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World Bank Document Document of The World Bank Public Disclosure Authorized Report No. P-2579-NEP REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE Public Disclosure Authorized INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE Public Disclosure Authorized KINGDOM OF NEPAL FOR THE SECOND RURAL DEVELOPMENT PROJECT MAHAKALI HILLS June 7, 1979 Public Disclosure Authorized This r4postmay not he publishednor may it be quotedas. representing the views of the World Bank. The Wor-ldBank doesnot acceptrespoosibility for the accurapyor complietenessof the repo'rtff CURRENCYEQUIVALENTS Currency Unit - Nepalese Rupee (NR) Since March 20, 1978 US$1.00 NRs 12.00 NR 1.00 = US$0.08 NRs 100 = US$8.33 WEIGHTS AND MEASURES 1 kilogram (kg) = 2.20 pounds 1 quintal = 100 kg = 220 pounds I metric ton = 1,000 kg = 0.98 long ton 1 millimeter = 0.039 inch 1 meter (m) = 3.29 feet = 1.09 yards 1 kilometer (km) 2 = 0.62 mile 1 hectare (ha) 3 = 10,000 m = 2.47 acres 1 cubic meter (m ) 35.31 cubic feet 1 liter (1) = 0.26 US gallon FINANCIAL YEAR July 16 - July 15 ABBREVIATIONS AND ACRONYMS ADBN - Agricultural Development Bank of Nepal AIC - Agricultural Inputs Corporation BVNCC - Back to the Village National Campaign Committee CCC - Panchayat Development Central Coordination Committee DAP - District Administrative Plan DA - Department of Agriculture DCVI - Department of Cottage and Village Industries ICB - International Competitive Bidding LDD - Local Development Department, Ministry of Home Panchayat MFAI - Ministry of Food, Agriculture and Irrigation MOHP - Ministry of Rome Panchayat PCC - Project Coordinating Committee ZCC - Zonal Coordinating Committee STAFF ABBREVIATIONS CDO - Chief District Officer CPC - Central Project Coordinator PC - Project Coordinator FOR OFFICIALUSE ONLY NEPAL SECOND RURAL DEVELOPMENTPROJECT MAHAKALI HILLS Credit and Project Summary Borrower: Kingdom of Nepal Amount: US$11.0 million Terms: Standard Relending Terms: Agricultural credit funds of about US$350,000 equiva- lent would be made available to the Agricultural Develop- ment Bank of Nepal (ADBN) at 6% per annum for short-term and 4% per annum for medium-term loans. ADBN would on-lend to cooperatives at 10% and 8% per annum respec- tively, which would in turn lend to farmers at 14% and 11% per annum respectively. Project Description: The proposed project would help develop the three Hill districts of Dandeldhura, Baitadi, and Darchula and aims to raise agricultural production to levels whereby farmers could meet full family subsistence. The proposed project would provide for increased agricultural and live- stock production through minor irrigation development, strengthening of agricultural extension and animal health services, training, and improved availability of farm in- puts. These directly productive investments would be com- plemented by investments in erosion control, health care, village water supplies, lower and upper secondary educa- tion, postal services, panchayat facilities, and trails and foot-bridges. The project also provides for a study of cottage industry potential and prospects, as well as for facilities and staff required for project implementation. At full development, the project would raise food levels to about 330 days at average subsistence levels, compared to present food levels of about 260 days, for the 53,300 families residing in project districts. In view of the remoteness of the project area, the project faces a risk that government staff may not be willing to live and work in project areas. The project, however, is designed to minimize this risk by providing accommodation, project allowances and social amenities. This document has a restricteddistribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Estimated Cost US$ Million Equivalent of Project: 1/ Component Local Foreign Total I. Agriculture Agriculture Extension 0.88 0.08 0.96 Credit & Input Supply 0.44 0.42 0.86 Horticulture 0.06 - 0.06 Livestock 0.49 0.12 0.61 Irrigation 1.00 0.11 1.11 Subtotal 2.87 0.73 3.60 II. Social Infrastructure Water Supply 0.09 0.01 0.10 Health Services 1.27 0.18 1.45 Education 0.15 0.03 0.18 Panchayat Development 0.17 0.02 0.19 Postal Service, 0.04 0.01 0.05 Trails and Bridges 0.91 0.25 1.16 Erosion Control 0.36 0.11 0.47 Cottage Industry 0.26 0.06 0.32 Subtotal 3.25 0.67 3.92 III. Project Administration 1.01 1.52 2.53 Total 7.13 2.92 10.05 IV. Contingencies Physical 0.40 0.20 0.60 Price 1.90 0.90 2.80 Subtotal 2.30 1.10 3.40 Total Project Cost 9.43 4.02 13.45 Financing Plan: US$ Million Equivalent Local Foreign Total IDA 8.0 3.0 11.0 Government 1.4 - 1.4 UNDP 0.1 1.0 1.1 Total 9.5 4.0 13.5 1/ Includes a negligible amount of taxes and duties. - iii - Estimated IDA US$ Million Equivalent Disbursements: IDA FY 1980 1981 1982 1983 1984 1985 1986 Annual 0.02 0.54 1.68 2.30 2.70 2.45 1.31 Cumulative 0.02 0.56 2.24 4.54 7.24 9.69 11.00 Rate of Return: 21% Staff Appraisal Report: No. 2401-]NEPdated May 31, 1979. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT lO THE KINGDOM OF NEPAL FOR THE SECOND RURAL DEVELOPMENT PROJECT - MAHAKALI HILLS 1. I submit the following report and recommendation on a proposed development credit to the Kingdom of Nepal for the equivalent of US$11.0 million on standard IDA terms to help finance the Second Rural Development Project - Mahakali Hills. The UNDP is expected to provide about US$1.1 million equivalent for the technical assistance requirements of the project. About 3.0% oE the total project cost (US$350,000 equivalent) will be on- lent to the Agricultural DeveLopment Bank of Nepal (see para 50). 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. An economic mission is visiting Nepal (May/June 1979) and will prepare an economic memorandum for the Aid Group Meeting scheduled for January 1980. 3. Nepal is one of the least developed countries in the world. Per capita incone 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. 1/ Part I of this Report is substantially the same as Part I of the Report and Recommendation of the President to the Executive Directors on a proposed credit to the Kingdom of Nepal for the Narayani Zone Irrigation Development Stage II Project (Report No. P-2385-NEP of September 25, 1978). - 2 - 5. As a small open economy with virtually free trading links with India, Nepal's economy is highly susceptible to developments in India. The Terai, which lies along the Indian border, has close trading links with India, and accounts for about 60 percent of the country's GDP, and about 40 percent of the population. The Kathmandu Valley, the administrative and commercial center, is closely linked with the Terai, but at significant transportation costs. The rest of the country, the hills and mountains, is almost inaccessi- ble economically, and consists of a large number of fragmented markets. 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 develop- ment efforts necessarily concentrated on establishing a foundation for future development. 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; and investment has begun to be reoriented. However, GDP growth has been well below the 4-5% annual growth rate envisioned in the Plan, mainly because of poor agricultural performance.
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