A Review of Major Issues Related to Nepal's Development Prospects

Report No. 677a-NEP A Review of Major Issues Related to Nepal's Development

Public Disclosure Authorized Prospects

May 23, 1975 FILE 'OtfpY South Asia Department Not for Public Use Public Disclosure Authorized Public Disclosure Authorized

Public Disclosure Authorized Document of the International Bank for Reconstruction and Development International Development Association

This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CURRENCY EQUIVALENTS

Currency Unit - Rupee

US$ 1.00 = Rs 10.56 R 1.00 = US$ 0.095 Rs 1.00 million = US$ 94, 6 97

GOVERNMENT OF NEPAL FISCAL YEAR July 16 to July 15

This report is based on the findings of a mission which visited Nepal for a month in November/becember 197)1. The mission consisted of Mr. C. Ladonne (chief of mission), Mr. A. Arnanwa (economist, public corporations), Ms. K. Artus (economist, public finance) and Mr. John Gallagher (consultant, transport). TABLE OF CONTENTS

Page No.

Country Data

Surmary and Conclusions i-iv

I. Slow Economic Growth 1

A. Identification of Constraints and Potentials 1 B. Past Economic Policy 4 C. Development Strategy of the Fifth Plan 5

II. Effects of Changing World Economic Conditions 6

A. The External Sector 6 B. Impact of World Inflation 11 C. Possible Remedies 13

III. The Resource Problem 19

A. Domestic Resource Mobilization 20 B. The Financial Performance of Public Sector Enterprises 23 C. Resources Available for Investments 26

IV. Sectoral Development Programs and Policies 27

A. Transport 28 B. Agriculture 35 C. Industry and Power 38 D. Social Sectors 41

Statistical Appendix

Maps

Page 1 of 2 pages

COUNTRY DATA - N.PAL

AREA 2/ POPULATION DENSITY (1970) 141l,000 laz2 12.3million (mid-197j0 i80 per 2/ Rate of Growth: 2.2% (eat.) (frmn 1961 to 1971) 579 per km2/ofoultivatad land

POPULATION CHARACTERISTICS (1970) 1EALTH (39701 Crude Birth Rate (per 1,000) 42 (eat.) Population per physician 40,000 Crude Death Rate (per 1,000) 20 (est.) Population per hospital bed 6,000 Infant Mortality (per 1,000 live births) between 200 and 300 (est.)

INCOME DISTRIBUTION DISTRIBUTION OF LAND OWNERSHIP % of national income, nigrest quintile %..% owned by top 10% of owners lowest quintile *. 7 owned by smallest 10% of owners

ACCESS TO PIPED WATER (1974) ACCESS TO ELECTRICITY % of population 7.0 7%of population - urban - rural

NUTRITION EDUCATION Calorie intake as Z of requirements Adult literacy rate % (1970) 11 Per capita protein intake Primary school enrollment % (1972) 34

1/ GNP PER CAPITA in 197. US $90-100

GROSS NATIONAL PRODUCT IN 197 2/73 ANNUAL RATE OF GROWTH (%, constant prices)

US $ Mln. % Apiproxately 2.2 (1965-67 to 1972-74)

GNP at Market Prices 1,070 100.0 Gross Domestic Investment Gross National Saving Current Account Balance Exports of Goods, NFS Imports of Goods, NFS

OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 197 2/73

Value Added US $ Mln. %

Agriculture 730 68.o Industry 95 9.0 Services 245 23.0

Tota1/Average 1,070 100.0

GOVERNMENT FINANCE Central Ooverxment (Rs MLn.) % of GDP 19 74 w 72M7 Current Receipts 730 4.6 Currntn Expenditure b98 Current Surplus 2321 Capital Expenditures 811 5-4 External Assistance (net) 320 1.8

1/ The Per Capita GNP estimate is at 1970 market prices, calculated by the same conversion technique as the 1972 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered.

not available not applicable Page 2 of 2 pages

COUNTRY DATA - NFPAL

MONEY, CREDIT and PRICES 1965 1971 1972 1973 197L (Million Rs outstanding mid-July)-

Money and Quasi Money 554 1,055 1,240 1,493 1,850 Bank Credit to Public Sector (net) -149 -103 -39 117 251 Bank Credit to Private Sector 136 320 400 459 652

Money and Quasi Money as 7. of GDP 8.0 11.1 11.9 13.2 .13.7

TRANSACTIONS IN CONVERTIBLE CURRENCIES "

1972 1973 1974 (Millions US $)

Receipts 29.9 37.8 40.3 Exporta 8.8 11.8 12.3 Invisibleo 21.1 23.4 28.0 P ants 25.1 28.3 25.9 Ia orts =2 .127 1. Invisible. 13.9 9.6 9.8 EXTERNAL DEBT, DECEMBER 31. 1971

Surplus 4.8 9.5 14.4 US $ Mln prosa Official Reserves Public Debt, incl. guaranteed 19.6 July 1972 Julyv 1_973 lr 1974 Non-Guaranteed Private Debt (Nillioum u s) Total outstanding & Disbursed 19.6 117.6 128.6 135.7 . 2 DEBT SERVICE RATIO for 1973- Less than 1% Public Debt, incl. guaranteed Non-Guaranteed Private Debt Total outstanding & Disbursed

RATE OF EXCHANGE IBRD/IDA LENDING. JanuarY 31. 197C, (Wi114.uns"s

Up to F br!arUy 20. 1973 IBRD IDA US I 1.0 - IIR !o.i5 NR 1.00 - US $ 0.099 Outstanding & Disbursed - 3.3 Undisbursed _ 30.5 Sinae Februar-y 20, 1973 Outstanding incl. Undisbursed - 33.8 us $ 1.00 - NR 10.56 NR 1.00 - US $ 0.095

/ Since aubatantial parts of Nepal'o foreign trade are unrecorded, there is no overall balance of payments available. This table is a balance of payments with countries other than India and represents about 10% of Nepal's foreign trade.

/ Ratio of Debt Service to Exports of Goods and Non-Factor Servicea.

not available

not applicable

March 20, 1975 South Asia Department SUMMARY AND CONCLUSIONS

i. Nepal's economic growth over the last nine years has been slow. From 1965-67 to 1972-74, the average annual rate of growth in GDP was only 2.2% in real terms. During the same period population increased at a rate of over 2%. There was therefore hardly any improvement in GDP per capita. Agriculture accounts for about two-thirds of GDP, for 80% of export earnings and provides employment to 94% of the population. Food- grain production has grown at less than 1% annually since the mid-1960's. If present trends of population and foodgrain production growth continue, Nepal may have a foodgrain deficit by the turn of the decade. It is currently exporting over 200,000 tons of rice a year, accounting for about 60% of export earnings. Some progress was achieved in the manufacturing sector which, however, accounts for less than 3% of GDP. ii. This slow growth was largely due to the priority given to development of infrastructure over productive sectors. This priority was probably an inescapable necessity. When the country came out of its isolation in 1951 it had no transportation facilities and hardly any educated people to man an administration oriented towards economic development. At least one generation was needed to build a minimal physical and administrative infrastructure without which a development policy is devoid of meaning. In that respect, substantial progress was achieved. iii. In the past only 20% of public sector investments went into productive sectors which mostly benefited the Kathmandu Valley, and to a lesser extent the Terai pldins. The development of the Kathmandu Valley where 4% of Nepal's population lives, has been a success story. New cultivation methods have been widely adopted and the farming community is enjoying an improved standard of living. With the forthcoming Fifth Plan (1975-76-1979/80) Nepal is now attempting to shift its order of priorities and to focus on productive sectors. 50% of planned development expenditure is tentatively allocated to productive sectors. Because of absorptive capacity'problems, among other things, the country may experience serious difficulties in redirecting its investments along this new and very pertinent course. iv. Nepal's development is likely to be impaired by the recent changes in world economic conditions. For lack of economic diversification the country has to import practically all development and manufactured consumer goods. World price increases are therefore greatly affecting Nepal, at a time when export prospects are not too encouraging. As the country is landlocked it depends on India for most of its imports. India has also been hurt by world inflation and has developed shortages of its own for many of the goods required by Nepal. This has forced Nepal to import from distant places which involves very high freight and transit costs through India in the case of bulky commodities like cement. A ton of cement, for instance, costs four times as much in Nepal as in industrialized countries. So far the balance of trade deficit has been more than offset by invisible earnings; for the last ten years balance of payments surpluses amounted to about $10 million a year and foreign exchange reserves ($139 million in November 1974) are at a very comfortable level of 12 months of imports. The new world economic conditions are likely to turn this surplus into a deficit of possibly up to $20 million a year. v. If at some stage in the future, imports have to be curtailed, this would not only directly affect economic activities but also the potential for domestic resource mobilization, as nearly two thirds of tax and non-tax revenue is collected on external transactions. Revenue potentials from other tax sources are limited. For years to come dynamic export growth is likely to be one of the few potential avenues towards increasing resource mobilization. This link clearly indicates investment priorities, since exports in Nepal are largely synonymous with production of agricultural surpluses. Despite the commendable performance of a few public sector corporations, their overall performance has been disappointing. The drain they exert on public savings is substantial. vi. The scope for increasing domestic resource mobilization through the budget in the short run is limited, given the poverty of the country and the low degree of monetization of the economy. However, every effort should be made to improve tax enforcement and increase taxation wherever possible (e.g., land and urban property taxes). The desirability of sys- tematically extending tax holidays to industrial and tourist ventures should be investigated. As currently granted, tax holidays may be too liberal and prevent the broadening of the Government's tax base. Public sector enterprises are nowhere near their potential in terms of generating savings. Therefore, there is a need to review the pricing policies of this sector so as to increase both its internal financing and the transfer of resources to the budget. vii. In April 1975 substantial changes were brought into the policy framework which aimed at signalling the right price of resources to consumers and investors. Consumer subsidies on basic commodities, such as rice and sugar which in the recent past were growing rapidly, have been almost entirely rescinded. This will help generate additional budgetary resources. A major reform of the interest rate structure has been introduced with the view to increasing mobilization of private savings, restric- ting speculative inventories and flight of capital to India, and maximizing resource allocation. This welcome and timely reform entails an increase of the 2-year fixed saving deposit rate from 9-3/4 to 16% per annum. Lending rates of commercial banks have been raised to the level of 15 to 18% per annum and those of financial institutions 10 to 16%. viii. Development expenditures for the Fifth Plan (1975/76-1979/80) are tentatively planned to be of the order of $670 million, i.e., twice as much in real terms as during the current plan. The plan is not ambitious compared to Nepal's needs, yet it may be ambitious compared to the likely availability of resources and to the country's implementation capacity. Regular expenditures are likely to increase sharply on account of rapidly growing expenditures in social sectors, especially in education, increased maintenance cost of the transportation network, and additional - iii -

'administrative costs that the attempt to extend government services through the country will entail. As in the past, growth in expenditure is likely to outstrip growth in revenue so that the regular budget surplus is likely to be sharply reduced, possibly to a third of its current level in real terms. After allowing for generous flows of foreign assistance, substantial transfers from the private sector and a safe amount of deficit financing, the resource shortfall as percent of planned development outlays could be as high as 20%. Financing of such a shortfall by additional deficit financing would necesi- tate important exchange rate adjustments. ix. It is likely that the proposed investment program will not be carried out in its entirety. Productive sectors, especially agriculture, may not receive as much investment as planned because of absorptive capacity problems. To a lesser extent, and for the same reasons, there may be some underspending in social sectors. On the other hand, investments in transport especially in roads, may exceed the planned targets. Some of the road projects selected may not appear entirely consistent with the basic official strategy of developing north-south roads, which aims at facilitating the integration of the southern plains with the Hills and ultimately allowing the specialization of both areas along the lines of their respective comparative advantages. The cost of on-going and firmly planned road projects are likely to absorb nearly all of the planned allocations for the road sub-sector. Additional road projects may possibly be taken up during the Plan period because of strong popular pressures to extend the road network. The Fifth Plan may therefore still turn out to be substantially a program of infrastructure development. x. The investment policy of the Government, in the short and medium term, should be geared towards improving the balance of payments situation. Thus, the focus should be on the productive sectors, particularly in agriculture, where there is the potential of larger export surpluses (foodgrains, oilseeds, and horticulture). This implies that recent efforts towards accelerating the tempo of project preparation for this sector should be given the highest priority. Tourism is developing rapidly and should be encouraged, though not necessarily through financial incentives (customs privileges and tax holidays), which the profitability of this sector does not appear to warrant. Some of the basic development goods, which are so costly to import, could profitably be produced in the country. The feasibility of a second cement plant should be investigated. Longer range export and growth possibilities would include the development of Nepal's abundant hydro potential. xi. Conversely, investments with large import content, entailing substantial maintenance costs and with little immediate effect on production, should be carefully weighed against alternative uses in other sectors. It is time to consider the appropriateness of the further expansion of the road network at the planned pace. If capitalization in this sector is pushed too far, maintenance costs may prove a great burden on Nepal's resources. The needs of social sectors are critical, but their development at a too rapid pace may also unduly strain the country's resources. - iv -

xii. Proper investment planning necessarily involves very careful planning of the use of foreign assistance, sector-wise and project-wise. For many years to come foreign assistance is likely to amount to half, and possibly more, of the capital budget. In addition, the local cost of foreign-assisted projects drains the modest pool of the Government's own resources. Therefore, if foreign-assisted projects are not closely linked to development priorities, the overall investment program cannot be closely linked to development priorities either. xiii. To help Nepal overcome its difficulties additional foreign assistance above the present level is required. As important as its magnitude is the sectoral allocation of this assistance. The highest priority should be given to productive sectors, but their absorptive capacity, albeit growing, is still limited. The needs of the social sectors are critical and to relieve the burden their development will entail for the budget, greater involvement of foreign assistance in these sectors is called for. Invest- ment in highways should be de-emphasized and the focus directed towards the development of small feeder roads which will bring economic benefits. NEPAL - ECONOMIC REPORT

I. SLOW ECONOMIC GROWTH

1. Nepal's economic growth over the last nine years 1/ has been very slow. From 1965-67 to 1972-74, the average annual rate of growth in GDP was only 2.2% in real terms. During the same period, population increased at a rate of over 2%. On the basis of national income statistics, there was therefore hardly any improvement in GNP per capita (around $90- 100 a year). Except for the increased contribution of transport and communications, the structure of GDP has remained largely unchanged.

2. Agriculture accounts for about two-thirds of GDP and for 80% of export earnings. Foodgrain production has grown at less than 1% annually since the mid-1960's. This modest growth has been due to area extension; for the country as a whole, the productivity of the land has declined. 2/ If present trends of population and foodgrain production growth continue, Nepal would probably have a foodgrain deficit by the turn of the decade. Nepal may be currently exporting over 200,000 tons of rice a year, accounting possibly for 60% of export earnings. Some progress was achieved in the manufacturing sector which, however, accounts for less than 3% of GDP.

A. Identification of Constraints and Potentials

3. When the isolationist policy of the Rana Regime (1846-1951) came to an end, Nepal had no infrastructure, no transportation facilities, and hardly any educated people to man an administration oriented toward economic development. Equally important, there was no information available on the socio-economic conditions prevailing in the country except for the Eastern Terai which provided most of the revenue of the Kathmandu regime in the form of land taxes and earnings from timber export to India.

4. Nepal is a landlocked country bordering India and China. It still has a Consul General in Lhassa, but exchanges with the Tibetan region of China are negligible. Trade with China, as with countries other than India, has to go through Calcutta. Transit facilities through India are therefore crucial. Because the rivers flow from north to south

1/ GDP estimates have been prepared since 1964/65 only. Th2 data base for these estimates is weak.

2/ Yields have declined in the Hills, remained more or less stagnant in the Terai area, and increased only in the Kathmandu Valley (less than 3% of the cultivated area). - 2 -

in the Gangetic plain (towards India) it is natural that trade should be with that country. Nepal is a Hindu Kingdom and culturally the two countries are very close. Not only is there a constant exchange of goods and services through the open border, but also of population, ideas and techniques.

5. Population pressure is strong on the land resource base. In mid-1974 the population was about 12.3 million with a growth rate in the range of 2% to 2.4% per annum. At this rate, the population will double in the next 30 to 35 years. Pressure on cultivated land is highest in hilly and mountainous areas; size of family holdings is on the average 0.4 ha. To survive, farmers attempt to cultivate unsuitable land on hill- sides and/or to migrate to the Terai and beyond, exporting their services as soldiers (Gurkhas) to the Indian and British armies or as casual labor. To compound the difficulties, livestock compete with humans for the scarce land and forest resources. The growth of the livestock population (see Appendix Table 2.2) may exceed that of the human population. A part of livestock is unproductive and kept mainly for cultural reasons.

6. In Nepal the soil is generally light, permeable, and wfith some exceptions, of mediocre fertility. The combined pressure of humans and animals on land, forest and natural pastures has resulted in erosion of tragic proportions. The denudation of steep slopes for purposes of cultivation, the cutting of small trees for firewood, the overgrazing of forest and natural pastures which prevents regeneration, are all con- vergent factors which create erosion especially in a permeable terrain. Deprived of its protective cover, the soil is prone to landslides and its water retention power diminished during the monsoon season. This increases the flow of mountain torrents, and therefore of the rivers eroding the land in the valleys; further south in the Gangetic plain, flooding is increasing its damages.

7. Comparisons with countries in the sub-continent indicate the magnitude of the problem of population pressure in the Hills.

Table 1: POPULATION PRESSURE ON CULTIVATED LAND - 1970 (Persons per sq. km.)

Nepal 579 Bangladesh 824

Mountains 1,174 India 350 Hills 1,002 Pakistan 224 Terai 336 Burma 148

At the beginning of the 1960's, 68% of the Nepalese population was living in the Hills and mountains; ten years later, this percentage has gone down to 62%, indicating a large migration to the Terai plains. Approx- imately 5 to 600,000 persons settled on about 200,000 ha. of forest in the Terai, which they turned into crop-land. This movement was largely spontaneous; only 20% of these settlements were officially organized. - 3 -

8. Preliminary analysis 1/ indicates that about 325,000 ha. of Terai forests with less than 10% slopes, are probably suitable for agriculture. Therefore, there is further scope for resettling Hill farmers in the Terai, so that for a time population pressure in the Hills can be somewhat relieved. But there are also competitors for these virgin lands. Population density on the Indian -side of the border is three times as high as on the Nepalese side and there is a flow of immigrants to Nepal from India. This competition for land in the Nepalese Terai from the Hills and from India poses delicate political problems. Nepal intends to police the 500 mile-long border to the extent possible, and to restrict the movement of persons of Indian citizen- ship by using working permits. However, it will be extremely difficult to control effectively the movement of people between the two countries.

9. Nepal has widely different climates from sub-tropical to temper- ate. Consequently, the specializationi of the Hills in high valued products such as vegetables, fruits, and tea, is a distinct possibility (see para 101). This can take place only after foodgrain yields have increased and marketing has improved. In the Terai, apart from the flat forests which can be reclaimed for cultivation, there is an appreciable production potential which could be developed by irrigation allowing double cropping. Surface and underground water resources appear very substantial.

10. Nepal's potential for hydroelectic power is estimated at 83,000 megawatts (MW), 2/ equivalent to the combined installed hydro-electric capacity of Canada, USA and Mexico. Commercially exploitable potential is probably less, but likely to be extremely important. Such an asset is of prime importance to Nepal particularly for export to India.

11. Forest resources are being rapidly exploited, but remain important. In the Hills, near populated areas, most of the mature trees have been removed. In the Terai, commercial and legal extraction has been con- fined in recent years mainly to areas earmarked for settlement. Illegal cutting has been extensive and parts of some forests of easy access appear to have been deprived of their high grade timber. Growing stock losses of up to 40% in the past 10 years may not be an unrealistic estimate. 3/ Less than 800,000 ha of relatively level forests are left for commercial exploitation (equivalent to 40 million m3 of tradable timber). 4/ Over 300,000 ha are suitable for cultivation, so that ultimately commercial exploitation of timber could be carried out on about half a million ha. if strong policing of forest use is successful.

1/ IBRD Report No. 519a-NEP "Agricultural Sector Survey of Nepal: General Report", December 20, 1974.

2/ Present installed capacity is 33 MW.

3/ See IBRD Report No. 519a-NEP, already mentioned.

4/ IBRD Report No. 377a-NEP, "Appraisal of Settlement Project in Nepal," May 24, 1974. -4-

12. With its original syncretic culture which has made tolerance a cardinal virtue for the Nepalese, its inventive ancient arts - Nepalese architects are said to have taken the art of the Pagoda to China - its unique scenery, its wildlife, and the kindness and hospitality of its people, Nepal is probably one of the most fascinating countries in the world. The growing numbers of visitors attest to this attraction. Tour- ism could become a major asset in Nepal's development.

B. Past Economic Policy

13. It would have been impossible for the Nepalese authorities to evolve an economic policy oriented towards growth when the country came out of its self-imposed isolation in 1951. A generation was needed to build a minimal physical and administrative infrastructure without which a development policy is devoid of meaning. With the help of considerable foreign assistance, major achievements were made:

Table 2: PROGRESS IN INFRASTRUCTURE AND SOCIAL SECTORS

Roads (in Km) 600 (1952) 3,175 (1974) Installed Power (in Kw) 6,280 (1950) 45,320 (1972) Literacy rate 4.4% (1950) 11% (1970) No. of graduates 300 (1951) 10,880 (1972) Primary school-age children in schools 0.7% (1950) 34% (1972) Number of doctors 50 (1950) 318 (1972)

The pace of financial development in Nepal has been substantial and the number of development institutions grown dramatically. Staffing of the administration and of development institutions remains qualitatively uneven, but the number of high caliber staff is increasing. The movement of administrators and the flow of information have been facilitated by the considerable development of the air transport system. Nearly every area in Nepal can now be reached rapidly by air.

14. Assessing two decades of Nepal's efforts at development three striking features emerge. First, there has been heavy dependence on foreign grants and loans; in the past, foreign aid has financed an average 50% of the development budget. Second, most of past investments - perhaps as much as 80% of public investment has gone into infrastructure. Third, an analysis of the distribution of the few investments which have gone into productive sectors, reveals a disproportionately high allocation to the Kathmandu Valley and to a lesser extent to the eastern and inner Terai. The development of the Kathmandu Valley and of its immediate surroundings, where 4% of Nepal's population is located, has been a success story. New cultivation methods have been widely adopted and the farming community is enjoying a decent standard of living. In the Terai, irrigation projects were designed to provide supplementary water to the main crop grown in the monsoon period. It is only recently that irrigation projects 1/ designed to allow double cropping have been initiated.

C. Development Strategy of the Fifth Plan

15. The Fifth Plan document is still at the draft stage and is not expected to be finalized before June 1975. A great deal of reflection has gone into defining the broad strategy of the proposed Plan (1975/76 - 1979/80) with its emphasis being rightly given to regional development and within this frame to productive sectors. The four development Regions include hilly and lowland areas, and within each a north-south growth axis based on north-south roads is intended to integrate the various terrains and ultimately to develop them according to their respective comparative advantages. 2/ As a consequence, the Plan aims at capitalizing on past investment in transport infrastructure, at emphasizing quick-yielding projects, and at more even distribution of investments than in the past of public resources among development regions. If the proposed breakdown of public sector expenditure during the Fifth Plan is of any guidance, _t indicates a very definite and welcome shift to productive sectors. (See Appendix Table 2.3.) It remains to be seen whether the actual selection of projects will converge with this declaration of intent.

16. In the past the role of the Planning Commission has kept changing from a full executing authority to a mere advisory one and vice versa. The supreme planning body in Nepal is the National Development Council under the chairmanship of the King. Currently, the National Planning Commission acts as a Secretariat of the Council and in that capacity has regained executive authority - at least theoretically. Projects whose feasibility the Commission has not yet analyzed continue to be taken up in the nation's program. Major policies of many sectors are often initiated and finalized elsewhere, not necessarily even in the relevant technical Ministries. Many projects are financed with external assistance which comes under the responsibility of the Finance Ministry. Selection of individual

1/ Kankai project financed with Asian Development Bank's assistance, and Birganj project financed with IDA's assistance.

2/ The four growth axes centers and subcenters are: Kosi Growth Axis (Biratnagar, Dharan, Dhankuta, Hedangma); Gandaki Growth Axis (Bhairawa, Butwal, Tansen, Syangja, Pokhara, Tuche); Karnali or Western Growth Axis (Nepalganj, Surkhet, Dailekh, Jumla); Metropolitan Growth Axis (Birganj, Hetaura, Kathmandu, Barbise, Dhunche). Note: growth centers are underlined. - 6 - projects is, to some extent, done by that Ministry. The result is that the Planning Commission is not always in a position to ensure that project selection tallies with the development strategy adopted for the Fifth Plan (see Chapter IV). A recent reorganization of the Foreign Economic Relations Department of the Ministry of Finance, whereby individual officers will be responsible for a sector, rather than for a donor, may help considerably in improving consistency between project selection and sectoral plans.

II. EFFECTS OF CHANGING WORLD ECONOMIC CONDITIONS

A. The External Sector

17. The balance of trade has never been in Nepal's favor. However, even before the 1974 increase in world prices the gap between imports and exports was widening. /a Table 3: BALANCE OF TRADE-/ (in million NRs)

Year Export Import Deficit

1966/67 375 481 106 1967/68 393 478 85 1968/69 572 748 176 1969/70 489 855 366 1970/71 462 703 241 1971/72 617 870 253 1972/73 487 1,031 544

/a These data supplied by the Ministry of Finance are highly tentative for the last three years. Import figures are inflated to the extent that they include Indian excise duties which are refunded to Nepal (85 million NRs in 1972/73). Export and import data relate only to officially recorded transactions. Unrecorded export transactions may be equivalent to half of recorded transactions. Import statistics are believed to be of a much higher degree of accuracy but under-recording is not negligible. The magnitude of the deficit is probably over-estimated.

Nepal's trade is predominantly with its neighbor India, not only because of its geographical position but also because of the heavy overland transport costs involved in trade with third countries, i.e.other than India. Until - 7 -

the introduction of an Export Exchange Entitlement (EEE) Scheme in 1961, 1/ over 98% of all trade was with India.

Commodity Exports to Third Countries

18. The introduction of the EEE scheme was followed by a rapid upsurge in Nepal's exports to third countries. By 1968/69 India's weight in Nepal's trade was reduced to 85%. Over that period the increase in exports was naturally associated with an expansion of imports. Initially they tended to consist almost exclusively of luxury imports which com- manded the highest premium. This resulting import pattern was against the wishes of the Government and subsequent regulations restricted to 25% of the entitlement the amount which could be spent on imports of luxury goods. Consequently, the scheme lost.part of its attraction and exports to third countries levelled off after 1968/69. The scheTne indirectly restricted imports because EEE holders did not spend that part of their entitlement which was not profitable 2/. At the same time the Government restricted licenses-to other importers for fear it would lessen the attrac- tiveness of the EEE scheme. This partly explains why the balance of trade with third countries has remained more or less in equilibrium.

19. There are nine different EEE ratios, which means that exports -are subject to nine different effective exchange rates. The major draw- back of such a system is that it tends to cancel out comparative advantages by giving the lowest rate to the most profitable export. The system has the advantage of permitting some diversification of Nepal's geographical trade pattern which is a welcome development as the dependence on one trading partner is inherently unstable. In addition, given the con- vertibility between the Indian and Nepalese rupees, the Government has no control over Indian rupee earnings, while it has fairly strict control over convertible currency earnings and their use. The EEC scheme is currently under review; it is possible that the Government may decide to have only one ratio which would be an appropriate measure.

20. About 70% of exports to third countries are jute and jute goods. 2/ Over the years raw jute and production of jute goods has remained rather even: about 50,000 tons of raw jute a year, out of which 15,000 tons were processed in the existing two mills. A modernization

1/ Under the Scheme an exporter to a third country received an entitlement to purchase a certain amount of foreign exchange for imports of goods, the amount being a proportion of the export earnings which varies with the commodity exported. Exports beyond the Indian market generally entail a loss to the exporter. Imports which he obtains by using his exchange entitlement can be sold at a profit, compensating for this loss and generating a'profit on the transaction as a whole.

2/ Especially on imports of development goods items, which account for 25% of the value of the license. - 8 - project assisted by financial and technical aid from the Asian Development Bank is near completion which will increase the manufacturing capacity of the two mills by 60%. At the present level of raw jute production, mill requirements will represent about 50% of the crop. At the same time, efforts are being carried out to improve cultivation methods by the use of high yielding variety seeds and improved retting facilities.

21. Raw jute exporters were entitled to a 20% EEE. In 1973, exporters requested a higher entitlement which the government found excessive. As a result, the export trade was nationalized and the responsibility was given to National Trading Ltd., a public Corporation which was ill-prepared to take over the assignment. The Belgian market which in the past absorbed most of Nepal's raw jute has been practically lost. However, the Corpora- tion was able to export to the People's Republic of China. The value of the order was about $3.5 million. The responsibility for export was handed over in the autumn of 1974 to the Jute Development Corporation which thus far has had no experience in international trade. As a result of nationali- zation, the EEE scheme has become inoperative for raw jute exports. Losses incurred in exporting will be borne by the budget.

22. Exports of jute goods continue to be handled by private exporters. Import entitlements are equivalent to 60% of export proceeds. Sacking is exported mostly to Singapore and hessian to the USA. Inventories with the jute mills are equivalent to 18 months production. The Government is reportedly considering building a third jute mill. With the current uncer- tainty regarding world market prospects for jute goods and Nepal's own capital scarcity, such an investment proposal should be weighed very carefully, particularly in view of the fact that more indirect subsidies are needed to export jute goods than raw jute.

Commodity Exports to India

23. Over 60% of exports to India consist of rice. Near stagnant production and an increase in population has brought down the rice export surplus from half a million tons around the beginning of the 1960's to an estimated 200,000 tons during the last few years. In addition, the Government follows a deliberate policy of procuring surplus rice in the Terai to supply food deficit areas in the Hills (especially Kathmandu). Due to favorable climatic conditions, paddy production was 2.4 million tons in 1973/74, up from 2.1 million tons the previous year, which given domestic consumption needs of about 2.2 million tons left a possible rice surplus of about 200,000 tons. Typically, in 1973/74 rice traders purchased from the farmers at $230 per ton and exported to India at about $380 per ton by selling at the right time. Around 80,000 tons of rice were exported offi-ially. The granting of export licenses was contingent upon traders - under a compulsory levy scheme - handing over 25% of their registered stocks to the Agricultural Marketing Corporation - 9 - at a procurement price of $170 per ton. 1/ Assuming that about 200,000 tons were exported, both legally and illegally, the Indian rupee (IRs) earnings should have been of the order of $70 million. Contrary to what should have been normally expected, the Indian rupee official reserves fell so sharply during the first half of 1974, that the Nepal Rastra Bank had to draw on its IRs 100 million stand-by agreement with the Reserve Bank of India.

24. Apparently exporters financed their transactions by relying on credit from Nepalese commercial banks and failed to repatriate their IRs earnings. Outstanding bank credit on export bills nearly doubled between mid-January 1973 (430 million NRs) and mid-January 1974 (790 million NRs). In addition, the large profits made by traders on Nepal's rice went largely untaxed. This haemorrhage of wealth is very substantial by Nepal's standards, and constitutes a serious problem through the loss of Indian currency, loss to the farmers and loss to the budget. This underlines the lack of development of the Nepalese-controlled trade and explains the recent efforts of the Government to further expand the activities of public sector trading agencies.

25. These leakages are not new. Last year, however, they occurred on a larger scale than ever before. Faced with sharp price increases in India, the Nepalese Government tried to keep down internal prices. This policy resulted in a larger than usual outflow of the country's domestic and imported supplies. A reasonably efficient control of the border, would call for the fixation of Nepalese prices in line with the level of Indian prices (see para. 104) and for better policing of the border which would be difficult but should be attempted. Small transactions by indi- viduals cannot be controlled, but more frequent patrols, including the use of small aircraft and helicopters could help deter the present traffic of entire bullock convoys travelling either by night or day, from illegally transporting rice and timber south of the border. To better control the movement of rice across the border and ensure repatriation of earnings, the Government has recently decided to institutionalize the rice trade. To that effect, seven rice export companies have been formed in different parts of the Terai. 49% of the companies' capital (10 million NRs) is controlled by mill-owners and traders, 10% by Government, and 41% by cooperatives and farmers' associations. The purpose of creating these companies is to obtain the cooperation of traders and use their expertise, and at the same time monitor their activities so as to make them compatible with national interests. It is an interesting experiment, and, although it would be hazardous to predict its immediate success, it may gradually gain in effectiveness.

1/ Most of the rice so procured was sold in the Kathmandu Valley at that price, transportation costs being subsidized. - 10 -

The Overall Payments Picture

26. The global deficit in the balance of trade (both with India and third countries) has been more than made up for by the balance on invisible receipts and official capital transfers. However, no information is available on the balance of payments with India and especially on its most crucial element - the movement of private capital. The balance of payments figures in Table 4 are therefore only an approximation.

Table 4: BALANCE OF PAYMENTS (in US$ million)

1971/72 1972/73

Balance of Trade - 24 - 52 Indian Excise Refund + 5 + 8 Official Foreign Transfers + 27 + 23 Others (services, private capital, etc.) /a + 6 + 40 Net Reserves + 14 + 19

/a Derived as a residual.

27. A large number of Gurkhas, who are pensioned off or still active in the Indian Army, remit part of their earnings which were recently substantially increased. About 20,000 Indian tourists visit Nepal every year, spending a fair amount of money. Part of the attraction for them is that through the EEE scheme Nepal is a country where luxury goods and spare parts for cars are available, in contrast to India where imports are tightly restricted. India provides Nepal with substantial assistance (an average of 100 million NRs a year, mostly on a grant basis) as does the U.S. (80 million NRs, mainly from PL480 counterpart funds accumulated in India). An appreciable part of foreign assistance (in convertible currency from countries other than India) is used for purchases in India. Not- withstanding these substantial flows of IRs, the level of Indian currency reserves decreased to such an extent that, as mentioned earlier, Nepal had to draw on its stand-by with the Reserve Bank of India. Recently the situation has improved slightly. USAID transferred some PL480 funds from India, and imports from that country decreased as the result of its inability to supply Nepal with certain types of goods, e.g., cement and steel products and some consumer goods. The Nepal Rastra Bank has been able to clear its accounts with the Reserve Bank of India. However, the level of IR reserves remains very low.

28. Invisible transactions in convertible foreign exchange are very much in Nepal's favor. In 1973/74, repayment of the public foreign debt amounted to slightly over half a million dollars. Debt service is expected to increase moderately in the future (see Appendix Table 4.2). On the receipts side, Gurkha pensions and remittances are of the order - 11 -

of $6 million a year, tourism receipts increased sharply from $6 million in 1972/73 to $9 million in 1973/74 1/, and interest on investments abroad of the reserves amounted to $8 million in 1973/74. Altogether, the balance of payments in convertible currency showed a surplus of $15 million in 1973/74. As of November 1974, official foreign exchange reserves amounted to about $139 million (out of which $26 million was in Indian rupees) or equivalent to 12 months' imports. This very comfortable position is likely to deteriorate rapidly. In December 1974, exchange reserves have already been drawn down by over $10 million.

B. Impact of World Inflation

29. Nepal, one of the least developed countries in the world, has been very hard hit by the steep rise in the price of petroleum products and also other products like cement, fertilizer and steel. What compounds the difficulty is that India has not been in a position to supply some of the items it used to deliver to Nepal. Thus Nepal has had to procure bulky commodities (such as cement) from distant countries, which entails very high transport costs.

30. Nepal has no domestic production of oil and its imports consist of refined products. Estimated consumption in 1973/74 was about 800,000 barrels: kerosene (35%), high-speed diesel (19%) and gasoline (13%). 2/ Until 1972/73, Nepal was dependent on India for most of its needs within the limits of a quota (536,000 barrels) fixed in 1970/71. Imports above this quota had to be paid for in convertible currency. Starting January 1975, India has stopped delivering petroleum products under the quota system against payment in Indian currency. According to arrangements negotiated between the two countries, Nepal delivers the crude oil it imports from a third country to India at the nearest Indian port of entry and receives an equivalent amount of refined products from the Indian re- finery at Barauni (Bihar). It is not certain, however, whether Nepal will receive the exact product mix it needs. It may have to rely on other sources for certain types of finished products (probably kerosene), adding to transportation costs. For instance a barrel of kerosene purchased in the USSR during the second half of 1974 at $11.9, cost $15.6 at the port of Calcutta, $17.9 at the Nepalese border and $20 in Kathmandu. At the present level of consumption, the additional import bill to be borne by Nepal may be of the order of $10 million a year.

1/ This figure includes gross foreign exchange earnings from Royal Nepal Airlines.

2/ Per capita yearly consumption of gasoline in Nepal is equivalent to less than 7 hours of per capita consumption in the U.S. - 12 -

31. Nepal consumed 36,800 tons of fertilizer in 1973/74 against 16,000 tons in 1969/70. Based on contracts arranged by the Agricultural Marketing Corporation (AMC), price developments have been as follows:

Table 5: PRICES OF FERTILIZERS (c.i.f. Calcutta; $ per ton)

1972/74 1973/74 1974/75 1974/75/ (selling price)

Ammonium Sulphate 56 195 220 307 Complex 106 340 355 500 Urea 129 320 404 550 Potash 77 175 198 292

/a Prices paid by farmers at selling depots. They include transportation, costs from Calcutta, administration costs, dealers' commission and 2% profit to AMC. These costs are averaged to provide for a uniform price throughout Nepal.

Assuming that consumption would be the same in 1974/75 as in 1973/74, the additional import bill compared to the prices prevailing before the autumn of 1973, would be about $7.5 million. Fertilizer consumption is expected to continue to grow, though the increase in cost may be reduced somewhat since international prices ard expected to come down from their present level.

32. Since 1971, Nepal has had difficulty in importing cement from India, and this has been a major cause of delays in implementation of projects. In 1974, India practically stopped its supplies, 1/ because among other things of its own shortages. Therefore Nepal had to look elsewhere for the supply of this bulky commodity, at a staggering cost to the economy. Nepal recently purchased 60,000 tons of cement from South Korea. The cost per ton was as follows: 2/ $38 (f.o.b. Seoul) plus $28 (freight to Calcutta) plus $6 (Calcutta port charges) plus $26 (railway freight to the border) = $98. Wholesale prices in industrialized countries vary from $20 to $30 per ton. To reach Kathmandu, trucking to Hetaura cost $7 per ton and the use of the ropeway from Hetaura to Kath- mandu $10. The cost of cement would be $115 per ton. 3/ Nepal currently

-I Except for Indian financed projects.

2/ Information provided by the Nepal Trading Ltd.

3/ Adding custom duties and sales taxes ($60), a ton of cement cost about $160 in the Terai and $175 in Kathmandu. - 13 -

needs about 120,000 tons of cement a year. If this new situation (i.e., sources of supply and prices) were to continue, it will add over $7 million to the import bill. 1/ Prices of other commodities, such as steel rods, have also increased tremendously. Altogether, it is estimated that during the last 18 months, construction costs (storage facilities, roads and buildings) have increased by no less than 60%.

33. This staggering price increase was not felt in the 1973/74 balance of payments. Fertilizers were delivered under old contracts, petroleum imports were restricted, 2/ and imports of cement drastically cut to 40,000 tons. Similarly, basic consumer goods such as soap, baby food, paper and, to a lesser extent, cotton textiles, were in very short supply as a result of India's own shortages. The overall surplus in the 1973/74 balance of payments was therefore the result of a sharp cut in essential imports. This situation is likely to change in 1974/75, following the resolve of the Government of Nepal to procure abroad commodities not available in India. If development activities are not to be curtailed, the import bill might increase by approximately an equivalent of $30 million (at 1974 prices) the full effect being felt in 1975/76. There is little hope that in the short run this jump in the import bill can be offset by increases in export earnings. World prices of jute are uncertain, and the rice surplus is sloxly dwindling. For the last 6 years or so, Nepal has had on a yearly average, a $10 million balance of payments surplus. This surplus may well turn into a $20 million deficit.

C. Possible Remedies

34. Due to its lack of economic diversification, Nepal has to import practically every single consumer and development item - apart from food and timber. Moreover, depending as it does on India for most of its imports, India's shortages have forced Nepal to import goods from distant places involving prohibitive freight and transit costs in the case of bulky commodities. Furthermore, Nepal's imports are so marginal in world trade that it is sometimes difficult to procure them at all. Dis- patch of small quantities also means higher freight rates.

1/ Assuming a c.i.f. price (1973) Nepal at $40 per ton (from India).

2/ It is estimated that current unrestricted consumption would amount to over 1 million barrels a year. - 14 -

35. In dealing with these problems, Nepal should do its utmost to again procure most of its imports from India. Compared with India's domestic production Nepal's crucial requirements are very marginal. How- ever, India is faced with extremely serious balance of payments problems and tries to maximize export earnings in convertible currency by cutting its own consumption to generate exports, as in the case of cement. Possibly Nepal could have procured more goods from India had it been willing to pay in convertible currency, admittedly as a very exceptional step. In addition, India used to supply Nepal with certain categories of development goods at Indian prices, which are much lower than international prices on account of internal subsidies. This partly explains why India was unwilling to sell to Nepal. As a matter of fact, India is currently asking Nepal to pay international prices for its imports of cement, steel products and coal. Negotiations are under way between the two countries on this subject.

36. Nepal would be much better off if it were to use its convertible currency reserves for purchases of Indian rupees (IRs). For many of the imported commodities, one dollar converted into IRs and spent in India will purchase much more than the same dollar spent in third countries. This is vividly illustrated in the case of cement. The freight cost from Seoul to Calcutta per ton, plus handling charges in Calcutta, was more than the ex-factory cost of a ton of cement in India (possibly of the order of $28-30). In addition Indian exporters of many products (such as trucks, cotton textiles, engineering goods) are entitled to substantial subsidies passed over to importers if transactions are carried out in hard currency. Nepal could therefore obtain a good price for its convertible currency converted into IRs.

37. The payment agreement between India and Nepal which provides that trade transactions will be settled in IRs, is a fair one. After all, India is importing from Nepal against rupees, commodities such as rice, oilseeds and timber which could easily be sold in convertible currency if exported in the world market. In its transactions with Nepal, India is thus saving a considerable amount of convertible currency. On the other hand, being short of IRs, Nepal should not hesitate to use its convertible currency reserves for purchases of IRs or for direct purchase of such goods which benefit from export subsidies in India, if the transaction is carried out in convertible currency.

38. A second problem facing Nepal is that of transit through India. Nepal's imports and exports with third countries transit through the port of Calcutta which is beset with recurrent technical and labor troubles. To reach Birganj (Nepal's border town) goods have to be trans-shipped at Barauni from broad gauge to meter gauge railway wagons and at Raxaul (India's border town) from meter gauge to narrow gauge wagons. These numerous trans-shipments, apart from adding to transport and handling costs, also increase handling losses and pilferage. The Government is studying the possibility of extending the meter gauge from Raxaul to Birganj, coupled with the building of storage facilities at the proposed - 15 -

new terminal which will do away with one trans-shipment. Wagons could be sealed by Indian customs at Barauni which would save time at the border. Up to 3% of import costs could be saved, not only on goods from third countries, but also on Indian goods shipped by rail. 1/ Another problem which delays shipments 2/ and increases losses is the non-availability of wagons.

39. There is little scope for Nepal to cut back on its imports. Con- sumer goods imports from India are by no means luxury items but mostly basic consumer goods. Cuts in imports of fertilizer and development goods would be damaging. Cuts in imports of petroleum products would affect the useful- ness of the existing road network already grossly under-utilized, and the implementation of development projects. Substitution of petroleum products by hydro-power can only be gradual and partial. A well conceived development of hydro-power potential would undoubtedly reduce the future growth of petroleum products imports but not its absolute amount. Imports of luxury goods can be suppressed only through the dismantling of the EEE scheme which would involve direct budget export subsidies - an alternative which merits examination. Exports to third countries are only possible at a considerable cost to Nepal. In return however, convertible currency is earned, which gives the country room for maneuver and bargaining power which can be translated into economic benefits.

40. If Nepal is to develop, a rapid growth of imports is called for. To finance imports, better use of existing foreign exchange reserves and more investment in the export sector are required. Resource allocation during the Fifth Plan period and beyond, should give high priority to the export sector, e.g. paddy, oilseeds, horticulture, wood-based industry, and hydro-power. Import substitution, especially in the case of cement, should also be carefully looked into (see Chapter IV). Development of tourism should also be carefully monitored so as to maximize the country's benefits from it.

41. In the past tourism has developed rapidly and spontaneously. The number of non-Indian tourists increased from 7,000 in 1964, to nearly 80,000 in 1974 (see Appendix Table 8.4) a growth of 30% per year. Tourism in Nepal is largely of the transit type, many of the travellers staying an average of 3 to 4 days, but trekking, involving a two to three weeks stay is gaining popularity. In 1974 there were 6,000 trekkers, whereas only 2,000 were reported a few years back. Overland tourists are also increasing in number. Tourist expenditures increased from less than $200,000 to $9 million from 1964 to 1974. The expenditure of the 20,000 Indian tourists visiting Nepal per year is not known. Major restoration work is now under

1/ About 300,000 tons of reight transit at Birganj, both by trucks and rail.

2/ Because of uncertain shipments, Nepal's jute exporters have to offer substantial discounts. - 16 - way to perserve national monuments. Tourism has helped the revival of ancient arts like wood carving, production of bronze figures and jewelry and tankha 1/ making, and it may be providing a living for approximately 10,000 families.

42. Many of the tourists visiting Nepal do so as an extension of a visit to India. The ratio of visitors to Nepal compared to visitors in India has been steadily growing from 5% in 1964 to about 18% in 1974. Foreign visitors to India (over 400,000 in 1974) represent a very significant potential for Nepal tourism requiring little promotional effort. Large potential also exists for attracting additional visitors from such places as Bangkok and Hong Kong. The lengthening of the Kathmandu airport runway is nearing completion which should ease considerably the flow of tourists and make the landing of large charter flights possible, thus increasing the possibility for a growing number of tourists to choose Nepal as a primary destination.

43. As in the past, however, the growth of tourism is likely to remain constrained chiefly by the shortage of hotel rooms in Kathmandu and the near complete lack of hotel accommodations outside the capital, with the exception of Pokhara. Nepal now has 25 classified hotels with 1700 beds (572 beds in 3 to 5 star hotels). Non-classified hotels and lodges may currently be able to accommodate 2,000 visitors 2/ per night. Plans are under way to nearly triple the number of beds in the 3 to 5 star hotels. If these plans were to be carried out on time, the number of visitors to these types of hotels could grow from 50,000 bo 125,000 before the end of the decade. In- vestment plans for non-classified hotels are not known. By and large, it seems that development prospects for tourism during the Fifth Plan period are encouraging.

44. The tourist industry in Nepal was originally built around the needs and interests of round-the-world free spending air travellers from Europe and the U.S. In the late 1960's, this type of traveller began to be outnumbered by tourists moving in large groups in "economy tours."

1/ Mythological scroll paintings.

2/ Mostly young travellers who spend several weeks touring Nepal. Their daily expenditures are small. - 17 -

This tourism is of a transit type, has a relatively high import content 1/ and is largely limited to the Kathmandu Valley. There is a need to diversify the tourist industry and spread its benefits outside Kathmandu.

45. With the improvement of road connections across Iran and Turkey, recently a steadily growing number of tourists have travelled to India overland (mostly on tour buses), a surprising percentage of whom make Nepal their final destination. Currently, overland travellers account for most of the increase in tourist arrivals. Development of this kind of tourism whose expenditure has a low import content, is constrained by the lack of facilities outside Kathmandu. There appears to be a large tourism potential if ways could be found to open up the countryside so that there are more places for tourists to visit and stay, and better facilities for them in these places.

46. The 10-year master plan for the development of tourism adopted in 1972, made practical proposals designed for this purpose, but no action has so far been taken. 2/ Among other things, the building of a chain of guest houses, both on principal roads and along principal trails commonly used by tourists could provide the basic facilities for overland tourists and also for transit tourists who could be lured away from Kathmandu and be encouraged to extend the length of their stay by a few days. A base already exists in the guest houses built by the various foreign aid missions in Nepal and turned over to HMG. Most have fallen into disrepair because of maintenance neglect and lack of operating management. With a relatively modest expenditurelfor rehabilitation and expansion, the introduction of skilled management, a central reservation system, and some intensive promotion, these could be turned into a national asset.

1/ Many air travellers stay in the 3 to 5 star Kathmandu hotels, largely built, furnished and equipped with imported materials. Food consumed in these hotels and most restaurants also has a high import content. Sugar is imported from Singapore, butter, fish, meat and even rice from India, and half the vegetable supplies are airlifted from Calcutta. A very good beer and rum are made in Nepal, but are not promoted in the best hotel, and not even sold in the second best hotel. Import substitution has been successful only in the raising of poultry and the production of eggs. 2/ The tourist industry in Nepal is largely controlled by a few travel bureaus and hotels associated with them. They have so far successfully kept the tourist, and his money, in Kathmandu and effectively under- mined all attempts to support tourist enterprises outside the valley, including Pokhara. Travel agencies prefer to sell tourists one-day charter bus tours to Pokhara rather than arrange for an overnight stay there, despite the fact that the most impressive sight is the mountains at sunrise. As a result, hotels in Pokhara have a low occupancy rate (20% in December 1974). - 18 -

47. The tourist industry in Nepal appears to be a seller's market and every attention should be given to develop it to the best interests of the country. Being short of capital, Nepal should minimize, to the extent possible, the capital cost of its new hotels, and maximize the country's earnings by reducing the import content of the industry as far as is feasible, thus increasing employment creation. It should not be imlpossible - especially in Kathmandu - to have a substantial part of the food supply gradually procured locally by organizing small producers and providing some incentives to hotels and restaurants to do so. Tourism is a dynamic and promising industry. The Master Plan provides useful guide- lines for such a policy, but they have not so far been used effectively to channel private sector initiative towards the diversification and ra- tionalization of the industry.

Conclusions

48. As a result of the change in world prices and its effect on India, Nepal is faced with an entirely new situation. The past balance of payments surplus is likely to give way to a substantial balance of payments deficit. Moreover, a cut in import capacity which could result from a possible ex- haustion of foreign exchange reserves, would upset the development effort in another way. Not unexpectedly, in a count1y where agriculture is the main economic activity, about two thirds of budget revenues depend on external transactions. Therefore, a cut in imports would drastically affect the potential for domestic resource mobilization.

49. In this connection, the recent decision (April 18, 1975) of the Nepal Rastra Bank to change drastically the interest rate structure is to be welcomed. The main features of the reform are the following: (a) savings deposit rate with the commercial banks has been raised from 6-1/2 to 8% per annum and the 2-year fixed deposit rate from 9-3/4 to 16% per annum; (b) the lending rates of commercial banks ranging from 8 to 15%, have been increased to the level of 15 to 18% per annum; (c) the interest rates on loans charged by the Agricultural Development Bank to the private sector have been raised from the level of 5-1/2 to 9-1/2% to the range of 10 to 15% per annum; and (d) the lending rate of 3 to 9% of the Nepal Indus- trial Development Corporation has been raised to the level of 10 to 16% per annum.

50. This commendable reform is expected to encourage exporters to repatriate their IRs earnings, thus helping the balance of payments, and discourage the building of speculative stocks. It should also lead to a better resource allocation by allowing interest rates to perform their function of monitoring investment opportunities offering a high rate of return, and induce investors, manufacturers and traders to make efficient use of scarce capital. Finally, it is hoped that this reform will attract private savings by offering positive interest rates on commercial banks' deposits and on bonds to be floated by financial institutions. The previous deposit rates had become negative as a result of high rate of price increase and consequently fixed and savings deposits with the banks had stagnated (see Appendix Table 6.3) and considerably decreased in real terms. - 19 -

51. A certain number of other policy decisions need to be taken to face the impact of the anticipated structural changes brought about by world inflation. A careful scrutiny of the current project selection proposed for implementation during the Fifth Plan period is necessary. It should lead, wherever feasible, to the reorientation of public investments in the export and import-substituting sectors, even if it means cutting down investments in infrastructure. Some normalization of Nepal's trade relations with India should be actively pursued; if this cannot be achieved, the economic viability of the country will, indeed, be at stake.

III. THE RESOURCE PROBLEM

52. Since 1969/70, and despite substantial foreign grants, the budget has moved some NRs 100 million deeper into deficit 1/ each year. Disburse- ment on foreign loans has increased by NRs 25 million a year. Therefore financing from domestic sources had to increase by NRs 75 million per year. This was not achieved and the bulk of the deficit has had to be financed through expansionary means.

Table 6: GOVERNMENT BUDGET (in million NRs)

1969/70 1 9 7 0 / 7 1 /a 1971/72 1972/73 1973/74 1974/75 (estimated) (budgeted)

Total Receipts 708 730 795 796 946 1297 Revenue 464 460 553 616 729 960 Foreign grants 244 271 242 180 217 337

Total expenditures 684 770 890 983 1310 1741 Regular 219 305 325 374 498 588 Development 465 465 565 609 811 1153

Surplus or Deficit t-) 24 -39 -94 -187 -363 -444

Financing Domestic (non inflation borrowing) 6 7 20 18 24 40 Foreign loans 8 33 39 47 107 244 Expansionary (-38) 0 36 121 232 160

/a During 1970/71, significant changes were made in the budget classification of expenditures. Source: Ministry of Finance Budget Speech, various issues. Figures may not add up due to rounding.

1/ Defined as budgetary revenue and foreign grants less regular and development expenditure. - 20 -

53. For many years in the past, more budgetary resources, domestic and foreign were available than could be spent (see Appendix Table 5.1). There were several reasons for this: the conservative management of public finances, limited absorptive capacity, and the pattern of external assistance. Till recently the cost of most foreign assisted projects was entirely financed by the donors including local costs, and in some instances maintenance costs, which was tantamount to revenue support. Recently, however, this situation has gradually but considerably changed. The absorptive capacity of the country has improved and the tempo of investment has increased. The increase of the country's capital stock entails rapidly growing expenditure for maintenance. The efforts of the Government to promote the development of health and educational facilities and services, involve increased spending in social sectors, to be borne by the regular and development budgets.

54. More and more aid donors have recently restricted their financial contribution to the import content of a project plus, in many instances, a part of the local costs. This development is not only due to the growing importance in total assistance of the multilateral organizations like the Asian Development Bank and the World Bank group, which as a matter of policy insist on the country's own contribution, but also the result of changes in the assistance policies of some bilateral donors (UK, Switzerland and, recently, India). The revenue support element implicit in the previous pattern of assistance has therefore to a great extent disappeared.

A. Domestic Resource Mobilization

55. The ratio of tax revenue to GDP increased significantly in the 1960's from 2.3% in 1963/64 to 4.7% in 1969/70 (see Appendix Table 5.3a). Thereafter the ratio has stabilized and remained at about 4.5% for the period from 1969/70 to 1972/73. In 1973/74, this ratio declined to 4.1% because of sharp price increases 1/ which demonstrates the lack of elasticity of certain sources of revenue. Land revenue has an elasticity of zero. The yield of those indirect taxes which are specific rather than ad valorem has also been adversely affected by inflation. However, the Government is prompt in readjusting specific rates at the beginning of each financial year to take that development into account.

56. Even if 1973/74 was not a representative year, the tax ratio achieved in the previous years appears very low in comparison with corresponding ratios (around 10%) observed in other developing countries. However, Nepal is a country where 94% of the population derives its meagre

1/ In the Kathmandu Valley, the consumer price index increased by 22% in 1973/74. This percentage may underestimate inflation for the country as a qhole because of special measures taken to keep down the price of essential goods (especially rice) in Kathmandu. - 21 -

living primarily from agriculture, a sector which contributes more than two-thirds of GDP. Most of this agriculture is of a subsistance type, with foodgrains accounting for about 90% of total acreage. Given the difficulties of taxing this kind of production, it should not come as a surprise that nearly 80% of tax revenue is derived from indirect taxation and must depend on a small base of manufacturing and trade. The taxation of the "modern" sector is probably not far behind other South Asian countries.

Taxes on Incomes and Assets

57. The share of land revenue in budget revenue has been declining during the 1960's, but still amounted to more than 10% in 1972/73 and 1973/74. 90% of land revenue is collected from the Terai which produces about 62% of agricultural output. Enforcement appears to be a problem in the Kathmandu Valley where only 40% of the land revenue was collected and arrears amounted to one and a half times one year's assessment. For the country as a whole, collection as percentage of assessment was over 80% which shows that, outside Kathmandu, enforcement has been good. There are indications that the Government intends to expedite collection of back taxes, improve regular collection and fully use its legal power, which could include confiscation of land, to discourage non-compliance.

58. The land revenue rate schedule has not been altered since 1967/68. Rates are specific and since that date, food prices have considerably increased and the real incidence of the tax has fallen sharply. The ratio of land revenue to the value df agricultural production declined from 1.5% to 1% during the 1963/64-1972/73 period. The cadastral survey has been completed in the Terai and Kathmandu. Early consideration should be given to adjusting rates there. Land revenue could be increased by 60%, from NRs 80 to NRs 130 million, if the 1967/68 ratio of land revenue to the value of agricultural production were to be reached again. The agricultural income tax introduced in 1973/74, may be difficult to administer and is not expected to bring much revenue.

59. Income tax provides the Government with less than 5% of current revenue, or 0.2% of GDP. The Tax Department estimates that between 60% to 70% of income taxes are paid by public enterprises. Incomes of most salaried workers, including Government and public enterprise employees, fall short of the exemption limits of NRs 6,000 per family. The possibility of increasing the profitability of Government enterprises should be looked into. This is largely a matter of pricing policy. Serious consideration should be given to the desirability of continuing the practice of extending incentives to almost all industries in the form of long income- tax holidays (5 to 10 years for most industries). In many cases entre- preneurs would probably have invested irrespective of this incentive, specially in the hotel industry. Such liberal incentives mean an unnec- essary loss of revenue to the Government. - 22 -

60. The revenue from the urban property tax has been small, accounting for less than 0.2% of total current revenue, because of the difficulties of tax enforcement and the existence of numerous loopholes. A substantial part of private savings is invested in residential buildings 1/ mostly for rental purposes. A recent study showed that better valuation methods and a change in the exemption limits from Rs. 50,000 to Rs. 30,000, could result in a five-fold increase in the revenue collected in the municipalities of Kath- mandu and Patan.

61. The above review of the tax potential on income and assets indicates that a substantial increase in revenue is possible. Changes in tax rates and improved inforcement would increase Government's revenues, though they are unlikely to change the resource mobilization picture dramatically, since the base is very small at present. Taxes on income and assets contribute less than 20% of total revenues. For many years to come the bulk of Government revenue will therefore continue to originate from indirect taxes.

Indirect Taxation

62. Excise duties are levied at specific rates, but regular annual adjustments have so far prevented any major loss of real revenue due to inflation. Revenue from this source rose from 0.2% of GDP in 1963/64, to 0.6% in 1970/71, but levelled off thereafter. Excise duties account for about 10% of current revenue. 75% of excise duties are levied on local cigarettes and liquor. Given the poverty of the country, there is only limited scope for increasing the rates in real terms. The major constraint, hlowever, is that excise duties in Nepal cannot be too dissimilar from the rates prevailing in India. Increased domestic production would improve revenues from this source.

63. Revenue from taxes on international trade has been about 2% of GDP or 40% of revenue during the 1966/67 to 1973/74 period. About 15% of this revenue is collected as export taxes and the balance as import taxes (Indian Excise Refund 2/ and customs duties). The import tax rates applied to basic consumer goods are moderate. Duties on luxury goods are appropriately high. A token duty of one percent is imposed on development goods. The classification of individual items is often questionable, however, particularly the wide-ranging definition of development goods. Thus the tourist industry has, within certain limits, the right to import cars, refrigerators and air conditioners as development goods. These concessions have in the recent past, reportedly given rise to unfortunate mal- practices. If it is judged that the development of the tourist industry

1/ In 1973, possibly as much as 1% of GDP was invested in residential buildings in the Kathmandu Valley alone.

2/ Excise duties paid on goods directly purchased from Indian manufacturers are refunded by India to Nepal. - 23 -

were to be seriously impaired without such concessionary treatment, which is extremely doubtful, strict control should be deployed to avoid diversion to the market. Sales tax accounts for about 13% of current revenue. Since there are very few processing industries in Nepal, it is estimated that about 90% of sales tax revenue is collected from imported goods.

64. Of non-tax revenue which accounts for about 15% of total revenue, about two thirds are also dependent on external transactions. It consists mostly of dividends paid to the Government by the Nepal Rastra Bank, as a result of its earnings on investment abroad of the foreign exchange reserves, and royalties on timber, mostly for exports. The potential for increased revenue from these sources is very limited. The too rapid exploitation of timber resources is a matter of concern for the Government which would like to slow down forest cutting to protect the future and make better use of this potential. The Rastra Bank dividends are dependent upon the level of exchange reserves and foreign interest rates.

65. It is not surprising that, given the limited diversification of the economic structure, nearly two thirds of total revenues are directly or indirectly collected on external transactions. Revenue potentials from other'tax sources are limited. For years to come dynamic exports, increasing the import capacity of the country, appear to be the main avenue towards increasing resource mobilization. Import substitution also offers consider- *able potential-provided such activities are properly taxed, directly and indirectly, and adequately priced.

B. The Financial Performance of Public Sector Enterprises

66. It is very difficult to assess accurately the performance of public enterprises since for many of them there are no published data. Of 33 public corporations already established and functioning, only 15 have published reports or balance sheets and in many cases the most recent one is for 1970/71. Additional data was obtained during interviews but a considerable gap still remains. Cumulative capital transfers (paid-in capital) from the Government to the enterprises increased from NRs 100 million in 1965 to NRs 434 million 1/ in 1973/74. About 36% of the paid-in capital was invested in the financial and banking sectors, 41% in manufacturing, 13% in trading and distribution, and the remainder among various other sub- sectors (see Appendix Table 10.1). No information is available on transfers from the budget to help in providing the working capital needs of those enterprises which require operating subsidies. Against the known investment of NRa 434 million, dividend payments have totalled about NRs 128 million up to 1973/74. 95% of these dividends are from the Nepal Rastra Bank, which makes handsome profits on its investments abroad of hard currency reserves (see Appendix Table 10.2).

1/ Source: Accountant General's office. - 24 -

67. Leaving the case of the Rastra Bank aside, the Government receives very little in return for its investments in public enterprises. Therefore the drain on the budget appears serious, specially in view of the recent increase in budget allocations to the enterprises (averaging NRs 60 million a year). 1/ The gross income of the 12 enterprises 2/ for which data are available increased from NRs 15.1 million in 1963/64 to NRs 278 million in 1970/71. Income in 1963/64 was only 2.5% of total assets, but it increased to 23.5% in 1970/71. The gross profits of the enterprises were rather low and the rate of return on assets averaged only 1.7% during the 1963/64-1971/72 period (see Appendix Table 10.3). If the banking and financial enterprises are excluded the rate of return on assets of the remaining corporations would be less than 1%.

68. Based on information the mission obtained during visits and interviews, there appear to have been improvements of late in the working of some corporations. The Janakpur Cigarette Enterprise has even become a success story. For a long time this factory had difficulty selling its products because they were not adapted to market tastes. Market research and the growing of a new variety of tobacco resulted in a modified product and increased consumer acceptance. The factory is now producing in excess of its rated capacity and is completing a self-financed expansion which will cater for the full level of domestic demand. Exporting is under consideration for a later stage of development. For years the viability of the Agricultural Tools Enterprise in Birganj has been in question. Adaptive research has been carried out and the factory has been able to achieve acceptance by consumers of some of its products (e.g., HYV paddy threshers and trailers of its own design). The factory is, however, still working at less than half its capacity. There also appears to have been some improvemenlt in the production performance of the Brick and Tiles and Shoe Factories.

69. Despite these recent improvements, the overall financial performance of the enterprises still appears very disappointing, and this is reflected by the small amounts of income tax paid by the corporations. Only six enterprises 3/ have ever paid income tax at all and the Nepal

1/ A substantial part of this allocation has admittedly benefitted development institutions whose main purpose is not necessarily profit.

2/ The 12 corporations are Nepal Rastra Bank, Nepal Bank Ltd., Rastriya Banijya Bank, Nepal Industrial Development Corporation (NIDC), Rastriya Beema Sansthan, Agricultural Development Bank, Agricultural Tools Factory, Royal Nepal Airlines Corporation, Nepal Transport Corporation, National Construction Comnpany of Nepal, National Trading Ltd., Nepal Electricity Corporation.

3/ Some of the remaining enterprises established in the last 10 years benefit from tax holidays. - 25 -

Bank Ltd. is the only corporation that has paid income tax for more than 10 years continuously. Yet total income tax collection in Nepal is so modest that these corporations 1/ account for 60 to 70% of income tax proceeds.

70. On the other hand, some enterprises contribute a considerable proportion of indirect tax revenues. In 1974/75, the Janakpur cigarette enterprise is expected to account for NRs 50 to 60 million of excise duties, or about half of total excise duties, and about NRs 20 million of duty on imported tobacco leaves. In 1974/75 Nepal Oil Corporation is expected to collect about NRs 120 million for the Government, out of which approximately NRs 100 million is in the form of import duties and Indian excise refund, or more than 30% of the Customs Department's total revenue. Nepal National Trading Ltd. also pays a large amount of custom duties and sales tax on its imports. Under these circumstances it is not surprising that some public sector enterprises regard themselves primarily as tax collectors, and pay little regard to their role as potential taxpayers.

71. The public sector enterprises appear to have had a considerable impact on Nepal's economy. 2/ Available statistics suggest that they do not optimize returns to the large capital resources made available to them in the form of paid-in capital, easy access to credit facilities, and the actual and potential monopoly positions which some of them enjoy. This relative inefficiency is due to a large number of problems and constraints, the most important of them being the lack of definition of a clear pricing policy.

72. The pricing policy pursued by public sector enterprises is extremely confusing. A simplistic generalization would be that many enterprises aim at a positive cash flow to avoid reliance on the budget for working capital. Full cost pricing is the rare exception; most prices do not include provision for capital depreciation. To the extent possible, the Government tends to avoid subsidies and prefers to resort to price manipulation. This means that when trading organizations are required to sell certain products at or below cost they make up for this loss by putting higher markups on other goods rather than by obtaining an explicit budgetary subsidy. This cross-subsidizing is encouraged inter-regionally and between commodities. National Trading Ltd. sells coarse cloth and cement, steel rods, etc., slightly below cost and covers its overhead from sales of other items. Losses on the sales of kerosene and diesel oil incurred by Nepal Oil

1/ Essentially the Nepal Bank Ltd., Rastriya Beema Sansthan, Nepal Transport Corporation, the Nepal Construction Company and National Trading Ltd.

2/ In November 1974, employment provided by 21 enterprises amounted to 16,500 or about 12% of the estimated urban labor force. - 26 -

Corporation are more or less offset by profits made on gasoline sales. The- oretically, cross-subsidizing can be considered a form of progressive taxation whereby consumers of luxury goods subsidize consumers of necessities. In practice, however, it is not always clear whether the benefits reach the right people since the rich also use the subsidized items. In some instances low prices have encouraged black markets and exports to India.

73. The public enterprises are likely to extend their role in the future, especially in the field of international transactions and internal distribution. It is, therefore, crucial that their financial performance be greatly improved. If not, the public enterprises which should be a valuable asset for Nepal's economic development, may aggravate the current drain on public savings and finally become a damaging liability to the country. There is a need to review the pricing policies of all enterprises. Revenue surpluses should be generated-not only for increasing the scope of internal financing of the enterprises' expansion programs, but also for transferring revenues to the budget. One way to achieve this goal could be to agree with each individual enterprise engaged in trading and manufacturing activities on the kind of financial performance it is expected to attain and let it fix prices directed at achieving this without outside interference. If for social reasons some prices need to be fixed below cost, losses incurred should be covered by direct budget subsidies rather than by the enterprise. In this way, the performance of an enterprise can be evaluated more accurately and the full impact of subsidies on the budget known to the Government.

C. Financial Resources Available for Investments

74. Public sector development outlays for the Fifth Plan (1975/76- 1979/80) are tentatively planned to be of the order of NRs 6.7 billion, i.e., nearly three times as high (twice as high in real terms) as during the current plan (see Appendix Table 2.3). The Plan is not ambitious in relation to the needs of the country; but it may be ambitious in relation to the likely availability of financial resources. To meet both regular and development expenditures during the Fifth Plan, the tax ratio will have to be increased by 50% to around 7% of GDP, which does not appear likely given the constraints discussed above.

75. Regular expenditures are likely to increase sharply - between 10 to 15% a year in real terms -on account of rapidly growing expenditures in social sectors, increased maintenance cost of the transportation network, and additional administrative costs that the attempt to decentralize government services will entail. On the revenue side, it is unlikely that the Government can increase the tax ratio over the Plan period by more than 1% of GDP to 5.5%. In Table 5.4 and 5.4a, an attempt has been made to estimate the resource availabilities and requirements for the Fifth Plan. The tentative assumptions on which these estimates in constant 1974/75 prices are based, are spelt out in a comprehensive note attached to these tables. - 27 -

76. It appears that the regular budget surplus may decrease rapidly over the period and be reduced to a third of its current level. 1/ Foreign assistance including grants, is assumed to reach NRs 600 million (US$60, million) a year, which compared with the past (see Appendix Table 3.6) may prove very optimistic.. Even after assuming substantial transfers of private savings to the Government and accepting reasonable - but safe - expansionary financing, the resource shortfall as a percentage of planned development outlays could possibly increase from 10% in the initial year to over 30% in the terminal year, averaging 20% for the Fifth Plan period.

77. It is unlikely that the Nepalese economy could accommodate additional deficit financing equal to the resource shortfall. In Nepal the limitations on deficit financing may be more severe than in other countries. The Nepal Rastra Bank has calculated that every NRs 100 added to the money supply creates an additional import demand from India of NRs 40. The balance of payments with India is already delicate and the reserve position very weak. The gradual phasing out of USAID PL480 rupees which served in effect as balance of payments support, will add to the pressures. Export prospects are not encouraging and the transformation of convertible currencies into Indian rupees will be limited as the impact of world economic changes will gradually decrease convertible currency reserves. Excessive deficit financing would create extreme pressure on the balance of payments with India. In order to avoid this, the magnitude of planned public sector outlays should be revised to a level compatible with the likely availability of resources.

IV. SECTORAL DEVELOPMENT PROGRAMS AND POLICIES

78. As in other countries, a good transport system is a necessary prerequisite for Nepal's economic development. It is only through improvements of this system that development projects in productive sectors can yield their full benefits. However, the rugged topography of the country poses formidable problems and has resulted in an enormous need of resources for development of the transportation sector. Past investments, especially in trunk roads, have resulted only in limited economic benefits and have not significantly increased the country's capacity to grow and save because the topography has effectively constrained their area of influence. Therefore, a balance has to be struck between potential transport needs and the use of limited resources. Nepal may already be reaching the point where it is overspending on trunk roads compared to its ability to maintain and utilize them effectively. Therefore, the country should aim at improved road maintenance and construction of short feeder roads which would open up remote

1/ During the past 5 years regular expenditure and revenue increased by 21% and 12% respectively in nominal terms per year. It is tentatively assumed that during the Fifth Plan, they would increase by 13% and 5% respectively in real terms. - 28 -

areas with some economic development potential. More attention should also be given to improvement of porter trails and building of suspension bridges and ropeways.

A. Transport

Roads

79. Nepal's road system has been expanding rapidly in recent years and will continue to do so in the years ahead because of existing commitments. It is estimated that in July 1974 there were 1,376 kms. of bitumen roads, 306 kms. of gravel roads, and 1,371 kms. of improved earth roads. This total network of 3,053 kms. excludes some 429 kms. of city streets. Approximately 300 kms. of additional highways presently under construction will be added to the system by July 1977.

80. The traffic on all-weather roads is low, as can be seen from a survey carried out by the Road Department during a week in July 1974. 1/

Table 6: AVERAGE DAILY TRAFFIC

Route Automobiles Trucks Buses Total

Kathmandu - Trisuli 58 11 4 73 Kathmandu - Hetaura 24 178 19 221 Kathmandu - Kodari 25 9 16 50 Kathmandu - Pokhara 11 18 20 49 Butwal - Pokhara 14 16 6 36 Pathlaiya - Dhalkebar 14 58 10 82

Except for the main trunk road Hetaura - Kathmandu, the volume of freight traffic is small, resulting in underutilization of the road network. The purchasing power of the Hill's area population is extremely limited and therefore fails to generate inbound traffic. South-bound traffic to the major markets is also small because the Hills as a whole do not produce significant surpluses; with the exception of empty gunny bags and seasonally a few cases of oranges, trucks return to the Terai empty. The traffic is also scarce between Kathmandu and Pokhara, the two most populous cities in the Hills, as they have little to exchange among themselves.

81. The lack of return freight adds considerably to transport costs. Considering no allowance for profits, and capital costs for trucks, the operating costs between Hetaura and Kathmandu are over NRs 5 (about 50 US cents) per truck-kilometer witiout return freight. The average cost per

1/ This count was taken in the middle of the monsoon season with lower than average traffic volumes. - 29 - ton/km. is over NRs 1. In the Terai where roads are flat, costs range around NRs 0.40 per ton/km. In addition to lack of return freight the high costs in the Hills are due to several reasons. The rugged topography and the poor conditions of the roads cause high fuel consumption and excessive wear of the tyres and the vehicle considerably reducing its service life. Operators are not adequately trained and qualified mechanics are scarce. Fuel costs are relatively high (US$0.76 per gallon of diesel) and the quality is poor, increasing fuel consumption and engine wear. Also, fuel supplies are irregular. Road cess collected at many points adds to cost. On an average trip from Birganj to Kathmandu, a distance of about 170 kms., about one hour is lost in settlement of the road cess, plus added time spent on police checks. In 1973/74 gross revenue amounted to NRs 6.5 million out of which 60% was spent on collection. We suggest the cess be discontinued and the revenue loss offset by increases in truck and bus registration fees.

82. Over the years the Road Department has increased its capacity to build and maintain roads and bridges. However, serious difficulties remain which arise mainly from managerial shortcomings, rather than lack of technical expertise. These shortcomings do not only relate to the Road Depart- ment, but result from cumbersome administrative, financial and fund sanctioning procedures, as well as from organizational practices and lack of personnel policies. Most of the Road Department's professional and skilled trade staff are assigned to externally assisted new projects. There is inadequate staff 1/ and equipment now on hand for a full-scale maintenance program.

83. Maintenance is a major problem in the road transportation sector. Many roads now in service have gone without adequate maintenance and are in danger of becoming unusable, especially in the Hills. The 1974 monsoon, particularly violent, caused an estimated NRs 50 million in damages to principal Hills roads. It appears to be impossible to repair the damage in time for the next monsoon which may well cause serious additional damage. It is probable that many Hill roads may go out of service for extended periods.

84. Nepal is now at the point where major investments must be made very soon in road maintenance, understaffed and under-funded for years. According to the Roads Department during the Fourth Plan period (1970/71 - 74/75), full normal maintenance would have required, (apart from adequate staffing) approximately NRs 70 million, whereas only NRs 39 million has been sanctioned, 2/ and not all of that was released in time for effective use.

1/ Procedures for recruiting additional staff normally take to 24 months, and often longer. 2/ This does not include the NRs 24.7 million requested for this year to repair the worst damage done by the 1974 monsoon, of which only NRs 10 million has so far been released. - 30 -

It is estimated that maintenance requirements for the coming five years will range from NRs 30 million in 1975/76 to over NRs 43 million in 1979/80. In addition, an allocation of NRs 30 million for the five yeais will be needed to overcome past maintenance deficiencies. Such maintenance costs are by no means negligible and may represent 4 to 5% of current budget revenue at the-end of the Fifth Plan. In addition there must be adequate staff, tools, and equipment combined with proper management, so as to ensure their efficient use.

85. Proper maintenance is not only required to keep existing roads in service, but also to save on investment costs of new roads. Given the present traffic, most roads are of a very high standard. The Government is determined to shift from present standards to improved earth roads. This policy is fully justified provided that these roads are built along carefully surveyed and engineered aligniments which can be upgraded as traffic warrants. Earth and gravel roads require constant and careful maintenance as small lapses in maintenance can lead to major damage, so that such construction standards must be linked to adequate maintenance capabilities.

86. Preliminary proposals for the Fifth Plan period (1975/76-1979/80) call for 30 road projects totalling 1,394 kms.,, 2 road bridge projects and 50 pedestrian bridges at an estimated cost of NRs 1,450 million (see Appendix Table 2.4). In fact, the cost of these projects if realistically priced would be no less than NRs 2,250 million. Seven of the roads totalling 742 kms. and one bridge project are already either under construction or com- mitted. In practice the Fifth Plan will continue emphasizing the building of main roads rather than of feeder roads. It is estimated that these projects will require about NRs 1,100 million during the Fifth Plan. If NRs 1,450 million is allocated by the Government to all road investment, then only NRs 350 million will remain for all other projects under consideration; these are estimated to cost about NRs 1,150 million. 1/

1/ On February 2, 1975, the People's Republic of China offered Nepal assistance in constructing the biggest road project ever undertaken in Nepal. This road, 407 kms. long, will connect the mid-eastern development center, Pokhara, with the far-western development center, Surkhet. The building of the road will be a major engineering feat because it will cross extraordinarily difficult terrain. The project will involve the building of 12 large bridges, 300 medium bridges and more than 2,500 culverts. At certain places the road will be at altitudes of more than 10,000 feet. The cost of this project is not known, but is likely to exceed $100 million. The time schedule for its completion is not known either. The first portion of the road (SyanyaBaglung) appears justified on economic grounds; of a length of 60 kms. it may cost about NRs 80 million. The remaining 350 kms. are of doubtful economic benefits. This project does not fit well into the development strategy, which aims at developing north-south axes. - 31 -

87. The Government intends to put more emphasis on the suspension bridge program. During the Fifth Plan period 50 suspension bridges are planned for construction at an approximate cost to the Government of NRs 90 million. There is little room left in the Fifth Plan for construction of additional new roads, with the remaining NRs 260 million or equivalent per- Laps to less than 100 kms. There is even the possibility that more accurate cost estimates will show that the existing road building commitments, plus suspension bridges, will absorb all planned allocations. The Government appears aware of this situation and therefore is prepared to bring about appropriate adjustments in the Plan. Even so, the process may be hard because expectations are high for a rapid expansion of the road network.

88. The realignment of the tortuous Kathmandu-Hetaura road has for long been a matter of discussion among government officials. It would involve the construction of two tunnels (one of 3 kms.) and 18 steel viaducts at an unknown cost (between $100 to $200 million). Tiis realignment would shorten the route to Hetaura by 80 kms. in addition to providing a two lane road with greatly improved design. Attractive as it may be, this project is obviously more ambitious than the country can afford, especially at this point in time when resources are so limited and critical demands are arising in other sectors of the economy. The project would solely benefit the Kathmandu Valley by cutting transportation costs. Therefore, it is recommended that it be delayed until such time as adequate resources can be made available without harming the rest of the country. However, since Kathmandu is Nepal's largest economic center with increasing transport needs, some attention should be directed to improvement of the existing Kathmandu- Hetaura road so it can accommodate the Valley's needs for another 10 to 20 years. This can be done with some minor improvements to the road at a possible cost of NRs 30 million.

Air Transport

89. There was large expansion in air transport facilities during the 1964-1975 period. The 1964 inventory listed 29 airports which included only 3 all-weather fields. The 1975 inventory contains one international jet-port, 5 all-weather airports and 45 short take-off and landing (STOL) fields. Nepal's aircraft has also increased in number and sophistication. Extension of the air transport network has played a crucial role as it has provided the only communication between the Hill areas, which were remote for centuries, and the center of government in Kathmandu. The political, administrative, economic and social developments achieved in those parts of the country far from Kathmandu, owe much to the air transport services which made it possible. Initially it was essential that air transport expand rapidly to fill the communication gap resulting from the long time required for Gver-land travel. Therefore, the past development of aviation has been a success story. At the same time, considerable improvement took place in the management of the national airline, Royal Nepal Airlines (RNAC). For the first time RNAC started to show profits in 1973/74, a commendable achievement by international standards, thanks mostly to an extremely high utilization of the jet aircraft on international routes. - 32 -

90. At the present level of traffic there seems to be little need for additional investments except for improvement and extension of the Kathmandu airport. Preliminary proposals prepared by the Department of Civil Aviation call for a rather ambitious plan.

Table 7: PRELIMINARY PROPOSALS FOR AIR TRANSPORT DEVELOPMENT DURING THE FIFTH PLAN (in NRs million)

Expansion and improvement of Kathmandu Airport 132 New airports at Pokhara, Nepalganj, Surkhet and Dhangarhi 113 Construction of ten new STOL fields 17 Others 41

Total 303

The highest cost is for Tribuvhan Airport in Kathmandu where work has begun with considerable assistance from the Asian Development Bank, and needs to be finished promptly. The cost of the Kathmandu project could be reduced by constructing a simple and less costly terminal building. It should be designed to be functional, with a minimum of mechanical cargo handling equipment, and constructed in stages as traffic needs develop.

91. Out of the 4 airports scheduled for modernization or reconstruction, there is little economic justification for two of them (Surkhet and Dhangarhi) beyond some irnprovement in drainage. Pokhara is a tourist center linked to Kathmandu by a road; the current air traffic is low with only two flights a day. The present runway could accommodate more than that, consistent with an expected growing flow of tourists. However, air safety may be a problem. The runway at the present airport has a not entirely safe approach from the south at times of limited visibility, and somewhat hazardous prevailing cross-winds most of the year. For safety reasons the building of a new airport may eventually be warranted. If so, a 5,000 foot runway should be more than adequate for the time being and there is no need for an elaborate or expensive terminal building. Nepalganj is the operating center for all western Nepal and the need for a new airport should be studied. The runway at present runs north-south and has dangerous prevailing cross winds seven months of the year. The site is poorly located for the drainage necessary to permit operation during the monsoon season.

92. With the STOL fields already constructed plus the reliable heli- copter services now available, the problem of access to remote areas for political and administrative purposes is now well in hand, and the need for more STOL fields is not at all evident. The proposed investment program of NRs 303 million appears too high and may lead to overcapitalization, to the extent the planned network is very unlikely to be effectively used. The investment program can be cut to around NRs 200 million while meeting the most immediate needs of this sub-sector. - 33 -

Railways

93. There are two narrow gauge (750 mm) railways in Nepal, both located in the Terai. The Nepal Railway from Raxaul in India, to Birganj is 10 kms. long. The Janakpur Railway from Jaynagar in India, to Janakpur and Bizulpura is 53 kms. long. In addition, there is 35 kms. of narrow gauge track from Kosi in India to Chaitra in Nepal which was built to haul construction materials during the construction of the Kosi barrage; this track is not being used. Both the Nepal and the Janakpur railways have had very few capital improvements made since the lines were first built in 1938 and 1928 respectively, and maintenance has been minimal. As a result both investments have been depleted and are nearing the end of their useful life. Both railways are operated on a sunk investment basis without concern for interest and investment, return on capital, or even generation of replacement capital for fast wearing items such as wheel sets. On this basis, both lines generate a positive cash flow estimated at about NRs 20,000 in 1972/73, for the Nepal railway, and NRs 708,850 for the Janakpur railway.

94. The Janakpur railway caters principally to a growing number of pilgrims from India (over 1 million in 1973/74) annually visiting the shrines in Janakpur to Lord Ram. The useful life of the railways' property is so far gone that appropriate new investments must be planned for its future if it is not to be forced to close by the depletion of its assets. The Nepal railways, vital to the northern movement of goods from the Indian to the Nepalese border, is in urgent need of modernization. The draft Fifth Plan currently carries a NRs 10 million proposal for the construction of a new meter gauge railway from Raxaul to Birganj.

95. This project should not only include the construction of the line from Raxaul to Birganj but also of a freight terminal which is a key element in the scheme and should be designed to include platforms and godowns suitable for an efficient rail-truck transfer with integral facilities for customs formalities. There should also be facilities for handling and storing ;on- tainers, for direct rail-truck transfers of bulk commodities such as coal and limestone, and for packing of empty wagons and trucks. In addition, there should be a separate petroleum terminal capable of accepting tank wagons, storage tanks for petrol, HS diesel, kerosene, etc., a truck loading terminal, and necessary filters, transfer pumps, etc., for the pipeline to the Nepal Oil Corporation depot at Amlekhganj.

Ropeways

96. The rugged and difficult terrain of Nepal opens possibilities for using less common means of transport such as ropeways. Ropeways were, and are, still successfully used in difficult mountainous areas in Europe and South America. Although they only serve terminal or station areas and provide no direct benefits to intermediate points, they are often used in mountainous terrain to cross difficult topography where service to intermediate points between stations is of minor importance. The use of ropeways - 34 - has so far been explored to only a limited extent in Nepal. However, the Government and the UNDP are about to start a Remote Areas Ropeways Feasibil- ity Study which will investigate the technical and economic feasibility of connecting three remote areas by means of a simple, long-distance mono- cable ropeway. Extensive use of ropeways in Nepal may prove to be well adjusted to the country's geography, but extensive studies are needed to determine whether building of ropeways is economically justified compared with other transport alternatives. Tentatively we estimate that the capital cost of one kilometer of a simple ropeway may be less than a fourth of one kilometer of roads. Moreover in Hill areas a road would, on the average, require 100% more travel distance, than a ropeway.

97. The only ropeway in existence is a bi-cable track linking Hetaura to the heart of Kathmandu (42 kms.). It was installed in 1963 with financial assistance from USAID, but encountered some financial difficulties because of keen competition by the truckers. By late 1970, due to lack of maintenance, the ropeway was in danger of an imminent and permanent shut down and the Government decided after careful study, to authorize a major rehabilitation project. A grant of NRs 4.6 million was provided, including NRs 1.2 million in convertible currency. By the end of 1974, the rehabilitation, entirely carried out by Nepalese engineers, was almost complete. Freight rates have been adjusted to reflect current costs and plans are being made for a continuing preventive maintenance program designed to keep the property in good operating condition at all times. The cost of transporting one ton of cargo by ropeways is nearly half that of road transport. In addition each ton of cargo carried on the ropeway (which uses hydropower) instead of by road, saves approximately 30 liters of fuel.

98. The annual capacity of the ropeway is 70,000 tons, while the break even point at the current tariff is around 40,000 tons. The Ministry of Transport targeted 1974/75 operations to carry 55,000 tons. It may prove to be too optimistic. Making maximum use of the ropeways will require changes in the present national practice of procurement and storage so more traffic can move in what have been traditionally slack periods. These changes will require direct action by the Government and several large government corporations such as National Trading and the Agricultural Inputs Corporation. In particular, the need is to have more traffic available for movement in October which is normally slack because of Nepalese holidays, and during the June-September monsoon period. Accom- plishing this will require the construction of more godown facilities, and the purchases of better ropeway carrier waterproof covers. The Govern- ment is considering an extension of the ropeway from its present terminal in Hetaura to Birganj (45 kms). The main objective is to save on the use of petroleum. A feasibility study is being currently undertaken by an Indian consulting firm. - 35 -

B. Agriculture

99. The basic strategy of the Fifth Plan towards agriculture is to balance growth with income distribution and provide more regional development. -This strategy is being translated into the concept of corridor development to integrate the Terai with the Hills. Complementary opportunities in the Hills (surplus manpower, potential for horticulture and livestock) and in the Terai (surplus food, source of consumer goods and access to Indian markets) require closer integration. The improvement of communication along the north-south axis is important to achieve that goal. Developing land settlements in the Terai would contribute to Hill development as most of the beneficiaries are Hill people. Besides, Terai agricultural development would also contribute to employment of the large number of winter migrants from the Hills and enable part of Terai's food surpluses to reach the Hills through them.

100. The objectives of the Fifth Plan are to achieve a growth rate of 3.5% in agriculture, i.e. double that of the past. Given the predominant share of agriculture in GDP, such a rate of growth, if attained, would have a very positive impact on the rest of the economy. This sectoral priority is reflected in the allocation tentatively set at about NRs 2 billion (or 30% of public outlays) for agriculture and forestry. It remains to be seen whether this allocation will actually be spent; in real terms it would be nearly three times as much as was spent during the previous Plan. It is indeed easier to spend money on road building or in social sectors, than on complex agricultural projects involving multi-disciplinary coordination. In addition, administrative and technical skills are less abundant in agricultural related fields than in other sectors. Many project ideas have been proposed but very few projects are in an advanced stage of preparation; 1/ nor is it evident that many aid donors outside multilateral agencies will be ready to come forward with substantial financial assistance for agricultural projects. If the most recent policy of bi-lateral donors is any guide, it seems that they prefer to assist agricultural projects which have a large technical assistance but rather modest financial component. Nepal may, therefore, experience difficulties in fulfilling its investment and growth targets in agriculture.

101. Development projects in the Hills are likely to be difficult. The average holding per family is so small (0.4 ha.) that very intensive

1/ An Agricultural T.ojects Services Center (APROSC) has been created to prepare projects which hopefully will help to mitigate this gap. APROSC has been established with participation from the Government, the Rastra Bank, the Agriculture Development Bank and commercial banks. The Center has a subscribed capital of NRs 10 million, out of which NRs 2.5 million is paid up. Rastra Bank's share is 51%. Technical assistance will also be provided by UNDP to improve the Ministry of Food and Agriculture's capacity for project preparation. - 36 -

methods of cultivation are the rule. Informal irrigation systems are also well developed. Yet, most of the Hill districts are globally deficit areas in foodstuffs; within a district, many families would not survive without temporary or permanent migration to the Terai or India. Before considering specialization in horticulture, increased productivity of food crops should first be achieved and this appears possible in many instances by bringing about improvements pertaining to irrigation, management of forests for fuel- wood and pastures, communal pastures, livestock, improved seeds, cottage industries, etc. The main assets for this kind of project are the farmers themselves. Nepal's farmers are acutely aware of their problems, especially the tragedy of erosion. They need an external impulse, a cata- lyst, and are expected to accept a kind of communal organization imply- ing some social discipline, provided that it offers an answer to their perception of the problems. 1/

102. In some areas because of tradition or less pressure on marginal lands, some projects aimed at specialization are already feasible and should be vigoroulsy pursued. Export market prospects are encouraging. Nepal has a seasonal advantage which permits various fruits and vegetables to be produced and marketed fresh in India. In 1973/74, between July and September when there is little local production, India imported about 10,000 tons of grapes (about US$3 million) by air from Afghanistan. Nepal has a suitable climate to compete successfully in this market. It also has promising export market prospects for a number of labor-intensive crops such as oak mushrooms (for export to Japan), raisins, 2/ ginger and orange oil. Processing of these crops would necessitate the establishment of a few simple, modern plants. Development of horticulture on commercial lines would require modernization of nurseries, the setting up of an effective horticultural extension service employing well-trained specialists, and the development of collecting, packaging and storage facilities.

103. In the short run, increased production for the purpose of generating export surpluses will come, however, primarily from development projects located in the Terai. Production potentials appear excellent in that region - paddy, oilseeds, sugarcane, cotton and tobacco. 3/ Surface and ground- water resources are very substantial and their development could allow more

1/ It seems particularly true in the case of the use of forests. Farmers know that by ising forest resources indiscriminately they are eating away their capital in an irreversible manner. It appears that each village community would be ready to discipline itself in that respect provided that neighboring villages cooperate accordingly. 2/ In 1973/74, India imported from Afghanistan about 11,000 tons of raisins, about US$8 million. 3/ Tobacco leaves produced in Nepal have a low nicotine content and could probably find markets abroad. The possibility of extending export in- ceat:ives to that commodity should be investigated. - 37 -

double cropping. In addition, over 300,000 ha. of flat forests can be reclaimed for cultivation. To develop this potential, the further improvement of the input delivery system and the strengthening of extension services 1/ are called for. However, two problems remain: a considerable part of the Terai surpluses are smuggled out of the country, entailing a loss to the budget (export duties and income tax), and an appreciable part of the earnings accruing to traders is kept in India and therefore not reinvested in Nepal. While better control of the border may improve the situation, a different pricing policy may constitute the most effective answer. A few years ago and in order to encourage the consumption of fertilizers, the Nepalese Government fixed fertilizer prices at a level much lower than those in India. The outcome of this policy was illegal exports to India. This experience has been assimilated, and it is now the Government's policy to fix prices of fertilizers at a level similar to those in India. What hap- pened to fertilizers in the past is now happening to agricultural products.

104. When a small country with a long border with a much larger country, endeavors to maintain internal prices considerably lower than its neighbor's, there is a net outflow in the direction of the higher prices. Thus a small country can find itself being bled by having its internal supplies slip across the border. Last year in Nepal there were abnormally large leakage:s into India, primarily of agricultural products, in part because of the Government's policy of keeping internal prices low. Sugar was imported from third countries but much of it found its way into the hands of Indian merchants who purchased it in Nepal at a price slightly higher than the controlled price. The profits from resale at a still higher price in India were of course kept in that country. A ban on vegetable oils exports to India was imposed to prevent leakages, but it proved ineffective. The Government had to resort to imports from third countries, which again found their way to India. Vegetable oils were among the scarcest commodities in Nepal last year, although local production was much greater than internal market needs. This policy amounted to subsidization of exports to India. Measures taken in April 1975 seem to indicate that the Government is gradu-lly phasing out this policy. At the same time, subsidies on rice and sugar for the benefit of the Kathmandu consumers have been almost entirely rescinded. Apart from its budgetary impact, the continuation of a subsidization policy by the Government marketing agency may have had an adverse effect on production. Kathmandu farmers who utilize 60% of the fertilizer consumed in the country may soon have found the use of fertilizer unprofitable because of its increased price. This new course of action on pricing should be welcomed.

1/ One of the main purposes of institutional development should be promotion of the use of better cultivation methods. Fertilizer consumption in the Terai is, for instance, remarkably low. - 38 -

C. Industry and Power

Industry

105. While growth in the manufacturing sector has been encouraging the sector remains small. National income statistics indicate an increase in the contribution of the sector to GDP from 1.4% in 1965/66 to about 3% in 1973/74, reflecting a growth rate much higher than that of total GDP. With the on-going construction of new capacities, industrial production is expected to continue to grow, albeit at a moderate pace. Industry in Nepal is still at an incipient stage. Ambitious plans for industrial de- development have been drawn up in the past but have remained largely un- implemented. However, actual achievements are not discouraging taking into account the difficulties encountered;

106. The Government itself has played a leading role. It started a number of fairly large factories, many of which were foreign assisted turn- key projects. 1/ The Government constructed some industrial estates at Patan (Indian aid) and Balaju (US aid) in the Kathmandu area, and Hetaura (US aid) on the Kathmandu-Birganj axis. More are under construction (Nepalganj, Dharan) or being planned (Pokhara, Butwal). The private sector has moved somewhat slowly but into a fairly wide range of activities. The role of the private sector has been limited in part by government's reluctance to use the entrepreneurship, managerial and marketing know-how available in India, for fear of an excessive control of the industry by Indian nationals.

107. There are many handicaps to industrial development in Nepal. The constraints with regard to markets are severe. The internal market is not only very small because of low incomes and the low degree of urbanization, but also very fragmented. The mountainous topography results in physical barriers which divide an already small market into many parts that are not linked together by the transport system. This results in a serious problem of efficient scale of production and puts Nepalese industries at a dis- advantage with Indian competitors, who enjoy an internal market large enough to allow economies of scale, and have comparatively good marketing arrangements backed by adequate financing. Moreover, the open border with India makes it difficult to cut off competing Indian imports, particularly for the Terai market. Furthermore, dependence on India, (which itself suffers from many shortages and transportation bottlenecks) for many basic raw materials and intermediate products and for equipment which is often of indifferent quality, adds to the costs and problems of industry in Nepal.

108. There is, however, some scope for private initiative in the small scale sector. Already the private sector has moved in a modest way into food processing, textiles, leather and wood-based industries. There are

1/ Bricks and tiles, leather and shoes (both from China); cigarettes, agricultural tools, sugar (USSR); sawmill (USA); dairy and metal workshop (Switzerland). - 39 -

also soap, plastic and straw board factories and some animal feed plants. In the metal sector, there is a steel re-rolling mill which also makes galvanized buckets, and several workshops making a range of steel products. Nonetheless because of the constraints mentioned above, it is to be expected that future industrial development in the large scale sector will be largely the responsibility of the public sector.

109. Among the most serious gaps in the present productive structure is cement. Given the prohibitive transportation costs, steps should be taken to explore the feasibility of a c'rment plant. The cement plant in Kathmandu has been under construction for the last eight years and is practically completed. It is, however, beset with difficulties. Even if in the future this plant is able to work near its capacity (40,000 tons a year) there is room for another plant (preferably in the Terai). Current consumption of cement is about 120,000 tons a year. Plywood has an excellent internal and export market. Local consumption is estimated at 400,000 square meters per year. A small plant of a capacity of 450,000 square meters on a one shift basis has been completed in Butwal 1/. However, this plant has also had numerous problems, especially the extreme difficulty in obtaining the right type of timber. The supply problems point to inadequate marketing arrangements, which prevent timber being used to the country's best interests. As long as no better solution is found, the potential development of an efficient plywood industry will be impaired. The establishment'of a cotton textile industry has long been considered; but the supply of raw cotton is the problem. The country does not produce raw cotton, although cotton could be grown in Nepal. As long as the supply problem remains so uncertain, the decision to go ahead with investment in the cotton industry should be carefully weighed. In the past, a number of abortive attempts were made to launch textile production.

110. There are a certain number of medium-size industries (large in Nepal's context) mostly in the public sector which are far from working to their full capacity. Therefore with some exceptions the first priority should be to improve the operation of the existing units rather than adding new capacities which would strain the limited availability of investment resources and managerial capacity. Small scale import-substituting activities offer more scope for development since they can be located near the market giving them a competitive edge over Indian products. More efforts should also be made to help cottage industries which suffer from input shortages, e.g., wool. With the administrative decentralization now being implemented, it should be possible for the district authorities to deal with this matter.

111. Since the late fifties the Government has given legislative and institutional support to the development of industry. The new Industrial Enterprises Act of 1974, sets out the policies and procedures on industrial development. The aims of the Act are to encourage industrial production and productivity, increase industrial employment, mobilize local capital,

1/ Built in cooperation with United Church Mission (66% of capital) and NIDC. - 40 - techniques and resources, achieve self-sufficiency in essential consumer goods and some construction materials, reduce regional economic disparity, and improve the balance of payments by export promotion and import substitution. To achieve these ends, the Government will make available concessions on tax, custom duty and interest rate, and provide other facilities designed to make investment in industry more attractive than investment in trade or urban land owning. Additional concessions will be provided for investment in backward regions.

112. The new Act also specifies the respective roles to be played in the industrialization process by the State, the domestic private sector, and foreign investors. All new investment in the defense and power industries will be in the Government sector. New enterprises in iron and steel, chemicals, and cement industries and in some essential consumer goods such as cotton textiles, may have private participation up to a maximum of 49%. In other sectors, private participation may reach 100%. Rural, cottage and small-scale enterprises may only be established if wholly owned by Nepalese nationals. Medium scale enterprises (investment of over NRs 1.0 million up to NRs 5.0 million) may be established by both Nepalese nationals and non-nationals, but priority will be given to those with a higher percentage of investment by nationals. Equal opportunity for both nationals and foreigners will be given for the establishment of large scale enterprises.

113. The general thrust of the Act appears to be in the right direction, but suffers from a number of unfortunate biases: it favors capital-intensity (low interest rates, free import of machinery, legal minimum wage) and import intensity (low tariffs on imported inputs). The new interest rate structure introduced in April 1975 is removing somne of these biases.

Power

114. There is no breakdown in the Plan of public sector expenditures for power, since investment in industry and power are lumped together. The proposed expenditure for thae two sectors is over NRs 1,330 million, or about 20% of total public sector investment. The development of the hydro- electric potential appears to be a key asset for Nepal especially in view of the country's need to earn Indian rupees. North Eastern India is short of energy and is likely to remain so in the foreseeable future constituting a promising export market for Nepal hydro-power potential surplus. Far and away the most important project proposal is for the Karnali project (installed capacity of 1,800 MW). Wlile it may well be a sound project, its size and, therefore, its cost (possibly near $1 billion) makes its implementation a remote possibility. Rather than trying to find financing for such a huge project, efforts should be concentrated on identifying small or medium size hydro-projects for which external financing requirements can realistically be expected to be found. - 41 -

D. Social Sectors

115. Past planning efforts have been directed towards the building of a basic transport infrastructure while limited productive and social investments have gone to a few privileged parts of the country. Much of the country is still untouched by these development efforts. In order to spread the message of development to a majority of people, expenditure on the social sectors has come to be regarded as the answer. As a result, public sector allocations for these sectors in the Fifth Plan have greatly increased and now represent 23% of total expenditure, as against 15% during the preceeding Plan. In real terms it means more than a three-fold increase. Out of an allocation of slightly less than NRs 1,500 million, NRs 500 million are to be invested in education, NRs 450 million in health, and NRs 250 million in supplying drinking water.

116. The main health problems in Nepal are the high infant and child mortality and the resurgence of malaria. Empirical observations suggest an infant mortality rate as high as 200 to 300 per 1,000 live births. In addition, mortality of children in the 2-5 year age group is very high: the National Hlealth Survey found that 56% of all deaths involved children under 5. Life expectancy at birth is probably between 40 to 50 years. A joint WHO/USAID Situation Analysis team has recently reported an alarming increase in cases of malaria in the Terai from 2,500 in 1971 to 14,000 in 1974. This resurgence of malaria is the result of administrative complacency, failure of logistic support and non-availability of insecticides, spraying equipment and drugs. There is every indication that unless stringent (and very expensive) measures are taken, this situation will deteriorate rapidly. Such a development would affect adversely production activities and tourism. WHO estimates that US$10 million in foreign exchange is needed during the Fifth Plan period if sufficient insecticides and drugs are to be made available.

117. Health services in Nepal are inadequate and very unevenly distributed. In 1972, the Kingdom has only about 320 doctors (one per 40,000 people). About a third of these practice in the Kathmandu Valley, where about 4% of the country's population live. Half the hospital beds (2,000 for the country) are located in the Kathmandu Valley. In its efforts to extend and improve medical services the Government is relying increasingly upon a still embryonic paramedical corps. In 1971 there were only 158 graduate nurses, 233 auxiliary nurse mid-wives and 405 auxiliary health workers. Popula- tion control has been recognized as vital by the Government, which is conscious that unless the health network is extended, concrete results are unlikely to materialize. Closely linked to health improvement is the development of safe water supplies. At present about 7% of the population has access to piped water; with the investment contemplated for the Fifth Plan it is expected that this percentage will increase to 12% at the end of the Plan period. - 42 -

118. Despite major progress in education, 1/ until recently most improvements were quantitative. The education system is suffering from poor standards and inappropriate content. Higher education has increased rapidly with the usual heavy emphasis on arts and low emphasis on technical or vocational education. The new educational plan introduced in 1971 is an original and ambitious one. 2/ It aims at greater opportunities for all and at increasing the number of technicians in Nepal by introducing vocational education at all educational levels. The Plan has still to pass the test of implementation. The main problem remains the limited availability of trained teachers.

119. The needs of the social sectors are obvious. Their development is a prerequisite to economic development. Yet there are severe financial constraints. Even if the proposed investment program were within the means of the country, the regular expenditures entailed will badly strain government's budget. Regular expenditure for health will nearly double to NRs 120 million in 1979/80 as compared to 1974/75. Similarly if the education plan is implemented as scheduled, the increase in regular expenditure would be staggering. Whereas, most teacher's salaries at the primary and secondary levels until recently were paid by the children's parents, it will be to a large extent charged to the budget. According to the Planning Commission, salaries for primary and secondary school teachers could amount to NRs 160- 180 million at the end of the Fifth Plan. Although this additional expenditure would only represent about 1% of GDP, which by international standards is not excessive, yet in Nepal's context, it would represent nearly 20% of expected government revenues.

1/ A UNESCO Education Sector Survey M4ission visited Nepal in November/ December 1974. Its report is expected in May 1975.

21 See IBRD Report No. 125-NEP, Economic Situation and Prospects of Nepal, April 13, 1973. STATISTICAL APPENDIX

Table No.

I. POPULATION

1.1 Population Estimates

II. NATIONAL ACCOUNTS

2.1 Total Agriculture and Non-Agriculture GDP at Current and Constant Prices 2.2 Gross Domestic Product of Nepal at Current Market Prices 2.3 Past and Proposed Public Sector Expenditures 2.4 Road Projects for the Fifth Plan

III. THE EXTERNAL SECTOR

3.1 Receipts and Payments of Convertible Foreign Exchange 3.2 Composition of Recorded Exports 3.3 Composition of Recorded Imports 3.4 Commodity Composition of Trade with Countries other than India 3.5 External Reserves 3.6 Foreign Aid Received

IV. EXTERNAL DEBT

4.1 External Public Debt Outstanding as of December 31, 1973 4.2 External Public Debt as of December 31, 1973

V. PUBLIC FINANCE

5.1 Central Government Budgetary Performance 5.2 Budgetary Expenditure of the Central Government 5.2a Budgetary Expenditure of the Central Goverrnment as Percent of GDP 5.2b Composition of Central Government Budgetary Expenditure 5.3 Budgetary Revenue of Central Government 5.3a Budgetary Revenue of Central Government as Percent of GDP 5.3b Composition of Central Government Current Revenue 5.4 Estimated Resource Availability and Requirement for the Fifth Plan 5.4a Estimated Resource Availability and Requirement for the Fifth Plan as Percent of GDP

VI. MONETARY STATISTICS

6.1 Monetary Survey 6.2 Assets and Liabilities of Commercial Banks 6.3 Fixed and Savings Deposits and Credit Operations of the Commercial Banks 6.4 Agricultural Development Bank Resources and Utilization of Funds 6.5 Industrial Development Corporation Resources and Utilization of Funds Table No.

VII. AGRICULTURAL STATISTICS

7.1 Area, Production and Yields and Growth Rates for Major Crops 7.2 Estimates of Livestock Population, 1966/7 - 1969/70 7.3 Estimates of Livestock Production 7.4 Supply and Use of Selected Agricultural Inputs

VIII. STATISTICS ON OTHER SECTORS

8.1 Production of Principal Industries 8.2 NIDC Outstanding Financial Assistance 8.3 Nepal Highway Network 8.4 Tourist Trade

IX. PRICES

9.1 Changes in Kathmandu Consumer Price Index

X. PUBLIC CORPORATION4S

10.1 Financial Investment of Central Govermnent 10.2 Dividend Receipts of Central Govermnent 10.3 Public Sector Corporations: Rate of Return on Assets Table 1.1: POPUIATION ESTIMATES

Average Census Po Rlation Annual Growthe ('000)

1911 5,639

1920 5,574 -0.1

1930 5,533 -0.1

1941 6),A4 +1.2

1952-54 8,257 +2.3

1961 9,I4.3 +1.6

1971 11, 556 +2.07

Source: Central Bureau of Statistics, 1974. Table 2.1: TOTAL AGRICULTURE AND NON-AGRICULTURE GDP AT CURRENT AND CONSTANT PRICES

(Million of Rs)

At Current Market Price At 1964/65 Price Share of Year Agriculture Non-Agriculture Total Agriculture Non-Agriculture Total Agriculture

1964/65 3,654 1,948 5,602 3,654 1,948 5,602 65

1965/66 4,794 2,113 6,907 44,082 1,912 5,994 68 1966/67 X4,292 2,123 6,415 3,914 1,992 5,906 66 1967/68 4,883 2,291 7,174 3,935 2,008 5,943 67

1968/69 5,357 2,629 7,986 4,053 2,155 6,208 65 1969/70 5,927 2,869 8,796 4,193 2,193 6,386 66 1970/71 6,040 3,037 9,077 4,219 2,163 6,382 67

1971/72 7,095 3,304 10,399 4,250 2,261 6,511 65 1972/73 7,704 3,556 11,260 4,294 2,347 6,641 65 1/ 1973/74 n.a. n.a. 13,512 n.a. n.a. 7,172 n.a.

!/ Mission's Tentative Estimates.

Source: Central Bureau of Statistics, 1974. Table 2.2: GROSS DOMESTIC PRODUCT OF NEPAL - AT CURRENT MARKET PRICE

(Million of Rs)

Sector 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73

Agriculture 3,654 4,794 4,292 4,883 5,357 5,927 6,040 7,095 7,704

Mining 1 2 1 1 5 4 1 2 3

Manufacturing 83 98 104 137 212 195 215 285 312

Construction 123 108 118 134 144 192 213 149 153 Transport and Communications 91 93 102- 120 141 192- 234 285 347 Cottage Industry 365 479 429 488 536 593 604 710 770 Financial Insti- tutions 69 80 82 87 106 128 139 145 163 Ownership of Dwelling 654 669 683 698 714 729 745 762 779 Public Adamn. and Defense 82 101 143 154 166 199 215 230 228

Electricity 4 5 8 10 16 18 20 23 29 Wholesale and Retail Trade 306 301 249 243 354 363 372 381 390

Services 170 177 204 219 235 256 279 332 382

Total: 5,602 6,907 6,415 7,174 7,986 8,796 9,077 12a99 11,260

Source: Central Bureau of Statistics, 1974. 'fable 2.3: PAST AND PROPOSED PUBLIC SECTOR EXPENDITURES

Third Plan (1965/66-69/70)- Fourth Plan (1970/71/74/75)- Fifth Plan (1975/76-79/80) Million of Rs in % MIillicn of Rs in % Million of0Rs in %

Transport anr Communications 873 49 1050 41 1869 28

Agriculture and Rural Development 397 22 662 26 2003 30

Industry and Power 86 5 470 18 1335 20

Social Services 239 13 352 15 1467 22

Unallocated 205 11 14 1 - -

Total 1779 100 2548 100 6674 100

a Actuals b/ Planned

Source: Planning Commission. Table 2.4: ROAID PROJ CTS FOR TH_ FIFTH PLAN

Total Financial Allocaition Amount allo- Cost By end Sixth and Total cated for the (Mission of Fourth Fifth S'absequent Financial -roject loen th Surface Fifth Plan Estimate) Plan Plan Plans Sup t (k1s.) (Million of R) (H1iJnnI i °O Rs) 'xisting Commitments

Mahendra Raj Marj. (MRM) - Hetaura - Naryangarth 80 Pitch 130.0 250.0 100.0 130.0 20.0 ADB - Buthwal - Kohalpur 251 Pitch 200.0 44°o° lihO.0 300.0 - India

Dharan - Dhankuta 58 Gravel 117.5 192.5 12.5 180.0 - U.K.

Lomosangu - Jiri 105 Gravel 80.2 150.1 0.1 130.0 20.0 Swiss

MURM - Surkhet 84 Gravel 110.0 270.0 50-0 220.0 - Nepal

Dhangarhi - Dandeldhura 14O Gravel 90.0 222.8 132.8 90.0 - USAid

KTM Ring Road 24 Pitch 18.0 50.0 32.0 18.0 - China

Pokhara - Surkhet (Syanja- Baglung) 60 Earth 80.0 80.0 - 80.0 - China

Kamla Bridge - - 17.0 30.0 5.0 25.9 - India

802 842.7 1,685.4 472.4 1,173.0 40.0

Other proposed road projects a/ 592 527.3 983.0 - 983.0 -

Suspension bridges (50) _ 80.0 90.0 _ 90.0 _

Total 1,394 1,450.0 2,758. 4 472.4 2,2U6.00 h.4D

a/ Based on preliminary Roads Departmunt Proposals. The, are feeder roads and ten'tatively asswnued to be completed during the Plan period. Table 3.1: RECEIPTS AND PAYMENTS OF CONVERTIBLE FOREIGN EXCHANGE (Million of $US)

1969/70 1970/1 1971/2 1972/3 1973/4 -/ 1974/5 2/

Receipts 27.6 25.1 29.9 37.8 40.3 44.1

Merchandise goods 10.7 8.6 8.8 14.4 12.3 12.5 Invisibles 9.9 10.4 12.9 14.5 20.5 23.4 Remittances and pensions (4.6) (4.8) (6.5) (4-1) (5.4) (5.4) Interest (4.0) (4.0) (4.3) (5.0) (7.0) (7.2) Tourism (1-3) (1.6) (2.1) (5.4) (8.1) (10.8) Diplomatic missions 0.8 1.1 1.6 1.8 1.9 1.9 Foreign aid 2.2 0.7 2.2 3.4 3.1 3.7 Other 4.0 4.3 4.4 3.7 2.5 2.6

Payments 18.7 16.9 25.1 28.3 25.9 52.8

Merchandise goods 13.3 7.8 11.2 18.7 16.1 40.4 Invisibles 1.2 1.3 2.1 3.1 6.9 8.8 Interest (0.2) (0.6) (0.3) (0-4) (0.6) (2.5) Other (1.0) (0.7) (1.8) (2.7) (7.7) (6.3) Diplomatic missions 1.4 1.4 1.7 1.5 1.4 1.8 Other 2.8 6.4 10.1 5.0 1.5 1.8

Surplus or deficit (-) 8.9 8.2 4.8 9.5 14.4 -8.7

1/ Estimates 2/ Budget forecasts Table 3.2: COMPOSITION OF RECORDED DCPORTSI/ (Million of rupees)

1964/5 1965/6 1966/7 1967/8 1968/9 1969/'70

Foodstuff and raw material Foodgrains and other food products 258.9 184.0 256.1 206.2 252.8 296.3 Beverages and tobacco 1.1 1.4 0.5 1.6 3.1 2.2 Animal and vegetable oils and fats 8.7 5.6 2.2 1.0 0.4 1.6 Inedible crude materials (excluding fuel) 116.0 115.8 109.1 105.0 167.2 120.5 Petroleum products 0.1 - - - -

Sub-total 384.7 306.8 367.9 313.8 424.0 420.6

Manufactured products Chemicals 1.8 1.3 0.4 0.6 1.9 1.3 Consumer goods 53.5 66.4 57.7 83.7 146.2 66.9 Machinery and transport equipment 0.2 0.1 0.2 0.4 0.2 0.2

Sub-total 55.5 67.8 58.3 84.7 1148.3 68.4 Miscellaneous 0.3 0.4 0.2 0.4 0.4 0.2

Grand total 440.5 375.1 426.4 399.0 572.2 489.2

1/ To all countries (including India) as recorded at customs

Source: Nepal Rastra Bank, Quarterly Economic Bulletin, mid-July, 1974 Table 3.3: COMPOSITION OF RECORDED IXPORTS-/ (Million of rupees)

1964/5 1965/6 1966/7 1967/8 1968/9 1969/70

Foodstuff and raw materials Foodgrains and other products 102.2 127.8 95.0 84.9 104.3 157.2 Beverages and tobacco 58.8 52.6 U.7 7.5 8.1 -1.0 Animal and vegetable oils and fats 16.7 11.6 4.8 9.9 6.9 8.1 Inedible crude materials (excluding fuel) 82.3 40.5 64.5 44.5 50.8 52.4 Petroleum products 72.3 82.8 70.0 42.2 72.9 87.9 Sub-total 332.3 315.3 242.0 188.9 243.0 316.7

Manufactured products Chemicals 37.9 43.0 28.9 32.5 52.3 64.8 Consumer goods 394.5 373.8 176.6 217.4 392.9 393.8 Machinery and transport equipment 53.3 48.5 29.2 37.5 58.8 78.8 Sub-total 485.7 465.3 251.6 287.4 504.0 537.4 Miscellaneous 0.9 1.4 0.6 1.0 0.8 0.6 Grand total 818.9 782.0 481.3 477.3 747.9 854.7

1/ From all countries (including India), as recorded at customs.

Source: Nepal Rastra Bank, Quarterly Economic Bulletin- mid-July, 1974 Table 3.4: COMIMODITY COMPOSITION OF TRADE WITH COUNTRIES OTHER THAN INDIA (thousancsof U.S. dollars)

1969/70 1970/71 1971/72 1972/73 1973/74

Exports Raw jute 4,209 3,291 6,637 5,899 5L 3 Jute cuttings - 267 206 1,404 324 Jute goods 2,266 2,274 3,414 4,934 4,747

Sub-total 6,475 5,832 10,257 12,237 5,59L.

Musk 282 287 97 585 3?39 Bristle 1,651 787 229 234 151 Curio goods 395 184 120 334 426 Mica 920 289 - - - Carpet 115 75 100 172 172 Miscellaneous 1,493 1,145 1,179 2,035 5,1.16

Total 11,331 8,399 11,981 15,597 12,141

Imports Machinery and spare parts 1,206 461 4,811 744 I.,547 Raw materials 2,870 490 1,135 1,122 c9^, Construction materials 575 587 1,179 494 525 Vehicles 350 726 1,122 1,013 1,`92 Clothing and carpets 1,152 2,568 2,632 2,244 0,S&2 Beverages and tobacco 180 212 410 204 165 Pharmaceuticals 307 153 467 146 20? Agricultural tools, fertilizers,etc. 451 146 764 2,762 491 Stationery 57 221 363 226 583 Laboratory equipment 971 153 180 356 211 Food products 245 82 1,698 3,143 218 Photographic equipment 91 40 108 142 170 Miscellaneous 3,896 2,487 1,840 2,393 4,429

Total 12,054 8,327 16,709 14,989 13,h05

source: Data supplied by the Nepalese authorities. Table 3.5s EXTERNAL RESERVES (Million of US dollars)

Nepal Rastra Bank Commercial Banks India Indian Mid-month Convertible currency Convertible currency Total

1968 July 47.7 11.8 0.6 2.9 63.0

1969 July 60.4 17.2 3.9 6.1 87.6

1970 July 68.0 21.2 4.2 5.0 98.4 1971 July 78.6 23.4 3.9 3.6 109.5 1972 July 87.8 18.3 5.7 5.8 117.6

1973 July 102.1 11.8 8.1 6.6 128.6

October 97.7 13.6 9.6 6.8 127.7 1974 January 99.6 12.5 8.9 7.3 128.3

April 107.1 15.1 9.7 7.2 139.1 July2 111.0 7.8 9.7 7.2 135.7 November2/ 106.1 12.7 5.9 14.3 139.0

1/ Includes gold holdings, IMF gold tranche position and SDRs. 2/ Actual for the Rastra Bank and estimates for commercial banks. Sources: Nepal Rastra Bank, Quarterly Economic Bulletin- mid-July 1974, and data supplied by the Nepalese authorities. Table 3.6: FOREIGN AID RECEIVED, 1967/8-74/5 (Million of rupees)

1973/4 1974/5 .Revised Original 1967/8 1968/9 1969/70 1970/1 1971/2 1972/3 Estimates Eptimates

Foreign grants India 95.9 106.5 139.6 125.4 103.6 84.9 112.7 133.9 People's Republic of China 26.2 37.6 48.5 47.2 53.2 24.3 34.3 44.0 United States 32.2 38.5 43.7 59.7 48.o 41.3 31.9 64.7 United Kingdom 0.3 1.3 5.1 17.4 17.0 14.8 19.6 16.5

USSR 3.1 1.3 4.5 2.8 5.0 - - 11.3 Others, including UNDP 0.5 0.8 2.4 18.3 15.3 14.9 18.8 66.6

Total grants 158.1 185.9 243.7 270.7 242.1 180.2 217.3 337.0

Foreign loans United States - 20.0 United Kingdom - - - - 17.0 14.8 19.6 16.5 USSR - - - - 14.0 Canada - - - - 9.9 7.4 19.6 - Denmark - - - - 3.5 - Asian Development Bank - 10.0 16.6 49.3 74.7 IBRD - -- - - 2.0 8.6 14.9 58.9 Others - - - - - 59.6

Total loans 7.6 32.5 38.9 47.4 106.9 243.7

Source: Ministry of Finance, Budget Speech. PRELIMINARY Table 4.1 02/03/?5

EXTERNAL PUBLIC DEBT OUTSTANDING AS OF DECEMBER 31.1973

DEBT REPAYABLE IN FOREIGN CURRENCY

IN THOUSANDS OF U.S. DOLLARS

DEBT OUTSTANDING DFCEMBER 31#19?3

CREDITOR COUNTRY UNnfIS TYPE OF CREDITOR DISBURSED BURSED TOTAL

UNITED KINGDOM 825 825 SUPPLIERS 825 * 825 ASIAN DEV.RANK 5,372 32.338 37,710 IDA 2,006 17.987 19,993 LOANS FROM INTL. ORGANIZATIONS 7,378 50,325 57,703

CANADA 2J506 4 2,510 DENMARK 166 2,998 3,184 GERMANY (FEDeREP6OF) 2.517 1,129 3,646 INDIA 326 724 1o050 JAPAN 136 1J143 1J279 UNITED KINGDOM 5.659 5.R08 11J467 USA 150 150 LOANS FROM GOVERNMENTS 11,0480 I1IPO6 23#286

TOTAL EXTERNAL PUBLIC DEBT 19.683 62.*31 81,814

NOTEI DEBT WITH A MATURITY OF OVER ONE YEAR. THIS UPDATE IS BASED ON THE CREDITOR'S INFORMATION PENDING THE RECEIPT OF THE STANDARD OFFICIAL DEBT REPORT FROM THE GOVERNMENT OF NEPAL. THE LATEST OFFICIAL REPORT RECEIVED IS AS OF DECEMBER 31, 1971.

EXTERNAL DEBT DIVISION ECONOMIC ANALYSIS & PROJECTIONS DEPARTMENT FEBRUARY 4, 1975 PRELIMINARY Table 4.2 01/30/75

EXTERNAL PUBLIC OEBT AS Of OCCENIER 3i1.973

OEBT REPAYABLE IN POREIgN CURRENCY

IN THOUSANDS Of U*S. DOLLARS TOTAL

DEBt OUTSTANDING TRANSACTIONS DURING PERIOD BEGINNING OF PERIOD CANCEL LATIONS. OISBURSED INCLUDING COMMIT& DISBURSE- SERVICE PAYMENTS AOJUST- YEAR ONLY UNORSBURSED MENTS NENTS PRINCIPAL INTEREST TOTAL NENTS CI) (2) C3) C4) CS) C6) Cl) to)

1969 4.742 7.151 7,640 771 1.182 181 1.363)t 1970 4#313 13,592 17.020 5e3 2.107 130 2#237 0169 1971 2#804 28.336 5.938 5,30o 110 5 16? 1.027 1972 83.401 35,191 26P293 3,963 167 95 262 0425 1973 12.221 60.892 21.692 8*1t2 26? 186 453 aS0)

1974 19,683 81,814 * 14P662 57s 190 768 It875 1975 320616 79.361 16.198 996 448 1J444 19s6 47.618 78.365 - 12.1S2 1.066 6ro 1.736 S 1977 58.904 77,299 10*148 1.321 804 2.125 1978 67.731 75#978 40566 1.844 879 2.723

1979 70453 74,134 2#805 2.S104 961 3.06S B 1980 71.154 72,030 ' 6s2 20565 10ool 3.565 1901 69.242 69.466 1138 3.014 939 3.953 1982 66.366 66J,452 61 3*129 865 3.994 1983 63.301 63.323 1a p.918 794 3*712 1984 60.401 60.405 *a p805 746 3.551 i 1985 57.596 57.600 a - 2.842 t01 3.544 1906 54,r53 54,757 - p.880 656 3.537 a 1987 51,873 51,677 a 22,678 612 3,290 a 1988 49,195 49.199 - 2,710 573 3.283 a 1989 46,485 46,489 - - 2,761 532 3,294 a 1990 43.723 43.727 - - ?838 491 .329 - 1991 40885 40.889 a 2.87? 449 3#327 a 1992 38.009 38.012 a a934 407 39342 a 1993 35#074 35.077 -a 31s 364 3#552 a

NOTE: INCLUDES SERVICE ON ALL DEBT LISTED IN TABLE 1, PREPARED FEBRUARY 4, 1975 WITH THE EXCEPTION OF THE FOLLOWING: SUPPLIER'S CREDITS $ 825(UNDER LITIGATION AT PRESENT) LOANS FROM GOVERNMENT - INDIA $1,050 (REPAYMENT TERMS ARE NOT KNOWN) TOTAL 1,875 TABLE 5.1: CENTRAL GOVERNMENT BUDGETARY PERFORMANCE 1/ (In millions of Rs)

1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 Revised Budget Estimate Estimate

Budgetary Expenditure 2/ 259.1 349.9 428.1 438.8 462.0 537.2 683.8 769.5 889.6 982.8 1302.8 1740.9 Regular Expenditure 3/ 1IT.3 117.-9 T 170.6 T8757 193.0 219. 1 304.5 325.0 374.2 49B.3 587.5 Development Expenditure 3/ 144.7 231.9 280.8 268.2 281.2 344.2 464.7 465.0 564.6 608.6 811.4 1153.4

Budgetary Revenue 4/ 157.9 192.3 216.5 256.7 326.0 413.0 464.o 459.7 553.4 61S.8 729.4 959.7 Of which, Govt. Loans Repaid C-) (0.2) (-) (1.0) (1.3) (-) (4.5) (4.6) (6.9) (7.5) (9.9) (11.4)

Deficit (Budgetary Expenditure less Budgetary Revenue) 101.1 157.5 211.6 182.2 136.o 124.2 219.8 309.8 336.2 367.0 580.4 781.1

Pinanced by: Foreign Grants / 94.5 141.0 175.3 142.2 158.1 185.9 243.7 270.7 242.0 180.3 217.2 337.4 Foreign Borrowing (Gross) i 11.4 5.9 3.3 3.7 - - 7.6 32.5 38.9 47.4 106.9 243.7 Domestic Borrowing (Gross) V/ 71.8 107.4 186.6 271.8 229.7 121.4 45.0 80.4 83.3 86.8 132.4 200.0 2/ Nepal Rastra Bank (Net) (-15.3) (5.4) (12.3) (3.2) (-17.6) (-0.3) (24.9) (62.8) (28.2) (34.4) (99.7) (n.a.) Commercial Banks (Net) (-1.5) (0.3) (0.4) (-) (1.6) (4.5) (7.6) (9.9) (38.4) (31.9) (1.9) (n.a.) Other Financial Institutions (Net) (neg.) (0.8) (1.0) (0.8) (3.9) (5.4) (-0.3) (0.8) (10.2) (3.4) (7.8) (n.a.) Provident Funds (Net) (2.6) (o.8) (0.5) (0.3) (1.1) (-1.3) (0-3) (0.8) (1.3) (8.3) (5.0) (n.a.) Non-Financial Public Enterprises (Net) (0.3) (0.3) (-0.3) (-) (0.3) (neg.) (0.8) (o.5) C-) (1.0) (neg.) (n.a.) Other (Net) (7.2) (P.3) (5.1) (2.5) (2.1) (-0.1) (4.2) (4.6) (4.2) (7.9) (8.1) (n.a.) Adjustment for Debt Repayment 21 (78.5) (97.5) (167.5) (265.0) (238.3) (113.1) (7.5) l.o (0.9) 20. 10.7 Residual (Net Receipts) O -7o.6 -80.7 -168.7 -212.6 -173.7 -15.0 -25.1 -- 3.5 -. 65 32.5 103.1 Use of Cash Balance 1 -6.o -16.1 15.1 P7.0 -78.1 -118.1 -51.4 9.7 -8.6 32.5 20.1 Deposits with Nepal Rastra Bank (-3.3) (-19.1) (17.9) (25.5) (-72.5) (-92.3) (38.5) (-20.1) (-15.9) (50.2) (-2.1) () Deposits with Commercial Banks (-) (-) (-) (-) (-) (-21.4) 15.1) (22.2) (9.5) (-15,8) (19.6) Treasury Cash Holding (-2.7) (3.0) (-2.7) (i.5)' (-5.6) (-4.4) (2.1) (7.5) (-2.2) (-i.9) (2.7) Footnotes to Table 5.1

1) Figures show the financial transactions of the central government basically on a cash basis, but there are some deviations from the cash basis principle.

2) Budgetary payments as defined as "1Expenditure" in the budget, which include amortization of govermnent debts and gross lendings from the government.

3) Definitions of "Regular" and "Development'" expenditures changed over the period, and the figures are not necessarily comparable. In particular, major redefinitions were introduced in 1970/71.

4) Budgetary receipts as defined as "Revenue" in the budget, which includes the receipts of the repaid government loans.

5) Foreign grants expended in the corresponding fiscal year. Hence figure may differ from the actual receipts in each year.

6) Foreign loans expended in the corresponding fiscal year. Hence figure may differ from the actual receipts in each fiscal year.

7) Borrowing through development bonds, non-interest-bearing prize bonds, treasury bills, and other borrowings from the Nepal Rastra Bank. The last item is not accounted for in the statistics shown in the annual Budget Speeches.

8) Development bonds to be newly issued in l974/75.

9) A part of these outlays are included in "Budgetary Expenditure."

10) Unaccounted for net cash in-flows. The major factors causing this dis- crepancy are as follows:

(a) Repayments of borrowings from the Nepal Rastra Bank not accounted for in the budget;

(b) Time-lag between the actual receipts and recording of the contribution from the Nepal Rastra Bank;

(c) Time-lag between the receipts and the spending of foreign grants and foreign loans; foreign grants and foreign loans are acknowledged as receipts by the government only when they are spent, but the cash balance position of the government reflects the actual receipts;

(d) Net receipts of deposits into the "Public Security Accourts" of the government, which are not included in the budgetary revenue, but are reflected in the cash balance position of the government.

11) As shown in the government accounts of the Nepal Rastra Bank compiled on the basis of the records of government accounts held in the Nepal Rastra Bank and commercial banks.

Sources: Ministry of Finance, Budget Speech, various issues; Nepal Rastra Bank, Quarterly Economic Bulletin, various issues; and Nepal Rastra Bank, unpublished data. TABLE 5.2: BUDGETARY EXPENDITURE OF THE CENTRAL GOVERNMENT / (In thousand of Rs)

1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 Revised Budget Estimate Estimate

Regular Expenditure 1131 117943 147330 170595 180789 192981 219109 304481 324964 374237 498335 587535

General Public Services 44787 47765 60051 69495 73583 814oo 92052 111401 116515 133773 144736 185844 General Administration 15562 16509 19780 20245 22684 409 0 47317 8471 Revenue Administration 7086 7674 9820 14848 10263 13972 17117 14823 12867 12764 16451 20231 Judiciary Services 3079 3104 4378 4473 4442 4943 5262 6630 7249 7326 8954 11755 Police and Jail 12794 13078 17646 20830 24309 26804 29311 33798 34235 38947 46715 64172 Foreign Service 6266 7400 8427 9099 11885 12223 13909 15170 14847 16337 16562 21215

Defense 26975 27495 31193 39946 44059 48075 50170 57042 63218 68537 83165 97276

Social Services 12666 14452 20140 P3~R0 26554 26213 33008 61662 69503 72803 90996 131727 Education 6861 7780 10149 13197 13932 13804 164q 27088 3 33578 -37-0 63427 Health 2527 3404 5395 5407 7848 6977 11772 12050 16112 16108 24225 30756 Drinking Water n.a. n.a. n.a. n.a. n.a. n.a. n.a. 875 1017 1232 1695 2165 Panchayat 1607 1660 2019 2390 2352 2955 1557 12770 10027 12292 13239 18605 Other 1671 1608 2577 2336 2422 2477 3240 8879 7859 9593 12167 16774

Economic Services 20163 1707o4 2 3515 2269 222 22422 2581 35835 38782 42283 57898 77708 Agriculture 715 906 829 7-21 677 739 - 4459 4132 5573 7254 10764 Irrigation n.a. n.a. n.a. n.a. n.a. n.a. n.a. 1199 1658 1643 1809 2414 Land Reform ------4670 3533 4164 5083 6114 Cadastral Survey 70 75 109 109 126 146 156 897 1097 1243 1729 2024 Forest 3112 3537 4085 4113 3658 4241 4643 3269 3799 3686 3799 5570 Industry and Commerce 314 794 615 723 593 623 1285 - - - - - Industry and Mining ------1355 1438 1579 1525 1902 Communication 4019 4790 7278 6176 6174 6525 605 7188 7605 9273 13409 20567 Transportation 4822 1584 2875 2377 3002 2355 2286 8600 11727 10590 17619 22061 Electricity 837 163 298 236 180 202 523 2595 3179 3931 4967 5452 Other 6274 5225 7426 8311 7727 7591 10105 1603 614 601 704- 840

Miscellaneous 8727 7515 10152 10327 10963 10737 12475 23140 24908 30649 67295 38450 Pensions, Allovances & Gratuities 4 344 3050 3197 3768 416225 5826 6 9 3836 139 8700 9050 Contingency, etc. 4383 4465 6955 6559 6801 6512 6649 16291 21072 22510 58595 29400

Loan, Investment and Debt Transactions 998 3642 2279 4728 3403 4134 5523 15401 12038 26192 54245 56530 Loans and Investment n.a. n.a. n.a. n.a. n.a. n.a. n.a. 6946 2996 9719 9765 1 Debt Transactions n.a. n.a. n.a. n.a. n.a. n.a. n.a. 8455 9042 16473 44480 54845 Interest Payment (n.a.) (n.a.) (n.a.) (n.a.) (n.a.) (n.a.) (n.a.) (4448) (7693) (15430) (25287) (37707) Debt Repayment (n.a.) (n.a.) (n.a.) (n.a.) (n.a.) (n.a.) (n.a.) (4007) (1349) (1043) (19193) (17138) Table 5.2: (Contd.)

1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 Revised Budget Estimate Estimate

Development Expenditure 144735 231910 280776 268240 281183 344225 464716 465019 564637 608559 811438 11533556

General Public Services 986 1295 2027 2620 2892 2595 2915 5141 5683 4078 7422 7690 58 Social Services 5066) 61806 899 53095' 53869 63657 56478 75180 122050 158754 247611 Education L7678 22420 -i94 20227 -15755 23730 25757 I 725 93282 Health 11573 14810 18497 15518 15502 17349 24034 21830 25343 31197 38849 62334 Drinking Water n.a. n.a. n.a. n.a. 3510 3000 2367 3871 8471 10797 11380 32284 Panchayat 6851 11309 36po 21176 14267 8581 9330 5089 10162 17156 17700 31063 Other 955 21~.23 47b5 1978 962 1209 lbb9 1087 2615 6502 11200 28648 Economic Services 994,05 172037 199254 193085 215619 250776 Economic Ser______ices_ 375744____ 399191 460863 475877 637006 876258 Agriculture 105823 10609 13375 20396 -22605 20772 35305 458 0550 b107 91473 113656 Irrigation n.a. n.a. n.a. n.a. 18753 24581 17913 37485 44784 34256 73945 90936 Land Reform 266 2773 8963 10181 10135 9018 8917 2333 2053 3193 3260 10829 Cadastral Survey 2261 3485 4105 4278 5230 5830 6234 5529 6302 7775 8600 14081 Forest 4859 7575 6398 6070 4502 4693 8198 8889 13213 13228 18980 29897 Industry and Commerce 28538 22645 20527 16239 14705 12292 17794 - - - - Industry and Mining - - - _ _ _ 39667 75175 49467 88000 126088 Communication 1475 5509 5300 3541 5113 6772 8711 7410 5264 9221 17413 13296 Transportation 9578 10403 10577 3006 98332 127981 223427 222968 229968 272861 292160 374392 Roads (n.a.) (n.a.) (n.a.) (n.a.) (92961) (119057) (195300) (204595) (165211) (173596) (215885) (293236) Bridges (n.a.) (n.a.) (n.a.) (n.a.) (3843) (3371) (1014) (4106) (2408) (10711) (17900) (29811) Other (9578) (10403) (10577) (3006) (1528) (5553) (27113) (14267) (62349) (88554) (58375) (51345) Electricity 19931 57323 45114 24738 25959 23231 38945 32622 36549 14955 36000 80927 Other 21674 51715 84895 104636 10230 15606 10300 1830 6975 9114 7175 22156

Miscellaneous (Contingency, etc.) 6547 7916 9955 7949 5385 6899 5759 4209 22911 6554 8256 21797 Loans, Investment and Debt Transactions 740 - 7734 5687 4192 30086 16641 - - - - -

Total Budgetary Expenditure 259051 349853 42810 33 461972 537206 63825 7 982796 1309773 1740091

/ This table shows the budgetary expenditure of the central government on a cash basis. Due to the changes in the coverage uf edoih headiiig the figures are not necessarily comparable over time. In particular, the figures for 1963/64 - 1969/70 and those for 1970/71 and thereafter may considerably differ in coverages because of the comprehensive changes in the definitions of "Regular Expenditure" and "Development Expenditure" and the format for budget presentation, which were introduced in 1970/71. Basically, "Development Expenditure" is the outlay for development projects, and "Regular Expenditure" is the outlay for administrative services, defense arid maintenance works. "Development Fxpenditure" is not synonymous with capital expenditure; "Regular Expenditure" is not synonymous with current expenditure.

Source; Annual Budget Speech, varicus issues. TABLE 5.2a: BUDGETARY EXPENDTTURE OF THE CENTRAL GOVERNMENT AS PERCENT OF GDP

1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72_ 1972/73

Regular Expenditure 2.16 2.00 2.17 2.69 2.40 2.25 2.49 3.35 3.12 3.32

General Public Services 0.85 0.81 0.88 1.10 0.98 0.95 1.05 1.23 1.12 1.19 Police and Jail 0.24 0.22 0.26 0.33 0.32 0.31 0.33 0.37 0.33 0.35 Other 0.61 0.59 0.62 0.77 0.65 o.64 0.71 0.85 0.79 0.84

Defense 0.51 0.47 o.46 0.63 0.58 0.56 0.57 o.63 0.61 0.61

Social Services 0.24 0.25 0.30 0.37 0.35 0.31 0.38 0.68 0.67 0.65 Education o.l3 0.13 0,15 0.21 0.18 0.17 0.19 0.30 0.33 0.30 Health 0.05 0.06 o0o8 0.09 0.10 0.08 0.13 0.13 o.15 0.14 Drinking Water n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.01 0.01 0.01 Panchayat 0.03 0.03 0.03 0.04 0.03 0.03 0.02 0.14 0.10 0.11 Other 0.03 0.03 0.04 0.°4 0.03 o.o 4,03 0.10 0.08 0.09

Economic Services 0.38 0.29 0.35 0.36 0.29 0.26 0.29 0.39 0.37 0.38 Agriculture 0.01 .0,2 0.01 0.01 0.01 0.01 0.01 0.05 0.04 0.05 Irrigation n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.01 0.02 0.01 Land Reform - - - 0.05 ° 0.3 0.04 Cadastral Survey neg. neg. neg. neg. neg. neg. neg. 0.01 0.01 0.01 Forest 0.06 0.06 0.06 0.06 0.05 0.05 0.05 0.04 0.04 0.03 Industry and Commerce 0.01 0.01 0.01 0.01 0.01 0.01 0.01 - - - Industry and Mining ------0.01 0.01 0.01 Communication 0.08 0.0' 0.11 0.10 0.08 0.08 0.07 0.08 0.07 0.08 Transportation 0.09 0.03 0.04 o.04 0.04 0.03 0.03 0.09 0.11 0.09 Electricity 0.02 neg. heg. neg. neg. neg. 0.01 0.03 0.03 0.03 Other 0.12 0.09 0.11 0.13 0.10 0.09 0.11 0.02 0.01 0.01

Miscellancous 0.17 0.13 0.15 0.16 0.15 0.13 o.i4 0.25 0.24 0.27

Loan, Investment and Debt Transactions 0.02 0.06 0.03 o.o6 0.05 0.05 o.o6 0.17 0.12 0.23 Loans and Investment n a. n,a. n.a. n.a. n.a. n.a. n.a. 0.07 0.03 0.09 Debt Transactions n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.09 0.09 0.15 Interest Payment (n.a.) (n.a.) (n.a.) (n.a.) (n.a.) (n.a.) (n.a.) (0.05) (0.07) (0.14) Debt Repayment (n.a.) (n.a.) (n.a.) (n.a} (n.a.) (n.a.) (n.a.) (0.04) (0.01) (0.01) TABLE 5.2a: (Contd.)

1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73

Development Expenditure 2.74 3.94 4.13 4.24 3.73 4.02 5.28 5.12 5.43 5.40

General Public Services 0.02 0.02 0.03 0.04 0.04 0.03 0.03 o.o6 0.05 0.04

Social Services 0.70 o.86 0.91 0.93 0.70 o.63 0.72 0.62 0.72 1.08 Education 0.33 o.38 0.37 0.32 0.29 0.25 0.27 0.27 0.51 Health 0.22 o.25 0.27 0.25 0.21 0.20 0.27 0.24 0.24 0.28 Drinking Water n.a. n.a. n.a. n.a. 0.05 0.04 0.03 0.04 o.o8 0.10 Panchayat 0.13 0.19 0.20 0.33 0.19 0.10 0.11 o.o6 0.10 0.15 Other 0.02 0.04 0.07 0.03 0.01 0.01 0.02 0.01 0.03 o.o6

Economic Services 1.88 2.92 2.93 3.05 2.86 2.93 4.27 4.40 4.43 4.23 Agriculture 0.20 0.13 0.20 0.32 0.30 24 g0SF 0.5 0.39 0.55 Irrigation n.a. n.a. n.a. n.a. 0.25 0.29 0.20 0.41 0.43 0.30 Land Reform 0.01 0.05 0.13 0.16 0.13 0.11 0.10 0.03 0.02 0.03 Cadastral Survey o.o4 o.o6 0.06 0.07 0.07 0.07 0.07 o.o6 o.o6 0.07 Forest 0.09 0.13 0.09 0.10 0.06 0.05 0.09 0.10 0.13 0.12 Industry and Commerce 0.54 0.38 0.30 0.26 0.19 0.14 0.20 - _ Industry and Mining ------o.44 0.72 o.44 Communication 0.03 0.09 o.o8 o.o6 0.07 0.08 0.10 0.08 0.05 o.o8 Transportation 0.18 0.18 0.16 0.05 1.30 1.49 2.54 2.46 2.21 2.42 Roads (n.a.) (n.a.) (n.a.) (n.a.) (1.23) (1.39) (2.22) (2.25) (1-59) (1.54) Bridges (n.a.) (n.a.) (n.a.) (n.a.) (0.05) (0.04) (0.01) (0.05) (0.02) (0.10) Other (0.18) (0.18) (0.16) (0.05) (0.02) (0.06) (0.31) (0.16) (0.60) (0.79) Electricity 0.38 0.97 o.66 0.39 0.34 0.27 0.44 0.36 0.35 0.13 Other 0.41 o.88 1.25 1.65 0.14 0.18 0.12 0.02 0.07 0.08

T1,1s-c211anous 0.12 0.13 0.15 0.13 0.0'7 0.08 0.07 0.05 0.22 O.o6

Loans, Investment and Debt Transactions 0.01 _ 0.11 0.09 0.06 0.35 0.19 - _ _

Total Budgetary Expenditure 4.90 5.94 6.30 6.93 6 172 6.27 7.77 8 48 8.73

Source: Table 5.2 TABLE 5.2b: COMPOSITION OF CENTRAL GOVERNMENT BUDGETARY EXPENDITURE (Percent of Total)

1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 Revised Budget Estimate Estimate

Regular Expenditure 44.1 33.7 34.4 38.9 39.1 35.9 32.0 39.6 36.5 38.1 38.0 33.7 General Public Services 17.3 13.7 14.0 15.8 15.9 15.2 13.5 14.5 13.1 13.6 Police and Jail 439 11.1 10.7 -. 4.7 T- 75.3 5.0 4T.44 3 4 T. 3. 6 3.7 Other 12.4 9.9 9.9 11.1 10.7 10.2 9.2 10.1 9.2 9.6 7.5 7.0 Defense 10.4 7.9 7.3 9.1 9.5 8.9 7.3 7.4 7.1 7.0 6.3 5.6 Social Services 4.9 4.1 4.7 5.3 5.7 4.9 4.8 8.o 7.8 Education 2.6 7.4 6.9 7.6 2.2 2.4 3.0 3.0 2-.T 1. 3.5 3.9 3.4 3.0 Health 1.0 1.0 1.3 1.2 1.7 1.3 1.7 1.6 1.8 1.6 1.8 1.8 Drinking Water n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.1 0.1 0.1 0.1 0.1 Panchayat o.6 0.5 0.5 0.5 0.5 o.6 0.2 1.7 1.1 1.3 1.0 1.1 Other o.6 0.5 o.6 0.5 0.5 0.5 0.5 1.2 0.9 1.0 0.9 1.0 Economic Services 7.8 4.9 5.5 5.2 4.8 4.2 3.8 4.7 4.4 4.3 Agriculture 0.3 4.4 4.5 0.3 0.2 0.2 0.2 0.1 0.1 o.6 0.5 oh.6 o. o.6 Irrigation n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.2 0.2 0.2 0.1 0.1 Land Reform - - - o.6 o.4 o.4 o.4 o.4 Cadastral Survey neg. neg. neg. neg. neg. neg. neg. 0.1 0.1 0.1 0.1 0.1 Forest 1.2 1.0 1.0 0.9 0.8 0.8 0.7 o.4 o.4 0.4 0.3 0.3 Industry and Commerce 0.1 0.2 0.1 0.2 0.1 0.1 0.2 - - - - - Industry and Mining ------0.2 0.2 0.2 0.1 0.1 Communication 1.6 1.4 1.7 1.4 1.3 1.2 0.9 0.9 0.9 0.9 1.0 1.2 Transportation 1.9 0.5 0.7 0.5 0.6 o.4 0.3 1.1 1.3 1.1 1.3 1.3 Electricity 0.3 neg. 0.1 0.1 neg. neg. 0.1 0.3 o.4 o.4 o.4 0.3 Other 2.4 1.5 1.7 1.9 1.7 1.4 1.5 0.2 0.1 0.1 0.1 neg. Miscellaneous 3.4 2.1 2.4 2.4 2.4 2.0 1.8 3.0 2.8 3.1 5.1 2.2 Loans, Investment & Debt Transactions 0.4 1.0 0.5 1.1 0.7 0.8 0.8 2.0 1.4 2.7 4.1 3.2 Loans and Investment n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.9 0.3 1.o 0.7 0.1 Debt Transactions n.a. n.a. n.a. ri.a. n.a. n.a. n.a. 1.1 1.0 1.7 3.4 3.2 Interest Payment (n.a.) (n.a.) (n.a.) (n.a.) (n.a.) (n.a.) (n.a.) (0.6) (0.9) (1.6) (1.9) (2.2) Debt Repayment (n.a.) (n.e.) (n.a.) (n.a.) (n.a.) (n.a.) (n.a.) (0.5) (0.2) (0.1) (1.5) (1.0)

Development Expenditure 55.9 66.3 65.6 61.1 60.9 64.1 68.o 60.4 63.5 61.9 62.0 66.3 General Public Seroce 0.4 o.4 0.5 o.6 o.6 0.5 o.4 0.7 o.6 o.4 o.6 o.4 Social Services 14.3 14.5 14.4 13.4 11.5 10.0 Education 9.3 7.3 8.5 12.4 12.1 14.2 -6. 6 . 4 .6 Th7 4 37 3.2 3.2 5.7 T.1 Health 4.5 4.2 4.3 3.5 3.4 3.2 3.5 2.8 2.8 3.2 3.0 3.6 Drinking Water n.a. n.a. n.a. n.a. 0.8 0.6 0.3 0.5 1.0 1.1 0.9 1.9 Panchayat 2.6 3.2 3.2 4.8 3.1 1.6 1.4 0.7 1.1 1.7 1.4 1.8 Other 0.4 o.6 1.1 0.5 0.2 0.2 0.2 0.1 0.3 0.7 0.9 1.6 Table 5.2b: (Contd.)

1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 Revised Budget Estimate Estimate

Economic Services 38.4 49.2 46.5 44.o 46.7 46.7 54.9 51.9 51.8 48.4 48.6 50.3 Agriculture 3.023° 3.1 W7 3.9 3 5.2 5.3 i7 Z 3 7.0 Irrigation n.a. n.a. n.a. n.a. 4.1 4.6 2.6 4.9 5.0 3.5 5.6 5.2 Land Reform 0.1 o.8 2.1 2.3 2.2 1.7 1.3 0.3 0.2 0.3 0.2 o.6 Cadastral Survey 0.9 1.0 1.0 1.0 1.1 1.1 0.9 0.7 0.7 o.8 0.7 o.8 Forest 1.9 2.2 1.5 1.4 1.0 0.9 1.2 1.2 1.5 1.3 1.4 1.7 Industry and Commerce 11.0 6.5 4.8 3.7 3.2 2.3 2.6 - - - - - Industry and Mining ------5.2 8.5 5.0 6.7 7.2 Communication o.6 1.6 1.2 o.8 1.1 1.3 1.3 1.0 o.6 0.9 1.3 0.8 Transportation 3.7 3.0 2.5 0.7 21.3 23.8 32.7 29.0 25.9 27.8 22.3 21.5 Roads (n.a.) (n.a.) (n.a.) (n.a.) (20.1) (22.2) (28.6) (26.6) (18.6) (17.7) (16.5) (16.8) Bridges (n.a.) (n.a.) (n.a.) (n.a.) (o.8) (0.6) (0.1) (0.5) (0.3) (1.1) (1.4) (1.7) Other (3.7) (3.0) (2.5) (0.7) (0.3) (1.0) (4.0) (1.9) (7.0) (9.0) (4.5) (2.9) Electricity 7.7 16.4 10.5 5.6 5.6 4.3 5.7 4.2 4.1 1.5 2.7 4.6 Other 8.4 14.8 19.8 23.8 2.2 2.9 1.5 0.2 o.8 0.9 0.5 1.3

Miscellaneous 2.5 2.3 2.3 1.8 1.2 1.3 o.8 0.5 2.6 0.7 o.6 1.3

Loans, Investment & Debt Transactions OR _ 1.,8 1.3 0.2 5.6 2.4 _- -

Total Budgetary Expenditure 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Source: Table 5.2 TABLE 5.3: BUDGETARY REVENUE OF CENTRAL GOVERiNENT (In thousands of Rs)

1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 Revised Budget Estimate Estimate

Tax Revenue 121988 155647 181770 225783 283860 368251 411293 395622 466668 521108 601620 759530 Taxes on Net Income and Profit 2793 5311 7331 8317 12268 17433 19634 21169 22045 23375 29000 57000 Income Tax 2792 5261 705 7729 11415 T177T 196374 21169 -22045 23375 29000 55000 House Rent Tax - - 189 466 765 692 - - - 2000 Foreign Investment Tax 1 50 59 122 88 10 - - - _

Taxes on Property and Property Transfer 43692 46582 47421 59390 87943 85477 102744 91495 101117 94039 101100 129500 Land Revenue 40000 43158 44510 56646 3295 79352 57718 76397 73170 745 2- T 5 I 100500 Urban House and Land Tax 720 592 638 394 502 403 548 587 604 945 1100 3000 House and Land Registration Fee 2972 2832 2265 2350 4146 5722 14478 14511 17343 18642 20000 26000 Taxes on Goods and Services 16676 20398 33482 36261 52933 81626 95344 126443 144908 165497 187020 251530 Sales Tax - - - ~ o2566~2 12147 26091 - -39 51090 62334 69-080 79520 92000 105300 Excise Duties 10667 13880 20062 19964 21479 28043 38124 56566 63591 67757 73300 117000 Rakshi Contract (5985) (6066) (6065) (6173) (7600) (8303) (9055) (16918) (17185) (17560) (19000) (22000) Industrial Production (2749) (5755) (12170) (10757) (11372) (17782) (23583) (36028) (43803) (47432) (52500) (93500) Agricultural Production (1883) (1772) (1502) (2911) (2045) (1099) (4532) (2674) (1238) (1575) ( -) ( Miscellaneous ( 50) ( 287) ( 325) ( 123) ( 462) ( 859) ( 954) ( 946) (1365) (1190) ( 1800) ( 1500) Taxes on Services 5652 6071 6415 2106 2117 2561 3270 3743 7518 12108 15010 18100 Entertainment Tax (1327) (1171) (1411) (1898) (1716) (1901) (2243) (2458) (2785) (3739) ( '4900) ( 5000) Roadcess (3862) (4797) (4751) ( - ) ( - ) ( - ) ( - ) ( - ) (3262) (5553) ( 6500) ( 7600) Air Flight Tax ( 170) ( 103) ( 253) ( 208) ( 270) ( 395) ( 521) ( 587) ( 560) (1304) ( 1310) ( 2500) Hotel Tax ( 293) ( - ) ( - ) ( - ) ( 131) ( 265) ( 506) ( 698) ( 911) (1512) ( 2300) ( 3000) Taxes on Use of Goods or Property, or Permission of Activities 357 441 750 2044 2419 2983 2860 3800 4719 5812 6710 8130 Contract Tax ( - ) ( - ) ( 365) (1717) (1451) (2289) (1755) (2536) (3208) (4025) ( 3900) ( 4600) Radio License Fee (167) (183) (97) (88) ( 9) ( ) -) (-) (-) (-)(-) Vehicle License Fee ( - ) ( 100) ( 124) ( 130) ( 49) ( 60) ( 820) ( 870) ( 896) (.983) ( 1000) ( 1100) Vehicle Tax (- ) (-) (- ) (- ) (- ) (- ) ) ) ( ) ( 503) (1490) (2000) Arms & Ammunition Registration ( 58) ( 29) ( 31) ( 22) ( 43) ( 68) ( 142) ( 133) ( 140) ( 50) ( 100) ( 100) Agency, Firm ,e Company Registration ( 132) ( 129) ( 133) ( 37) ( 867) ( 566) C 143) ( 261) ( 475) ( 251) ( 220) C 330) Taxes on International irade 58827 83308 e 121746 129733 133564 193512 156515 198598 2 28450 321500 Import Taxes 47919 67323 79540 '004 107009 142217 170204 138428 168240 216495 26006 Customs Duties (18138) (20799) (37494) (85887) (78113) (110244) (125475) (99317) (117337) (131371) (142500) '(166500) Indian Exc2se Refunc (29781) (46524) (h2046) (21117) (28896) (31973) (44731) (39111) ( 50903) ( 85124) (117500) (120000) Export Duties 8880 11075 13139 13603 21726 40421 21740 17264 27331 16415 20500 32000 Miscellaneous 2028 4910 836 1139 998 926 1566 822 3027 5287 4000 3000 Other Taxes - 48 21 69 983 151 59 - - - - Table 5.3: (Contd.)

1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 Revised Budget Estimate Estimate

IT. Pon-Tax Revenue 35940 36539 34728 29879 40801 44783 48206 59518 79893 87260 117881 188818

Revenues from Departmental Enterprises 4919 4479 4249 4439 5806 7321 6403 7442 9243 12986 13160 17698 Irrigation 211 150 175 T69 1 240 175 171 219 22 360 19 Water 155 161 180 380 645 857 910 1103 1552 1320 2000 3410 Electricity 93 ------2675 1400 1600 Post Office 2161 1959 2634 2533 2803 3839 4488 4732 5809 6058 6600 7200 Telecommunications 377 453 '(92 953 1783 1821 154 - - - - Aviation 378 550 468 405 392 492 563 653 1100 2041 2100 2500 Railway and Ropeway 1544 1198 - - - 72 113 783 563 870 700 1000

Administrative Charges and Fees 3637 5786 5611 4157 4246 5283 5974 13394 12462 15156 14350 15400 Judiciary 1033 147_1 1771 1409 2232 2055 2000 2762 -2t6v1 3000 3200 Education 154 436 501 548 665 852 885 1001 704 945 200 200 Health 233 120 150 107 358 394 493 581 564 590 600 700 Veterinary and Fishery 16 14 14 48 158 140 731 1160 1018 1034 900 1000 Passport and Visa 533 316 400 99 380 686 1141 1400 1416 1900 2000 2100 Other 1668 3429 2775 1866 453 1156 964 7252 5998 7826 7650 8200

Dividend and Interest 1167 3760 3827 3680 7132 8214 14381 24640 26053 21475 27756 83500 Dividend ' 3541 3194 13926 235479355 9 1923621200 73900 Interest from Companies & Corporations 816 4 - - 95 - 54 12 473 1491 6206 9400 Interest from Govt. Employees 75 215 142 486 183 280 401 372 1021 748 350 200

Royalties 77 24 319 49 22 195 226 163 121 893 2215 5720 Electricity - - - - - 7- - - - T9 2000 5500 Hunting 36 6 311 49 22 141 74 32 15 15 15 20 Mountaineering 41 18 8 _ 54 152 131 106 282 200 200

Forest Revenue 16405 2n860 19085 16483 21794 20950 17653 12516 22523 35185 51700 61500 Lumber 15182 19790 10029 15376 20076 19202 15628 10952 33714 50000 6 0000 Other 1223 1070 1056 1107 1718 1778 2025 1564 2138 1471 1700 1500

Other Non-Tax Revenue 9735 1630 1637 1071 1801 2790 3569 1363 9491 1565 8700 5000

III. Current Revenue (I & II) 157928 192186 216498 255662 324661 413034 459499 455140 546561 608368 719501 948348

IV. Loan Repayment Received6 - 1000 1318 - 4532 4558 6868 /458 9919 11400 From Public Enterprises - _ 15b 1032 1049461282 R 10200 From Govt. Employees - - 3515 5922 1330 1670 1200

V. Total Budgetary Revenue (i1T & IV) 157 928 192342 256662 325979 413034 164313597 5329 610582 4729420 95978

Source: Annual Budget Speech various issues. TABLE 5.3a: BUDGETARY Rh'VENUE OF' CENTRAL GOVERDNNT AS PERCEN'1' OF GDP

1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73

I. Tax Revenue 2.31 2.64 2.68 3.57 3.76 4.30 4.68 4.36 4.49 4.63

Taxes on Net Income and Profits 0.05 0.09 0.11 0.13 0.16 0.20 0.22 0.23 0.21 0.21

Taxes on Property and Property Transfers o.83 0.79 0.70 o.94 1.17 1.00 1.17 1.0l 0.97 o.84 Larnd Revenue 0775 0.73 10.1 o.g30.899.1o 1.00 o.84 0.870 E0 Other 0.07 o.o6 o.o4 o.04 o.o6 0.07 0.16 0.17 0.17 0.17

Taxes on Goods and Services 0.32 0.35 0.49 0.57 0.70 0.95 1.03 1.39 1.39 1.47 Sales Tax - neg. 0.09 0.19 0.36 o7 0.71 Excise Duties 0.20 0.24 0.30 0.32 0.28 0.33 o.43 0.62 0.61 o.60 Taxes on Services 0.11 0.10 0.09 0.03 0.03 0.03 0.04 0.04 0.07 0.11 Taxes on Use of Goods or Property or Permission of Activities 0.01 0.01 0.01 0.03 0.03 0.03 0.03 o.o4 0.05 0.05

Taxes on International Trade 1.11 1.41 1.38 1.92 1.72 2.14 2.20 1.72 1.91 2.12 Import Taxes 0.91 1. T 1.17 1.69 1.TI2 T1.6 1.94 1.53 12 1.92 Customs Duties (0.34) (0.35) (0.55) (1.36) (1.04) (1.29) (1.43) (1.09) (1.13) (1.17) Indian Excise Refund (0.56) (0.79) (0.62) (0.33) (0.38) (0.37) (0.51) (0.43) (0.49) (0.76) Export Duties 0.17 0.19 0.19 0.21 0.29 o.47 0.25 0.19 0.26 0.15 Miscellaneous o.o4 0.08 0.01 0.02 0.01 0.01 0.02 0.01 0.03 0.05

Other Taxes neg. neg. neg. neg. 0.13 neg. neg. - - -

II. Non-Tax Revenue o.68 0.62 0.51 o.47 0.54 0.52 0.55 o.66 0.77 0.77

Revenue from Departmental Enterprises 0.09 0.08 o.o6 0.07 0.08 0.07 0.07 0.08 0.09 0.12 Administrative Charges and Fees 0.07 0.10 0.08 0.07 0.06 o.o6 0.07 0.15 0.12 0.13 Dividend and Interest 0.02 0.06 o.o6 0.06 0.09 0.10 0.16 0.27 0.25 0.19 Royalties neg. neg. neg. neg. neg. neg. neg. neg. neg. 0.01 Forest Revenue 0.31 0.35 0.28 0.26 0.29 0.24 0.20 0.14 0.22 0.31 Other Non-Tax Revenue 0.18 0.03 0.02 0.02 0.02 0.03 0.04 0.02 0.09 0.01

III. Currenit Revenue (I & IT) 2.99 .2 3.19 40 4.30 4.o23 5.22 5.01 5.26 5.40

IV. Loan Repayment Received - neg. - 0.02 0.02 - 0.05 0.05 0.07 0.07

V. Total Budgetary Revenue (III & IV) 2.99 3.z 63.19 4 5.32 5.06 2 5.47

Source: Table 5.3 TABLE 5. 3b: COMPOSITION OF GENTRAL GOVERXNKNT CURRENT REVENUE (P'ercent of Total)

1963/64 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 Revised Budget Estimate Estimate

I. Tax Revenue 77.2 81.0 84.o 88.3 87.4 89.2 89.5 9 85.4 85.7 83.6 80.1

Taxes on Net Income and Profit 1.8 2.8 3.4 3.3 3.8 4.2 4.3 4.7 4.o 3.8 4.o 6.o

Taxes on Property and Property Transfer 27.7 24.2 21. 23.2 27.1 20.7 22.4 20.1 18.5 14.1 13.1 Žt.7 Land Revenue 25.3 22.5 20. 22.2 25.7 19.2 19-. 16.8 15.2 12.2 =1ix 10.6 Other 2.3 1.8 1.3 1.1 1.4 1.5 3.3 3.3 3.3 3.2 2.9 3.1

Taxes on Goods and Services 10.6 10.6 15.5 14.2 16.3 19.8 20.7 27.8 26.5 27.2 26.0 26.5 Sales Tax - neg. 2.9 17F 7 3 T 11.1 13.7 2 T3 P12.6 13 1 Excise Duties 6.8 7.2 9.3 7.8 6.6 6.8 8.3 12.4 11.6 11.1 10.2 12.3 Taxes on Services 3.6 3.2 3.0 0.8 0.7 o.6 0.7 0.8 1.4 2.0 2.1 1.9 Taxes on Use of Goods or Property, or Permission of Activities 0.2 0.2 0.3 0.8 0.7 0.7 o.6 o.8 0.9 1.0 0.9 0.9

Taxes on International Trade 37.2 43.3 43.2 47.6 40.o 44.4 42.1 34.4 36.3 39.2 39. 33.9 Import Taxes 30.3 35.0 5677 41.9 33.0 3. 37.0 30,+o 35. 61 30.2 Customs Duties (11.5) (10.8) (17.3) (33.6) (24.1) (26.7) (27.3) (21.8) (21.5) (21.6) (19.8) (17.6) Indian Excisa Refund (18.9) (24.2) (19.4) (8.3) (8.9) (7.7) (9.7) (8.6) (9.3) (14.0) (16.3) (12.7) Export Duties 5.6 5.8 6.1 5.3 6.7 9.8 4.7 3.8 5.0 2.7 2.8 3.4 Miscellaneous 1.3 2.6 o.4 0.4 0.3 0.2 0.3 0.2 o.6 0.9 o.6 0.3

Other Taxes - neg. neg. neg. 0.3 neg. neg. - - - - -

II. Non-Tax Revenue 22,8 19.0 16.o 11.7 12.6 10.8 10.5 13.1 14.6 14.3 16.4 19.

Revenue from Departmental Enterprises 3.1 2.3 2.0 1.7 1.8 1.8 1.4 i.6 1.7 2.1 1.8 1.9 Administrative Charges and Fees 2.3 3.0 2.6 1.6 1.3 1.3 1.3 2.9 2.3 2.5 2.0 1.6 Dividend and Interest 0.7 2.0 1.8 1.4 2.2 2.0 3.1 5.4 4.8 3.5 3.9 8.8 Royalties neg. neg. 0.1 neg. neg. neg. neg. neg. neg. 0.1 0.3 o.6 Forest Revenue lo.4 10.9 8.8 6.4 6.7 5.1 3.8 2.7 4.1 5.8 7.2 6.5 Other Non-Tax Revenue 6.2 0.8 o.8 o.4 o.6 0.7 o.8 0.3 1.7 0.3 1.2 0.5

III. Current Revenue (I & II) 100.0 lOO.O lOO lOO.O 100.0 TOO.0 l00.0 100.0 100.0 100.O 100.O 100.0

Source: Table 5.3 TABLE 5.4: ESTI1MATED RESOURCE AVAILABILITY AND REQUIREMENT FOR THE FIFTH PLAN 1/ (In million of Rs in constant 1974/75 prices)

- Mission Estimate National Planning 1975/76 1976/77 1977/78 1978/79 1979/80 Fifth Plan Commission Estimate Peri6d Fifth Plan Period

Revenue from Existing Sources (1) Central Government Current Revenue 860 875 900 925 950 4,510 * (2) Tax Revenue (730) (745) (765) (785) (805) (3,830) (*) (3) Non-Tax Revenue (130) (130) (135) (140) (145) (680) (*) (4) Local Government Revenue 15 15 15 20 20 85 * (5) Public Enterprises' Profits 50 50 55 55 55 265 230 (6) Total 925 940 970 1,000 1,025 76*

Regular Outlays (7) Central Government 685 755 835 940 1,070 4,285 * (8) Salaries for Primary & Secondary School Teachers (5) (10) (25) (50) (100) (190) (*) (9) Other, Excluding Debt Services (645) (710) (780) (860) (945) (3,940) (10) Interest on Development Bonds (35) (35) (30) (30) (25) (155) (*) (11) Local Governments 15 15 15 20 20 85 * (12) Total 700 770 50 1,90 4,370 *

(13) Revenue Surplus 225 170 120 40 -65 490 (14) Plus: Additional Tax Revenue of HMG 65 90 120 150 180 605 * (15) Adjusted Revenue Surplus 290 2 40 190 115 1,095270

(16) Foreign Grants and Loans 600 600 600 600 600 3,000 2,575

(17) Net Borrowing from Private Sector 95 100 100 105 110 510 (18) Direct (15) (15) (15) (15) (20) (80) (19) Through Commercial Banks (80) (85) (85) (90) (90) (430) (20) Less: Interest -10 -15 -25 -30 -80 (21) Amount Available for Development Outlays 95 90 5- 4 0 30 ) 1,460

(22) Expansionary Financing, Maximum Limit 170 170 175 175 180 870

(23) Potential Resources Available for Development Outlays 1,155 1,120 1,100 1,045 975 5,395 6,795

(24) Planned Development Outlays 1,295 1,325 1,360 1,390 1,425 6,7956,795

(25) Resource Snortfall 140 205 260 345 45G 1,400 - As Percent of Planned Development Outlays (10-8) (15.5) (19.1) (24.8) (31.6) (20.6) (-)

See Explanatory note following Table 5.4a. 4 TABLE 5. a: ESTIMATED RESOURCE AVAILABILITY AND REQUIREMENT FOR THE FIFTH PLAN AS PERCENT OF GDP J

1975/76 1976/77 1977/78 1978/79 1979/80

Revenue from Existing Sources (1) Central Government Current Revenue 5.3 5.3 5.3 5*3 5 3 (2) Tax Revenue (4.5) (4.5) (4.5) (4s5) (45) (3) Non-Tax Revenue (0.8) (o.8) (o.8) (0.8) (0.8) (4) Local Government Revenue 0.1 0.1 0.1 0.1 0.1 (5) Public Enterprises' Profits 0.3 0.3 0.3 0.3 0.3 (6) Total 5.7 5.7 5.7 5.7 5.7 Regular Outlavs (7) Central Government 4.2 4.5 4.9 5.4 6.0 (8) Salaries for Primary & Secondary School Teachers (neg.) (0.1) (0.1) (0.3) (9) (o.6) Other, Excluding Debt Services (4.o ) (4.3) (4.6) (4.9) (5.3) (10) Interest on Development Bonds (0.2) (0.2) (0.2) (0.2) (0.1) (11) Local Governments 0.1 0.1 0.1 0.1 0.1 (12) Total 3 b47 5.0 5.5 T7

(13) Revenue Surplus 1.4 1.1 0.7 0.2 -o.4 (14) Plus: Additional Tax Revenue of HMG o.4 0.5 0.7 0.9 1.0 Adjusted Revenue (15) Surplus . 7 1.1 7

(16) Foreign Grants and Loans 3.7 3.6 3.5 3.4 3.4 (17) Net Borrowing from Private Sector o.6 o.6 o.6 o.6 o.6 (18) Direct (0.1) (0.1) (0.1) (0.1) (0.1) (19) Through Commercial Banks (0.5) (0.5) (0.5) (0.5) (0.5) (20) Less: Interest - -0.1 -0.1 -0.1 -0.2 (21) Amount Available for Development Outlays 7 0.5 0.5 0.5 076 (22) Expansionary Financing, Maximum Limit 1.0 1.0 1.0 1.0 1.0

(23) Potential Resources Available for Development Outlays 7.1 6.7 6.4 6.o 5.5

(24) Planned Development Outlays °.0 8.o 8.0 8.0 8.o (25) Resource Shortfall 0.9 1.2 1.6 2.0 2.5 i:/ See explanatory note on the follDwing pages. Explanatory Note for Tables 5.4 and 5.4a

Table 5.4 shows an illustrative estimate of public sector's resource requirement for Fifth Plan development outlays and an illustrative estimate of resources available to the public sector in the Fifth Plan period. The estimates are expressed in constant 1974/75 prices. The estimate of resource requirement has been derived from the following Plan drafts prepared by the National Planning Commission:

(a) Basic Principles of the Fifth Plan (1975-80). February 27, 1973; and

(b) "Selected Portions of the Working Policy on Fifth Plan," unpublished draft dated September 1974.

Table 5.4a shows the estimates in percentage ratios to GDP. Fol- lowing assumptions are made to project GDP in the Fifth Plan period:

(a) In 1973/74 GDP grew bry 8% in real terms and increased by 28% in nominal terms;

(b) In 1974/75 GDP will grow by 2.5% in real terms and will increase by 9.7% a year in nominal terms; and

(c) During the Fifth ?lan period GDP will grow by 2.5% a year in real terms and will increase by 7.6% a year in nominal terms.

Furthermore, it is tentatively assumed that price inflation at 5% a year during the Fifth Plan period implied in (c) above will be generated by factors other than the bor-owing of the public sector.

The rest of this note explainsthe definition of terms used in Tables 5.4 and 5.4a and the derivation of the estimates in the two tables.

1) Goverrnent Current Revenue: Budgetary revenue of Govermnent less receipts of loans repaid, as defined in Table 5.3.

2) Tax Revenue: Tax revenue that would accrue to the Governnent if the structure of taxes and the state of tax administration remain as at present during the Fifth Plan period. Estimated as 4.5 percent of GDP (average in 1970/71 to 1973/74), assuming unit elasticity of tax revenue with respect to GDP in current prices.

3) Non-Tax Revenue: Estimated as 0.8% of GDP (average in 1970/71 to 1973/74). The contribution of the Nepal Rastra Bank may decline in the near future as its net foreign asset holdings are likely to diminish. Forest revenue may also decline a little due to the threatening danger of deforesta- tion. However, increases in the receipts of departmental enterprises which will accompany expansion of their services will offset the reduction in the revenue from the two sources mentioned above. -2-

4) Local Govermnent Revenue: istimated as 0.1% of GDP on the basis of the accounts of Kathmandu Town Panchayat and Pokhara Towqn Panchayat and with the assumption of unit elasticity of revenue with respect to GDP in current prices.

5) Public interprises' Profits: Operating surpluses plus property incomes of non-financial public enterprises, including depreciation allowances but excluding direct taxes and dividends remitted to the Government. Esti- mated on the basis of a study by the Central Bureau of Statistics (National Accounts of Nepal (Public Corporation), September 1971), which indicated that consolidated profit of non-financial public enterprises was 0.27% of GDP in 1967/68. It is assumed in these tables that the ratio of the profit to GDP in the Fifth Plan period will be 0.3%, a little higher than in 1967/68. National Planning Commission's estimate for the five-year period is Rs.230 million, which is a little lower than Mission's estimate.

7) Government Regular Outlays: Regular expenditure less debt repayments. It is assumed that the definition of "regular expenditurel" will remain the same during the Fifth Plan Period as in 1974/75.

8) Salaries for Primary and Secondary School Teachers: The National Planning Commission estimates that these outlays will reach Rs.160 million a year by the end of the Fifth Plan period if the New National Education Plan is implemented fully in accordance with schedule. Mission's estimate assume. that a part of the New National Education Plan will be postponed due to the difficulty in obtaining required number of qualified teachers.

9) Other Government Regular Outlays, Excluding Debt Services: Estimated to increase from Rs.585 in,l974/75 by 10% a year in real terms. The National Planning Commission estimates that annual increase by 15% is necessary to improve socio-economic services in remote areas according to schedule. Mission's estimate assumes that a part of such programs will be postponed due to manpower constraints.

10) Interest on Development Bonds: Interest payable on development bonds outstanding at the end of 1974/75, calculated on the basis of development bond retirement schedule and converted into 1974/75 price figures. It is assumed that the 11th series of Rs.200 million to be issued at the end of 1974/75 will bear an interest at 8.5% a year and will not be redeemed before the end of 1979/80.

11) Regular Outlays of Local Governments: Estimated on the basis of the accounts of Kathmandu Town Panchayat and Pokhara Town Panchayat.

12) Total Regular Outlays: Consolidated total. The figure would be larger if the New National iducation Plan and other socio-economic service programs are implemented fully in accordance with schedules.

13) lbxcess of "Revenue from Existing Sources" less "Regular Outlays." - 3 -

14) Additional Tax Revenue of Government: Estimated increase that may be derived from better enforcement of existing taxes and gradual reduction of various taix privileges stipulated by the Industrial Enterprise Act. The increment is assumed to increase from 0.4% of GDP in 1975/76 to 1% of GDP in 1979/80. The estimated potentials for increase are greater, probably in the order of 2.5% of GDP, but it would not be practical to expect that such potentials could be fully realized in a short period.

15) Adjusted Revenue Surplus: (13) plus (14). The estimate in the Plan drafts indicates Rs.2.8 billion for the five-year period including Rs.0.8 billion to be generated by local governments. Mission's view is that local governments would not generate any revenue surplus.

16) Foreign Grants and Loans: Estimated to be about US$60 miLlion a year on the basis of existing agreements and on-going discussions.

17) Net Government Borrowing-from Private Sector: Net increase in development bonds sold to the private sector either directly or indirectly through comnercial banks, which onvert the savings and time deposits of the private sector into development bonds.

18) Direct Net Government Borrowing from the Private Sector: Estimated as 0.1% of GDP. In the past the maximum ratio to GDP of net increase in development bonds held by the private sector was a little over 0.1%. Since the prospects for private investment in productive facilities are uncertain, Mission expects that a part of private saving equivalent to 0.1% of GDP will be invested in development bonds, provided that the future series of development bonds bear interest sufficiently attractive relative to returns on deposits in Indian banks.

19) Net Goverrnent Borrowing from Private Sector through Commercial Banks: Estimated as 0.5% of GDP. For the same reason as above Mission estimates that private sector's savings and time deposits in commercial banks will increase by about 1% of GDP annually. And about half of this increase can be invested by commercial banks in development bonds without causing any serious strains on private investment.

20) Interest: Interest payable on development bonds purchased by the private sector and commercial banks during the Fifth Plan period. Calculated on the assumption that the average interest rate on these development bonds will be 9%, instead of 8.5% offered on the 8th to l1th series, and converted into 1974/75 price figure. Depending on the movement in interest rate offered by Indian banks it may become necessary to offer higher rate on development bonds in order to prevent outflows of private savings to India.

21) Amount of Funds Borrowed from the Private Sector Available for Development Outlays: (17) less (20).

22) Kxpansionary Financing, Maximum Limit: Maximum size of the sum of net borrowing from the Nepal Rastra Bank and drawing on cash balances (held in the Nepal Rastra Bank) that would not originate any inflationary tendency in Nepal. Estimated as follows: (i) Money supply can increase at rates up to 3.5% a year (1% in excess of GDP growth rate permitted by the expansion of monetized sector in the economy). Since money supply at the end of 1974/75 will be about Rs.1.5 billion, the maximum annual increase in money supply will be about Rs.50 million in constant 1974/75 prices.

(ii) Net foreign assets held by banks will decline during the Fifth Plan period even in the absence of inflationary movements originating in Nepal, and this will tend to reduce money supply. In Tables 5.4 and 5.4a it is assumed that annual decline will be about 0.4% of GDP, which will reduce net foreign assets from US$120 million at the end of 1974/75 to US$60 million by the end of 1979/80 in constant 1974/75 prices. Thus, the size of expansionary finance of aIG can be considerably larger than the ceiling on incremental money supply derived above. It is plausible that net foreign assets of banks decline faster than assumed here, in which case there will be more room for expansionary finance of Goverrment.

(iii) As mentioned above, savings deposits and time deposits of private sector will increase annually by amount equal to l% of GDP, which will also tend to reduce money supply. However, it is already assumed that about half of the increment in savings and time deposits will be used by commercial banks to purchase development bonds, thus the net effect on money supply is reduction by annual amount equal to 0.5 of GDP.

(iv) Other factors affecting money supply (credits to the private sector, capital accounts of the banking sector, etc.) will tend to increase money supply by about 0.2% of GDP annually.

(v) Hence the maximum size of expansionary financing that will not generate inflationary movement in Nepal will be about 1% of GDP.

The condition that public sector's borrowing (plus drawing on cash balances should not generate inflationary tendency may be somewhat too strict in the Nepalese situation. If the public sector is permitted to generate a minor inflation, then the ceiling on incremental money supply will be raised. Furthermore, the net foreign assets of banking sector will decline faster, and hence the size of expansionary financing can be considerably greater than the estimate shown in Tables 5.4 and 5.4a.

23) Potential Resources Available for Development Outlays: (15) plus (16) plus (21) plus (22). - 5 -

24) Planned Development Outlays of the Public Sector: Derived from the Fifth Plan drafts of th-. National Planning Commission cited at the beginning of this note. The figure includes Govermnent grants and loans to the private sector, the latter to be channelled through financial insti- tuticns. Temporal distribution of outlays is not specified in Plan drafts, but it is assumed here that outlays will increase at the same rate as GDP, i.e., 2.5,.

25) Resource Shortfall: (24) less 23). Table 6.1: MONETARY SURVEY

(Amounts outstanding at mid-July; in millions rupees)

1970 1971-/ 1972 1973 1974 1975 A B (Est.) (Proj.)

Net foreign assets 987.0 1,071.6 1,018.7 1,083.9 1,219.4 12367.4 1,320.4

Domestic credit 95.8 217.8 217.8 361.9 576.7 902.7 1,378.7

Government (net) -221.3 -148.5 -148.5 -80.3 21.7 153.7 313.7 Government enterprises 58.2 45.5 45.5 41.8 96.0 97.0 188.0 Private sector 258.9 320.8 320.8 400.4 459.0 652.0 877.0

Monetary liabilities 958.5 1,107.9 1,055.0 1,240.4 1,493.2 1,850.2 2,227.2

Quasi-money2/ 196.2 261.6 261.6 382.7 477.4 577.4 700.4 Money 762.3 846.3 793.4 857.7 1,015.8 1,272.8 1,526.8

Other liabilities (net) 124.3 181.5 181.5 205.4 302.9 419.9 471.9

1! Prior to August 1970, the foreign liabilities of the central bank were not known; these amounted to NRs 52.9 million at mid-July 1971. Data in Column A are consistent with prior years where such liabilities are included in money and not netted from foreign assets. Column B and subsequent years treat these liabilities appropriately. 2/ Adjusted for devaluation and SDRs. 3/ Includes fixed and savings deposits. These data are not comparable with those in Appendix V where quasi-money includes fixed deposits only.

Source: IMF Report SM/74/265, Nepal - Recent Economic Developments, December 10, 1974. Table 6.2: ASSETS AND LIABILITIES OF COMMERCIAL BANKS / (in million rupees)

1970 1971 1972 1973 1974

Cash 20.7 26.9 30.2 32.5 27.6 Balance with Rastra Bank 58.2 102.0 104.6 108.0 157.8 Foreign assets 2/ 92.6 76.5 120.7 165.1 180.7 Loans and overdrafts 279.0 333.9 399.3 491.9 569.1 Claims on Government 17.9 17.2 65.8 100.9 100.4 Balances with commercial banks 4.0 2.6 8.4 13.3 23.0 Other assets 46.8 47.5 64.2 71.5 84.4

Assets = liabilities 519.2 606.5 793.1 983.2 1,143.0

Deposits 379.4 445.3 581.6 737 0 839.8 Demand deposits (183.2) (183.7) (198.9) (259.7) (306.8) Fixed deposits (143.7) (193-3) (294.9) (357.0) (403.8) Savings deposits (52.5) (68.3) (87.9) (120.2) (129.2) Foreign liabilities 9.8 13.9 21.7 18.4 19.1 Borrowing from Rastra Bank 21.0 10.8 1.3 7.3 9.5 Capital and reserves 15.5 15.7 15.7 18.2 18.4 Other liabilities3J 93.6 120.8 172.8 202.3 256.2

1/ For 1969-73, mid-July; for 1974, mid-January. 2/ Since mid-August 1969, including foreign bills discounted. 3/ Including margin deposits anc cashier's security deposits.

Source: IMF Report SM/74/265 "Nepal - Recent Economic Developments," December 10, 1974. Table 6.3s FIXED AND SAVINGS DEPOSITS AND CREDIT OPERATIONS OF THE COMMERCIAL BANRS (Millions of rupees)

Fixed and Savings % % Mid-month Deposits change Credit i change

1970 July 196.2 _ 279.0 - 1971 July 261.6 (33.2%) 333.9 (19.7%) 1972 July 382.7 (46.3%) 399.3 (19.6%) 1973 July 477.4 (24.7%) 491.9 (23.2%) 1974 July 569.o (19.3%) 766.9 (55.9%) 1974 August 613.0 708.0 1974 September 612.6 712.0 1974 October 612.1 756.0 1974 November 615.4 780.0 1974 December 600.2 826.7 1975 January 2/ 607.4 918.8 1975 Februai 595.7 984.5 1975 March - 605.7 1124.9

1/ Excluding investment in government bonds and foreign bills purchased and discounted.

2/ Provisional.

Source: Nepal Rastra Bank. Table 6.4: AGRICULTURAL DEVELOP4ENT BANK RESOURCES AND UTILIZATION OF FUNDS (Million of rupees)

mid-July mid-July mid-July mid-July mid-July mid-Jan. 1970 1971 1972 1973 1974 1975 _

1) Total Resources 26 37 47 74 181 137

(a) Capital 18 23 33 45 58 58 (b) Borrowings and Deposits 06 12 12 27 106 76 (c) Reserves 02 02 02 02 17 03

2) Credit and Invest- ments 18 34 44 60 165 130

1/ Provisional.

Note: Figures relating to Land Reform Savings Corporation incorporated since mid-July 1974. Source: Nepal Rastra Bank. Table 6.5: INDUSTRIAL DEVELOPMENT CORPORATION RESOURCES AND UTILIZATION OF FUNDS (Millions of rupees)

Mid- hid- Mid- Mid- Mid- Mid- July July July July July March 1970 1971 1272 1973 1974 1975 1/

1. Total Financial Resources 52 67 109 128 150 150

a) Capital Fund 24 27 70 88 108 108 b) Borrowings 28 40 39 40 42 42 2. Loans and Investment 47 57 63 72 95 125

1/ Provisional. Source: Nepal Rastra Bank. Table 7.1t AREA, PRODUCTION AND YIELDS AND GROWTHRATES FOR MAJOR CROPS

Annual I/ 2/ Growth Rate 1964/65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72 1972/73 1973/74 Average 1967- Average 1972 1967-1972

Paddy Area -/ 1,101 1,111 1,100 1,154 1,172 1,173 1,122 1,204 1,140 1,213 1,122 1,176 0.9 Producti on 4 2,201 2,241 2,007 2,027 2,178 2,241 2,304 2,358 2,062 2,402 2,115 2,185 0 6 Yield - 2.00 1.99 1.82 1.75 1.86 1.91 2.05 1.95 1.80 1.98 1.88 1.85 -0.3

Maize Area 437 451 450 412 421 433 445 435 438 442 438 439 0.1 Production 854 856 824 735 765 795 833 730 753 793 809 772 -O 9 Yield 1.95 1.90 1.83 1.78 1.81 1.83 1.86 1.67 1.72 1.79 1.84 1.75 -1.0

Wheat Area 100 118 126 192 208 226 228 247 260 270 148 249 10.6 Production 126 147 159 204 233 265 193 225 313 315 170 244 7.4 Yi6ld 1.26 1.25 1.26 1.07 1.13 1.17 .84 .91 1.20 1.17 1.15 0 99 -3.1

Barley Area 24 27 27 23 26 26 27 28 27 28 26 27 0 8 Production 26 28 28 23 22 24 25 25 26 25 26 25 -0 8 Yield 1.08 1.04 1.04 .92 .85 .92 .93 .89 .96 0.89 1.00 0.93 -1.6

Millet Area 96 100 100 102 109 112 115 115 121 124 101 117 3.0 Production 63 120 120 113 121 125 125 130 134 142 118 131 2.1 Yield .66 1.20 1.20 1.11 1.11 1.12 1.30 1.13 1.11 1.15 1.17 1.12 -0.8

Sugar Cane Area 9 13 10 11 12 13 14 15 15 15 11 15 6.4 Production 126 192 147 169 189 216 236 245 245 250 169 242 7.5 Yield 14.0 14.77 14.70 15.36 15.75 16.62 16.86 16.33 16.33 16.67 15.37 16.51 1.1

Jute Area 32 32 32 47 46 52 55 60 55 33 37 57 9.0 Production 39 39 38 46 43 49 53 59 55 40 41 56 6.5 Yield 1 22 1.22 1.19 .98 .93 .94 .96 .98 1 00 1.21 1.11 0.98 -2.5

Oilseed Area 108 96 98 97 101 103 106 111 117 114 97 Ill 2.7 Production 51 51 58 52 54 57 55 57 60 62 54 57 1.1 Yield .47 .53 .59 .54 .53 .55 .52 .51 .51 0.54 0.56 0.51 -1.6

Tobacco Area 8 8 8 9 9 9 9 9 9 10 8 9 2.4 Production n.a. n.a. n.a. n a. n.a. n.a. n.a. 7 7 8 n.a. 7 n.a Yield n.a. n.a. n.a. n.a. n.a. n.a. n.a. .8 .8 0.80 n.a. 0.8 n a.

Potato Area 29 42 43 43 43 46 49 51 51 53 43 50 3.0 Production 186 277 300 245 250 263 273 294 294 305 274 287 0.9 Yield 6.41 6.60 9.98 5.70 5.81 5.72 5.57 5.76 5.76 5.75 6.37 5.74 -2.1

I/ Average 1965/66 - 1967/68 2/ Average 1970/71 - 1972/73 3! Area in '000 ha 4/ Production in '000 m ton 5/ Yields in m ton/ha

Source Agricultural Statistics of Nepal. Table 7.2: ESTIMATES OF LIVESTOCK POPUIATION, 1966/67-i969/70

1966/67 1967/68 1968/69 1969/70 (000 heads)

Cattle

Cows 3,010 3,074 3,136 3,198 Oxen 2,850 2,911 2,969 3,028

Tot,l 5,860 5,985 6,105 6,226 Buffalo

She-buffaloes 2 ,802 2,862 2 ,919 2,977 He-buffaloes _475 485 _ 495 505

Total 3,277 3,347 3,414 3,,482 Sheep Ewes '1*,500 1,533 1,567 1,601

Rams 475 485 496 507

Total 1,975 2,018 z,063 2,108 'Goats

She-goatb 1,650 1,686 1,723 1,761

He-goats 450 460 470 480 Total 2,100 2,146 2,193 2,241

Pigs 500 307 313 320

Source: EAPD, Agricultural Statistics of Nepal, 1972. Table 7.3: ESTIMATES OF LIVESTOCK PRODUCTION

1965/66 1966/67 1967/68 1968/69 1969/70 (000 mntons)

Meat

Buffalo 17.5 17.8 18.3 18.7 19.0

Sheep 2.4 2.5 2.6 2.6 2.7

Goat 2.5 2.6 2.6 2.7 2.9

Pig 3.6 3.6 3.9 4.0 4.2

Poultry 15.0 15.6 16.4 16.9 17.5

Total 41.0 42.1 43.8 44.9 46.3

Milk

Buffalo -- -- 375.0 386.0 400.0

Cow -- -- 170.0 173.5 178.0

Others -- - _ 4.5 4.5 4.6

Total -- -- 549.5 564.0 582.0

Milk Products

Cheese 20.0 30.0 42.0 50.0 55.0

Butter and Ghee 8.0 8.2 8.5 8.7 9.0

1/ In tons.

Source: ELPD, Agricultural Statistics of Nepal, 1972. Table 7.4: SUPPLY AND USE OF SELECTED AGRICULTURAL INPUTS

1969/70 1970/1 1971/2 1972/3 1973/41 1974/4$

Distribution of fertilizers ('000 tons) 29.1 17.7 25.4 32.6 21.0- 42.5

Distribution of pesticides 1/ ('000 NRs) - - 505 305 AXr 625

Area covered by new seeds ('000 hectares) 138.4 177.7 218.3 404.8 -

Distribution of improved seeds ('000 tons) - - 1.2 2.1 1.5 2.0

Gross agricul- 3 / tural credit- (NRs mn.) 38.4 41.4 61.3 68.7 36.5 _

1/ First nine-month figures. Z/ Projected. 3/ Gross credit provided by the Agricultural Development Bank and the Land Reform Savings Corporation.

Source: Data supplied by the Nepalese authorities. Table 8.1: PRODUCTION OF PRINCIPAL INDUSTRIES

1972/3 1973/4 1966/7 1967/8 1968/9 1969/70 1970/1 1971/2 1972/3 (First nine months)

Jute (1,000 tons) 12.2 12.2 14.0 10.5 13.5 13.1 13.7 9.6 9.6

Sugar (1,000 tons) 4.4 3.3 9.7 16.2 14.5 7.6 10.6 10.6 13.6

Cigarettes (billions sticks) 1.0 1.1 1.7 1.5 2.1 2.2 2.3 1.6 1.9

Matches (1,000 gross) 465 424 468 516 419 527 587 361 355

Shoes (1,000 pairs) 20.1 28.7 21.1 42.0 65.8 70.0 79.0 58.0 55.o

Leather (tons) 57.0 64.2 99.8 138.9 152.0 171.0 187.0 139 113.0

Stainless steel utensils (tons) 381 738 2,419 933 356 133 139 139 134

Synthetic textiles (1,000 m.) 2,008 2,493 3,541 2,354 984 48 - - 25

Tea (tons) 8 11 17 20 20 24 35 18 28

Woolen textiles (1,000 pounds) - 4 11 1 18 23 10 10 -

Iron goods (tons) - 1,379 2,500 2,900 3,000 2,500 5,716 3,450 2,689

Liquors (1,000 liters) 19 46 211 219 122 124 270 130 138

Nylon buttons (1,000 gross) - 188 278 266 308 170 44 29 5

Soap (1,000 maund) - 10 9 30 22 24 36 15 9

Beer (1,000 liters) - - - - - 137 363 - 324

Bricks and tiles (mn. pcs.) - - - - - 28 36 _ 115

Source: Data supplied by the Nepalese authorities. Table 8.2: NIDC OUTSTANDING FINANCIAL ASSISTANCE (in million rupees)

Sectors 1969 1970 1971 1972 1973 1974

Hotels 10.7 11.4 15.4 18.5 18.4 21.1

Manufacturing 14.5 18.9 20.4 16.7 21.1 21.6

Sugar 6.2 6.2 6.7 6.2 6.2 6.2 T'extiles 0.3 2.9 2.9 0.7 - - Jute 2.9 0.2 0.1 0.2 0.3 0.2 Others 5.1 9.6 10.7 9.6 14.6 15.2

Transportation 4.1 6.4 6.6 7.3 7.4 7.5

Electricity 1.2 1.2 4.5 3.8 3.1 3.0

Services 1.9 1.6 1.5 1.1 1.4 1.6

Miscellaneous 2.7 2.9 3.6 3.8 6.3 9.9

Total 35.1 42.5 52.0 51.2 57.7 64.7

1/ Net (cumulated) amounts due as of mid-July of each year; for 1974, the figures are for mid-April.

Source: Data provided by the Nepalese authorities. Table 8.3: NEPAL HIGHWAY NETWORK (kilometers)

Paved Gravel Earth Total

1955 295 n.a. 365 660

1965 289 147 1,390 1,826

1967 536 344 1,551 2,432

1969 661 4b8 1,611 2,680

1970 820 433 l,495 2,728

1971 950 465 1,365 2,780

1972 1,080 500 1,?50 2,830

1973 1,376 306 1,371 3,053

1974 (est.) 1,489 288 1,396 3,173

Source: Ministry of Works and Transport. Road Department. Table 8.4: TOURIST TRADE

Expenditure Tourist Per 2 Number of Expenditures - Tourist _ Year Tourists 2! (Mn. of Es) (Rs)

1962 6,179 o.6 97

1963 7,275 0.9 123

1964 9,526 1.5 157 1965 9,388 1.6 170 1966 12,567 3.0 239 1967 18,093 6.0 332

1968 24,209 7.7 318

1969 34,901 9.4 269 1970 45,970 13.2 287 1971 49,658 16.7 534 1972 52,930 22.0 416

1973 68,047 53.2 782 1974 (est.) 75,000/80,000 90.0/100.0 1,200

1/ From countries other than India; figures for calendar years. 2/ Figures for tourist expenditures are on the basis of fiscal years, ending mid-July of the given year.

Source: Department of Tourism. Table 9.1: CHANGES IN KATHMANDU CONSUMER PRICE INDEX (percentage per annum)

1969/70 1970/71 1971/2 1972/3 1972/31 /1973/L-r

Food and drink 21.9 -3.7 9.7 9.4 11.8 25.8

Foodgrains 28.4 -10.5 10.6 8.o 14.6 25.0 Oil and ghee 12.7 0.0 7.4 9.8 5.2 34.3 Liquor 32.3 1.5 10.1 14.3 2.8 -3.7 Meat and poultry 1.3 5.2 3.1 35.4 13.2 39.6 Vegetables and spices 17.4 24.1 3.0 -17.9 -2.9 38.3

Other consumer goods 11.9 -2.2 6.6 10.3 U.4 9.6

Clothes and shoes 8.9 1.8 21.9 30.2 29.< 22.5 Fuel, power and light 5.5 -3.3 5.4 2.5 13.5 8.o Household goods 39.4 -8.2 1.4 -6.2 -6.6 14.4

Overall change 19.7 -4.3 9.9 9.6 11.6 21.8

1/ Comparisons are of fourth quarter price data, except that in the last two columns third quarter price data are compared with those a year earlier (since data on component items were not available for the fourth quarter of 1973/74). Source: Nepal Rastra Bank, Quarterly Economic Bulletin, various issues, and data supplied by the Nepalese authorities. TABLE 10.1: FINANCIAL INVESTMENT OF CENTRAL GOVERNMENT (In thousand of Rs)

Outstanding at the end of Investment 1971/72 1972/73 1973/74

Financial Enterprises

Nepal Rastra Bank 10,000 - - Nepal Bank Limited 2,585 Rastriya Banijya Bank 3,000 _ - Agricultural Development Bank (ADBN) 28,738 10,000 10,000 Nepal Industr al Development Corporation (NIDC) 70,929 20,000 20,000 National Insurance Company 1,300 500 ___ 116,552 30,500 30,000 Non-Financial Enterprises

Cultural Establishments

Cultural Corporation 234 759 300 Royal Nepal Film Company 3,270 - 3,420 National News Agency (Rastriya Samachar Samati) 301 330 _ Ratna Recording Corporation 100 214 130 Gorkha Patra Corporation 150 680 350 4,055 1,983 4,200 Communication & Transportation Companies

Nepal Telecommunication Board 1,072 5,335 4,705 Nepal Transport Company 1,500 6,000 1,276 Transport & Warehouse Corporation 4,000 _ _ Royal Nepal Airlines Corporation (RNAC) 42 113 48,684 11,335 5,981 Electricity Companies

Butwal Power Company 600 200 200 Nepal Electricity Corporation 25,589 _ _ Morang Hydroelectricity Corporation 40 - - 26,229 200 200 Agricultural Establishments

Ilam Tea Development Corporation 11,087 _ _ Dairy Development Corporation 700 1,900 3,506 Tobacco Development Corporation 1,000 500 _ Agricultural Tools Factory 412 470 8,886 Agricultural Supply Corporation 1 500 1,000 _ 14,so99 -3j70 12,392 TABLE 10.1: Contd.)

Outstanding at the end of Investment 1971/72 1972/73 1973/74

Manufacturing Establishments

Leather and Shoe Factory 8,199 1,200 2,400 Biratnagar Jute Mill 886 - Rajupati Jute Mill, Limited 4,650 - Birgunj Sugar Factory 40,718 8,750 Morang Sugar Factory 1 Nepal Cigarette Factory 160 Janakpur Cigarette Factory 27,226 Nepalese Carpet Limited 100 - Nepal Textile Processing Industries - 2,900 1,904 Balaju Textile Industries Limited 800 200 - Hitaura Textile Industries Limited - 500 Juddha Match Factory 1 1 - Vegetable Ghee Plant Limited 1,500 Royal Drug Limited 1,800 500 - 84,541 6,301 13,554

Trading Companies

National Trading Limited 2,500 Oil Corporation 6,000 520 Salt Trading Corporation 300 - Timber Corporation of Nepal 6 286 - 15,0o86 520

Other

Agricultural Lime Industry - 750 National Construction Company 3,000 - 3,000 750 - Total Investment 312,8445 555 66,327 TABLE 10.2 DIVID)END RECEIPTS OF CENTRAL GOVERNMENT (In thousand of Rs)

1971/72 1972/73 1973/74

Financial Enterprises

Nepal Rastra Bank 23,774 17,502 20,002 Nepal Bank Limited 181 129 517 Nepal. Industrial Development Corporation - 644 _ Insurance Corporation 3 78 18,275 20,597

Non-Financial Enterprises

Electricity

Nepal Electricity Corporation - 100 Morang Hydroelectricity Corporation - - 2 - - 102 Manufacturing Establishments

Biratnagar Jute Mill 133 133 133 Rajupati Jute Mill - 316 _ Morang Sugar Factory 1 _ _ Judha Match Factory 0.1 0.2 0.1 134 449 133

Trading Companies

National Trading Limited 75 _ _ Salt Trading Corporation 30 - 36 Timber Corporation of Nepal 98 332 94 203 332 130

Other National Construction Company - 150 - 150

Total Receipts 24,330 19,206 20,963

Source: Accountant General's Office Table 10.3: PUBLIC SECTOR CORPORATIONS: RATE OF RETURN ON ASSETS 1

1963/6h 196L /65 1965/66 1966/67 1967/68 1968/69 1969/70 1970/71 1971/72

Total Assets (Rs. million) 612.7 760.6 891.9 937.1 1,238.8 1,665.2 2,008.6 2,227.5 2,568.6 Total Profits (Rs. million) 7.7 l|-3 18.2 | 1L.9 21.1 31.6 h1.2 | 5L.5 27.6 Rate of Return on Assets (%) 1.3 1.9 2.0 1.6 1.7 1.9 2.0 2.4 1.1

1/ The assets data were for 11 corporations only, namely: Nepal Rastra Bank, Nepal Bank Ltd., Rastriya Banijya Bank, Nepal Industrial Development Corporation (NIDC), Rastriya Beema Sansthan, Agricultural Development Bank, Agricultural National Tools Factory, Royal Nepal Airlines Corporation, Constraction Cosnany of NepalJ National Trading Ltd., Nepal Electricity Corporation. 32' 82 84° IBRD - 10154R e5 su6 AFGHANI$TAN FEBRUARY1973 EPAE L ~-a> CHITN/SKINA ;: :; PAKISTAN/ EPA~-01S8E TIM 30,~~~~~~~73 GEOPHYSICAL< 30 I/'NJ E IAN v ~~~~~~~~~~~~~~~~~~~~~~~~ELEVATIONIN METERS El -A- is,54 e/ 0 Above 4,000 IN D I A BANG1LAD

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