Document of FILEC If The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized ReportNo. P-2385-NEP REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE Public Disclosure Authorized INTERNATIONALDEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL Public Disclosure Authorized FOR THE NARAYANI ZONE IRRIGATIONDEVELOPMENT STAGE II PROJECT September 25, 1978 Public Disclosure Authorized This documenthas a restricteddistribution and may be used by recipientsonly in the performanceof their official duties. Its contents may not otherwisebe disclosed withoutWorld Bank authorization. CURRENCY EQUIVALENTS Currency Unit - Nepalese Rupee (NR) Until March 20, 1978 US$1.00 - NRs 12.50 Since March 20, 1978 US$1.00 NRs 12.00 WEIGHTSAND MEASURES 1 meter (m) 3.28 feet (ft) 1 kilometer (km) 0.62 miles (mi) 1 hectare (ha) 2.47 acres (ac) 3 1.50 bighas 1 million cubic meters (Mm ) 810 acre-feet (ac-ft) 1 cu ic meter per second (m /s) - 35.31 cubic feet per second (cusec) 1 metric ton 2,205 pounds GOVERNMENTOF NEPAL FISCAL YEAR July 16 to July 15 PRINCIPALABBREVIATIONS AND ACRONYMS USED ADBN - Agriculture Development Bank of Nepal AIC - Agriculture Input Corporation DA - Department of Agriculture DIHM - Department of Irrigation, Hydrology and Meteorology GM - General Manager JT - Junior Technician JTA - Junior Technician Assistant MFAI - Ministry of Food, Agricultureand Irrigation NEC - Nepal Eastern Canal NZIDB - Narayani Zone IrrigationDevelopment Board O&M - Operation and Maintenance WUG - Water Users' Group FOR OFFICIAL USE ONLY GLOSSARY Main Canal - supplies water to the whole irrigation system Main Secondary Canal - supplies water to 4 or more branch secondary canals Branch Secondary Canal - serves about 200-600 ha Tertiary Canal - serves about 40-50 ha Field Channel - serves about 10 ha This document has a restricteddistribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bankauthorization. NEPAL THE NARAYANI ZONE IRRIGATION DEVELOPMENT STAGE II PROJECT Credit and Project Summary Borrower: Government of Nepal Amount: US$14.0 million Terms: Standard Project Description: The proposed project would upgrade and increase the capacity of the existing Nepal Eastern Canal (NEC) irri- gation system and extend the development of its command area which was begun under the ongoing Birganj Irrigation Project (Cr. 373-NEP) hereinafter called Stage I. The proposed project would include the improvement of NEC's remaining length (52 km) beyond that restored (27 km) under Stage I; protection of NEC against flood damage; further development of the NEC command's irrigation distribution system; drainage network and canal service roads in 12,700 ha, and improvement of those constructed in 16,000 ha in Stage I, thus completing irrigation infrastructure throughout 28,700 ha; pilot schemes for privately-owned community tubewells, waterlogging control, low-cost all-weather roads and micro-hydroelectric devel- opment; an expansion of the intensified agricultural ex- tension and training scheme started in two Districts under Stage I; and the provision of technical services including consultants. The project would increase agricultural production and employment opportunities for the 216,000 inhabitants in the NEC command area and improve agricul- tural practices and productivity in six Districts in the Terai. A possible risk associated with the project would be that waterlogging could eventually occur in low-lying areas of the NEC command area. The project provides for monitoring of the watertable so that corrective action can be taken promptly. The project faces no other risks beyond those normally associated with irrigation projects. Estimated Cost Local Foreign Total of Project: 1/ -US$ millions equivalent- Civil works and buildings 4.5 3.1 7.6 Equipment and vehicles - 2.8 2.8 Technical services 0.2 0.9 1.1 Project establishment 0.9 0.3 1.2 TOTAL BASE COST 5.6 7.1 12.7 Contingencies Physical 0.6 0.6 1.2 Price 1.1 1.5 2.6 Subtotal 1.7 2.1 3.8 Land acquisition 0.5 - 0.5 TOTAL PROJECT COST 7.8 9.2 17.0 Financing Plan: Local Foreign Total -US$ millions equivalent- IDA 4.8 9.2 14.0 Government 2.6 - 2.6 Agriculture Development Bank - of Nepal 0.1 - 0.1 Farmers' Contribution 0.3 _ 0.3 Total 7.8 9.2 17.0 Estimated IDA US$ millions equivalent Disbursements: IDA FY 1979 1980 1981 1982 1983 Annual 1.5 3.7 4.2 3.4 1.2 Cumulative 1.5 5.2 9.4 12.8 14.0 Rate of Return: 22% Staff Appraisal Report: No. 2067a-NEP dated September 18, 1978. 1/ Includes taxes and duties (US$0.1 million equivalent). REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IDA TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR THE NARAYANI ZONE IRRIGATION DEVELOPMENTSTAGE II PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Kingdom of Nepal for the equivalent of US$14.0 million on standard IDA terms to help finance the Narayani Zone Irrigation Development Stage II Project. PART I - THE ECONOMY 1/ 2. The most recent economic report entitled "Nepal-Country Economic Memorandum" (Report No. 1873a-NEP) was distributed to the Executive Directors on March 21, 1978. The principal findings of the Memorandum are described below. Country data are shown in Annex I. 3. Nepal is one of the least developed countries in the world. Per capita income in 1977 was estimated at $120, and health and education standards are well below the average of South Asia: life expectancy at birth is less than 44 years, infant mortality exceeds 200 per thousand, and adult literacy is only 19%. Population in mid-1976 was 12.9 million, of which over 90% lived in rural areas. Both birth and death rates are high, keeping popu- lation growth at 2.1% a year. 4. The economy of Nepal centers around agriculture. It accounts for 65% of GDP and almost 75% of merchandise exports, and provides a livelihood to over 90% of the population. In addition, most of the small industrial sector, which comprises about 4% of GDP, processes agricultural raw materials. However, about 25% of total rural incomes are estimated to arise from non- agricultural activities. Cottage industries are one of the most important of these, estimated to engage over 1 million people and comprise about 7% of GDP. They provide basic consumer goods in the many small, isolated markets where such goods would otherwise not be available. 5. The landlocked, isolated location of Nepal and its extremely rugged topography have severely constrained the country's development. Nepal is far removed from sources of supply of many development goods anA access to export markets, which makes development more costly and uncertain than in most 1/ Part I of this Report is substantially identical to Part I of the Report and Recommendation of the President to the Executive Directors on a pro- posed credit to the Kingdom of Nepal for the Sunsari=-MlorangIrrigation and Drainage Development Stage I Project (Report No. P-2325-NEP of May 11, 1978). -2- countries. The inaccessability of much of the country compounds these prob- lems and limits the rate at which development activities and the expansion of social services can be undertaken. 6. When Nepal adopted economic and social development as major govern- ment objectives in the early 1950s, there was virtually no economic and administrative infrastructure. Under these circumstances, initial development efforts necessarily concentrated on establishing a foundation for future devel- opment. It was inevitable that, during these early stages, growth would remain slow and that, as a result, there would be little if any increase in per capita income. However, four successive development plans passed with little shift in emphasis or improvement in per capita incomes and living standards. The Fifth Plan (1975/76 - 1979/80) was to become the turning point; emphasis was to shift away from heavy infrastructure towards quicker-yielding investments in directly productive activities, and towards the provision of social services. Investment in primary infrastructure would be highly selective, and kept in line with the country's near-term ability to exploit it. Infrastructure directly supporting other development activities would continue to receive priority. 7. To some extent the objectives of the Fifth Plan are being achieved. Overall public investment has been close to targets, and investment is begin- ning to be reoriented. However, GDP growth is well below the 4-5% annual growth rate envisioned in the Plan, mainly because of poor agricultural per- formance. Favorable weather in 1975/76 led to a record cereals crop, and GDP was estimated to have grown by 4-5%. However, a poor monsoon resulted in a 5.5% drop in cereals production in 1976/77, and overall economic growth of only about 1% resulted. In 1977/78, it again appears that adverse weather will limit growth in GDP to no more than 2%. 8. In the external sector, overall performance continues to be good. Foreign exchange reserves in September 1977 stood at US$144 million, 16% higher than a year earlier, and at the equivalent of about 10 months of im- ports. But the rise in reserves has occurred in conjunction with a large and increasing trade deficit. Imports have been growing under the impetus of the Government's development programs, while exports, principally rice (almost 50% of total exports) and jute (about 15%), declined. However, increased tourism earnings and remittances from Gurkhas (soldiers from Nepal serving in the British or Indian army) brought about a significant improvement in the current account. Tourism earnings accounted for 22% of total convertible foreign exchange earnings in 1976/77 and have displaced Gurkha remittances as the largest single source of convertible foreign exchange.