resource base of the economy.Cultivation has been extended beyond economically feasible and ecologicallysafe limits in the Hills, and together wilh denudation of forests to meethousing and fuel needs, soil erosion has become a critical problem. Firewoodand water have become more difficult to obtain as the forests are reducedand springs and streams dry up. This deg:-adation of the agricultural basehas made even the present low level of living standards difficult to main-tain.

5. AgricuiLure accounts for nearly 60% of Nepal's GDP and 75% ofmerchandise exports, and provides the main source of livelihood to over 90%

l/ Parts I arnd II of this report are substantially the same as in thePresident's Report (Report No. P-3437--NEP) dated December 29, 1982 forthe Bhairawa-Lumbini Groundwater Stage II Project in Nepal, distributecdto the Executive Directors under cover of the Secretary's MemorandumIDA/R83-1.

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of the population. Crop production accounts for about 60% of agriculturaloutput, livestock for 30%, and forestry for 10%. Paddy is the predominantfood cIrop (planted on about half of the total cropped area), followed bymaize, wheat, millet, and barley; cash crops (oilseeds, jute, sugar and

tobacco) are grown on about 10% of the cropped area. About 25% of totalrural incomes arise from nonagricultural activities, of which cottageindustries are one of the more important and engages over one million peopleon a part time basis.

6. Apart from agricultural land, Nepal's only other importantexploitable resources are hydropower and tourism. The exploitation of thevast hydropower resources, however, beyond that required to satisfy thecountry's own power demand, will depend crucially on Nepal's ability to entercomplex: financial, exploitation and export agreements with neighbouringcountries. The tourism sector, based on Nepal's magnificent landscape andrich cultural heritage, has been dynamic though it still accounts for onlyabout 1% of GDP.

7. When modernization efforts started in the early 1950s, there was

virtually no economic or administrative infrastructure, and initial develop-ment efforts were necessarily concentrated on establishing a foundation forfuture development. The Fifth Development Plan (1975/76-1979/80) marked ashift in development objectives; acceleration of economic growth, employmentcreation and raising living standards of the population became major planobjectives. Development expenditures rose during this period and there weresubstantial shifts in the composition of spending away from transport to

agriculture, power and social services. But given the lead time required forinvestments to start yielding returns, GDP growth barely kept up with that ofpopulation.

8. Part of the reason for this stagnation lies in factors beyond Nepal's

control. The difficult topography and poor resource base are obviouslyimportant in retarding growth. Nepal's landlocked position, long open borderwith India and the dependence of its overseas trade on transit through Indiacreate additional disadvantages. While Nepal benefits from the proximity ofa vast potential market for Nepalese goods, the ability to pursue independenteconomic policy measures is circumscribed. Furthermore, industrial develop-ment faces the competition of a far larger and more efficient industrialsector in India.

9. But factors within Nepal's control have also contributed to thestagnation. Problems with the implementation of projects in most sectors ofthe economy have constrained the growth of public sector capital formationwhich grew at an average of only 5.5% per annum in real terms during the

1970s. In addition, the returns on investments were often lower thanexpected because necessary complementary investments or current spending werelacking, and because of managerial deficiencies. A good example is theagriculture sector, where output stagnated despite considerable investments

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in irrigation, a virtual doublirig of the irrigated area and a 40% increase infertilizer use between 1974/75 and 1979/80. tn the past, insufficient atten-t-ion was paid to bringing water down to the farm level and this was com-pounded by inadequate support services such as extension and research, by thelack of timely supplies of improved seed, fertilizer and other inputs such ascredit, and by the lack of farm-to-market roads. Recent major irrigationprojects financed by IDA and the Asian Development Bank are now addressingsome of these problems by taking more comprehensive and integratedapproaches.

10. Over the past decade, the Government lhas made continuous efforts torincrease tax revenues. But, despite the improving long-term trends, therevenue effort (about 9% of GDP) remains small by comparable internationalstandards. With limited domestic resources, current expenditures have beensqueezed in order to generate savings for investment spending, with theresult that the efficiency of total spending was lowered. Furthermore, whileabout one quarter of total budgetary expenditures (regular and development)was being financed by the rest of the world in 1974/75, this proportion was36% in 1981/82.

Ii. The slow economic growth has been accompanied by a widening tradedeficit. Import payments have grown while the trend in export earnings hasbeen sluggish due to declining rice exports. Increased tourism receipts andremittances, together with foreign assistance in the form of grants andconcessionary financing have, however, genera:ly ensured that the overallbalance remained in surplus. But even so, for-oign exchange reserves havedeclined from being equivalent to abou, one year of imports in .-he ea.ly1970s to six months in 1981.

12. Whereas 1980/81 was a year of recovery from the previous year'ssevere drought, 1981/82 was a more modest yea-:; agricultural production isestimated to have grown by 3.5% and GDP by about 4%. Budgetary developmentswere quite encouraging. Development expenditures increased sharply, andrevenue collections increased substantially for the second successive year.Ne.vertheless, the budget deficit increased from about 5.5% of GDP in 1980/81to about 8.5% in 1981/82, and while foreign assistance also increased, domes-tic borrowing rose sharply. Also, the underlying economic trends have notpicked up yet, and the economy remains dependent upon the weather. Earlyreports indicate that the 1982 monsoon has been less than satisfactory andthi will adversely affect economic performance in 1982/83.

: c aOn Seprember 19, 1981 Nepal unified it:s exchange rate with the US*.:llar a; 3Ro 1',2 = US$1; the exchange rate with the Indian rupee was

-.. Langed N.' 145 = 100. Th-s completed a series of steps to reforai:.al's eAchan- w-cate system which .gan when a complex system of multipleexchange rates and trade restrictions for overseas trade was replaced with adual exchange system on March 31, 1978.

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14. During 1979-81 economic policy making had been delayed by politicaldevelopments. Following disturbances in 1979, a referendum was held in May1980, which reaffirmed the existing partyless system, with suitable reforms.The constitution was amended in December 1980 to provide, among other things,for direct election of members of parliament. General elections were held inMay 1981, and the political situation appears to have since stabilized.During the past year, the Government has focussed its attention on economicproblems and on implementing the Sixth Plan (1980/81-1984/85).

15. The Sixth Plan reflects Nepal's determination to search for ways toovercome stagnation and, as a set of objectives, it was endorsed by membersof the Nepal Aid group at its December 1981 meeting. The strategy to shiftinvestment into more productive sectors is continued and emphasis is given toalleviating some of the factors that limited past growth. The Plan's prin-cipal objectives are to increase production at a faster rate, to increaseemployment, and to meet basic minimum needs in food, fuel (firewood), drink-ing water, health services, primary education and rural transportation. Thestrategy: (i) accords high priority to developing agriculture, small-scaleindustries and Nepal's abundant water resources; (ii) stresses soil conserva-tion and population control; and (iii) emphasizes full utilization of exist-ing infrastructure and alleviation of absorptive capacity constraints. Thedevelopment strategy also calls for full involvement of the private sector inagriculture, manufacturing, trade, tourism, construction and transport opera-tions.

16. Achieving the Plan's objectives will require quick-yielding sectorprograms to generate growth in the short to medium-term as well as humanresource development programs to lay the foundation for sustained growth inthe longer term. Program targets must also be made consistent with overallfinancial and implementation capacity. But at the same time, vigorousmeasures are needed to remove administrative and domestic financial con-straints, and the Government has begun to respond to these problems. Reformsin development administration include the establishment of an AdministrativeStaff College; appointment of a Permanent Pay Commission to review civilservice salaries and schemes of service; creation of a Central MonitoringUnit within the Foreign Aid Division of the Ministry of Finance; and estab-lishment of treasury offices in each of Nepal's 75 districts to expedite therelease and audit of budgetary funds. The record 49% increase in developmentexpenditures during 1981/82 may indicate that these efforts have resulted ina speed up in disbursements. To strengthen domestic resource mobilization,the Government has set up a revenue training center; formed a Tariff Boardwhich recommended increases in indirect taxes for the 1982/83 budget; madepreparations for close monitoring of all public enterprises and also liqui-dated certain of these enterprises; and decided to phase out rice and fer-tilizer subsidies in the relatively higher-income Kathmandu Valley.

17. Nepal has received substantial external assistance,. Aid commitmentshave averaged US$165 million per year since 1976, and, according to current

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indications, could reachl an average of about US$300 million per year during1981/82-1983/84. Foreign assistance is expected to account for about 53% oftotal development spending during the Sixth Plan period. The Nepal Aid Groupwas formed in 1976 to assist in the overall coordination of financial andtechnical assistance efforts and the Group ncw accounts for some 70% of allaid disbursements. The Group has met four times at plenary meetings underthe chairmanship of the Bank to discuss overall external assistance needs;local Aid Group meetings in Kathmandu are also held to discuss and coordinatesectoral development strategies.

18. Foreign aid disbursements grew rapidly in current prices during thepast five years and were estimated to be US$156 million in 1981/82, but onlyabout 42% of disburseme-ats were from foreign borrowings, the remainder beinggrants. As of December 31, 1981, official fcreign debt outstanding wasUS$234 million, of which. US$192 million was cue to multilateral agencies.These loans were obtained on a highly concessional basis and the grant ele-ment of total loans remains in excess of 70%. As a result, debt servicepayments were only US$4.0 million during 1981, equivalent to less than 2% ofexports of goods and services.

PART II - BANK GROUP OPERA"IONS IN NEPAL

9. Bank Group operations in Nepal began in FY70 with an IDA credit ofUS$1.7 million equivalent for a telecommunications project. Since then, 28additional credits have been approved, bring:ng total IDA assistance to Nepalto US$326.5 million equivalent, net of cance:lations. In view of Nepal'smany development needs, this assistance has been for projects in a widevariety of sectors. Six of these sectors account for about 79% of IDAcredits by amount: irrigation/agriculture (US$110.2 million for nineprojects); water supply and sewerage (US$46.3 million for three projects),power (US$40.8 million for one project); telecommunications (US$21.7 millionfor three projects); highways (US$19.2 million for two projects); and ruraldevelopment (US$19.0 million for two projects). The proposed credit would betihe second in FY83, bringing the total amount of IDA assistance to Nepal toUS$345.5 million equivalent, net of cancellations. No Bank loans have beenmade to Nepal. TFC made its first investment in Nepal (US$3.1 million) in ahotel project in Kathmandu in FY75. In addi-:ion, IFC approved a loan ofUS$6.23 million equivalent to Nepal Orind Magnesite (Private) Limited (i.e.a private company) on Narch 16, 1982. The loan was to help finance a US$24.9million project to mine and process magnesite ore. Annex II contains asummary statement of Bank Group operations a, of September 30, 1982, andnotes on the execution of ongoing IDA projects. It shows certain delays inthe implementation of some of these projects, particularly during the initialperiods. The delays have been largely due tD Nepal's limited technical andmanagerial capabilitiec. In order to assist Nepal in coping with this con-straint, considerable technical assistance is being given by Bank Group

staff, including our Resident Representative in Katlhnmandu. As a result, therate of disbursements is improving; during FY81 and FY82. US$27.8 million andUS$28.5 million equivalent, respectively, was disbursed compared to USq65.1million equivalent disbursed uirirng the entire previous 10 vears. Projectcompletion reports have been prepared for four projects--First Telecommunica-tions (Credit No.166, US$1.7 million equivalent), First Highways (Credit No.223, US$2.2 million equivalent), Tourism (Credit No. 291, US$3.2 millionequivalent), and Birganj IrrSga-ion (Ciedit No. 373, US$6.0 million equiv-alent). All four projects experienced delays in implementation, and institu-tional improvements were less than anticipated; however, all four generatedacceptable rates of return. A completion report on the Settlement Project(Credit: No. 505, US$6.0 million equiai'len)n has also been written and isunder review.

20. Bank Group lending to Nepal has so far been at a modest level com-pared to the country's need for external. assistance, The internationalcommunity has shown considerable interest in Nepal's economic developmentand, to date, the shnortage of funds hias nGt been a major bottleneck. Themain constraint cn the utilization of increased aid has been Nepal's limitedabsorptive capacity, affecting the pace of project preparation and implemen-tation, The Bank Group has been assisting the Gover^nment in project prepara-tion through a Technical Assistance Credit (Credit No. 659-NEP, US$3.0 mil-lion equivalent) and by acting as Executing Agency for a number of technicalassistance projects financed by UNDP.

21. The Bank Group's current lending strategy places major emiphasis uponthe directly productive sectors (particularly agriculture) and the develop-ment of complementary infrastructure, including manpower training programsand facilities, transport, and hydroelectric power. For agriculture, thebasic strategy is to assist Nepal maintain overall foodgrain self-sufficiencyand where possible promote exports of agricultural products. This strategyhas two major elements: (a) to assist in building tha irrigation infrastruc-ture in the Terai mainr7 to increase paddy productionir and (b) to help reducethe food deficits in the Hills both through rural development projects whichemphasize increasing food production, and more recently through a specificHill food projects. To increase the chances for the success of theseefforts, the Bank has, at the same ticm.e, assisted in the improvement ofagricultural extension as well as the provision of other inputs includingcredit. Projects are being prepared in forestry, leather industry, agricul-tural manpower development, highways and hydroelectric power.

PART IlI - THE AGRICULTURE SECTOR

22, AgricuLture dorminat`es the econorLy, and crop production accounts forabout 60% of agricultural output. Food crops are growmn on about 90% of thetotal cropped area, Paddy is the predominant crop with maize, wheat, millet

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and barley being of lesser importance. Cash crops are grown on some 240,000ha or about 10% of the total cropped area. Oilseeds are cultivated over some

125,000 ha while jute, sugarcane and tobacco are grown on 56,000 ha, 23,000ha, and 8,000 ha respectively.

23. The production of major foodgrains, except for wheat, has not beensatisfactory over the past decade and has not kept pace with the rate ofpopulation increase which averaged 2.6% per annum. Moreover, increasedproduction was largely due to area expansion, since average yields, againwith the exception of wheat, declined somewhat. Many factors contributed tothis decline including generally decreasing soil fertility, loss of landthrough erosion, cultivation of marginal lands, higher cost and irregularsupply of fertilizers, inadequate agricultural advice and other supportingservices, and inappropriate pricing policies. The Government is takingmeasures to overcome these constraints, including, for example, developmentof irrigation down to secondary and field level infrastructure to permitintensive crop production, formulation of suitable forestry and soil conser-vation programs, improvements in input supply and extension services anddevelopment of manpower training programs. Cash crops, however, fared betterdue to more favorable prices, and growth averaged about 3.5% annually throughthe 1970s.

24. Nepal's Sixth Plan (1980/81-1984/85) envisages crop intensificationas a means of increasing food supplies and of improving self sufficiency inthe production of raw materials required for agro-based industries servingdomestic needs and export markets. To meet the latter needs, the Planemphasizes the development of cash crops sucL as sugarcane, tea, tobacco,oilseeds and jute in the Terai and high value crops likce ginger, medicinalplants, spices, cardamom and sericulture in the hills.

Cash Crops

25. The total value of cash crops produced in 1978/79 was US$110.0 M,

equal to about 9% of agricultural GDP. In the same year, Nepal exported cashcrops worth US$27.0 M (about one quarter of merchandise exports) out of whichthe contribution of jute was 88%. Imports oi- commodities such as tobacco,tea, sugar and vegetable oil in 1978/79 amournted to US$3.0 M.

26. Oilseeds. Mustard and rapeseed are t:he principal oilseeds and aregrown mostly after maize or early paddy crop: exports amounted to nearly US$2million in 1978/79. In recent years oilseed production has increasedannually by about 3% but yields remain low, due to delays in sowing, insectattacks, inadequate input use and poor cultivation practices. HMGN plans tointroduce groundnut cultivation on a large scale in order to manufacturevegetable oil.

27. Jute. Jute has been Nepal's second most important export crop(after rice) and is largely grown in the Terai with production having

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increased by 1.5% per year during the 1970s and exports which had averaged17 000 'IT annually during 1969-73, increased to 27,000 MT during 1975-78.

However, world market prospects are not promising at the moment and exportshave declined somewhat.

28. Sugarcane. Sugarcane is mostly grown in the Terai under rainfedconditions in rotation with food crops. Processing of white sugar is done bythree sugar mills (with a total crushing capacity of 2,400 MT/day) and a fewother smaller units which make brown sugar and gur (unrefined sweetener).Sugarcane yields are low because of a variety of factors: (a) poor extensionservices (currently the responsibility of the Birganj Sugar Factory) andinadecuate research support, (b) low levels of fertilizers and pesticidesusage, (c) poor seed and lack of timely cultural operations, (d) inadequateamounts of short term credit 3 and (e) difficulties in transportation of canedue tc a poor road network.

2'o Tobacco. Tobacco is a w-nter crop grown under rainfed conditions inthe Terai, in rotation with food crops such as maize, wheat and mustard. Twotypes of tobacco are commonly produced - Virginia Gold, a flue cured variety(FCV) of potentially high quality, and Natu, a sun cured variety of lesserquality. Yields and general quality (in terms of grades and nicotine con-tent) are low because of poor access to advice and absence of scientificharvesting and curing techniques, and low fertilizer usage as a result of ashortage of production credit.

30. Commercial production of tobacco started in 1967 following the estab-lishment of the Janakpur Cigarette Factory (JCF), which has an installedcapacity of 3,000 M cigarettes per year. Initially JCF relied entirely onlocal tobacco, and purchased all tobacco produced in the main tobacco growingdistricts immaterial of quality. JCF started producing better qualitycigare-ctes in 1977 and superior tobacco grades were imported for blendingwith local tobacco. The factory, however, continued to purchase all domesti-cally produced tobacco which resulted in considerable overstocking. As accnsequence, JCF exported about 3,700 MT of low quality tobacco and ceased tobuy domestic -tobacco in 1981 and 1982. JCF has now disposed off the surplusand beginning in 1983 will buy about 50% of its requirements from domesticgrowers

31. The Tobacco Development Company (TDC), established in 1971, was givenresponsibility for tobacco research and extension, buying tobacco from thefarmers, regrading and redrying the leaf and selling it to the JCF. TDC hasa limited number of technical staff who do not have adequate knowledge oftobaccc) cultivation and are thus unable to provide advice on cultural andcuring practices. Similarly, the quality of work produced at the tobaccoresearch station at Belachapi is poor. In addition, TDC's financial situa-tion has deteriorated because of poor management, high administrative costs,.ve-rstocking of tobacco and the low prices at which it sells redried tobaccoto JCF.

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32. Tea. Tea is cultivated on publicly and privately owned estates inthe eastern most part of Nepal amounting in total to about 3,000 ha. Asmallholders' tea program has also been recently introduced with financialassistance from the United Kingdom.

33. Sericulture. Mulberry cultivation and silkworm rearing was startedin the Hill areas of Nepal in the mid 1970s when the Department of Agricul-ture (DOA) established a sericulture station at Khopasi in Kavre district.Silkworm rearing has now been undertaken by about 20 farmers in the vicinityof the station and more recently by two farmers in the nearby district ofSyangja. Mulberry is usually cultivated on land which is not suitable forgrowing food crops and consequently has considerable scope for expansion.The main constraints to expansion are (a) inadequate facilities for con-tinuous egg production, (b) lack of technica:L support in Syangja district,(c) absence of credit facilities to farmers, and (d) lack of trainingprograms for farmers and staff.

34. Ginger. Ginger cultivation is mainly concentrated in a few WesternHill and Teral districts; about 20% of production is consumed domestically,the rest is available for export. So far there has been little change fromtraditional farming practices; research and extension efforts have beenlimited and have had little impact. New varieties, which would fetch abetter price in export markets have not been introduced; and drying techni-ques have yet to be adopted by farmers who, as a result, sell fresh gingerand thus encounter logistic problems in marketing. Marketing is done throughlocal traders who act as representatives of wholesalers, who in turn exportthe ginger to India.

35. Among other Hill grown cash crops are cardamom, turmeric, chillies,garlic, and medicinal plants. Production of all these crops has been con-strained by the absence of organized marketing, poor research and extensionservices to growers.

Agricultural Institutions

36. The institutions responsible for agricultural development and policyinclude: the Ministry of Agriculture (MOA), the Ministry of Water Resourcesand the Ministry of Forestry. MOA includes DOA which is entrusted with thetask of promoting production of cash crops through extension, training andresearch, although, as noted above, the responsibility for extension effortsfor sugarcane is presently with BSF and for tobacco extension and researchwith the TDC. DOA extension services are decentralized to the district levelwith each district program headed by an Agricultural Development Officer oran Assistant Officer. The actual field work is carried out by Junior Tech-nicians and Junior Technical Assistants, each receiving two years and oneyear training respectively. A recent innovation has been the employment ofAgricultural Assistants at the village level, selected mainly from among

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progressive farmers and retired servicemen. The extension wing of DOAemploys about 151 graduates and 1,007 other staff (including field staff).The extension services have been relatively ineffective in increasing produc-tivity for a variety of reasons. The extension staff are required to performvaried tasks concerned with the input supply, credit, data collection andapplication of regulations and can devote little time to meeting with farmersand providing them with technical support. The Government has, however,begun to deal with some of these problems and agricultural extension servicesin the Terai are being reorganized under the "Training and Visit" (T&V)system of extension. The IDA assisted Irrigation Projects (Credits 373, 654,812, 856 and 1055-NEP), as well as the Agricultural Extension and ResearchProject (Cr. 1100-NEP) have helped strengthen these efforts. Of 20 dis-tricts in the Terai, 14 are now covered by improved levels of extension. TheIDA assisted Hill Food Development Project (Cr. 1101-NEP) has also providedimproved extension services in four Hill districts. In addition, efforts arebeing made to alleviate some of the present deficiencies in training ofextension workers, possibly with IDA assistance.

37. The agricultural research service, operated by DOA, is responsiblefor providing information based on basic and applied agricultural researchfor development of all the regions and climatic zones of Nepal. 52 researchcenters are located throughout the country. Considerable progress has beenmade with rice, wheat and maize under the Integrated Cereals Project (ICP),assisted by USAID, but much more applied and adaptive research is needed forincreasing crop production. Major problems are insufficient operating funds,inadequate facilities at a number of research stations and shortages of staffworking in different agroclimatic zones on location specific problems.However as with extension, HMGN has begun to tackle some of these problemsand under the IDA assisted Agricultural Extension and Research Project, fourregional research stations are being upgraded.

38. The MOA also has overall responsibility for a number of publicinstituLtions such as the Agricultural Development Bank of Nepal (ADBN) andthe Agricultural Inputs Corporation (AIC). ADBN is the major source ofinstitutional credit in agriculture. Its functions are to provide (a) creditto Sajhas (multi-purpose cooperatives) and to corporate bodies engaged inagricultural development; (b) loans directly to farmers for purchases ofinputs; and (c) banking facilities in places where commercial banks are notestablished. Institutional credit, however, caters to only about 25% ofNepal's agricultural credit needs, with the balance being met from tradi-tional sources. Moreover, in the last few years, ADBN's lending operationshave decreased because of inadequate resources made available to ADBN,recovery of only 30-40% of loans made to Sajhas for onlending to members,lengthy and complicated procedures for borrowing, and difficulties in estab-lishing collateral for loans, which discourage farmers' demand for institu-tional credit. The objectives of the Sajhas are to provide credit, agricul-tural inputs and marketing facilities, as well as to sell consumer goods.Efforts were made during 1976-78 to strengthen their effectiveness by

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appointing them as buying agents in HMGN's foodgrain procurement program andalso by having ADBN provide management assistance. But these measures havebeen terminated and management difficulties have led to increasing financialproblems and have hindered Sajhas' ability to assist farmers.

39. AIC is the sole government agency responsible for supply of inputs offertilizer, seeds, pesticides, and agricultural tools and machinery; it sellsthe bulk of its products through the Sajhas. Poor management has, however,limited AIC's ability to supply appropriate inputs in a timely fashion, andthese difficulties have been further aggravated by the financial problemsresulting from HMGN's fertilizer subsidy policy. In addition, while Nepalobtains a large proportion of its fertilizer supplies on a grant basis, thetypes of fertilizer are not always approp-riate for Nepal's needs. Inresponse to these problems, HMGN is preparing a national fertilizer policy,which is likely to include some reduction in subsidies. In addition, theIDA-assisted Agricultural Extension and Research and the Hill Food Projectshave included the provision of fertilizer to complement other project com-ponents.

PART IV - THE IPROJECT

40. The original request from HMGN for assistance included an investmentprogram for the development of sugarcane, tobacco, tea, oilseeds, sericultureand ginger. At appraisal, it was decided not to include tea development asadequate assistance was already being provided. In the case of groundnut_-since neither suitable varieties existed nor enough research knowledge wasavailable for large scale development, only a small pilot program would beincluded in the project.

41. The proposed project was prepared by the Agricultural Projects Serv-ices Center (Nepal) with the assistance of t:he FAO/IBRD Cooperative Programand financed by HMGN. The project was appraised in May/June 1982. Nego-tiations were held in Washington, D.C. on December 9-10, 1982. HMGN wasrepresented by a delegation led by Mr. I.B. Shrestha. A report entitled"Nepal: Cash Crop Development Project, Staff Appraisal Report" (Report No.4073-NEP, dated January 28, 1983) is being distributed separately to theExecutive Directors. A timetable of key events relating to the project andthe special conditions of the proposed credit are given in Annex III.

Project Objectives

'.2. he project's objective is to promo-e the production of cash crops.

opecifically> it aims to increase production of sugarcane, tobacco and oil-seeds (mustard and rapeseed). Pilot develoi3ment of sericulture and ground-nuts would also be initiated and the existing ginger research facilitiesstrengthened. The project would build on existing efforts to upgrade

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agricultural extension and research in Nepal in order to provide improvedservices for these cash crops. This would be complemented by the provisionof credit to match the increased inputs needed to raise production.

43. Higher production of sugarcane will enable the Birganj Sugar Factory(BSF) to obtain sufficient inputs to enable it to operate at optimalefficiency. Tobacco development seeks to substitute domestic production forimports of high quality tobacco required for blending of better gradecigarettes, and the project is intended to reduce imports by about 50% overthe project period. The project would lay the foundation for a future areaexpansion program of groundnuts to meet the needs of Nepal's recently estab-lished vegetable ghee industry which at present has to rely on imports forthe bulk of its inputs. Nepal has been an exporter of oilseeds (rapeseed andmustard), and raising the yields of these crops would contribute to improvingNepal's export earnings, as would the promotion of ginger production.Sericulture development in the Hills is primarily aimed at increasing cashincomes of small farmers by making optimal use of marginal arable land.

Project Description

44. The proposed five year project would:

(a) increase sugarcane production on 4,660 ha through improve-ment of research and agricultural extension services,development of a seed multiplication program, provision ofshort term credit to canegrowers and upgrading and construc-tion of feeder roads;

(b) increase yields and quality of tobacco grown on 2,800 haby strengthening of research and extension services, improve-ment of tobacco redrying facilities, provision of incrementalshort and medium term credit to growers for production purposesand barn improvement, and by staff and farmer training andtechnical assistance;

(c) promote the development of sericulture on a pilot basis throughestablishment of 150 ha of mulberry, provision of staff, train-ing, vehicles, equipment and facilities for silkworm produc-tion and rearing, and provision of short and medium term creditto farmers for nursery establishment, mulberry cultivation andsilkworm rearing;

(d) increase yields of over 4,800 ha of rapeseed and mustard crops

through strengthening of research, provision of short termcredit to growers and initiating pilot development of groundnutproduction (350 ha) through research, varietal selection, seedproduction and production credit; and

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(e) strengthen ginger research and initiate a marketing study.

45. Sugarcane Development. The project would increase production ofsugarcane so that BSF would be able to meet its entire milling requirementsfrom farmers in Bara, Parsa and part of Rautahat districts where the "T & V"system of extension is in operation. Yield increase would come from improvedresearch, better advice to growers, planting of improved seed, use of optimallevels of inputs provided through short term credit and better and timelycane extraction through a road improvement prcgram. The sugarcane researchstation at Jitpur would be strengthened by prcviding laboratory facilitiesand some additional staff, and research programs reoriented to provide prac-tical answers to farmers' problems. The projEct would also include a seedproduction program to make available a regular supply of improved seed tofarmers. Extension support for sugarcane development, would, in future, beprovided by DOA staff already working in Bara, Parsa, and Rautahat districts.But the project would provide for a subject matter specialist (SMS) in sugar-cane to ensure training and technical support to extension staff. HMGN hasformally transferred the responsibility for the provision of extension sup-port and advice to sugarcane growers from BSF to DOA. The present fieldstaff of BSF, who largely concentrate on credit and input supply and onrunning the cane buying centers, would, however, continue to do this work.The project would provide the incremental credit needs of cane growers sothat all farmers could obtain the recommended level of credit to meet inputrequirements (see paragraph 55 for the lending terms). Loan recovery in theproject area will be "automatic" since it wil:L be made at the time that theBSF pays the farmers for their cane. To ensure a satisfactory network offeeder roads in the area supplying cane to BSF, the project would providefunds for raising the road level and gravelling of 59 kms of existing feederroads, construction of two small bridges and dlevelopment of 5 kms of newroad. The roads will be maintained by the Roads Department after the projectperiod (draft Development Credit Agreement (DCA), Section 3.03 and Part C(i)of Schedule 5).

46. Tobacco Development. The project would intensify research and exten-

sion efforts to increase tobacco yields and quality. HMGN has formallytransferred the responsibility for (a) the Tobacco Research Station atBelachapi from TDC to DOA, and (b) the provision of extension support andadvice to tobacco growers from TDC to DOA. The project would strengthen theexisting research facilities at Belachapi by providing additional staff,staff quarters, laboratory equipment and vehicles. The project districts(Sarlahi, Mahottari, Dhanusha and Sirha), are amongst those where the exten-sion system is being strengthened by the intrDduction of the "T & V" systemand transfer of extension functions from TDC to DOA will provide for inten-s:ive extension support to tobacco growers. The project would provide twotobacco SMS to provide technical support to extension staff and also atobacco production specialist who will work with field staff during the sixmonth growing season (draft DCA, Sections 3.03 and Part C(vii) of Schedule 5and 3.04). To train growers in barn management and curing, trained curers

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from neighboring countries would also be employed on a contract basis (draftDCA, Sections 3.03 and Part C(vi) of Schedule 5 and 3.04). The present fieldstaff of TDC would continue to coordinate credit and input supplies, to runthe tobacco buying stations and to help in redrying operations. In order toimprove the existing tobacco storage and redrying facilities, provision ismade for relocation of the redrying plant to new buildings. About 150 largetobacco curing barns would be remodelled through medium term loans to ownersto economize on fuelwood consumption.

47. The project would provide for the incremental credit needs of farmersto finance the increased use of fertilizer, pesticides and labor. As in thecase of sugarcane, loan recovery would occur when the farmer sells tobacco toTDC.

48. In order to improve the poor financial condition of TDC, HMGN under-

took an expert study of TDC which has been reviewed by IDA. As a result, themanagement and financial structure of TDC and JCF have been rationalized bythe appointment of a joint chairman for the two companies and by HMGN andJCF contributing to the equity and working capital of TDC. Under theproject, HMGN has also established a high level committee, comprising onerepresentative each from MOA, Ministry of Industry, ADBN, JCF, and TDC, whichwill be responsible for recommending the prices to be paid to farmers and therates at which tobacco should be sold to JCF (draft DCA, Section 3.02(b) andPart B of Schedule 5).

49. Sericulture. The project would finance (a) a substantial increasein silkworm egg production at the main sericulture station at Khopasi (Kavredistrict) so as to meet the needs of 200 ha of existing and of new mulberryareas to be developed by the fifth year of the project in both Kavre andSyangja districts, (b) establishment of a sericulture subcenter in Syangjadistrict (near Walling) to provide technical support to farmers, hatching andsupply of silkworms and purchase of cocoons, (c) testing of different typesof hand reeling units, (d) training for farmers and staff, and (e) short termcredit for establishment of mulberry nurseries and medium term credit formulberry cultivation and silkworm rearing. To ensure best use of existingtrained staff, SIGN will post the Assistant Sericulture Entomologist to theWalling subcenter by June 30, 1983 (draft DCA, Section 3.03 and Part C(ii) ofSchedule 5).

50. Oilseeds. The project would provide short term credit to growersto permit increases in production of the rapeseed and mustard crops (4,800ha) and groundnut (350 ha) in the Nawalparasi, Chitwan, Sarlahi and Rautahatdistricts. Credit for groundnut would be made available in the fourthproject year by which time suitable varieties and practices would have beenestablished. HMGN agreed that the Nepal Vanaspati Ghee Industries (NVGI)would purchase all suitable groundnut seed produced by farmers and distributeit to growers (draft DCA, Section 3.03 and Part C(iii) of Schedule 5).Efforts to upgrade agricultural extension are already underway in the four

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districts and should be sufficient to meet the needs of the oilseeds com-ponent of the project. The National Oilseed Research Station at Sarlahi hasalready been strengthened under the IDA-assisted Agricultural ExtensionProject but the present project will provide for an additional OilseedAgronomist.

51. Ginger. The project provides funds for strengthening of gingerresearch at Pokhara, testing of ginger drying units and a ginger marketingstudy. HMGN agreed to make available an area of 3 ha for ginger research atthe Pokhara Horticultural Station, and complete, by December 31, 1984 andfurnish to IDA, the marketing study and a report on drying units (draft DCA,Section 3.03 and Part C(iv) of Schedule 5).

Organization and Implementation

52. Project activities would be carriec out over approximately five yearsthrough the Government's line agencies and public sector institutions. Over-all responsibility for project implementation would be with the MOA butcoordination with other implementing agencies would be ensured through theProject Coordination Committee (PCC). The committee will be chaired by theSecretary MOA, and comprise the Secretaries of the Ministries of Industry,and of Commerce and Supplies and representatives of the Ministry of Financeand the National Planning Commission, the chief engineer of the Roads Depart-ment, the Director General of Agriculttf-n and General Manager/Chairman ofADBN, AIC, BSF, JCF, TDC and NVGI. As different ministries will haveexclusive responsibility for implernenting :->e.r respective programs, PCC hasestablished two sub-committees, chaired respect4vely by a Joint Secretar.Ministry of Industry (for sugarcane and tobacco) and the Director General ofAgriculture (for all other crops) comprising senior staff of those organiza-tions having an input into project implementation (draft DCA, Section 3.02(a)and Part B of Schedule 5).

53. Monitoring of project implementatiDn and the evaluation of projectbenefits would be carried out by the Evaluation and Program Analysis Divisionof MOA assisted by the Food and Marketing Services Department (FMSD) of the

same Ministry. HMGN agreed that FMSD would be responsible for collectingdata on those cash crops to be developed under the project (draft DCA, Sec-tion 3.03 and Part C(v) of Schedule 5).

Cost and5Financing

54. The total project cost is estimated at US$7.36 million equivalentincluding a negligible amount of taxes and duties. The foreign exchangecomponent is estimated at US$1.83 M (25% of project cost). The proposed IDAcredit of US$6.0 million would finance abcut 82% of project cost and wouldcover all foreign exchange cost (US$1.83 million) and US$4.17 million oflocal cost. The balance of the funds required for the project would be madeavailable by HMGN. The sugarcane component would absorb 41% of project cost,

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tobacco 21%, sericulture 9%, oilseeds 2%, ginger 1%, and monitoring andevaluation 1%. Physical contingencies are estimated at 20% on road costs,15% on buildings and tobacco redrying costs and 10% on other plant andvehicle operating costs, and which account for about 8% of the base cost.Price contingencies have been applied in accordance with current Bankestimates of expected inflation rates (1983: 9%; 1984: 8%; 1985: 7.5%;1986: 7%; 1987 onwards: 6%) and compounded accordingly and which accountfor about 25% of the base cost.

55. The bulk of the IDA funds (US$3.6 million) would be channeledthrough the Ministry of Finance to the budgets of participating ministries,and IHMGN would make adequate provision each year in the budgets of theseministries for the operation of the project (draft DCA, Section 3.01(b)).HMGN will make available to ADBN the remainder (US$2.4 million) as agricul-tures credit funds for meeting additional credit requirements for cash cropproduction in the project districts (draft DCA, Section 3.01(c)(ii)). Fundswou-Ld be on-lent to ADBN on terms equivalent to present rediscount facilitiesof the Central Bank which allow ADBN to have a 4% interest margin sufficientto cover operating expenditures and charges and to maintain adequate reservesto rmeet reasonable bad debt risks. In line with present policy, ADBN wouldlend to farmers at 15% and 12% for short and medium-term loans respectivelyand would also lend to cooperatives at 11% and 8%, who in turn would on-lendto farmers at 15% and 12% for short and medium-term loans, respectively.Inflation in Nepal was about 9% in mid-1981/82 and the medium-term outlook isfor it to decline somewhat. The interest rate to the farmers should there-fore remain positive in real terms.

Procurement

56. Procurement of vehicles and equipment involving contracts above

US$50,000 would be on the basis of international competitive bidding inaccordance with IDA guidelines. Where contracts are valued at less thanUS$30,000, and aggregating to US$200,000, items may be procured under localcompetitive bidding procedures satisfactory to the Association. Civil workswould comprise buildings which would be small and distributed throughout theproject area, and feeder roads which are simple and labor intensive. Accord-ingly, construction of buildings and feeder roads would be awarded followinglocal competitive bidding procedures satisfactory to the Association.

Disbursement and Audit

57. Disbursements would be made against: (a) 80% of expenditures forcivil works, (b) 100% of foreign expenditure for directly imported equipment,materials, and vehicles, (c) 100% of ex-factory cost for locally manufacturedgoods, (d) 75% of local expenditures for other goods procured locally,(e) 58% of incremental operating cost, (f) 90% of amounts disbursed by ADBNon short and medium term sub-loans, and (g) 100% of total expenditures ontraining and technical services. HMGN would prepare and present to IDA

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administrative and financial data regarding progress of the project, includ-ing procurement of goods and services, civil works, expenditure, and disbur-sements (draft DCA, Section 3.06(a)(b)(c)). HMGN would also maintainseparate accounts and audits of the project. including separate accounts forexpenditures made against statements of expenditures and would furnish to theAssociation, as soon as possible but in any case not later than nine monthsafter the end of each fiscal year, certified copies of financial statementsfor the year and the report of such audits (draft DCA, Section 4.01(c)).

Benefits and Risks

58. The principal benefit generated by the project would be the increasedproduction of cash crops in Nepal. This would lead to savings in foreignexchange primarily through import substitu:ion. At full development, produc-tion in the project area would increase, in the case of sugarcane by 72,700tons, tobacco by 1,600 tons, oilseeds by 1,200 tons, and of fresh cocoonsfrom sericulture by 115 tons. Farmers can expect an increase in net cashinflow from sugarcane of between 50-60%, fi-om oilseeds of between 25-35% andfrom tobacco of between 10-25%. No marketing constraints are foreseen forany incremental production resulting from -he project. The upgrading ofexisting feeder roads and the construction of new feeder roads should have afavorable impact on the project areas' overall development. The promotion ofthe cash economy can also be expected to have a multiplier effect on therural economy in the project area as a whole.

59. The project would improve the income and consumption levels of anestimated 37,000 farm families. Of these, over 50% are in the lowest incomegroups, with holdings of less than 1 ha, and whose incomes are inadequateto meet basic calorific requirements; 30% are medium size farm families withholdings of between 1-3 ha. In addition to increases in on-farm laborrequirements, the project would generate an estimated 1.0 million mandays ofconstruction employment over the project life. The economic rate of return ofthe total project is 62%. Sensitivity tests indicate that yields, the keyvariable in this project, obtained with the project would have to be muchlower than those projected, for the project's viability to be threatened.

60. The performance of public sector enterprises in Nepal has not beensatisfactory. However, of the three public sector units involved in theproject, the Birganj Sugar Factory and the Janakpur Cigarette Factory areperforming well. TDC had been experiencing financial problems, however, HMGNtook action to deal with these prior to negotiations. Other risks are mini-mal. The best farmers in the project area have already obtained yieldsanticipated under the project. Major increases are therefore possible, evenin the process of bringing the production level of average farmers up to thatof the best farmers.

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PART V - LEGAL INSTRUMENTS AND AUTHORITY

61. The draft Development Credit Agreement between the Kingdom of Nepal

and the Association, and the Recommendation of the Committee provided for inArticle V, Section 1(d) of the Articles of Agreement are being distributedto the Executive Directors separately.

62. Special conditions of the project are listed in Section III of Annex

III. The execution of the subsidiary Loan Agreement between HMGN and ADBNwould be an additional condition of effectiveness.

63. I am satisfied that the proposed credit would comply with theArticles of Agreement of the Association.

PART VI - RECOMMENDATION

64. I recommend that the Executive Directors approve the proposed Credit.

A.W. ClausenPresident

Attachments

March 3, 1983Washington, D.C.

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TAB lE 3ANEPAL - __ ''TAL INDICATO;S DATA INrT

NEPAL REFERENCE GRORPS 1WEIIHTi:D AV',URACES

ARrA P THOUITAND SQ. YM-) - PUT r'EI'ST ESTIVATE)--

IOTAL i4'.8 MOST RECENT LO U INC.-R- MIDDLE 'I1COME

ACRICULTURAL. 40.2 1960 lb 1970 /b ESTIMATE /b ASIA 6 PACIFIC ASTA S PACIFIC

CNP PER CAPITA (5S$) 50.0 70.0 156.0 261.4 890.1

ENLiiGY CONTiU.''TilOS P'ER CAPITA(KiLUJVAiS ,;' CUiL LyL,iAVALENT) 4.3 14.9 13.0 448.7 701.7

POPULIATIVN AND VITAL STATISTICSPoPILATIUN:, MID-YER (liDANDS) 9447.0 11355.0 15020.5 IcURBAN POPiLATI0 (PERC'tNT OF TOTALI) 3.1 3.9 5.0 17.3 32.4

POPULATICN PROJECTIONSPOPUL.IIu,N IN YEAK 2CC0 (MILLIONS) 22.3

STATIONARY rOFPLAFlOl (MILLIONS) 53.9

YEAR STATIONARI POP8LA1O 5i REACHED 2135

POPULATION DENSITYPER SQ. KM. 67.1 80.6 101.3 158.1 255.9

PER SQ. KlI. AGRICULTUIAl, LAND 267.f4 312.4 354.8 - 355.9 1748.0

POPULATION AGE STRUCTORE (PERCENT)0-14 YRS. 39.1 42.0 42.5 36.8 39.9

15-64 YRS. 57.4 55.0 54.5 59.7 56.8

65 YRS. AND ABOVE 3.5 3.0 3.0 3.5 3.3

POPULATION GROWTHi RITE (PERCENT)TOTAL 1.3 1.8 ; 2.0 2.3

URPAN 4.4 4.2 4.9 3.3 3.9

CR'JDE BIRTHi RAIT (PER THOUSAND) 43.6 45.5 42.1 29.3 31.8

CRUDE DEATl RATE (FER THOUSAND) 26.5 23.7 19.8 11.0 9.8

GROSS REPRODUCTION RATE 2.7 3.0 3.0 2.0 2.0

FiVRILY FLANNINGACCEPTORS, ANNUAL (THOUSANDS) - 37.4 146.0USERS (PERCENT OF MARRIED WOMEN) .. 0.7/d 4.3/d 19.3 36.3

FOOD AND NUTRITIONINDE: OF FOOD PRODUCTION

PER CAPIITA (1969-71-500) 106.0 101.0 89.0 108.1 115.6

PER CAE;ITA SUPPLY OFCALORIES (PERCENT OF

REQUIGHEMENIS) 94.2 94.5 88.7

/e 97.3 106.4

PROTEINS (GRAMS PER LA'.Y) 50.8 50.5 46.5/h 56.9 54.4

OF WHICH AN''"AL AND PULSE 9.5 9.2 8. 4e 20.0 13.9

CHILD (ACES 1-4) MORTALITY RATE 32.6 27.8 23.0 10.9 6.7

FEALIHl.IFF EXPECTANCY AT BIRTH (YEARS) 37.6 40.5 44.2 57.8 59.8

'INEANT MORTALITY PATE (fERTHOUSAND) 194.5 172.5 150.2 89.1 63.7

ACCESS TO SAFE WATER (PERCENT OFPOPULATION)

TOFAL .. 2.0 8.0/f 32.9 32.0

URBAN 47.7 53.0 81.0/f 70.7 51.9

RURAL .. .. 5.0(/ 22.2 20.5

ACCESS TO EXCRETA DISPOSAL (PERCENTOF POPULATION)

TOTAL .. 1.0 1.O/g 18.1 37.7

URBAN ., 14.0 14.0& 72.7 65.7RURAL .. .. .. 4.7 24.0

POPUIATiON PER PHYSICIMN 73804.7 51380.1/h 35896.6/h 3297.8 8540.4

POPULATION PER NlERSIt:G PERSON .. 70528.0/h 13513.67- 4929.3 4829.4

POPtLATICIN PER HOSPIAL BEDTOTAL 8294.1 6938.4 63

9 8.5/e 1100.4 1047.5

UFBAN 286.8 329.1 360.Oe 301.3 651.6

RURAL .. .. .. 5815.7 2597.6

ADMISSIONS PER HO2SPITAL RED .. .. .. .. 27.0

ROUSINGAVEARUE SIZE OF HOUSEHOLD

TOIAL .. 5.5;RFPAS 5.4 .. ..RIV&AL .. .. . ..

AYF:RACF NIMBER OF PERSONS PE ROOMTOTAL .. ..URBAN 2.0 ..

RURAL .. ..

ACCFSS TCo ELECTRICITY (PEFCENTOF L' .NGS)

TuIAL .. ..LEB AN 30.2 .. ..RURAL . . .. . ..

-20- APNNEy IPage. 2

lA.N. '. 3A_ FA.: rS - SR U..... -'. _ICATOUT ' ATA SH'RT

NE.'A'. NEFERENCO G;IO"iS (WEl(,HTED AVFRACTES- N'rT P -ENT ESTIMA7T F)

MOST RECENT LOW l101

-21- Annex IPage 3

DEFN'IITIONS OF SCIal INDICATORS

Notes kith-agh the data are droes from uncccet generally judged the =qst authoritati ngd reliable, it should alto be noted that they vay -t bh inter-nathonally co=paroblo beausestof rho lack of standard heed dtftiiliots and concepts cstd by d .ffetent uountritea is collecting the dana Thei data aee, none-theless. asoful co deacrtla otdtts of magnituda. indirate ttrendo, and charaecirito certain eujatr diftferences bet=ean roounctres

fhecrefeteice groups sre (1I the snatccttnry groupnt lre ubhjacituWorccatrydn(2) ucunttttl ccp Inuthotrahat highercntraga Ircosttholtihetcountryfgroupof [ht achj ect couonty 'enuapt Inc '01gb 1 nmeR> Dcl fnptrtoct" grqunvhece a"Middle Iscom Notch Africn atd Middle last' is chosen hbecanse of strongecsocla-calcural aflltutlos) Ino[hecreelrsctc Iron data the unarages art populascc neughteli arithmetic tmacs ton ouch lndhcatoc sod shoet only oheneajoroty of tie couccttca in agrocp has data fon chat itoicattr. S itre the ronerage of tcucutrtes onong the hod icacors dayeodu on the anatlahbiiy at dautoand is not Vuiform. caction msot ht nextlrcsd in relating averages of one indiccstortoanotht r. Thset anerages ace oney husattuc is cotparing the noIse ofonelindicatorar a tct a c amcongthaca rtdry ardpreference groups.

AR.1 (rhoasand s_.ks.) Poonlatlo per Hospital Mad - total, uthan. and rnrah - Popclation (total.Tatal - Totnl ncrfacs atta cosgctaccg luau area and irland eaters; 1909 dcat. u, ban. nd rcral,' diided hy theitr respective nu=er of hospital heds.ogrrcultaaal - geminarte cf agrcucltnral acsa hoed tempaorlrly or ptr0noaatly aonolahie In public and yrivate general end spentalized hospital oafd te-

fat crops. paasturs . trket sand hitchan gardens or to lie fauna;g 1909 data. th. lilitatiar rooters. Hospitals5 are eutablishRenats permanently staffedh' at least one physaican. Estahlithoests ptoniding petncipally canto-

CNP PER CAPITA ff591 - TsP per cayits a otieates at cuarrent market prices, cal- a al rcae ore sot included. gural hospttais. hweeoer, inrclde healthcolored hy taole cantatastan mahod aa b'oric lank utlas 11908-dOf hooks); 1960, aid =edical teeters noat persatently staffed hy a physitlan (hat hya19700. and 1900 data. m:dirul assistant, torte, nidetle, ent.) vhich affee in-patieetoacooino-

d.;tiat and prooide a hamatd rtnege of medboal factisltis. Poe stutis-SNERGY COttftL',TIlt PEi CAPiTA - Anncal coq atyrton of coaaerciol energy (coal r .cai purposes urban hospitoa lsrnlude tWNOs principail/general hospliols,

w ~~~~~~~and litgntite, peteolaaa. outural gun and hydto-, ouclear and goathercal tere- eta rural hospttals, lorsl or ruei'o hospitals and =edical and sateetityterlriyf it kilnograss of coal equivalenrt toe capita; 1960, 197U. and 1979 t.ntttrs. Speciohleed hospitals are inciuded oely andrer torah.data. Add=ssiots par laspitol Bed - Total onhate of ad=issioos to or discharges

fzo= hospitals divided hy the eatber of heds.poPIATIdIM AND VITTAT STATISTITCS

Total Popalasios. Old-Tear (thousatds) - As of daly 1; 19h0, 1900, and 1900 HOUSli1

$ lehan Popuaotlos (parcant of ctatll - tatto tf urhon tc ntota popalatuon; A household ronsisth of a geoup oPf indinidual d)h shtaiubntedlnn qstersldiffereat definicicas of urhar oceans un alfect zosparahillty of data and teber salt ueals. A hoarder on lodger say ne any cot he included it

lnl ou[ish; 19011i7, and 1950 data. ice houssehold for atanisitral yurposes.Popalaicos Pro]scrions Ave-agetctdtabraofpersons per roo=t- tol.curhan, andrural -aneragetae-

Popolation is tear 2000 - Turrosn poynlaciuc crojeetont nar hated on 19Sf h',t of parsons pee root is all nrhas, aod rural occupied ronneotiosaltotal populattot by ago sod oat and th-ete sortaltp said fertility rates. d:tlelrtgs. respectively . Dvellings etclude too-parAeontesttttcturestaedProjactuot parameters for mart:luty rntes co=prissaott[hresnleelsasasst- onwoccuoled parts.log hate eopernanry as hItch Inc eaaolng alth ounstey' n par capita tecolse ArCCass to iltccricley (percent at deellings) total. urban, and rural -lanaI, and fanala dcfa enyeean.y ntahilizing or 00.1 roars. Tha para- f,nnvertlooal dwellings oath electricity be loving quaaerter as tercentage

7esfor foccil icy rate alto hone thlroa lanels ssuaactlg dcrlne in o total. urhat, and rural dvoll ings rospectivnely.ferstitysornding[orincoacelenel andypaot fuily plaoturg porfortance.Etch cquncry us ther assign.ed ace of theta does cothinotloos of aorrolity EDUCA'IbONand fortulity trends for peaj ertlat purposes. Adyaissed aneolleats hatiot

Stationarcniepalstion-r oncacln[inary poyalanlonc[hert isno growthosince l'rimry schooli-totn:1, tlcrond fetc -fCrosstotal.salaond feeolotht himth rate isatqual to tho death cute, and aISD the age structura to- anrallaett of all egos or the primary lenel as parceotages of resperctinemelts tonstan,i. Ihes Ia urn. oede unly after fertiiity eanos derl oa toi prcsary school-ago popalatioos; cerail1y inrcldes childtes aged 6-lithearapiacemestlenel of nutn etirepaoduatiannaste,thenreach generstitn yearshbutadycsted for differenotlengbthsofprlary educatioo;,foeof anmlee replaces itself enactcly. The stationary population sloe eo cuounteiesaclti universal educartionaerolimesnt say exreed 100 percentettimered on rho hoots of the projertad chararrorist Ito of the populst:oc siote tome pupils are helov or ahove the offioial school ago.is the year 2D00, and the rare of decline of feetollcry roat to replace- Becandarc school - total, sale and fe=ale - doeputed as those; sevnodotymett leool. educatione requires a1 least four years of appronad primacy inastaeclion;

Tear satoinnary population is reachod - The year chat stationary pcpalancon pronides general, nocatlotol. or eeacher teaaitasg iestructions foe pupilstier w111 ha rearhed. usually of 12 to 10 years of age; correspondenre courses ate geserally

rPeulathon Density excluded.Pa o.i. - Old-your yopulariut par aquace hKilnoetee Ill0 hertaresa of Torational enrollient (parrent of serondarpf - VIocational iunsitat ions

total area; 1900. '9701 ean tqo data. itclude technicol, industrial, or other progrt.=s ehich operate independ-no q.t. agriculr2ral hood - Compated as alone for agricclraral land ently or as deporit7nis of secondalry institatiens.

cnly; 19103, 19701 sand 1919 data. YPtil-teurher ratciq - primary, and secondary - Total stud eets aenol led iaPopulatron Age Strucrure foercectl - fhil

-22-

ANT.EX TPage 4

ECONOMIC INDICATORS - NEPA1

GNP PER CAPITA IN 1981: US$156

GROSS DOMESTIC PRODUCT IN 1980 ANNUAL RATE OF GROWTT, 1960-1979

(%, constant prices)USS Mln.

at Market Prices 1,989 100.0 3.1Gross Domestic Investment 268 13.5

Gross Domestic Saving 148 7.4Current Account Balance (exc.

official grants) -72 -3.6Exports of Goods, NFS 241 12.1Imports of Goods, NFS 361 18.1

OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1979/80

VTaluoe AddedValue Added Labor Force a/ Per Worker

T]S$ Mln. % Mln. F 11S$

Agriculture 1,065 57 6.9 93 155

Industry 251 14 0.1 2 1,696Services 543 29 0.4 5 1,468

Total/Average 1,859 10 7.4 100 251

GOVERNMENT FINANCE

CENTRAL GOVERNMENTRs. Mln.

% of GDP1978/79 1979/80 1980/81 1981/82 1979/80

Current Receipts 1,791.6 1,852.9 2,403.9 ,900.9 8.9Current Expenditures 982.1 1,055.4 1,263.6 1,588.9 4.9Current Surplus 809.5 797.5 1,140.3 1,312.0 4.0Capital Expenditure 1,961.5 2,293.2 2,726.1 4.032.9 12.4External Assistance (Net) 989.4 1,317.8 1,531.1 2,024.0 6.2

MONEY, CREDIT AND PRICES

1978 1979 1980 1981 1982mid-April

(Million Ps outstanding mid-,July)

Money and Quasi Money 3,772 4,512 5,285 6,308 7,332Bank Credit to Government 966 1,129 1,258 1,263 1,785Bank Credit to Public Enterprise 869 1,080 1,131 1,401 1,292Bank Credit to Private Sector 1,072 1,332 1,917 2,498 2,641

Money and Quasi Money as % of GDP 19.3 21.1 22.1 22.2

General Price Index (1974/75 = 100) 113.3 117.3 128.7 145.9 159.6 (April)Annual Percentage Changes in:

General Price Index 11.2 3.5 9.8 13.4 9.2 (April on April)

Bank Credit to Government 28.9 16.9 11.4 0.4 42.4

Bank Credit to Public Enterprises 70.1 24.3 4.7 23.9 3.5

Bank Credit to Private Sector 24.1 24.3 43.9 30.3 10.2

Note: All conversions to IS dollars in this table are at the average exchange rate prevailing during the period

covered.

a/ Total labor force; unemployed are allocated to sector of their normal occupation.

not available

-23-

ANNEX IPage 5

TRADE PAYMENTS AND lAPITAL FLOWS

BALANCE OF PAYMENTS MERCHANDISE EXPORTS 1980/81 a/US$ Mln.

1978/79 1979/80 1980/81 _-

(Millions US$)

Exports, f.o.b. b/ 108.5 95.1 134.4 Agricultural products 100.7 75.1Imports, c.i.f. b/ 244.7 294.3 370.2 Manufactures 33.4 24.9

Trade Balance 135.2 -199.2 -235.8 Total 134.1 100.0

Services, net 65.6 91.6 93.1of which: Tourism 41.8 54.0 64.5 EXTERNAL DEBT, DECEMBER 31, 1980

US$ Mln.

Transfers, net 30.1 36.1of which: Private Remit. 25.5 29.6 40.4 Public Debt, inc. guaranteed 233.9

Indian Excise Fund 3.0 3.1 4.8 Non-Guaranteed Private Debt

Current Account Balance -39.7 -71.7 -96.4 Total Outstanding & Disbursed 233.9(exc. grants)

Official Grants 42.9 63.2 71.7Official Capital, net 36.0 48.1 52.8Private Capital, net 9.7 -37.4 -11.9 DEBT SERVICE RATIO for 1980/81 c/

Change in Reserves -48.9 -2.2 -16.2 Public Debt, inc. guaranteed 1.9(- Increase)

Gross Reserves (mid-July) 179.8 187.0 192.5Net Reserves 151.0 153.2 174.9 IBRD/IDA LENDING, (June 1982)(Millions USS)

IBRD IDA

Fuel and Related MaterialsImports of which: Petroleum 16.7 30.2 NA Outstanding & Disbursed 121.4Exports of which: Petroleum -- -- -- Undisbursed ---- 205.2

Outstanding, incl. undisbursed 326.6

RATE OF EXCHANGE

From October 1975 From March 20, 1978through March 20, 1978 through September 19, 1981 Since September 19, 1981 Since December 17, 198US$1.00 = NRs 12.5 US$1.00 = NRs 12.00 US$1.00 = NRs 13.20 US$1.00 = NRs 14.30NR 1.00 = US$ 0.08 NR 1.00 = US$ 0.083 NR 1.00 = US$ 0.076 MR 1.00 = US$ 0.070

a/ Customs basis.b/ Payments basis.c/ Ratio of Debt Service to Exports of Goods and Non-Factor Services.

not applicable

South Asia Programs DepartmentSeptember 1982

-24- ANNEX IIPage 1

STATUS OF BANK GROUP OPERATIONS IN NEPAL

A. STATEMENT OF IDA CREDITS (as of September 30, 1982) /a

US$ million(net of cancellations)

No. Year Borrower Purpose IDA Undisbursed

Five credits fully disbursed 39.0397 1973 Kingdom of Nepal Telecommunications II 5.5 0.2470 1974 Kingdom of Nepal Water Supply and Sewerage 11.8 1.8505 1974 Kingdom of Nepal Settlement 6.0 3.1600 1977 Kingdom of Nepal Kulekhani Hydroelectric 14.8 2.8617 1976 Kingdom of Nepal Rural Development 8.0 3.4654 1976 Kingdom of Nepal Bhairawa Lumbini Groundwater 9.0 0.2659 1976 Kingdom of Nepal Technical Assistance 3.0 0.2704 1977 Kingdom of Nepal Second Water Supply & Sewerage 8.0 3.0705 1977 Kingdom of Nepal Industrial Dev. Corporation 4.0 2.0730 1977 Kingdom of Nepal Second Highway 17.0 4.2772 1978 Kingdom of Nepal Technical Education 5.7 3.9799 1978 Kingdom of Nepal Telecommunications III 14.5 12.7812 1978 Kingdom of Nepal Irrigation (Sunsari-Morang) 30.0 21.5856 1978 Kingdom of Nepal Irrigation (Narayani Zone) 14.0 10.1939 1979 Kingdom of Nepal Second Rural Development 11.0 10.91008 1980 Kingdom of Nepal Community Forestry 17.0 16.51055 1980 Kingdom of Nepal Irrigation (Mahakali) 16.0 15.31059 1980 Kingdom of Nepal Third Water Supply & Sewerage 27.0 26.11062/c 1980 Kingdom of Nepal Grain Storage 6.2 6.01093/c 1981 Kingdom of Nepal Irrigation (Babai) 3.5 1.61100/c 1981 Kingdom of Nepal Agricultural Extension & Res. 17.5 12.91101/c 1981 Kingdom of Nepal Hill Food Production 8.0 6.71191/c 1982 Kingdom of Nepal Cottage & Small Industries 6.5 6.51198/c 1982 Kingdom of Nepal Second Education 14.3 14.31260/c 1982 Kingdom of Nepal Petroleum Exploration

Promotion 9.2 9.2

Total, 326.5 195.1

of which has been repaid 0.1

Total now outstanding /b 326.4

Total now held by IDA 326.4

Total Undisbursed 195.1

/a No Bank loans have been made to Nepal./b Prior to exchange adjustments.Ic IDA 6th Credits, Principal amounts shown in U.S. dollar equivalent at date

of negotiations, as shown in President Reports, and Disbursement amountsat the rate of SDR on September 30, 1982.

-25- ANNEX II

Page 2

B. STATEMENT OF IFC INVESTMENT (as of September 30, 1982)

Amount ($ millions)Year Obligor Type of Business Loan Equity Total

1975 Soaltee Hotel Hotel 2.7 0.4 3.1(Pvt) Ltd.

1982 Nepal Orind Mine and process 5.9 - 5.9Magnesite magnesite ore(Private)Limited 8.6 0.4 9.0

Total commitments now held by IFC 8.2 0.4 8.6

C. PROJECTS IN EXECUTION 1/

Credit No. 397 Telecommunications Projec: II $5.5 million Credit ofJune 20, 1973; Effective Date: September 11, 1973;Closing Date: December 31, 1982

Procurement for switching equipmeat was initially delayed due todifficulties with the selected bidder after award decision and the need forrebidding. The procurement for this item has subsequently been combined inone tender with procurement for a similar equipment under the third project.

Credit No. 470 Water Supply and Sewerage Project $11.8 million Credit ofMay 8, 1974; Effective Date: June 26, 1974;Closing Date: June 30, 1983

After a long mobilization period the project is now nearing comple-tion with 85% of the credit disbursed. Because of delays in completing thesewerage component, due to physical and contractural difficulties, the clos-ing date had to be extended by 6 months to June 30, 1983. This was alsooccasioned by delays in delivery of pipes for the remaining water supplycomponent. The British experts, funded by the UK Overseas DevelopmentAdministration to help WSSB operate its water supply facilities in Kathmanduvalley, have now completed their assignment and departed Nepal.

1/ These notes are designed to inform the Executive Directors regarding theprojects in execution and, in particular, to report any problems whichare being encountered and the action being taken. They should be usedin this sense on the understanding that they do not purport to presenta balanced evaluation of strengths and weaknesses in project execution.

-26-

ANNEX IIPage 3

Credit No. 505 Settlement Project $6.0 million Credit of August 14, 1974;Effective Date: February 20, 1975; Closing Date; July 15,1982

The project has been closed on scheduled date, i.e. July 15, 1982.The project failed to achieve revised targets for land clearing and settle-ment; only 66% of forest land had been cleared and 44% of families settled bythe c:Losing date. The project suffered from shift in Government policy ontimber export, and from implementation problems relating to timber extractionand land use. The Government is being consulted regarding cancellation ofthe remaining balance.

Credit No. 600 Kulekhani Hydroelectric Project; $40.8 million Credit ofJanuary 9, 1976; Effective Date: May 18, 1976; ClosingDate: December 31, 1983

Reservoir impounding commenced on June 9, 1981. When headrace tunnelwas tested with water for first time on November 8, 1981, water leakages wereobserved, which on subsequent investigation, were found due to inadequategrouting. Immediate rectification work was started and a panel of expertswas also set up by the Bank to suggest remedial steps. The additional workshave been undertaken. With the approval of the panel of experts, the tunnelwas refilled with water and Unit No.1 was commissioned on March 13, 1982.Since that date, all restrictions on the use of electricity in the centralgrid system of Nepal have been removed. Unit No. 2 was commissioned on March29, 1982.

The present cost estimate is $119.93 million, including taxes andduties but excluding any claims by contractors and additional works. Theforeign portion of the cost estimate is $98.39 million. The Government ofNepal is evaluating the claims to work out the total cost.

Credit No. 617 Rural Development Project; $8.0 million Credit of April 30,1976; Effective Date: July 15, 1976; Closing Date:December 31, 1983

Until about the end of 1980, implementation progress had been satis-factory for most of the components (except health, education and livestockdevelopment) and nearly 70-80% of physical targets had been achieved.However, implementation was unsatisfactory during 1981 due to (a) inadequatelocal funding of the project, (b) poor management and coordination of proiectactivities, (c) inadequate control and supervision of the activities of thePanchayats involved in construction work, and (d) the inability of the Minis-try of Local Development to provide leadership in matters of programming andimplementing activities of the various line ministries. Since early 1982,the situation has improved with HMG having released the required funds andadministrative action to improve implementation having been initiated.

-27 -

ANNEX ITPage 4

Credit No. 654 Bhairawa - Lumbini Groundwater Project; $9.0 millionCredit of July 9, 1976; Effective Date: November 16, 1976;Closing Date: December 31, 1982

55 of the 64 planned tubewells, whici. are to irrigate 7,600 ha, havebeen constructed and drilling is nearly completed. Progress on the construc-tion of the canal distribution network is slow due to the weakness of localcontractors. However, all civil works contracts have been awarded and theproject is scheduled for completion by mid-1983. The follow-up Stage IIproject would concentrate on ensuring effective operation and maintenance ofthe infrastructure built under Stage I.

Credit No. 659 Technical Assistance Project $3.0 millicn Credit ofSeptember 16, 1976; Effective Date: November 16, 1976;Closing Date: June 30, 1983

Four subprojects are ongoing and include: the Marsyangdi TechnicalReview Panel, second phase of the Cash Crop Development, second phase ofElectrical Accessories, and Primary School Mapping. These are proceedingsatisfactorily. Eleven of the subprojects financed under the technicalassistance credit have been completed and coatributed to che pipeline ofbankable projects in Nepal.

Credit No. 704 Second Water Supply and Sewerage Project; $8.0 millionCredit of May 27, 1977; Effecive Date: February 28, 1978;Closing Date: June 30, 1984

Slowness in rne:ruiting consultants Ceiayed declaring the crediteffective and, as a result, project implementation was hampered. Procurementof materials is now well advanced although suppliers, to whom awards weremade for pressure pipes, have had difficulty in meeting promised deliveryschedules. These problems have been overconme, enabling a construction startat the various sites. The contractor engagEd on building the sewerage com-ponent under this project is the same as the one having difficulties underCredit 470-NEP with a similar contract. Should delays continue, the sewercontract may need to be rescinded and relet.

Credit No. 705 Nepal Industrial Developmenl: Corporation Project; $4.0million Credit of May 27, 1977; Effective Date: February 17,1978; Closing Date: December 31, 1983

Since March 31, 1982 (latest date oE subloan authorization) NIDC hasfully committred the 84.0 milli on Credit. Close supervision is being carriedout to ensure further improvements in NIDC's operations and implementation ofsubprojects ala disbursements -rd -he Credit within the closing date.

-28-

ANNEX IIPage 5

Credit No. 730 Second Highway Project; $17.0 million Credit of October 19,197Tffective Date: December 23, 1977; Closing Date:December 31, 1984

The projecL is now moving steadily towards a successful conclusion,though there remain several areas where improved performance is required.Procurement, which has been a source of considerable delay in the past, isnow virtually complete. The work on the Thankot-Naubise road pavement hasnow been completed. Much supervisory attention is currently being given tothe Tulsipur feeder road in an effort to improve performance on a few con-tracts. Disbursements, which currently stand at 75% of appraisal estimates,are expected to improve substantially over the next year since the majorproject component has been completed.

Credit No. 772 Technical Education Project; $5.7 million Credit ofApril 14, 1978; Effective Date: July 11, 1978; ClosingDate: September 30, 1983

The project, which provides new facilities for technician training atthe Institute of Enginee-ing in Kathmandu, will be completed by June 1983.Good progress has been made with equipment procurement, furniture procurementand part of the civil works.

However, one contractor on the site has failed to achieve targetdates for construction, partly due to shortage of materials, but mainly dueto overcommitment of labor and machines on other contracts. Civil works arenow expected to be completed by June 1983. Educational objectives, espe-cially teaching quality improvements, which had been jeopardized by studentstrikes, are more likely to be achieved now that the new Vice Chancellor ofthe University has adopted a more resolute approach to students and studentproblems.

Credit No. 799 Third Telecommunications Project $14.5 million Credit ofAugUst 22, 1978; Effective Date: February 27, 1979;Cl osing Date: june 30, 1984

Project implementation is proceeding satisfactorily. The earthstation for satellite communication and the international telex exchange(both financed by ODA of UK) have been completed and commissioned. Procure-ment under the IDA credit is also progressing satisfactorily. About US$12.2million of the credit has been committed.

-29-ANNEX IITage 6

(redit No. 812 Sunsari-Morang Ir.rigation an!! Drainage DeveIcym_e P_Froject$30 million Credit of July 7. 1978; Effective Date:November 30, 1978; Closing Date: June 30, 1984

In July 1980, a landslide in the catahment area caused a major floodin the Kosi river, causing a considerable erosion and endangering the ChatraMain Canal. Emergency flood protection works were carried out. Investiga-tions for the design of headreach works to improve the water supply to anddistribution within the main canal have been completed. The ICB process forthe construction of the headreach improvements and irrigation and drainageworks in about 12,000 ha has been completed; bids have been evaluated and acontract award has taken place, Project implementation has fallen about twoyears behind schedule.

Credit No. 856 Narayani Zone Irrigation - Stage II Project$14.0 million Credit of November 27, 1978; EffectiveDate: January 8, 1979; Closing Date: December 31, 1983

Project implementation is proceeding steadily, although slower thananticipated. The major constraint is the weakness of local contractors.Construction is now on-going in all six irrigation blocks. Most civil worksand equipment contracts have been awarded, and construction is progressing

satisfactorily.

Credit No. 939 Second Rural Development Prcject - Mahakali Hills $11.0million Credit of August 9, 1979; Effective Date:Januarv 15, 1980; Closing DEte: February 28, 1985

Project progress since credit effectiveness has been negligible dueto: (a) delays in setting up and staffing of project management; (b) delaysin constructing project headquarters; (c) remoteness of the project area andcommunication difficulties; (d) dislocation created by the devastating earth-quake in the project area during June 1980; and (e) delay in the release ofbudgeted funds. Recently, some civil works have started, and a considerableamount of initial planning and design work for major construction work underthe project has been completed. Conseguent:y, implementation is likely topick up pace.

Credit No. 1008 Community Forestry Development and Training Project $17.0million of May 22, 1980; Effective Date: September 19,1980; Closing Date. June 3(0, i986

The Project is progressing well. An effective administrativeorganization has been established into which the UNDP/FAO technical assis-tance team has been integrated. Most planting targets have been achieved.Motivation and Education, and Monitoring and Evaluation programs are beingefficiently conducted. Project committees have been set up and are function-ing. Architects have been appointed for construction of training facilitiesat Pokhara, Hetaura and Kathmandu. The designs for the Kathmandu Training

13- ANNEX IIPage 7

Wing have been started by the Wra4rrni Wing and Tribhuvan University. Theurban fuelwood study has been completeC,;,

Credit No. 1055 Mahakali Irrigat-ion Prorect (Stage I); $16.0 millionCredit of September 29, 1980; Effective Date: Februarv 27,1981; Closing Date! December 31, 1985

Contracts for undertaking tie survey and engineering designs havebeen awarded to local engineerin'g con,sultants. Most of the work is progress-ing satisfactorily. ICB tenders for the procurement of the project's equip-ment and vehicles requirements have been invited. The project area has beenreduced by about 20%, because (i) inaccurate maps were used, and (ii) HMGdecided to put restrictions on forest cloning.

Credit No. 1059 Third Water SUUply andl Se-erage Project; $27.0 millionCredit of September 29j 1980; Effective Date: August 27,1981; ClosinQ Datei December 31, 1985

The credit was declared effective August 27, 1981, about 9 monthsafter the original effectiveness date- Consultants, appointed by WSSB, usingthe experience gained on Creditls 04 -NEP and 470-NEP quickly produced biddirngdocuments which have allowed early awaard of certain materials contracts.Final design of civil works is well underway and contracts are being groupedfor efficient implementation.

Credit No. 1062 Grain Storage Proiect; $6.2 million Credit of January 14,1981; Effective Date: July 31, 1981; Closing Date:September 30, 1984

Engineering staff for the project have been engaged and implementa-tion work commenced. The project study on marketing is completed, and theone on future storage and processing needs is well underway. Consultantshave been engaged to assist Nepv od Corporation (NFC) in management,finance and quality control. Nl stL-rced last season with primary procure-ment on a trial basis.

Credit No. 1093 Babai Irriga -.-iginee-ing Project; $3.5 million Creditof March 265 _98i_ Effective Date: June 5, 1981; ClosingDate: December 3i, 1983

Consultants were contracted in May 1981, and project implementationis proceeding on schedule The detailed design work is under way. Pre-qualifications for the constructicon of- project works are being processed.

-31- ANNEX IIPage 8

Credit No. 1100 Agricultural Extension and Research Project; $17.5 millionCredit of April 6, 1981; Effective Date: July 8, 1981;Closing Date: July 15, 1987

The Project Coordinator is in position. Orientation training forAgricultural Development Officers, Subject Matter Specialists, Junior Tech-nicians, Junior Technical Assistants and Panchayat Level Agricultural Assis-tants, has been completed in the first two project districts (Jhapa andNawalparasi) and field work has started.

Professional staff recruitment and progress of civil works is slow.The first year's supply of fertilizer has been received. Tenders have beenfloated for the second year's supplies.

The Technical Assistance Agreement has been signed and the fourconsultants have finished the first phase of their assignments.

The overall progress of the project is considered satisfactory.

Credit No.1101 Hill Food Production Project; $8.0 million Credit ofApril 6, 1981; Effective Date: May 28, 1981; Closing Date:July 15, 1987

The project was activated by the appointment of the project cocr-dinator in the summer of 1981, but HMG budget was not available untilNovember. Existing szaff have received orientation and training in extensionmethodology. Consultants for technical assisLnace have been appointed andthey have impleme-ited the f-rst phase of their pr-ran. The 'rsc s. ipmen-of fertilizer under ' ' 3ro ect has bee:- dLi.- 1Lu_d =d te! s ai icw outfor the second. Livestock and irrigation activities and construction. ofagricultural service centers are lagging, but the project is making satisfac-tory progress.

Credit No.1191 Cottage and Small Industries Project; $6.5 million Creditof March 9, 1982; Effective Date: July 9, 1982; ClosingDate: December 31, 1985

HMG complied with all conditions, anid the Credit was declared effec-tive on July 9, 1982. Staffing and training for nearly all implementingagencies have been completed. The advisor for the credit component has beenfielded, and other long term consultants, financed under the UNDP portion ofthe project, are expected to arrive in the second quarter of FY83. TrainedCottage and Small Industr- officers of the i:hree banks have been posted tokey branches3 and commitmen's under the credit component have begun.

ANNEX II-32-- Page 9

Credit No.1198 Second Education Project; $14.3 million Credit of April 7,1982; Effective Date: July 23, 1982; Closing Date: June 30,1988

The project, which will provide a new technician and trade traininginstitution in Pokhara in the Western Region of Nepal, was declared effectiveon July 23, 1982 having fulfilled two conditions of credit effectiveness,within 90 days of signing. These concerned the availability of the site toC