World Bank Document

Document of The World Bank FILECop FOROFFICIAL USE ONLY Public Disclosure Authorized RlportNo. P-2926-NEP REPORT AND RECOMENDATION OF THE OF THE Public Disclosure Authorized PRESIDENT INTERNATIONALDEVELOPMENT ASSOCIATION TO THE EXECUTIVEDIRECTORS ON A PROPOSED CREDIT TO THE Public Disclosure Authorized KINGDOM OF NEPAL FOR THE BABAI IRRIGATION ENGINEERINGPROJECT December 11, 1980 Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their officialduties. Its eotents may nototberwise bedisctsed without World Bankathoriation. CURRENCY EQUIVALENTS 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 ADBN - Agricultural Development Bank of Nepal AIC - AgriculturalInputs Corporation DCA - Development Credit Agreement DIHM - Departmentof Irrigation,Hydrology and Meteorology HHGN - His Majesty's Governmentof Nepal MFA - Ministry of Food and Agriculture SDR - Special Drawing Rights UNDP - United Nations DevelopmentProgramme FOR OFFICIAL USE ONLY NEPAL BABAI IRRIGATION ENGINEERING PROJECT Credit and Project Summary Borrower: Kingdom of Nepal Amount: SDR 2.8 million (US$3.5 million equivalent). Terms: Standard Project Description: The proposed project would assist the Government in the preparation of final designs, tender documents and evaluation of tenders for a proposed Babai Irrigation Project. The engineering credit would finance: (a) preparation of detailed engineering designs, cost estimates and tender documents for a diversion weir across the Babai River, irrigation, drainage and road systems within the project area, and a 30 km stretch of the East- West Highway passing through the project area; (b) aerial photography and topographical mapping; (c) a semi-detailed soil survey and a socio-economic benchmark survey, geological and hydrological surveys and hydraulic model tests; (d) procurement of engineering equipment; (e) camps and quarters required for the field work, local counterpart staff and related operational cost; and (f) assistance to DIHM in prequalifying interested civil works contractors and evaluation of tenders. The project faces no special risk. This document has a restricted distribution and may be used by recipients only in the performance of thcir official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii. - Estimated Cost: US$ Million Equivalent Local Foreign Total EngineeringConsultants: Remuneration& Subsistence 0.15 1.05 1.20 Travel & Other Expenses 0.03 0.12 0.15 Sub-contracts 0.15 0.40 0.55 Equipment & Vehicles 0.01 0.49 0.50 Socio-Economic Survey 0.05 - 0.05 Local Support 0.10 - 0.10 Camp & Quarters 0.25 - 0.25 0.74 2.06 2.80 Physical Contingencies 0.10 0.30 0.40 Price Contingencies 0.08 0.22 0.30 Total Cost Net of Taxes and Duties 0.92 2.58 3.50 Taxes and Duties 0.05 - 0.05 Total Project Cost 0.97 2.58 3.55 Financing Plan: US$ Million Equivalent Local Foreign Total IDA 0.92 2.58 3.50 Government 0.05 - 0.05 0.97 2.58 3.55 Estimated US$ Million Equivalent Disbursements: IDA FY 1981 1982 1983 Annual 0.6 2.3 0.6 Cumulative 0.6 2.9 3.5 Rate of Return: Not applicable. Maps: IBRD No. 15208 and IBRD No. 15209. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR THE BABAI IRRIGATION ENGINEERING PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Kingdom of Nepal for Special Drawing Rights (SDR) 2.8 million (US$3.5 million equivalent) on standard IDA terms to help finance the Babai Irrigation Engineering Project. PART I - THE ECONOMY 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 13.3 million (1978). Over 90% 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 9% 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 developments 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 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 government 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 - 2 - 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 expenditures 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 increased tourism receipts and remittances from Gurkhas (soldiers from Nepal serving in the British or Indian armies). Foreign assistance in the form of grants and concessionary financing have generally ensured that the overall balance remained in surplus. However, the shortfall in foodgrain production coming at a time when Nepal's oil bill was rising has resulted in payments deficit of US$8 million for the 12 months ending July 1980 and Nepal drew SDR 10.5 million (US$13.8 million equivalent) from the IMF under the Compen- satory Financing Facility in September 1980. As of May 1980, foreign exchange reserves were equivalent to six months of imports. - 3 - 10. On March 31, 1978, the authorities replaced a complex system of mul- tiple exchange rates and exchange and trade restrictions with a dual exchange system. Transactions with India, which were virtually free from restrictions, were unaffected by these changes.

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