Nepal Country Strategic Opportunities Programme 2021-2026

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Nepal Country Strategic Opportunities Programme 2021-2026 Document: EB 2021/132/R.19 Agenda: 12(b)(i)(a) Date: 22 March 2021 E Distribution: Public Original: English Nepal Country Strategic Opportunities Programme 2021-2026 Note to Executive Board representatives Focal points: Technical questions: Dispatch of documentation: Nigel Brett Deirdre Mc Grenra Regional Director Chief Asia and the Pacific Division Institutional Governance and Tel.: +39 06 5459 2516 Member Relations e-mail: [email protected] Tel.: +39 06 5459 2374 e-mail: [email protected] Tarek Kotb Country Director Tel.: +91 1146532789 e-mail: [email protected] Executive Board — 132nd Session Rome, 19-21 April 2021 For: Review EB 2021/132/R.19 Contents I. Country context and rural sector agenda: Key challenges and opportunities 1 II. Government policy and institutional framework 2 III. IFAD engagement: Lessons learned 3 IV. Country strategy 4 A. Comparative advantage 5 B. Target group and targeting strategy 5 C. Overall goal and strategic objectives 6 D. Menu of IFAD interventions 7 V. Innovations and scaling up for sustainable results 9 VI. COSOP implementation 9 A. Financial envelope and cofinancing targets 9 B. Resources for non-lending activities 10 C. Key strategic partnerships and development coordination 10 D. Beneficiary engagement and transparency 10 E. Programme management arrangements 11 F. Monitoring and evaluation 11 VII. Risk management 11 Appendices I. COSOP results management framework II. Transition scenarios III. Agricultural and rural sector issues IV. SECAP background study V. Agreement at completion point VI. COSOP preparation process VII. Strategic partnerships VIII. South-South and Triangular Cooperation strategy IX. Country at a glance X. Financial management issues summary COSOP delivery team Regional Director: Nigel Brett Country Director: Tarek H. S. Kotb Regional Economist: Fabrizio Bresciani Technical Specialists: Mylene Kherallah and Marie-Aude Even Climate and Environment Specialist: Kisa Mfalila Finance Officer: Le Chi Dung i EB 2021/132/R.19 Abbreviations and acronyms ADBL Agricultural Development Bank Limited ADS Agriculture Development Strategy ASDP Agriculture Sector Development Programme ASHA Adaptation for Smallholders in Hilly Areas Project COSOP country strategic opportunities programme ICT4D information and communications technologies for development IFAD11 Eleventh Replenishment of IFAD Resources KM knowledge management MSME micro, small and medium-sized enterprises PO producer organization RERP Rural Enterprises and Remittances Programme RPSF Rural Poor Stimulus Facility SDG Sustainable Development Goal SO strategic objective SSTC South-South and Triangular Cooperation VITA Value Chains for Inclusive Transformation of Agriculture Programme ii EB 2021/132/R.19 Map of IFAD-funded operations in the country iii EB 2021/132/R.19 Executive summary 1. Nepal’s 2015 constitution introduced federalism with three tiers of government – federal, provincial and local. Together with the 2017 elections, this created much- needed stability and growth. In 2019, Nepal achieved a third consecutive year of above 6 per cent GDP growth. With COVID-19, growth projections are anticipated to decrease to 1.8 per cent in financial year 2020 and 2.1 per cent in FY 2021. 2. Prior to the COVID-19 pandemic, 8 per cent of people lived below US$1.90 per day. However, 31 per cent lived between US$1.90 and US$3.20 per day and face significant risks of falling into extreme poverty due to COVID-19. 3. Nepal’s Fifteenth Plan (2020–2024) (approved before COVID-19) aims for the country to graduate from least-developed to developing economy status by 2022 and achieve the Sustainable Development Goals by 2030. The road map includes the Agriculture Development Strategy and the financial inclusion road map. It envisions agriculture contributing to economic growth and contributing to improved livelihoods and food and nutrition security. Four main outcomes are envisioned: (i) improved governance; (ii) higher productivity; (iii) profitable commercialization; and (iv) increased competitiveness. Alongside these outcomes, the plan seeks to promote inclusiveness and sustainability. 4. In partnership with the government, IFAD has a comparative advantage as an agent of change for rural transformation, building on a solid record of successes that include: accelerating rural economic development in deprived areas through inclusive supply chain development; strengthening rural and community institutions; mainstreaming climate adaptation in local government and private investment plans; and expanding agricultural finance and financial inclusion for the poor. 5. The COSOP covers the 2021–2026 period and follows the 2013-2020 COSOP. It is guided by Nepal’s Fifteenth Plan and the 2019 country strategy and programme evaluation, and the agreement at completion point. 6. Primary target groups are small-scale producers and workers in rural communities. The programme aims for at least 50 per cent of beneficiaries to be women and 30 per cent to be youth. A secondary target group will be producer organizations and micro, small and medium-sized enterprises active in supported supply chains. 7. The overarching goal is accelerated recovery and sustainable improvement of the incomes and nutrition of small-scale producers and the rural poor through market participation and increased climate resilience facilitated by accountable local institutions. 8. Strategic objectives (SOs) are: SO1. Accelerated inclusive and sustainable rural economic growth and recovery through greater market participation; SO2. Improved resilience of rural communities to the impacts of climate change and to economic and other shocks; and SO3. Strengthened rural and community institutions to effectively meet development needs under the decentralized federal system. 9. IFAD financing for the COSOP is envisaged in the range of US$138 million to US$177 million, expected to be on highly concessional terms. The Eleventh Replenishment of IFAD’s Resources (IFAD11) allocations of US$78.8 million for Nepal under the performance-based allocation system will be fully absorbed in the Value Chains for Inclusive Transformation of Agriculture programme. For IFAD12, high/low scenarios are assumed to be ±25 per cent as against IFAD11 allocations. iv EB 2021/132/R.19 10. To support priority areas in knowledge management, policy engagement, capacity- building and South-South and Triangular Cooperation, IFAD will seek to mobilize non-lending resources, including from its own Catalytic Initiatives Programme. v EB 2021/132/R.19 I. Country context and rural sector agenda: key challenges and opportunities 1. Recent stability and growth upended by COVID-19. The 2015 constitution introduced federalism with three tiers of government – federal, provincial and local. With the 2017 elections, this created much-needed stability and growth. In 2019, Nepal achieved a third consecutive year of over 6 per cent GDP growth for the first time in 50 years. However, due to COVID-19, recent projections anticipate growth to decrease to 1.8 per cent in FY 2020 and 2.1 per cent in FY 2021. Inflation has averaged 4.4 per cent since 2017 and is projected to average 6.6 per cent in the next two years. Fiscal and current account deficits are increasing significantly. 2. Poverty rates have been halved since 2010 despite seismic political change, a 7.8-magnitude earthquake and six-month border blockade with India. The 2019 poverty headcount ratio was 8 per cent at US$1.90 per day, down from 15 per cent in 2010. However, 31 per cent of people live between US$1.90 and US$3.20 per day and face significant risks of falling into extreme poverty as a result of COVID- 19. Multi-dimensional poverty rates are around four times higher in rural areas than urban areas. Provinces 2 and 5 are home to the most poor people. Karnali Province has the highest poverty headcount rate. 3. Remoteness and lack of connectivity have been key drivers of poverty in the hills and mountains. This is being tackled by expansion of road and telecommunications networks linking producers to markets, and by leveraging comparative advantages in livestock and counter-seasonal crop production (e.g. vegetables and seed potatoes). In the Terai lowlands, poverty is driven by high levels of landlessness and lack of employment opportunities outside agriculture. Other problems include fragmented farms, limited irrigation and mechanization, and lack of improved seeds and fertilizers leading to declining competitiveness of Nepalese cereals, pulses and oilseeds against subsidized Indian producers. 4. Agriculture, the second-biggest sector after services, is dominated by small-scale but increasingly market-oriented producers. Contributing 28.9 per cent to gross value added in 2019 (down from 38 per cent in 2000) agriculture is 97 per cent domestically oriented. Growth averaged 3.1 per cent between 2009 and 2019 (versus 4.6 per cent GDP growth) and is projected to average only 2.4 per cent through 2021, versus 5.1 per cent in 2019. The trade deficit in food and agriculture is large and increasing. Despite low labour productivity, 11.7 million working-age people (56.5 per cent of the working-age population) are involved in agriculture. Small-scale producers are increasingly market-oriented, with 52 per cent selling to market: three quarters of them sell the majority of their produce. Varied agroclimatic zones create profitable opportunities to meet market demand. Forests cover 25 per cent of all land and remain valuable sources of livelihoods. Remittances, a lifeline for many rural households, are used for consumption, savings and productive investments. Remittances and agriculture accounted for a similar share of GDP prior to COVID-19. Of Nepal’s 28.6 million people, 80 per cent live in rural areas. 5. Land. Poverty in Nepal is correlated to landholdings. Past reforms had little success in equalizing holdings, reducing landlessness or improving tenure security. There are around 1.3 million landless and land-poor households. Women own land in only one in five households. The 2020 Lands Act offers improved opportunities for women and youth to secure land rights. 6. Climate projections indicate increasing seasonal variations in temperature and precipitation.
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