Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Public Disclosure Authorized Repot Ng. P-2945-NEP REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE Public Disclosure Authorized INTERNATIONALDEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE Public Disclosure Authorized KINGDOMOF NEPAL FOR AN AGRICULTURALEXTENSION AND RESEARCH PROJECT January 14, 1981 Public Disclosure Authorized This doumet b1 a reotcted disbirition d maybe aed by reipiets ony lo the peorme of their eoliell do". Its ents may net otherwisebe discosed withoutWold Bak auhrlaln. 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 FINANCIALYEAR July 16 - July 15 ABBREVIATIONSAND ACRONYMS AADO - AssistantAgricultural Development Officer ADBN - AgriculturalDevelopment Bank of Nepal ADO - AgriculturalDevelopment Officer AIC - AgriculturalInputs Corporation CTC - Central Technical Committee DDG - Deputy Director General DG - Director General DOA - Department of Agriculture DTC - District Technical Committee FAMSD - Food and AgriculturalMarketing ServicesDepartment HMGN - His Majesty's Governmentof Nepal JT - Junior Technician JTA - Junior Technical Assistant MFA - Ministry of Food and Agriculture PLAA - PanchayatLevel AgriculturalAssistant RRC - Regional Research Coordinator RRS - Regional Research Station SMS - Subject Matter Specialist FOR OFFICIAL USE ONLY NEPAL AGRICULTURE EXTENSION AND RESEARCH PROJECT Credit and Project Summary Borrower: Kingdom of Nepal Amount: SDR 13.8 million (US$17.5 million equivalent). Terms: Standard Project Description: The objective of the proposed project is early and sus- tained improvement in agricultural production, particu- larly foodgrains, in eight of the twenty administrative districts of the Nepal Terai. Improvements in production would be brought about by the wide adoption of low cost, labor intensive agricultural practices, improved varieties of seeds and provision of fertilizer. The project would comprise: (a) reorganization and strengthening of agricultural extension services; (b) strengthening and reorientation of applied and adaptive research; (c) strengthening the coordination between research and extension services; (d) establishment of regular monitoring and evalua- tion procedures; (e) local and overseas training of staff, studies and provision of consultants; (f) establishment of regional training centers, and offices and housing for field staff; (g) facilities, equipment and vehicles to support extension and training programs; and (h) provision of fertilizer. The project faces no special risk. This document has a restricted distribution and may be used by recipientsonly in the performance of their, fficial duties. Its contents may not otherwise be disclosed without World Bank authorization. Estimated Cost of Project: US$ Million Equivalent Component Local Foreign Total Civil Works 2.07 1.71 3.78 Vehicles - 0.35 0.35 Equipment and Furniture 0.22 0.84 1.06 Farm Development 0.04 0.17 0.21 Technical Assistance - 0.65 0.65 Monitoring and Evaluation 0.17 - 0.17 Incremental Staff Costs 0.55 - 0.55 Incremental Operating Costs 0.60 0.31 0.91 Fertilizer 2.15 6.21 8.36 Base Cost 5.80 10.24 16.04 Physical Contingencies 0.53 1.01 1.54 Price Contingencies 1.18 2.09 3.27 TOTAL PROJECT COST 7.51 1/ 13.34 20.85 Financing Plan: US$ Million Equivalent Local Foreign Total IDA 4.81 12.69 17.50 Government 2.70 - 2.70 UNDP - 0.65 0.65 7.51 13.34 20.85 Estimated US$ Million Equivalent Disbursements: IDA FY 1982 1983 1984 1985 1986 1987 Annual 4.1 4.3 2.0 3.0 3.0 1.1 Cumulative 4.1 8.4 10.4 13.4 16.4 17.5 Rate of Return: 50% Staff Appraisal Report: No. 3104-NEP, dated January 5, 1981. 1/ includes US$70,000 of duties and taxes. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR AN AGRICULTURAL EXTENSION AND RESEARCH PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Kingdom of Nepal for Special Drawing Rights (SDR) 13.8 million (US$17.5 million equivalent) on standard IDA terms to help finance an Agricultural Extension and Research Project. UNDP has agreed in principle to provide US$650,000 equivalent to finance technical assistance and studies under the prcposed project. PART I - THE ECONOMY 1/ 2. The most recent economic report entitled "Nepal-Development Perform- ance and Prospects" (Report No. 2692-NEP) was distributed to the Executive Directors on December 14, 1979. The principal findings of the Report and recent developments 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 is estimated at $120 (1978), and health and education standards are well below the average of South Asia: life expectancy at birth is about 45 years, infant mortality 150 per thousand, and adult literacy 19%. The population, growing at the rate of 2.6% a year, is estimated to be 13.6 million (1978). About 95% of the population live in rural areas. 4. The economy of Nepal centers around agriculture. It accounts for more than 60% of GDP and 75% of merchandise exports, and provides a livelihood to over 90% of the population. In addition, most of the industrial sector, which comprises about 10% of GDP, processes agricultural raw materials. About 25% of total rural incomes are estimated to arise from non-agricultural activities. Cottage industries are one of the most important of these, engaging over 1 million people and comprising about 6% of GDP. They provide basic consumer goods in the many small isolated markets where such goods would otherwise not be available. 5. As a small open economy, Nepal is highly susceptible to develop- ments in India. The Terai, which lies along the Indian border, has close and virtually free trading links with India, and accounts for about 60% of the country's GDP, and about 40% 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 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 Babai Irrigation Engi- neering Project (Report No. P-2926-NEP of December 11, 1980). and Mountains, is isolated by the nature of the terrain and consists of a large number of fragmented markets. 6. When Nepal adopted economic and social development as major gov- ernment objectives in the early 1950s, there was virtually no economic or administrative infrastructure. Initial development efforts were necessarily concentrated on establishing a foundation for future development. During these early stages, it was inevitable that growth would remain slow and that there would be little if any increase in per capita income. However, the Fifth Development Plan (1975/76-1979/80) was to be a turning point; it was believed that the country was poised for more rapid growth on the order of 4- 5% annually. The level of investment was to increase substantially and its focus to shift towards the more directly productive sectors and the social services. 7. Public investment performance has been excellent; development expenditures have grown at over 15% annually in real terms and the Government has been relatively successful in reorienting investment away from the trans- port sector towards agriculture and the social services. However, few of the other Fifth Plan objectives have been achieved. The GDP growth rate is likely to average only 2.4% per year, mainly because of poor agricultural performance. Little progress has been made in increasing agricultural productivity and agricultural production increased at an annual rate of only 0.7% during the first four years of the Fifth Plan. Growth in other sectors has been mixed, with the poor agricultural performance limiting the growth of agro-related industries. Production in several large industries including jute goods, sugar, leather goods, and cement has increased but most Fifth Plan targets will go unmet. In the services sector, tourism has been dynamic, but it still only contributes about 1% of GDP. 8. Economic developments during 1979/80 were characterized by declining output, accelerating inflation, and a weakening in the trade and payments position. Foodgrain production declined by 13% due to the poor monsoon in 1979, and to deal with this shortfall, the Government appealed for 110,000 tons of foodgrains assistance. Donors have made available about 60,000 tons and together with local procurement from less seriously affected parts of Nepal, this may be sufficient to maintain minimum food requirements. The 1980 monsoon is reported to have been satisfactory. Inflation accelerated to about 12% in 1979/80, because of the deterioration in the domestic food situation, higher import prices and the expansionary effects of the budget deficit. Government activity slowed in 1979/80; real growth in total expen- ditures was only 5% compared with 10% in 1978/79, while revenues declined by 3.5% in current terms. However, the economic prospects for 1980/81 are some- what brighter in view of the improved weather as well as the planned accelera- tion in government expenditures given in the 1980/81 Budget; GDP growth should be positive in contrast to its 1% decline in 1979/80. 9. The disappointing overall performance of the domestic economy during the Fifth Plan period has been accompanied by a widening trade deficit. Imports have grown under the impetus of the Government's development program while the trend in export earnings has been sluggish due to declining rice exports. The deterioration on the trade account has been partly covered by - 3 - increased tourism receipts and remittances from Gurkhas (soldiers from Nepal serving in the British or Indian armies).