Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 15508-NEP

MEMORANDUM OF THE PRESIDENT

OF THE

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

COUNTRY ASSISTANCE STRATEGY

OF THE

WORLD BANK GROUP

FOR

NEPAL

April 30, 1996

Country Department IISouth Asia Region

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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The last Country Assistance Strategy for Nepal was reviewed by the Executive Directors onApril 12, 1994

CURRENCY EQUIVALENTS(as of mid-March 1996)

Currency Unit Nepali Rupees (NRs.)US$1 = NRs. 57.30

FISCAL YEARJuly 16 - July 15

ABBREVIATIONS AND ACRONYMS

ADB - Asian Development BankAPP - Agriculture Perspective Plan

CAS - Country Assistance Strategy

CEM - Country Economic Memorandum

CPPR - Country Portfolio Performance ReviewFIAS - Foreign Investment Advisory ServicesEDI - Economic Development InstituteESAF - Enhanced Structural Adjustment FacilityESW - Economic and Sector WorkFY - Fiscal YearGDP - Gross Domestic ProductIDA - International Development Association1DF - Institutional Development FacilityEFC - International Finance CorporationIMF - International Monetary FundMIGA - Multilateral Investment Guarantee AgencyMW - MegawattNEA - Nepal Electricity AuthorityNEPAP - Nepal Environmental Policy and Action PlanNGO - Non-Governmental OrganizationO&M - Operations and MaintenancePFP - Policy Framework PaperRPP - Rastriya Prajatantra Party

SAC - Structural Adjustment CreditUML - United Marxist-Leninist (Party)USAID - United States Agency for International DevelopmentVAT - Value Added Tax

FOR OFFICIAL USE ONLY

NEPAL: COUNTRY ASSISTANCE STRATEGY

Table of Contents

Page No.

A. The Economy ........................................................ 1

I. Recent Economic and Social Performance .................................... ,.,.,,,,,.,.1

B. Nepal's Development Strategy .................................... 4

I. A Poverty Alleviation Strategy for Nepal ................................. , , , . 4II. Priorities for the Next Three Years ................................ , , , . 7

Using Public Resources More Effectively ........................... , , . , . 7Building Capacity ........................... 9Encouraging Private Sector. NGO, and Beneficiary Participation .............................................. 10

III. Macroeconomic Scenario .12

C. The Bank Group Assistance Strategy .12

Policy Dialogue, Economic and Sector Work, and Technical Assistance .13Lending Program .14

Portfolio Management .. 20Coordination with Other Institutions .21

D. Agenda for Board Consideration .23

Attachments and Annexes

Attachment 1: Nepal Strategy Matrix

Annex 1: Selected Indicators of Portfolio Performance and ManagementAnnex 2: Bank Group Fact Sheet, FY93-99Annex 3: Summary of Economic and Sector WorkAnnex 4: Social IndicatorsAnnex 5: Key Economic IndicatorsAnnex 6: Key Exposure IndicatorsAnnex 7: Status of Bank Group Operations in Nepal

Technical Annexes

This document has a restricted distribution and may be used by the recipients only in the performance oftheir official duties. Its contents may not be otherwise disclosed without World Bank authorization.

I

MEMORANDUM OF THE PRESIDENT OF THE IDATO THE EXECUTIVE DIRECTORS ON A

COUNTRY ASSISTANCE STRATEGYOF THE WORLD BANK GROUP

FOR NEPAL

A. The Economy

I. Recent Economic and Social Performance

I. Since the last CAS was presented to the Board in April 1994, Nepal has witnesseda period of serious political instability. The Nepali Congress government, which had beenin power since 1991, resigned in June 1994. Subsequent mid-term elections failed to yielda clear winner, and a minority United Marxist-Leninist (UML) government was formed.After ten months in power, this was in turn replaced by a coalition government led by theNepali Congress. The current government is rather fragile, depending as it does on thesupport of the minority partner in the coalition, the Rastriya Prajatantra Party (RPP), toremain in power.

2. Political instability has had a negative impact on economic performance over thelast two years: good results were achieved in FY94, but several indicators havedeteriorated since then.' Severe weaknesses have since reemerged on the fiscal andexternal fronts, and little progress has been made in civil service reform, financial sectorreform, and public enterprise reform, all of which were identified by the last CAS as areaswhere changes were necessary.

3. Performance was satisfactory in FY94. GDP grew at 5.5 percent and theinvestment rate was sustained at 20.5 percent (seven percent public, 13.5 percent private).On the fiscal side, the Government implemented revenue and expenditure reforms agreedto with IDA and the IMF in the 1993-95 Policy Framework Paper and discussed in the lastCAS. Revenues were raised by expanding the income and sales tax net and increasing thenumber of taxpayers; expenditures were rationalized by applying some of the results of aPublic Expenditure Review supported by IDA -- identification of a core program ofpriority projects, cancellation of several low-priority activities, reduction in subsidies onfertilizer and electricity, and further privatization of five public enterprises. As a result,the fiscal deficit declined to seven percent of GDP, and domestic borrowing was containedto one percent of GDP. On the external front, the current account deficit declined to sixpercent of GDP, and the overall balance of payments registered a significant surplus,thanks to foreign aid and other capital inflows (mostly related to unrecorded exports toIndia).

The fiscal year starts in mid-July. Economic and social statistics are reported on a fiscal-year basisonly.

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4. Progress stalled in FY95. Political uncertainty had a negative impact on bothpublic and private investment. Total investment declined slightly to 20 percent of GDP,with public investment dropping from seven to 5.5 percent of GDP, while privateconsumption increased. GDP growth declined to 2.8 percent due to poor agriculturalperformance, which remains largely determined by weather fluctuations. On the fiscalfront, the FY95 budget passed in December 1994 contained a significant increase inexpenditures, as wages were increased and new domestically-funded expenditureprograms were introduced. Over the course of the fiscal year, no adjustments were madein the prices of goods and services provided by public enterprises, and subsidies increasedsubstantially. The PFP target for domestic borrowing of one percent of GDP was met, butthis occurred largely at the expense of development activities: projects came to a virtualhalt during the first part of the fiscal year. Therefore, actual development expendituresturned out to be substantially lower than initially budgeted, thus compensating for theincrease in regular expenditures; public investment was reduced in favor of publicconsumption. No progress was made in either civil service reform, pnrvatization, or therestructuring of the two inefficient public banks, which continued to accumulate bad loansand suffer high operating losses, posing a potential threat to fiscal stability.

Nepal: Fiscal Indicators (percent of GDP)

X___________X _______________ FY91 FY94 FY95Revenues 8.9 9.8 11.1Expenditures 19.5 16.8 17.5

Regular Expenditures 6.3 6.2 8.8Development Expenditures 13.2 10.6 8.7

Fiscal Deficit - 10.6 - 7.0 -6.5Foreign Financing 7.0 5.8 5.4

Grants 1.8 1.2 1.3Loans 5.2 4.6 4.1

Domestic Financing 3.6 1.2 1.1

5. The external position also weakened. Following a few buoyant years, overallexport growth leveled off in FY94 and exports actually declined 12 percent in constantdollar terms in FY95. Weak demand, quality problems, and concerns in the importingcountries over employment of child labor in some factories adversely affected Nepal'smain export, carpets. Exports of ready-made garments, Nepal's other major export item,which had benefited from preferential treatment under the Multi-Fiber Agreement,suffered as international trade regulations changed. This crisis highlighted the fundamentalweakness of Nepali exports, namely their lack of diversification in terms of both productsand markets. Reserves came under increasing pressure in the first few months of FY96, asno policy measures were taken to counteract either the trade imbalance or the wideninginterest rate differentials with India.

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Nepal: External Indicators (US$ million)

_FY91 FY94 FY95Exports of GNFS a 437 965 1068

Merchandise Exports 228 392 359Non Factor Services 210 573 709

Imports of GNFS 854 1278 1556Merchandise Imports 715 1048 1313

Current Account Balance 344 - 275 - 375Official Grants and Loans 246 234 283Other Net Capital Flows 225 176 100Change in Reserves (+ = Surplus) 127 135 8

a Goods and Non-Factor Services.

6. The coalition government which came to power in September 1995 was faced withthe difficult tasks of addressing the external imbalance, re-focusing public expenditures,and restarting the liberalization progress. In its most comprehensive pronouncement todate, the FY96 Budget Speech presented in October 1995, the Government expressed itscommitment to a stable macroeconomic framework, better targeting of public resources tothe sectors with the highest impact on growth, and further liberalization of the economy toencourage private initiative and foreign investment. Following up on the Budget Speech,actions were taken in several areas. Work resumed on a Three-Year Rolling ExpenditurePlan reflecting development priorities and an annual 'bore program" of projects to beprotected in case of budget shortfalls; legislation was passed to introduce a Value AddedTax; the Foreign Investment Act was amended to remove a provision limiting foreigninvestment in small companies; the privatization process was restarted, with threecompanies to be offered for sale in FY96,2 and awareness is growing on the negativeimpact of inefficiencies in the financial sector on private investment.

7. The dialogue with the IMF and IDA on macroeconomic issues was resumed on thebasis of the renewed commitment to reforms, and agreement in principle was reachedrecently on a Policy Framework Paper (PFP) to be supported by an Enhanced StructuralAdjustment Facility (ESAF) with the IMF. The PFP includes reforms on taxation(primarily introduction of the VAT) and expenditures (preparation of the Three-YearRolling Plan and annual core programs as well as gradual phase-out of subsidies) with aview to further reducing domestic borrowing as a percentage of GDP, tight monetarypolicy, privatization of 14 enterprises over the next three years, reform of the two statebanks with a view to complete divestiture by 1998, and further measures to improve theefficiency of the financial system and strengthen Central Bank supervision. Agreementwas also reached in March 1996 on a set of prior actions to be implemented beforepresentation of the PFP to the Boards of IMF and IDA. These include: completion of amid-term budget review and implementation of measures to control expenditures ifneeded; offer for sale of shares of Nepal Bank Limited (one of the two public banks) toreduce government ownership below 50 percent; formation of a committee for the

2 As of end-March 1996, the sale of one of the three companies has been completed.

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recovery of non-performing loans of the Rastriya Banijya Bank (the other public bank);and increases in the administered prices for fertilizers and petroleum products.

8. However, despite the agreement reached on the Policy Framework Paper,macroeconomic imbalances remain a very serious concern. On the fiscal side, the revenueand foreign financing projections of the FY96 budget are likely to prove overly optimistic,and spending will likely have to be contained to maintain domestic borrowing around theagreed target. On the external side, import growth has slowed, but exports have notpicked up, and pressure on reserves is continuing. Several of the prior actions envisagedin the Policy Framework have not yet been taken,3 and political instability continues todistract the Government from the task at hand. An improved macroeconomic framework,careful management of public resources, and the establishment of an environmentconducive to private investment are crucial to achieving the faster GDP growth rateswhich are desperately needed to improve the living conditions of the Nepali people. Poormacroeconomic performance and the unsatisfactory implementation of the developmentprogram are harming the efforts to improve Nepal's very low social indicators. Thus, thecurrent situation calls for decisive action to redress the fiscal and external imbalances andto give new momentum to the reform process.

Nepal: Social Indicators

Nepal India South Asiamost recent most recent most recent

Population Growth Rate 2.5 2.0 1.9Per Capita Income 200 300 310Adult Literacy, Female 13 % 34 % 31 %Life Expectancy, Female 54 61 60Infant Mortality (per 1000 1. b.) 96 79 85Total Fertility Rate 5.8 3.7 4.0Access to Safe Water, Urban 58 % 79 % 74 %Access to Safe Water, Rural 49 % 57 % 67 %Road Densitv (km per th. sq. km) 21 41.3 n.a.Access to Electricity (% househ.) 9 % 54 % n.a.

B. Nepal's Development Strategy

I. A Povertv Alleviation Strategy for Nepal

9. Broad-Based Growth. The striking beauty of the Nepali landscape stands in starkcontrast with the country's widespread poverty. With a per capita income of aboutUS$200, Nepal remains one of the poorest countries in the world. GDP has been growingat an average rate of 4.6 percent over the last decade, but population has grown at 2.7percent a year and income per capita has increased slowly. Moderate growth of output is

3 In early April, petroleum and fertilizer prices were increased, thus completing two of the prioractions.

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due to a combination of factors: limited natural resources combined with a landlockedlocation and difficult topography, poor infrastructure, a weak human capital base withextremely poor levels of education and health, and weak administrative capacity. Thepoverty alleviation strategy outlined in the last CAS remains appropriate for Nepal. Witha low per capita income fairly evenly distributed and almost no surplus to redistribute,there is little scope for targeted poverty-alleviating efforts on any scale large enough tomake a difference at the national level; therefore, poverty alleviation will require faster percapita income growth. This, in turn, will require faster output growth and slowerpopulation growth.

10. Sustainability. Faster output and income growth will only be sustainable if it follows adevelopment path consistent with the preservation of Nepal's natural resources. In Nepal, thelink between growth, poverty, and natural resources is particularly close, as the vast majority ofthe population earns its livelihood from agriculture and tourism, both of which depend on thesustainable use of natural resources. Nepal cannot afford to 'grow now and clean up later",environmental sustainability has to be integrated in the design of policies and programs at boththe macro and the sectoral level.

11. Sources of Growth. Nepal's economy is characterized by a large rural sectorbased on subsistence agriculture and a small modern sector centered around a fewmanufacturing activities and tourism. In the short-to-medium run (three to five years),agriculture presents the highest potential for growth and poverty alleviation, as it accounts foralmost 50 percent of GDP and 80 percent of employment: any increase in production wouldhave a direct impact on a large segment of Nepal's population and help reduce unemploymentand underemployment. The potential of agriculture has not been fully tapped: GreenRevolution-type yields have not yet been achieved in Nepal, because the productive Teraiplain remains largely unirrigated, and the hills have not yet made the transformation fromsubsistence rice-growing to higher-valued fruits and vegetables, to which they arepotentially better suited. Such transformation would have positive environmental effects,as higher productivity in the Terai would reduce the pressure to cultivate marginal lands,and the fragile hill ecosystem would benefit from a shift to tree-based production. TheAgriculture Perspective Plan completed in 1995 concluded that the agricultural growthrate, which has been stagnant in per capita terms, could be raised by about two percentagepoints, adding about one percent per annum to GDP growth.4

12. Other sources of growth -- hydropower, tourism, specialized exports to the growingIndian market -- have potential, but will take time to develop. Nepal's hydropower potential isvast and could be developed for exports, thus generating revenues to fund developmentprograms and substantial foreign exchange. But development costs are high because of thedifficult terrain and the risks posed by the young hydro-geology of the Himalayas; the capacityto develop the large projects which are needed for exports is not yet present; and existingagreements with India will not by themselves be sufficient to overcome the risks that have to bedealt with in order to obtain the substantial funding needed for significant growth in power

4 Agriculture grew by an average 2.7 percent per annum over the FY85 - FY95 period, at about thesame rate as population.

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exports. Thus, it is unlikely that hydropower will make a significant contribution to exportsand growth in the near future.

13. Similarly, Nepal's tourism potential is high, thanks to its scenery and rich culturalheritage. But tourism development is hampered by poor infrastructure -- limited airportcapacity, poor roads, unreliable power supply, poor water quality and sanitary conditions -- andby growing environmental problems, especially in the Kathmandu valley and in the most heavilyvisited national parks. Building up the stock of infrastructure to provide quality services tohigh-end tourists and access to trekkers, as well as cleaning up air, water, and waste inKathmandu and reversing the environmental degradation in the national parks will take time.

14. Nepal's potential for exports of manufactures and services to India is also significant.Nepal's position at the periphery of India -- an economy 80 times larger -- poses constraintsand at the same time offers opportunities. On the one hand, Nepal's internationalcompetitiveness is severely hampered by high transportation costs. All imports andexports must travel 500 miles on road and rail and through a border to reach the port ofCalcutta, Nepal's main access to international markets, and the country is highlyvulnerable to disruptions in traffic along this route.5 On the other hand, the recentliberalization of the Indian economy facilitated a similar process in Nepal, and Nepal'sgrowth prospects are positively influenced by growth in India, as markets open up andtrade and tourism flows increase.6 Exploiting these opportunities will require better policies,better infrastructure and a more educated labor force.

15. In summary, in the next few years Nepal needs to focus on agricultural and on layingthe infrastructure and human resource base for sustainable growth in the future, while at thesame time slowing population growth and protecting its natural resources. The success of thisstrategy depends on progress in three key areas:

(a) using public resources more effectively;

(c) building capacity; and

(b) encouraging private sector, NGO, and beneficiary participation.

The following paragraphs detail the priorities in these areas for the next three years.

5 In addition, Nepal's ability to implement autonomous macroeconomic and sectoral policies isconstrained by the free flow of goods and people through its long open border with India. Also, itscurrency is pegged to the Indian Rupee, which facilitates cross-border trade but subjects the economyto increases in the price of imports (most notably, fertilizer, oil, and foodgrains) whenever the IndianRupee depreciates.

6 Cooperation between the Nepali and Indian governments is crucial, and the progress made inFebruary towards expanding existing trade arrangements is a welcome step.

I. Priorities for the Next Three Years

Using Public Resources More Effectively

16. Prioritization of Public Expenditures. Faster growth in agriculture and fasteraccumulation of human and physical capital will require carefully prioritizing the use of scarceresources for productive investments and for the maintenance of existing assets. Newinvestments should be designed keeping in mind the difficulties of the Nepali environment --soil erosion, high sedimentation, flooding risks, deforestation -- to ensure that natural resourcesare not further depleted in the process of growth. In addition, allocations for O&M should beadequate to maintain the productivity of existing capital, human, and natural resources, so as toreap the full benefits of past investments.

17. Steps have been made in the direction of formulating sectoral strategies in the prioritysectors to guide new investments and the provision of recurrent costs. In agriculture, theGovernment endorsed the Agriculture Perspective Plan, which provides a growth strategy forthe sector based on developing sustainable foodgrain production in the Terai and fruit andvegetable production in the hills. Implementing this strategy requires a package of investmentsappropriate for each area and focused on irrigation, roads, power, and technology, and policyreforms to encourage private investment, provide the right price incentives, and ensure thatusers have control over natural resources (primarily tenure over land, forests, and water rights).Since the requirements outlined by the Plan are vast and the policy changes significant, the taskahead is to prioritize them and identify investment needs and policy actions for the next coupleof years.

18. In road transport, there is broad agreement between the Government and the donorsthat the priorities are completing the East-West highway, rehabilitating and maintaining thestrategic network, and building farm-to-market roads in the Terai. However, the Governmentcurrently attaches a higher priority than does IDA to the construction of North-South roadslinking remote district headquarters to the strategic network. This issue will be discussed in thecontext of the Prioritized Investment Plan for the Road Sector under preparation, which willprovide the basis for future investments. For all levels of roads, much remains to be done toadopt cost-effective and environmentally sound construction and maintenance standards;community participation should be considered wherever possible.

19. In the power sector, the Government's strategy is two-fold: to seek donorfinancing for large hydropower projects while encouraging private financing for mediumand small projects. At the recent Nepal Aid Group Meeting in Paris, the AsianDevelopment Bank (ADB) and the Government of Japan advised that they are appraisingthe Kali Gandaki A project (140 MW) and indicated their plans to commit a total ofUS$320 million to cover the foreign cost component of the project. In addition, theGerman Government indicated that about US$120 million would be available to financethe development of Middle Marsyangdi (42 MW), possibly in conjunction with privatefinanciers. On the private front, the agreement reached in February 1996 between theGovernment and a public/private consortium (which includes the ADB, the IFC, and the

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Norwegian Agency for Development Cooperation) to develop Khimti Khola (60 MW)indicates that, if the Government provides appropriate guarantees, there is interest on thepart of the private sector.

20. After withdrawing its support for the Arun III Hydropower Project, IDA isassisting the Government in encouraging private investment. IDA is helping theGovernment in screening potential sites and ranking them on the basis of technical,economic, social and environmental criteria. The Government plans to present theprojects at the top of the ranking to potential private investors, and a Power DevelopmentFund, to be established with an IDA credit, would provide financing. Recognizing thatprivate investment in generation is unlikely to materialize in a significant manner withoutGovernment guarantees unless the distribution entities are viable and creditworthy, IDA isassisting the Government in improving the efficiency and financial viability of the NepalElectricity Authority (NEA). In the future, the option of selling part of NEA's shares tothe public, which is foreseen under the Privatization Act, should be explored. TheGovernment is also promoting the development of micro-hydro and bio-gas plants toprovide a source of energy alternative to fuelwood in rural areas and reduce the pressureon forests.

21. In education, the Government's first priority is to provide access to primaryeducation to all, including girls, and improve its quality. To this effect, the Government isimplementing, with donor support, the Basic and Primary Education Program, acomprehensive effort to construct schools, train teachers, and improve teaching materials.Efforts are also underway to reform the curricula for secondary education, and a plan totransfer grades 10-12 from the university to the secondary education system is underpreparation. In health and population, the Government is committed to strengthening theprimary health care system, making health care accessible to the rural population, andreducing the total fertility rate. To this effect, the Government is setting up health posts ineach of Nepal's 4,000 villages, training female community health workers and birthassistants, and moving from vertical programs to the integrated delivery of familyplanning, maternal and child health services, and other preventive services. But results onthe ground remain unsatisfactory.

22. The Government recognizes the need to prioritize expenditures and directinvestment to: (a) the priority investments in agriculture identified as a result of theAgriculture Perspective Plan -- groundwater irrigation, farm-to-market roads, development ofquality inputs; (b) investments in the basic transport, water supply, and power systems whichpromise the highest returns in terms of growth and which cannot be undertaken by the privatesector; (c) investments in basic and primary education, family planning, and basic health tobuild up human capital and improve living standards. In the Eight Plan and the FY96 budget,agriculture, basic infrastructure, and primary education figure as priority sectors.However, little has been done to move forward with the implementation of the AgriculturePerspective Plan; family planning and primary health have received inadequate attentionwhile sizable allocations have been made for tertiary health; and the budget still does notcontain sufficient allocations for O&M of existing assets. IDA recommends that the

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Three-Year Rolling Expenditure Plan under preparation and the FY97 and FY98 budgets andannual core programs: (a) reflect more fully a prioritization of expenditures and investments;and (b) provide adequate allocations for O&M. If necessary, the number of new project startsshould be limited so as to ensure adequate funding to implement priority projects and O&M,while remaining within the PFP macroeconomic targets.

23. The Government's policy on environment is contained in the Nepal EnvironmentalProgram and Action Plan (NEPAP), completed in 1993. The NEPAP identified fivepolicy objectives: manage natural resources sustainably; address the problems ofpopulation growth, poor health, and poverty; safeguard the country's cultural heritage andbiodiversity; mitigate adverse environmental impacts of urban, industrial, andinfrastructure development; and develop appropriate laws and institutions. Currently,work is underway to prepare an Environmental Protection Bill and sectoral NEPAPs inwater resources, industry, and forestry. Environmental Assessment Guidelines have beenissued, and training for administration officials and project staff on environmentalassessment procedures and methods is underway. The Government recognizes that muchremains to be done in virtually all the areas identified by the NEPAP.

Building Capacity

24. Civil Service Reform. Efforts at improving the utilization of public resources must becomplemented by a build-up of capacity at the central and local government level. The civilservice lacks the skills, tools, and frequently also the motivation for efficientadministration, and weak capacity continues to hamper good management and projectimplementation. Little has happened on civil service reform since the last CAS, and thereis even less government commitment than at that time to undertake sweeping reforms.Nevertheless, a concerted effort should be made to devise reforms which improve skills,pay, and performance, are politically implementable, and respect the expenditure targetsset forth in the PFP. As first steps, the Government intends to establish a computerizedcentral payroll system, update the Census of civil servants completed in 1993, and linksalary increases and promotions more closely to performance evaluations, as agreed in thePFP.

25. Economic Management Capacity. Despite efforts made in recent years, thecapacity to manage the budget remains rather limited and needs further strengthening,particularly in the areas of project screening, implementation monitoring, and evaluation.The Government has requested support from IDA and other donors, and these initiativesshould receive high priority. Regular staff, rather than short-term consultants, ought toacquire the necessary skills, and trained staff ought to remain in place for some time afterthe training, so as to ensure adequate institutional sustainability.

26. Environmental Management Capacity. One area where capacity is particularlyweak is environmental management. A Ministry of Environment and Population has beencreated under the FY96 budget, but its role and responsibilities have not yet been definedand it remains unclear whether it will replace or complement existing institutions, in

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particular the Environmental Protection Council. Responsibilities for urban environmentalplanning, monitoring, and enforcement in the Kathmandu Valley are particularly ill-defined, and the confused institutional setup hampers work to improve environmentalconditions in the area. Despite the attention devoted to institutional aspects in theNEPAP, very little progress has been made since its completion. IDA expects theGovernment to quickly pass the Environmental Protection Bill, define responsibilitiesclearly, and seek support to strengthen capacity based on assigned responsibilities.

27. Local Capacity Building. The capacity of agencies at the district level and of localgoverning bodies is especially weak. Rural development through local initiative has beenemphasized by successive governments, and transfers to villages for local developmentprojects have been increased. However, decentralization will not be successful unlessit is accompanied by a strengthening of the capacity to make and implement technical andfinancial decisions at the village level. District-level agencies will need to providetechnical support and coordination where needed. The Government intends to monitorthe implementation of local development programs closely, and evaluate what thecapacity-building requirements of local institutions are and how they can be met.

Encouraging Private Sector. NGO. and Beneficiary Participation

28. Private Sector Initiative. While efforts at prioritizing public investment and buildingcapacity will help, public resources and the capacity of the pubfic administration remain limited.Private resources and competence, whether from the private sector, NGOs, or beneficiaries,must be mobilized to increase the level and efficiency of investment and service delivery.Commercial private sector provision of infrastructure and services is not a panacea inNepal: costs are high because of the difficult terrain; income levels are in some cases toolow to allow full cost recovery; the number and expertise of local entrepreneurs is limited;and foreign interest is still not very strong. However, competent private sector operatorsare active in some important areas, such as telecommunications, power, air and landtransport, and tourism. Where costs can be recovered, there is scope for further privateinitiative in both new investment and the operation of existing facilities.

29. The Government recognizes the importance of encouraging private domestic andforeign investment, and has intensified its dialogue on these issues with IDA and IFC. Tosignal commitment, the Government intends to move decisively to: (a) privatize publicenterprises, including the national airline and the telecommunications corporation; (b)restructure the two state-owned banks for eventual privatization; (c) improve theperformance of enterprises and utilities remaining in the public domain, beginning withmore timely submission of audited accounts; (d) issue licenses for private provision ofwireless phone services; and (e) amend the Foreign Exchange Act to facilitate repatriationof earnings. All of these actions were agreed to in the PFP.

30. NGOs. There are many qualified domestic and intemational NGOs active in Nepal,especially in the social sectors and in the environment. NGOs may represent the only way toreach the many areas and communities which government agencies will not be able to serve in

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the near future. In addition, they often work with disadvantaged beneficiary groups, such aslow occupational castes and ethnic minorities, which are generally difficult to reach throughpublic agencies. To date, most government agencies have been ambivalent toward NGOs,giving positive general statements but resisting any significant expansion of NGO-basedservice delivery. Over the next three years, IDA will continue to encourage theGovernment to expand service delivery through NGO channels, including Social Fund-type mechanisms to provide social services to underserved areas, and support donorinitiatives aimed at strengthening the capacity of local NGOs. In environmentalmanagement, the Government will be encouraged to work with qualified NGOs tostrengthen management of existing national parks and conservation areas and to seekdonor support for the establishment of an Environmental Trust Fund.

31. Beneficiary Participation. Even where full cost recovery is not possible, there is scopefor beneficiary participation in investment and maintenance costs, as well as project design,implementation, and monitoring. Cost-sharing by beneficiaries strengthens 'bwnership" ofassets, and reduces the need for public coverage of investment and O&M costs, thusstretching what can be achieved with a given government budget. Part of the failure toachieve tangible results, especially in rural areas, is due to the centralized, top-downapproach which the Government and the donors have followed for years in implementingprograms and projects. There is a long tradition of self-reliance in Nepal, partly a result ofthe remoteness of many areas, and experience suggests that communities do not hesitateto get involved. For instance, school reconstruction under the Earthquake SchoolsRehabilitation Project was facilitated greatly and costs were reduced thanks to villagerswho helped transport materials and construct classrooms. Similarly, communities havewelcomed receiving formal rights and the responsibility to manage forests they hadtraditionally been using.

32. In the last few years, the Government has taken some significant steps towardsgreater beneficiary involvement. Progress has been made on water and land rights throughthe issuance of policies and guidelines which enable user groups to take full control ofsmall/medium irrigation schemes, rural drinking water supply schemes, and communalforests. All these initiatives are in the right direction, but they are only first steps: theguidelines need to be fully implemented, and local capacity has to be strengthened. IDArecommends that, over the next few years, the Government: (a) continue to transferresponsibility for O&M of irrigation schemes to Water User Associations; (b) continue totransfer forest rights to Forest User groups; (c) address the issue of land tenure; and (d)implement legislation devolving part of tourist fees to communities living in or nearprotected areas, and support NGO initiatives to involve local communities in theprotection and restoration of natural resources, building on the experience of successful

7programs.

7 The programs in the Annapurna Conservation Area, Sagarmatha National Park and the Makalu-Barun Conservation Area, and under the Parks and People Project provide good examples ofcommunity involvement in the management of natural resources.

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III. Macroeconomic Scenario

33. The base-case scenario for the macroeconomic projections used in the CAS assumesthat the Government will implement the policy reforms and adhere to the macroeconomictargets for revenues, expenditures, domestic borrowing, money growth, and reserves agreed toin the PFP. Recognizing that it will take time before more efficient investment raises the rate ofgrowth of GDP, the growth assumptions used in the scenario are conservative: agriculture isassumed to grow at about three percent a year on average, and industry and services at about5.4 percent, yielding overall GDP growth of about 4.5 percent a year over the next three years.Revenues are projected to grow from 12.1 to 13.2 percent of GDP over FY97-99, recurrentexpenditures to remain stable at about 10.6 percent of GDP, and development expenditures togrow from 8.5 to 10 percent of GDP, mainly reflecting the increase in investment related to theKali Gandaki power project. Assuming foreign financing for the budget of the order of 6.5percent of GDP over the period, domestic borrowing would be contained to the sustainablelevel of half a percent of GDP.

34. Slippage from this scenario in terms of lower revenues and/or higher regularexpenditures would affect development expenditures directly, as lack of counterpart fundswould slow or halt project implementation, and with it aid utilization. Slippage in terms ofhigher domestic borrowing or faster money growth would lead to higher interest rates and acrowding-out of private investment. Such developments would have a negative impact onGDP growth, which could slow to 3.5-4 percent. Conversely, particularly good revenueperformance might allow for an expansion of public investment, if regular expenditures arecontained, and sound credit management policies could lead to higher private investment, thusaccelerating growth to around five percent.

35. Under the base-case scenario, Nepal's development needs and economic growthrequire imports at a level which is likely to continue to grow faster than that of exports.In the longer run, foreign private capital may help bridge the gap (even though paymentsfor dividends and debt service would also increase), but in the short and medium termsubstantial levels of concessional aid will be required. Concessional aid of the order ofeight to nine percent of GDP during the FY97-FY99 period, or disbursements of roughlyUS$400 million per year on average will be required to implement the agreed policyframework. Such a level of aid -- about US$17 per capita on a disbursement basis -- ishigh and most likely unsustainable. In the short to medium term, such aid flows can beachieved only if they are supported by: (a) adherence to a high-quality policy frameworkand budget management; (b) accelerated preparation of high-quality projects; (c) decisiveefforts at building implementation capacity; (d) effective aid coordination; and (e)mobilization of private sector support wherever suitable and available.

C. The Bank Group Assistance Strategy

36. In designing an appropriate strategy to assist Nepal, IDA reviewed progress sincethe last CAS and took into account two major lessons of past experience. First, evenwell-designed projects have little impact if macroeconomic and sectoral policies create the

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wrong incentives; therefore, operations must be accompanied by appropriate policyreforms. Second, it takes a long time to overcome capacity constraints; therefore, suchconstraints have to be taken as given in the medium term, and operations must be designedso as to be effective given existing capacity. Therefore, this CAS proposes that:

a) highest priority be given to the establishment and maintenance of an acceptablemacroeconomic, sectoral, and environmental policy framework;

b) IDA's lending operations be selectively concentrated in a small number ofpriority sectors where the policy framework is (or can be expected to become)satisfactory;

c) IDA's operations be simple in design, include strong capacity buildingcomponents, and involve as much as possible the private sector, NGOs, andbeneficiary/user groups for service delivery and maintenance;

In support of this strategy, IDA's policy dialogue would be aimed at assisting theGovernment in its efforts to follow sound macroeconomic and sectoral policies, improvepublic resource management, and encourage private initiative. IDA's economic and sectorwork would be used to help forge a consensus around programs and policies in thepriority sectors, providing the right context for IDA lending and other external assistance.Technical assistance would be aimed at strengthening capacity of public agencies and ofother institutions able to deliver services. In all of its activities, IDA will put specialemphasis on environmental sustainability and improved management of Nepal's fragilenatural resources.

'olicy Dialogue. Economic and Sector Work, and Technical Assistance

37. Policy Dialogue and Economic Work. IDA's macroeconomic policy dialogue --supported by IDA's economic work (the 1994 Country Economic Memorandum, the1996 CEM Update, and the recently completed Policy Framework Paper) has focused onthe themes of macroeconomic stability, public resource management, financial sector andpublic enterprise reform, and capacity building. These themes will remain central, as muchwork remains to be done. Issues of poverty, environmental sustainability, access tovarious forms of capital, and beneficiary participation will be brought to the forefrontthrough a Poverty Assessment (FY97) based on the data collected by the Nepal LivingStandards Survey now underway,8 a study on Financial Sector and Rural Banking (FY98),and an analysis of the nexus between decentralization, rural development, and povertyalleviation (Country Economic Memorandum, FY98).

38. Sector Work. In order to guide our sectoral dialogue and provide the policycontext for lending operations, IDA's future sector studies will maintain themethodological approach followed in recent studies on infrastructure and education: they

8 The last Poverty Assessment (Nepal: Poverty and Incomes, completed in 1991) was based on 1984/85data.

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will contain sectoral expenditure reviews and outline sector programs and policy actions.9

Thematically, the studies will focus on issues related to sustainable development. TheAgriculture Strategy Paper (FY97) will help define IDA's role in support of the policyreforms and prioritized investment plan now under preparation based on the 1995Agricultural Perspective Plan.

39. Two studies will assist the Government in formulating a comprehensive naturalresources management strategy, which will provide the policy and incentive framework forenvironmentally sustainable investment operations. The analysis in the Water ResourcesStrategy (FY97) will address the complex issues of water allocation among competinguses (hydropower, agriculture, industry, urban and rural areas), pricing policies, cost-sharing of investment and O&M, environmental impacts, and institutional reform. TheLand Resources Management Study (FY98) will look at the nexus between agriculturalpractices, use of forests, watershed management, and biodiversity conservation. IDA willwork with the newly-created Ministry for the Environment, the Environmental ProtectionCouncil, and various Ministries, such as Water Resources and Forestry and SoilConservation in preparing, discussing, and disseminating these studies.

40. Sector work on Operational Issues in Health (FY97) will take a comprehensivelook at health expenditures, quality and efficiency in the delivery of services, pricingpolicies, and the respective roles of the public and private sectors. The launch workshopfor this study has brought together experts from the Govemment, the private sector, thedonor community and NGOs. This model will also be followed at the finalization anddissemination stages.

41. Technical Assistance. IDF grants will be used to support capacity building in themanagement of public resources. An IDF grant of about US$200,000 has recently beenapproved to strengthen expenditure planning and monitoring through a twinningarrangement between the Economic Planning Unit in the Government of Malaysia and theNational Planning Commission and Ministry of Finance in Nepal. An additional IDF grantto improve auditing capabilities is being considered. Technical assistance is also beingprovided to support the establishment of a regulatory agency and legal framework forlicensing of private service providers in telecommunications.

Lending Program

42. Selectivity. This CAS proposes a lending program of about two-three IDAoperations a year, concentrated on agriculture (irrigation, research and extension), naturalresource management (forestry and biodiversity), basic infrastructure (transport, power,

9 The study on Selected Issues in Infrastructure Development (Report No. 11800, February 1994)discussed the spatial allocation of resources and recommended directing infrastructure investments toareas with high growth potential. The study on Critical Issues in Secondary Education (Report No.12243, August 1994) recommended reallocating expenditures from providing free secondaryeducation to improving the quality of and access to public schools while providing incentives forincreased private provision of secondary education.

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rural water supply and sanitation), social services (basic and primary education, familyplanning and basic health). These priority sectors for IDA involvement were selected onthe basis of their importance for poverty alleviation, growth, and natural resourcemanagement. Other considerations were the Government's willingness to undertakesectoral policy reforms, and IDA's comparative advantage relative to other donors. Thisselection implies that in some important sectors, such as urban infrastructure,telecommunications, tourism, and urban environment, IDA would not seek to developnew lending operations. In some of these areas, other donors are supporting theGovernment's objectives; in others, the private sector has shown willingness to take theinitiative. The selective focus of the proposed strategy will not be easy to uphold, as thereare strong pressures, internally and externally, to be involved more broadly. However, thisselective focus has the potential to achieve more lasting results, as resources, both humanand financial, both at IDA and in the Government, will be focused more effectively on themost important capacity-building interventions.

43. The proposed operations will cover the following sectors:

* Agriculture. Building on the Agriculture Perspective Plan endorsed by theGovernment, IDA will support irrigation, research and extension. In thecontext of the Water Resources Strategy under preparation (FY97), theIrrigation Sector Project (FY98) will provide support for private, farmer-managed surface and groundwater schemes and the transfer of systems tofarmer organizations for operations and maintenance. Learning from theexperience of past projects, investments in irrigation will pay attention todesign, implementation, and sustainability issues (with particular emphasis onwater rights and water charges), promote cost-sharing in O&M andinvestment, and emphasize beneficiary participation to the maximum extentpossible. To reap the full benefits of expanded irrigation, IDA will support thecomplementary provision of a package of integrated services, includingresearch and extension, fertilizer, and farm-to-market roads in the areas ofhighest potential. The Agricultural Technology and Dissemination Project(FY97) will assist with the development and dissemination of appropriatetechniques and varieties of crops by supporting the strengthening of publicresearch and extension capacity as well as the expansion of private extensionand veterinary services. The project will explore mechanisms to improve thelink between extension agents and farmers groups.

* Natural Resource Management. Drawing on the lessons learned from previousIDA activities, the experience of other donors, the 1992 report on NaturalResource Management,'° and the Land Resources Management Study (FY98),IDA will support sustainable natural resource management in the hill and Terairegions. The Land Resources Management Project (FY99) will providesupport for an integrated program of sustainable watershed protection, forestmanagement, and soil conservation, as part of an overall land resources

1° Report No. 10330, Natural Resource Mlanagement in Nepal: 25 Years of Experience, OperationsEvaluation Department, Fcbruary 1992.

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management strategy. In line with the objectives of the NEPAP, the projectwould also finance initiatives for biodiversity and wildlife conservation outsideprotected areas.

* Basic Infrastructure. IDA will focus on three areas: road transport, ruralwater supply and sanitation, and power. In transport, IDA envisages fundingfor a border transit facility cum inland container port to improve transport fromand to India (Multi-Modal Transit and Trade Facilitation Project, FY97).Another IDA operation will support maintenance and rehabilitation of thestrategic road network and construction of economically justifiable rural roads,subject to a sound government strategy for road maintenance and the adoptionof environmentally sustainable construction and maintenance practices (RoadMaintenance II - Rural Roads, FY98, and possibly a separate RuralInfrastructure Project, FY99). In water supply and sanitation, the Rural WaterSupply and Sanitation Project (FY96) will provide support through a RuralWater Fund for rural schemes built with extensive beneficiary involvement indesign and maintenance. The project aims at fostering the NEPAP's objectiveof addressing the widespread health problems caused by waterborne diseasesand at reducing water collection time, which poses a great burden on womenand girls. In power, IDA is working with the Government to promote andcatalyze private investment in technically, economically, environmentally andsocially sound projects within an improved enabling framework (PowerDevelopment Fund, FY97).

- Social Sectors. In education, the ongoing Basic and Primary EducationProject is supporting the Government's efforts to improve access, quality, andefficiency through school construction and renovation, teachers training,curriculum reform, and capacity building. A second operation would extendthe activities to more districts and strengthen institutions further to ensuresustainability (Basic and Primary Education II, FY98). Consideration will alsobe given to the need for future support to secondary education. In health, theongoing Population and Family Health Project has begun to address the acutedeficiencies of the public health system, particularly with respect to the deliveryof reproductive and child health services. An expanded population and familyhealth program will be pursued through a follow-up operation when theGovernment resolves the implementation issues plaguing the ongoing project(Population and Family Health II, FY99). The follow-up operation will buildon the findings of the ongoing health study (FY97).

44. Compared to the proposed IDA program, the Government would like to see ahigher share of lending in agriculture and infrastructure than in the social sectors. Thisreflects its belief that sufficient grant money is available to implement needed programs inbasic and primary education, family planning and basic health. IDA's view, based on pastexperience, is that the relatively fragmented grant support available will not be sufficient toachieve the improvements in delivery capacity on the ground which are urgently needed.Given the high priority of these programs, management has taken the position that, if theproposed IDA support for the social sectors were to go unutilized while needs are not met

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through support from other sources, IDA would not be prepared to make compensatoryincreases in its infrastructure lending.

45. Capacity Building Through Lending Operations. In light of the limitedimplementation capacity of most agencies, IDA's operations will have to be simple indesign and will have to include substantial capacity building components. Some agencieswill require mostly training in specific aspects of project management and implementation-- for example, IDA will be working with the Department of Roads to improve its RoadMaintenance Management at the central and divisional level, and its Procurement,Environmental and Traffic Safety capabilities. Other weaker agencies -- for instance theMinistry of Local Development, which has responsibility for district roads and services,the Ministry of Health, and the Department of Forestry -- will require a strengthening ofimplementation capacity at the central and district level. For example, a core componentof the Land Resources Management Project will be a comprehensive program to improveplanning, monitoring, evaluation, research, and human resource development at theDepartment of Forestry and other agencies involved in natural resource management. Ingeneral, IDA will rely on trust funds and advances from the Project Preparation Facility totest institutional arrangements and project design to achieve higher quality '"t entry". Asa consequence, if problems emerge during the pilot phase, IDA commitments may bedeferred relative to the lending plan until solutions are found.

46. Private Sector and Beneficiary Involvement. IDA's lending operations will seekopportunities to involve the private sector directly to overcome public capacityconstraints. The private sector will be involved directly in the Multi-Modal Transit andTrade Facilitation Project, where private operators will run the border transit facility andcontribute risk capital through additional investments. In the Power Development Fund,which will support investments in power generation, transmission, and distribution, privateinvestors would be given 'tight of first refusal" to participate in pre-screened, viableprojects. In addition, through policy dialogue and lending operations, IDA will assist theGovernment in its efforts to create a framework conducive to increased privateparticipation in priority sectors.

47. In line with the increased emphasis on private sector initiative, IFC's program inNepal is expanding. Until recently, IFC's activities in Nepal had been limited, not only insize, with only three transactions amounting to US$8.9 million, but also sectorally, withprojects only in tourism and mining. This limited involvement was mainly a function of thepolicy environment of the country, but the small size of the economy, the limited numberof industrial entrepreneurs, and the inefficiencies of the financial sector also played a role.With the recent changes in the policy environment, IFC's activity is iIlcreasing.Agreement has just been reached for a US$31 million investment on IFC's own account inthe Khimti Khola hydropower project. IFC management has also already approved theappraisal of a second small hydropower project, Bhote Kosi. Support for a joint venturein commercial banking and a leasing company are under discussion, and the IFC has beenapproached to consider investing in a private development finance institution, once the

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necessary laws are in place. MIGA has been approached to provide guarantees for theprivate partners in the Khimti project.

48. IFC's program for the next few years will complement IDA's in fostering a widerrole for the private sector in the Nepali economy by supporting: (a) more hydropowerprojects, as well as work with FIAS and IDA to identify any remaining legal, regulatory,or procedural impediments to private initiative in the power sector; (b) financial sectorreforms, in close cooperation with IDA, with a view to facilitating the entry of new privatesector players with strong foreign technical partners; and (c) viable private sectorinvestments in labor-intensive industries in areas of comparative advantage.

49. In addition to involving the private sector whenever possible, IDA's lendingoperations will also rely on the capacity of NGOs and beneficiary organizations whereverpossible. The Rural Water Supply and Sanitation Project will finance schemes designedand constructed by beneficiaries who, helped by support organizations (NGOs,community-based organizations, and private sector firms), will contribute time and moneytowards construction costs and take responsibility for maintenance. The AgriculturalTechnology and Dissemination Project will emphasize programming of district-levelextension services and research needs based on consultation with farmer groups; theIrrigation Sector Project will continue to support farmer-managed small and mediumirrigation schemes and the transfer of responsibility for O&M of tertiary and fielddistribution canals in large schemes to water user groups after rehabilitation has beencompleted; increased sharing of investment costs will also be pursued. The LandResources Management Project will continue to support the formation of user groups tomanage forest resources and actively involve NGOs in the dissemination ofenvironmentally friendly forest and watershed management practices. In ruralinfrastructure, a community-based approach to road construction and maintenance, whichhas been piloted by other donors, will be tested on a larger scale. Where appropriate,specific project components will promote female participation.

50. Lending Volumes. Under the base-case scenario commitments would amount toUS$320 million (about SDR 220 million) for the period FY97-FY99. This lending plan iscontingent on: (a) broad overall progress in achieving the PFP targets, including thosementioned in para. 7, (b) implementation of sound sectoral policies to ensure high-qualityprojects; (c) better utilization of existing IDA credits, with further improvements in projectimplementation, counterpart fund allocations, and overall sustainability; and (d) timelypreparation of high-quality projects. See the attached Nepal Policy Matrix for indicatorsof progress in macroeconomic and sectoral reforms required in FY97.

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Nepal - IDA Assistance - Base-Case Lending Program"

Fiscal Year Project USS Mlfillion

FY97 Multi-Modal Transit and Trade Facilitation 20Agricultural Technology and Dissemination 30Power Development Fund 75 - 175 a

FY98 Irrigation Sector Project 40Road Maintenance II - Rural Roads 40Basic and Primarv Education II 35

FY99 Population and Health II 30Land Resources Management 25Rural Infrastructure 25Total (approximately) 320

a Depending on status of project pipeline for the Fund.

51. Triggers. Failure to adhere to the macroeconomic framework outlined in thePolicy Framework Paper and implement the reforms discussed in para. 7 and detailed inthe attached Policy Matrix would trigger a 'low-case" lending scenario. In this case, theFY97-99 lending plan would comprise no more than two or three operations in the socialsectors (including the Basic and Primary Education and the Population and Health IIprojects), thus bringing commitments over the three years to below US$100 million (SDR70 million).

52. Lack of action in key areas of sectoral policy adjustment would affect lending forspecific sectors. For instance, future lending for agriculture is contingent upon thepreparation and successive implementation of a prioritized investment program and policyreforms based on the Agriculture Perspective Plan. Lending in irrigation is contingentupon the development and implementation of the Water Resources Strategy, includingneeded changes in pricing and subsidies. Future operations in the road sector arecontingent upon the adoption of a prioritized investment plan for the sector with adequatefinancial and institutional provisions for O&M. Investments in power are contingent uponthe satisfactory completion of the screening and ranking exercise of the pipeline ofhydropower projects and on power sector reforms which ensure that purchasingagreements reached with private investors can be honored. The Policy Matrix containsmore detail on these sectoral policy actions.

53. In addition, failure to improve the implementation of existing IDA-funded projectsin a sector would tend to delay the processing of new projects in that sector. Forexample, further operations in irrigation, extension, natural resource management, andpopulation and health hinge on the willingness of the Government to address systemicimplementation constraints -- lack of adequately trained personnel, inadequate supervisioncapacity, shortfalls in counterpart funds, and delays in processing contracts, procurement

" The lending program, covering FY97-99. does not include the Rural Water Supply and SanitationProject, which is expected to be presented to the Board in FY96, and would amount to US$14.3million.

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and disbursements -- which, if not resolved, would severely limit the development impactof new projects.

54 By contrast, sustained progress in meeting the PFP targets -- in particular,preparation of the rolling three-year expenditure plan and core program, regular conductof mid-term budget reviews, privatization of public enterprises, shift to majority privateownership of the Nepal Bank Limited and substantial loan recovery by the RastriyaBanijya Bank -- and implementation of the sector policy reforms mentioned above wouldlead IDA to consider a 'high-case" lending scenario. The high-case lending plan wouldinclude an adjustment operation designed to complement the IMF's ESAF by deepeningand accelerating the structural reform agenda set out in the PFP -- expenditure reform,public enterprise and financial sector reform. Financial sector reform in particular wouldhave a significant budgetary impact, as the Government absorbs the losses due to badloans and covers the costs of employee retrenchment. The adjustment credit wouldprovide a direct contribution to mitigate this budgetary impact. The exact modalities,amount, and policy triggers of such an operation could be determined only after significantprogress in the implementation of the currently agreed policy framework has been made.The lending plan under the high-case scenario would amount to about US$400 million(SDR 270 million) over three years.

55. Sustainabilitv/External Debt. Nepal relies heavily on foreign assistance, but sincevirtually all loans are on concessional terms, debt service payments, including payments tothe IMF, remain at the manageable level of six to seven percent of exports of goods andservices. Nepal's outstanding official foreign debt amounts to about US$2.3 billion, orslightly above 50 percent of GDP. For the debt service to remain manageable, Nepalneeds to realize the projected, ambitious export growth and secure the relatively high levelof concessional external assistance which it has been able to receive in the past.

Portfolio Management

56. Portfolio management has received particular attention since the last CAS. Inconsultation with the Government, IDA has canceled several problem projects and putothers under intensive supervision. The disbursement ratio has increased from 9.5 percentin FY93 to 14 percent in FY95 and the number of problem projects has declined from ninein FY93 to six in FY95 (corresponding to 27 percent of ongoing projects). The FY96portfolio now comprises 14 operations, down from 22 in FY95. The decline in thenumber of projects reflects the application of more rigorous standards to theadministration of credit closing dates.

57. The continued presence of a significant share of problem projects is due tosystemic issues, which hamper implementation: lack of prioritization results in shortfalls incounterpart funds and inadequate funding of recurrent expenditures; weak administrativecapacity leads to slow decision-making and delays in procurement and disbursement;frequent changes in project staff and lack of autonomy of implementing units results in

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Gender Issues

Women have a difficult life in Nepal. They work more hours and often do heavier work than men,and are paid less. Their health and education indicators are discouraging: life expectancy, at 54years, is lower than for men because maternal mortality is high; and illiteracv is 87 percent.Women are often socially discriminated against and have fewer legal rights -- for instance, theycannot inherit land. Poverty, lack of social services, and environmental degradation all have adisproportionate impact on women. The strategy outlined above does not include any operationaddressed entirely to women, but nonetheless supports improvements in the status of women inthree important ways. First, IDA aims to help women through its agriculture and infrastructureoperations. Women's employment opportunities would expand through enhanced irrigation andthe provision of extension services and training in agricultural practices. Women would bencfitdirectly from easier access to safe drinking water; special attention would be given to ways toimprove women's participation in community-based rural construction activities. Second, womenwould benefit from IDA's operations in natural resource managemenit and water through animprovement in the natural environment: healthier, more productive forests and better-managedwater resources would reduce the time needed to collect wood and water. Third, IDA's health andeducation projects aim at improving women's access to these services by supporting theconstruction of schools and health posts to increase access and the hiring of female teachers andhealth workers to improve the retention of girls in school and the delivery of health services towomen. In addition to addressing the status of women through lending operations, the strategyalso envisions new analytical work in the context of the FY97 Poverty Assessment, based on thegender-specific data collected by the Nepal Living Standards Survey. IDA expects this analyticalwork to provide guidance for future lending.

poor accountability and performance. These issues are being addressed at the country,rather than project level, and will be the subject of the next Country Portfolio PerformanceReview (CPPR), scheduled for June 1996. In line with recommendations of the Bank'sQuality Assurance Group, specific benchmarks and monitorable indicators will be definedduring the CPPR and agreed with the Government as part of the CPPR Action Plan. Thethree-year Action Plan will emphasize attention to budget allocations and releases andwider use of agreed implementation action plans at the project level. IDA will also stressthe importance of adopting standard bidding documents and audit procedures for itsprojects. To support the Action Plan, IDA will strengthen the capacity to handleprocurement review, disbursements, and monitoring of compliance with audit covenants atthe Resident Mission.

Coordination with Other Institutions

58. Intensive coordination has taken place between IDA, the IMF, and otherinstitutions on macroeconomic policy advice. IDA and the IMF have coordinated closelyon country dialogue and financing since the mid- 1980s when Nepal carried out anadjustment program. Fund and IDA staff have worked together to prepare and superviseIDA's two SACs (FY87 and FY89), five PFPs and an ESAF, as well as the current PFP.In the last two years, the Asian Development Bank has also participated in the PFP/ESAFdiscussions.

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59. Coordination of sectoral policy advice and investments has been satisfactory insome areas but less so in others. In primary education, maternal and child health, forestry,and road maintenance IDA has taken the lead in supporting operations that aim to providethe framework for donor involvement in the sector; in some of these sectors, IDA hasreplicated on a larger scale successful approaches piloted by others. In other areas, forexample technical and vocational training, tourism, women's employment and micro-enterprises, other donors are taking the lead. However, there still are sectors, such asenvironment and urban development, which would greatly benefit from enhancedcoordination.

60. In the past couple of years, the Government has taken a more active leadershiprole with the local donor community: local meetings have been held at regular intervals todiscuss both macroeconomic and sectoral issues; periodic reviews of assistance programshave been held with individual donors; and the Government is beginning to take theinitiative in suggesting to donors in what areas they should concentrate their futureassistance. The donors have also intensified their coordination efforts. The UNDP andIDA co-chair a local coordination meeting every two months, and are helping to set up orsupport sectoral coordination committees. Discussions and information-sharing ongeneral economic and sectoral issues have led to a better dialogue among donorsthemselves as well as with the Government, have contributed to minimizing duplication ofefforts at sectoral levels, and have allowed the donors to provide more coordinated advice,for example on agriculture and education sector policies. An Aid Group Meeting, chairedby the Government and IDA, was held in April 1996 in Paris.'2 IDA attaches particularimportance to improving donor coordination on environmental issues, and will workclosely with the UNDP in organizing a donor meeting on this subject to reach agreementon implementation programs to achieve the objectives of the NEPAP.

61. The Government's and donors' aid coordination efforts should be maintained andenhanced. As Chair of the Nepal Aid Group, IDA advised the Government to:

a) clearly define its sectoral priorities, and reflect these priorities in future budgets-- the Three-Year Rolling Expenditure Program and the core program areimportant instruments to ensure that crucial development programs areimplemented while maintaining fiscal stability;

b) maintain a pro-active role in suggesting areas of involvement for each donorand avoiding duplication of efforts -- this could be facilitated if theGovernment were to share the conclusions of its annual bilateral countryprogramming discussions with the donor community, as such an approachwould help develop a clear division of labor among the donors in terms ofsectors and programs and enable both the Government and the donors to planassistance strategies more efficiently;

12 The documentation relative to the Aid Group Meeting will be distributed under separate cover.

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c) strengthen its implementation capacity, in particular by ensuring adequatestaffing and funding for development projects and limiting the turnover ofproject staff.

62. On their part, the donors should:

a) support the Government's efforts to prioritize expenditures -- in practice, thiswould mean that donors, individually and collectively, should be willing tophase out low priority activities; reallocate resources wherever possible to theGovernment's highest priorities, such as agricultural development, ruralinfrastructure, and social sectors; and limit new initiatives to those in thehighest priority areas;

b) give favorable consideration to the financing, ad interim, of the recurrent costsof high-priority projects and programs, subject to performance andsustainability considerations at the macro and sectoral level;

c) assist the Government in the establishment of sector policy frameworks andinstitutions enabling private investment in infrastructure development, notablyin power, telecommunications, and selected aspects of urban infrastructure;

d) direct technical assistance programs to priority areas, with particular emphasison strengthening the local administration.

D. Agenda for Board Consideration

63. Strategic Obiectives. Even though Nepal has made significant progress in recentyears, it remains essentially a poor agrarian economy with limited infrastructure, extremelylow social indicators, and rapidly deteriorating natural resources. Faster growth is the keyto poverty alleviation, and will require a slowdown in population growth, the developmentof human and physical capital, and the protection on natural resources. This process willtake decades, but its pace can be accelerated by improving the effectiveness with whichpublic resources are used, by building capacity, and by encouraging private sector, NGO,and beneficiary participation. Its sustainability will depend to the degree in which naturalresources are protected, rather than depleted, in the process. In reviewing the strategyproposed to assist Nepal in meeting these challenges, the Executive Directors may wish toconsider:

* the choice of priority sectors for IDA assistance and the balance betweeninfrastructure and social sectors in the proposed lending program;

* the proposed approach to capacity building and the increased emphasis placedon private initiative in the development strategy;

* the proposed approach to natural resource management;* the proposed approach to donor coordination.

James D. WolfensohnPresident

NEPAL POLICY MATRIXOBJECTIVES OF T

HIS MAJESTY'S GOVERNMENT MONITORABLE ACTIONS AND FY97

OF NEPAL PERFORMANCE INDICATORS INDICATORS BANK SERVICES TASKS

|ACIIIEVE FASTER GROWITH AND POVERTY ALLEVIATION BY:1. UTILIZING PUBLIC RESOURCES MORE EFFECTIVELY

(see .ection BIll of the CAS)

Prioritize Expenditures and Provide Prepare anumally -Ihree-Year Rolling Budget and Core Documents prepared by mid- Economic Analysis! Policy Policy Framework Paper supervision;

Adequately for O&M Program reflecting prioritized investment plan. July 1996 alongside FY97 Dialogue Regular econ. work at HQ and RMN;

budget FY98 CEM;

Dissemination of Econ. and Sector Work

Ensure adequate allocations for O&M in annual budgets. Allocations in FY97 budget Budget analysis at RMN

adequate

Expand Revenues and Strengthen Tax Implement VAT; increase number oftaxpayers; broaden Actions taken in FY97 Economic Analysis/ Policy Policy Framework Paper supervision;Ad. i issratioi nbase for income and real estate tax; update import valuation, budget; VAT implemented by Dialogue Regular econ. work at HQ and RMN;

January 1997 FY98 CEM

Establish permanent Revenue Board; introduce ASYCUDA ASYCUDA system

system at customs, introduced by Sept. 1996 rt

i.nprove Budget Management Conduct mid-year budget reviews; introduce statutory limit DMRS introduced by Sept. Economic Analysis/ Policy Policy Framework Paper supervision;

on Nepal Rastra Bank financing to the government; 1996; Mid-year budget Dialogue

implement Debt Management and Reporting System review completed by Feb.

(DMRS); introduce new budget classification system. 1997

It. BlIiLDINGCAPACITY

|ihnprove Civil Service Administration Introduce central computerized payroll system; update Central computerized system Policy Dialogue Policy Framework Paper; FY98 CEM

iCensus of all civil servants; link salary increments and introduced by Dec. 1996

I promotions to performance evaluation.

Provide technical and administrative support to Village Training for support Policy Dialogue FY98 CEM

Development Committees, personnel identified by lune

1996

IImprove Economic Management Strengthen economic management capacity through Training of personnel Technical Assistance I DF Grant to strengthen NPC-MOF through

twinning arrangement with Malaysia. underway; planned seminars twinning arrangement with Malaysia

conducted

improve Environmental Management Build up environmental management capacity at the Responsibilities clarified by Policy DialogueMinistry of Environment and other agencies based on June 1996

assigned responsibilities.

OBJECTIVES OF11S MIAJESTY'S GOVERNMIENT MONITORABLE ACTIONS AND FY97

OF NEPAL PERFORMANCE INDICATORS INDICATORS BANK SERVICES TASKS

ACIIIEVE FASTER GROWTII AND POVERTY ALLEVIATION BY':III. ENCOURAGING PRIVATE SECTOR, NGO, AND BENEFICIARY PARTICIPATION(see sedtion B 11 of the CAS)

Reform the Financial Sector and Rural Restructure the two state-owned banks for eventual Achieve majority pfivate Economic Analysis, Policy Financial Sector and Rural Banking Study;Banking privatization; restructure rural banking; reduce cash reserve ownership of NBL by July Dialogue, possibly Program Policy Framework Paper supervision; possible

requirements 1996; draft acuion plan to Financing Financial Sector Adjustment Credit

reform RBB by Sept. 1996

Strengthen Nepal Rastra Bank's supervision capacity. Technical assistance from

IMF to be started in FY97

Rctiunn Public Enterprises Privaiize at least 14 public enterprises over the next three At least ten entcrprises Policy Dialogue/ Po licy Framcwork Paper supervisionyears, including the Royal Nepal Airline Corporation and pnvatized by end of FY97 Technical Assistancethe Nepal Telecommunications Corporation.

Require timely submission of audited accounts (within at All accounts up to FY95 to Technical Assistance IDF Grant to Accountant General's Officemost nine months from close of financial year) to the be submitted by Sept. 1996Accountant Gcneral's Office.

Phase out budgetary subsidies to PEs. Gradual reduction in

subsidies, beginning in FY97

budget

Liberalize T rade and Exchange Regime Amend Foreign Exchange Regulatioii Act; reduce Reduce top tariff rate Policy Dialogue Policy Framework Paper supervisionmaximum import tariff, simplify customs duty structure. gradually, beginning in FY97

budget; Act amended bySeptember 1996

M.aiitaiii Observer Status in WTO.

Eitcourage Private Initiative in (See sectoral sections below) (See Sectorai Sections) Economic Analysis/Agriculture, Transport, Power. Portfolio Management! ProjectTelecommunications, Toirism Financing

Increase BeneficiarN Involvement in Assess link between participatimrn and outcomes; strengthen I(See Sectoral Sections) Fconomic Analysis/ Poverty AssssnientDesign, Implementation and Mainitenance village and district-level capacity; continue to implement Portfolio Management! Projectjof Projects policies favoring in irrigation, extension, forestrv (see Financing

bej'oss).l _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ ___ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ __l_ _ _ _ _ _ _ _ _

OBJECTIVES OFHIS MAJESTY'S GOVERNMENT N1ONITORABLE ACTIONS AND FY97

OF NEPAL PERFORMANCE INI)ICATORS INDICATORS BANK SERVICES TASKS

ACHIEVE FASTER GRONNTH AND POVERTY ALLEVIATION TIIROIJGII EFFECTIVE INVESTMENTS IN:

AGRICULTURE

Utilize Public Resources More Effectively Finalize prioritized expenditure program based on the Prioritized plan reflected in Sector Analysis; Agriculture Strategy Paper;

Agriculture Perspective Plan and implement in annual FY97 budget Project Financing AG Technology and Dissemination Project;

budgets. Rural Infrastructure Project

Provide suflicient funds for O&M in irrigation, research and Allocations in FY97 budget Portfolio Management Mahakali Irrigation II, Bhairawa Lumbinii Irr.,

extension, and forestry. adequate Sunsari Morang Headworks

Hlill Community Forestry

Formulate a National Water Resources Strategy with Strategy ready by July 1996 Sector Analysis/ Water Resources Strategy;

provisions for water pricing, cost sharing by beneficiaries in Portfolio ManagemenVt Mahakali Irr.ll, Bhairawa-Lumbini Irr., Sunsari

investsnent and O&M, and further transfer of schemes to Morang IHeadworks;users. Project Financing Irrigation Sector Project

Reduce subsidies to Agricultural Inptits Corporation and Reduction in FY97 budgetNepal Food Corporation.

Encourage Private Sector, NGO, and Phase out public involvement in import and distribution of Reduction of subsidies in Policy Dialogue/ Policy Framework Paper; a

Beneficiary Participation DAP; reduce subsidies on urea. FY97 budget; pnce increases Sector Analysis Agriculture Strategy Paper

sufficient to cover recent

foreign cost increases andRupee depreciation

Increase private participation in distribution of seeds and Sector Analysis/ Agriculture Strategy Paper,provision of extension and veterinary services; improve Project Financing Agricultural Technology and Disseminationresponsiveness to farmers groups. Project

Continue to transfer forest rights and strengthen user groups Portfolio Monitoring/ I lill Community Forestry

and district offices; address the issue of land tenure. Project Financing Land Resources Management Project

[ OBJECTIVES OFHIS MAJESTY'S GOVERNMENT MONITORABLE ACTIONS AND FY97

OF NEPAL PERFORMANCE INDICATORS INDICATORS BANK SERVICES TASKS

ENSURE LONG-TERM SUSTAINABILITY OF GROWTH BY CAREFULLY MANAGINGNATURAL RESOURCES

Utilize Public Resources More Effectively Prepare Water Resources Strategy and Land Resources Water Resources Strategy Sector Analysis Water Resources Strategy;

Management Study to guide policy reforms and resource ftnalized by mid-FY97; Land Resources Management Studyallocation. progress on Land Resources

Management Study

Adopt integrated approach to natural resource management. Begin to prepare Land Project Financing Land Resources Management ProjectResources ManagementProject

Review and coordinate donor initiatives. Local Donor Coordination Local Donor Coordination Donor coordination through RMN (inmeetings held regularly in cooperation with UNDP)FY97

Implement the National Environmental Action Plan; Sectoral Plans for industry, Sector Analysis/ Water Resources Strategy;complete the preparation of sectoral Plans; implement the forestry, and water resources Land Resources Management Study;recommendations of the Plans. completed Project Financing Irrigation Sector Project;

Land Resources Maragement Project

Pass the Environmental Protection Bill; assign clear Bill passed by July 1996responsibilities for the implementation of the NEPAP.

Implement Environmental Assessment guidelines; EA guidelines implemented Project Financing Multi-Mod. Transit and Trade Fac. Project;strengthen capacity for EA preparation and monitoring of for all new projects Irrigation Sector Project;compliance. Power Development Fund;

Road Maint. 11 - Rural Roads Project

Mitigate the impact of environmental degradation on the Complete study by FY97 Sector Analysis/ Poverty Assessment;

poor. Project Financing AG Tech. and Diss. Project;Land Resources Management Project

Implement integrated approach to natural resource Complete study by end-FY97 Sector Analysis; Land Resources Management Study;

management. Project Financing Land Resources Management Project

OBJECTIVES OFIHIS MAJESTY'S GOVERNMENT MONITORABLE ACTIONS AND FY97

OF NEPAL PERFORMANCE INDICATORS INDICATORS BANK SERVICES TASKS

ENSURE LONG-TERM SUSTAINABILITY OF GROWTH BY CAREFULLY MANAGINGNATURAL RESOURCES

Encourage Private Sector, NGO, and Encourage private participation in tourism development and Satisfactory implementationBeneficiary Participation urban environmental protection. of ADB project

Discuss options to establish an Environmental Trust Fund. Sector Analysis/ Land Resources Management ProjectPolicy Dialogue

Implement legislation devolving part of tourist fees to local Implement existing Policy Dialoguecommunities, agreements with NGOs

BUILD UP THE COUNTRY'S CAPITAL STOCK THROUGH EFFECTIVE INVESTMENTS IN:INFRASTRUCTURE -- TRANSPORT N)

Utilize Public Resources More Effectively Finalize Prionty Investment Plan and implement in annual Priority Investment Plan Portfolio Management! Project Road Maintenance and Rehab. Project;budgets. finalized by Dec. 1996 Financing Road Maintenance II - Rural Roads Project

Provide sufficient funding for O&M of existing network. Allocations in FY97 budget Portfolio Management Road Maintenance and Rehabilitation Projectadequate

Develop economically justified, environmentally and Project Financing Road Maintenance 11 - Rural Roads Projectsocially sound, and maintainable standards for new ruralroads, to be built with local participation.

Encourage Private Sector, NGO, and Support streamlined procedures for providing transit, Timely processing of Multi- Project Financing Multi-Modal Transit and Trade FacilitationBeneficiary Participation customs, and storage facilities with private participation. Modal Transit Project Project

Involve local communities in the construction and Project Financing Road Maintenance and Rehab. Project;maintenance of local rural roads. Road Maintenance 11 - Rural Roads Project

OBJECTIVES OFHIS MAJESTY'S GOVERNMENT MONITORABLE ACTIONS AND FY97

OF NEPAL PERFORMANCE INDICATORS INDICATORS BANK SERVICES TASKS

INFRASTRUCTURE -- WATER SUPPLY AND SANITATION

IJtilize Public Resources More Effectively Establish autonomous Rural Drinking Water Fund. Fund established by July Project Financing Rural Water Supply and Sanitation Project

1996

Phase out direct public implementation of small rural water Reduced or no amounts in Project Financing Rural Water Supply and Sanitation Project

schemes. FY97 budget

Improve performance of urban drinking water utility. Resolve outstanding project Portfolio Management Urban Water Supply and Sanitation Project

implementation problems;Improve project performance

Encourage Private Sector, NGO, and Design, implement, and maintain rural drinking water and Schemes prepared under Project Financing Rural Water Supply and Sanitation Project

Beneficiary Participation sanitation schemes serving up to 500 households with JACKPAS pilot project

significant beneficiary participation helped by supporting completedorganizations.

INFRASTRUCT-IRE -- POWER

tJtilize Public Resources More Effectively Improve performance of Nepal Electricity Authonty. Compliance with project Portfolio Management Power Sector Efficiency Project

covenants; preparation ofsatisfactory audit reports

Conduct Screening and Ranking (S&R) of potential S&R exercise completed by Portfolio Management/ Power Sector Efficiency Project;

hydropower projects using socio-environmental criteria. July 1996 Project Financing Power Development Fund

Encourage Private Initiative Present best hydropower projects to private sector and Projects to be presented by Project Financing Power Development Fund

encourage private dcvelopment; set up Power Development December 1996Fund.

INFRASTRUCTURE -- TELECOMMUNICATIONS

Encourage Private Initiative Issue licenses for private sector provision of wireless Licenses issued by July 1996 Portfolio Management Telecommunications V

services (basic, mobile, and paging)

Prepare Nepal Telecommunications Corporation for Plan prepared dunng FY97 Technical Assistance JGF Grant for Telecommunications

Privatization; establish regulatory agency.

OBJECTIVES OFHIS MAJESTY'S GOVERNMENT MONITORABLE ACTIONS AND FY97

OF NEPAL PERFORMANCE INDICATORS INDICATORS BANK SERVICES TASKS

BUILD UP TIlE COUNTRY'S HUMAN CAPITAL THROUGH EFFECTIVE INVESTMENTS IN:EDUCATION

tJtilize Public Resources More Effectively Prioritize expenditures to support basic/primary education. Priorities reflected in FY97 Portfolio Management] Basic and Primary Education Project;Include priority projects in the annual core program to budget Project Financing Basic and Primary Education IIprotect allocations in case of revenue shortfalls.

Provide adequate allocations to finanice recurrent costs. Adequate allocations in Portfolio Management Basic and Primary Education ProjectFY97 budget

Improve quality of services in higher education. Portfolio Management Higher Education Project;Engineering Education Project

Encourage Private Sector, NGO, and tindertake sector refomis and encourage pnrvate provision o Transfer Technician Training Portfolio Management Higher Education Project,Beneficiary Participation higher education. Program to private sector, Engineering Education Project

prepare higher secondaryeducation reform. O

HEALTH

tJtilize Public Resources More Effectively Prioritize expenditures to support family planning and basic Priorities reflected in FY97 Sector Analysis! Operational Issues in Health;health programs. Include priority projects in the annual core budget; improved Portfolio ManagementV Population and Family Health Project;program. performance of health project Project Financing Population and Family Health 11

Provide adequate allocations to finance recurrent costs. Adequate allocations in Portfolio Management Population and Family Health ProjectFY97 budget

Encourage Private Sector, NGO, and Explore altemative mechanisms to deliver services to under- Project Financing Possible Social Fund ProjectBeneficiary Participation served areas with increased NCGO and local community

participation.

- 31 -

ANNEX IPage I of I

Nepal - Selected Indicators ofBank Portfolio Performance and Management

Indicator FY93 FY94 FY95 FY96

Portfolio Performance

Number of projects under implementation 25 26 22 14Avemge implementation penod (years' 5 2 5 6 6 0 5 3Percent of problem projects rated U or HU'

(for past yearsa rted 3 or 4)Development objectives' 28 0 19 2 22 7 40 0Implementation progress (or overall 36.0 23 1 27 3 46 7

status for past yean)'Canceled durng FY in USSm 13.5 37 3 52 8 46 6Dabursement ratio(%)' 9 5 12 4 14 0 12.2Disbursement lag (%)f 31 6 33 4 33 6 45 8Memorandum item: % completed projects 0 50% 50% 0

rated unsatisfactory

Portfolio Management

Supervision resources (total USS thousands) 1100 7 1354 3 1050 7 497 5Average supervision (USS thousands/project) 44 0 52.1 47 8 33 2Supervision resources by location (in %)

Percent headquarter 69 6 73 2 83 8 69 8Percent resident mission 30 4 26.8 16 2 30 2

Supervision resources by ratng category(USS thousands/project)

Projects rated HS or S 47 3 51 8 42 4 21.9Projects rated U or HU 38 2 79 4 74 5 27.2

Memorandum item: date of last/next CPPR June 1996

aI Averae age of projects the Banks countiy porLfoliob. Rabngscale: HS' denotes 'Highly Sausfactory' .S' denotes 'Satsfactory', 'U denotes "Unsatsfactory'. and

'HUb denotes 'Highly Unsatisfactoryc. Extent to whuch the project wil meet its development objectives (see OD 13.05, Annex D2, Preparation of

Implementation Summary WForm 5901)d. Assessment of overall performance of the project based on the ratings given to individual aspects of project

uiplementation (e.g., management, avaiLability of funds, compliance with legal covenants) and to developmentobjectives (see OD 13.05, Annex D2, Preparation of Implementation Swnmary [Form 590]) The overall statusnot given a better rating than that given to project development objectives

e Ratio of disbunements during the year to the undLsbursed balance of the Bank's portfolio at the beguuung of the yearinvestment projects only.

f For all projects comprsLng the Bank s country portfolio, the percentage difference between actual cum. disbursementsand the cumulative disbursement estmates as given in the 'Ongmal SARTPR Forecast" or, if the loan amounts havebeen modified, m the "Revised Forecast.' The country portfolio disbursement lag i effectively the weighted averageof dsburmement lap for projects comprisLng the Bank's country portfolio, where the weights used are the respectiveproject shares in the total cumulative disbursement estimates

gS For projects rated in the FY only from the OED database. This percentage refers to completed projects iutrialyevaluated by OED dunring the corresponding fiscal year

Disbursement data is as of Apnl 8, 1995SupervLsion rtsources mclude Salaries and Benefits for 'BBE source of finds but excludes FAO staff and PCR task costs.

- 32-

ANNEX 2

Page I of 2

Nepal - Bank Group Fact Sheet FY 1993-1999IBRD/IDA Lending Program, FY 1993-1999

Past Current Pl/a,edCne.go-y FY93 FY94 FY95 FY96 FY97 FY98 FY99

Comnutnerits (USSm) 28.0 97.2 0.0 14.3 (320-4001'

Sector (%)b

Agriculture 100 0 0 0 60 35 31Education 0 20.6 0 0 0 30 0Other Finance 0 0 0 0 0 0 0Population and Health 0 27.5 0 0 0 0 38

Power 0 0 0 0 0 0 0

Social Sector 0 0 0 0 0 0 0Transportation 0 52 0 0 40 35 31Water Supply & Sewerage 0 0 0 100 0 0 0

TOTAL 100.0 1000 100.0 100.0 100-0 100.0 1000

Leniding instrument (%)

Adjustment loans' 0.0 0.0 0 0 0 0 0 0 0 0 0.0

Specific invesonent loans and others 100.0 100 0 0.0 100.0 100.0 100.0 100.0

TOTAL 1000 1000 100.0 100.0 1000 100.0 100.0

Disbusements (USSmn)

Adjustment loans' 14.1 0.0 0.0 0.0 0.0 0.0 0.0

Specific investment loans and others 59.0 69.1 78.6 45.0 59.2 45 3 20.2

Repayments (TJSSm) 3.4 4 0 6.8 3.4 0.0 0.0 0.0

Interest (USSm) 5.7 6 2 6.9 4.8 0.0 0.0 0.0

a. Ranges that reflect the base-caae (i e, most likely) scenario For IDA countries, planned comnntmients are not presented by FY but as athree-year-total range; the figures are shown in bracketb. A footnote indicates if the pattern of IDA lending has unusual characterisics

(e.g. a bigh degree of frontloading backloadin or lumpiness). For blend countries, planned IBRD and IDA conintment are presentedfor each year as a combined total.

b. For future lending, rounded to nearest 0 or 5%. To convey the thrust of country strategy more clearly, staff may aggegate sectors.c. Structural adjustment loans, sector adjustment loans, and debt service reduction loans.d. Depending on size of Power Development Fund.e. Excluding Power Development Fund

Disbursement data iu updated as of December 31. 1995.

- 33 -

ANNEX 2Page 2 of 2

Nepal - IFC and MIGA Program, FY93-95Past

Category FY93 FY94 FY95IFC approvals (USSm) 0 8 31 0 0 0

Sector (%)Hotels & Tourim 100 0 0 0Infiwstructure 0 0 100 0

TOTAL 100 0 100 0 0 0

Investment instrument (%)Loari 98.0 90 0 0 0Equity 20 100 00Quasi-equity' 0 0 0 0 0 0

Other 0 0 0 0 0 0

TOTAL 100.0 100 0 0 0

MIGA guarantees (USSm) 0 0

MIGA commitments (USSm) 0

'Includes quasi-cquity types of both loan and equity truments

ANNEX 3

Page I of I

Nepal - Summary of Economic and Sector WorkUSS thousands

LastFY FY96 FY97 FY98

Categoiy Actual

Agriculture 79.2 55 3 51.5 20Education 4 0 0 0

Energy 0 0 0 0

Finance I.I 0 20 30Other 183.3 20.7 0 0Population/Health/Nutrition 2.8 80 25 0Macroeconomic Mgmt 12 6 55 5o 50Social Sector 74 5 30 80 0

Total 357 5 241 0 226.5 100.0

Figures include staff costs and consultants fees; travel is excludedFigures for FY96-98 are in constant FY96 dollars

- 35 -

ANNEX 4

Nepal Page I of 2

Most Same regiowincome group NIcaLatest single year recent higher

Unit of estimate South Low- incomeIndicator measure 1970-7S 1980-85 1988-93 Asia income group

Priority Poverty IndicatorsPOVERTYUpper poverty linc local curr. .. .. 3,825Headcount index % of pop. .. 28 19

Lower poverty line local curr. 2,520Headcount index % of pop.

GNPpercapita USS 120 160 190 310 380 1,590

SHORT TERM INCOME INDICATORSUnskilled urban wages local curr. ..Unskilled rural wagesRural terms of trade " .. ..

Consumer price index 1987=100 36 76 187Lower incomeFood 24 73 178UrbanRural

SOCLAL INDICATORSPublic expenditure on basic social services % of GDP .. 3.1 1.8Gross enrollment ratiosPrimary %schoolagepop. 51 82 102 106 108 104Male 86 110 121 118 116Female 16 51 81 93 101

MortalityInfant mortality perthou. live births 153.0 122.0 96.4 83.7 63.1 39.0Under 5 mortality .. .. 128.0 123.9 101.4 61.5

lmmunizationMeasles % age group *- 34.0 63.0 85.8 87.3 77.6DPT " *- 32.0 74.0 90.2 89.9 82.2

Child malnutrition (under-5) 69.6 .. 50.0 60.4 40.3Life expectancyTotal years 43 48 54 60 62 67Female advantage -1.5 -1.5 -0.8 0.4 2.1 5.9

Total fertility rate births per woman 6.3 6.4 5.3 4.0 3.6 2.9Maternal mortality rate per 100,000 live births .. .. .. 420

Supplementary Poverty IndicatorsExpenditures on social security % of total govt exp. 0.6 0.7Social security coverage % econ. active pop. .. ..Access to safe water: total % of pop. 8.0 28.3 36.7 69.5 67.0

Urban 85.0 71.0 62.0 73.8 78.7Rural " 5.0 25.0 38.0 67.2 62.0

Access to health care .. 10.0 .. 95.8

Population growth rate GNP per capita growth rate Development diamond"6 (annual average, percent) 1 (annual average, percent) Life expectancy

45

GNP Grou

2 0 Iper primarycapita enrllment

0- = -5

-2 Acest 0f ae1970-75 1980-85 1988-93 1970-75 1980-85 1988-93 Access to safe water

1 Nepal Nepal- Low-income - Low-income

a. The development diamond, based on four key indicators, shows the average level of development in the country compared with its income group.

- 36 -

ANNEX 4

Nepal Page 2 of 2

Most Same region/income group VestLatest single year recent higher

Unit of estmtwe South Low- incomeIndicator measure 1970-75 1980-85 1988-93 Asia income group

Resources and ExpendituresHUNLLN RESOURCESPopulation (inre=1993) thousands 13,006 16.975 20,812 1,193,503 3,091,764 1,096,665Age dependency ratio ratio 0.84 0.88 0.85 0.74 0.67 0.69Urban % of pop. 5.0 8.5 12.6 25.7 27.6 54.7Population growth rate annual % 2.5 2.6 2.6 2.1 1.9 1.6Urban 7.0 7.5 7.2 3.5 3.9 2.9

Labor force (15-64) thousands 5,588 6,870 8,271 437,138 1,442,452 459,196Agriculture % of labor force 93 93 ..

Industry 1 ..

Female 35 34 33 22 33 31F emales per 100 malesUrban number 79 86 ..Rural " 101 99 ..

NATURAL RESOURCESArea thou. sq. km 140.80 140.80 140.80 5,133.49 39,091.96 40,682.67Densitv pop. per sq. km 92.37 120.56 144.02 227.55 77.60 26.52Agricultural land %of land area 30.16 31.48 31.83 59.03 52.82 39.61Change im agricultural land annual % 0.34 0.42 0.02 0.00 0.03 -0.13Agricultural land under irrigation °'n 5.57 17.65 19.52 29.34 18.02 12.66

Forests and woodland thou. sq. km . 55.67 50.23 658.32 7.154.40 5,953.78Deforestation (net) annual % 1.02

INCOMEHousehold incomeShare of top 20% of households % of income .. 40 ..Share of bottom 40% of households .. 22 ..

Share of bottom 20% of households .. 9 ..

EXPENDITUREFood % of GDP .. 52.0 ..

StaplesMeat, fish, milk, cheese, eggs

Cereal imports thou. metric tonnes 18 10 27 6,211 34,420 66,281Food aid in cereals " 6 9 15 1,624 8,334 5,477Foodproduction per capita 1987 100 105 97 104 III 113 101Fertilizer consumption kg/ha 3.0 10.1 21.1 70.2 59.9 48.0Share of agriculture in GDP % of GDP 69.0 48.9 40.9 27.4 26.3 15.7Housing %ofGDP .. 12.8 ..

Average household size persons per household 6.0 6.0 ..

Urban .. 5.5F'ixed investment: housing % of GDP .. .. ..Fuel and power % of GDP .. 5.7 ..

Energy consumption per capita kg of oil equiv. 9 14 22 216 364 1,595Households with electricityUrban % of households 50.6 ..

Rural .. 4.6 ..

Transport tnd communicatIon %of GDP .. 1.1Fixed investment: transport equipment .. .. ..Total road length thou. km 3 6 8

INVESTMENT IN HUMAN CAPITALHealthPopulation per physician persons 52,060 30,752 16,106 2,850 3,277Population per nurse 17,950 4.758 2,300Population per hospital bed 7,191 5,820 6,499 1,638 1,016 604Oral rehydyration therapy (under-5) % of cases .. .. 14 37 38EducationGross enrollment ratioSecondary % ofschool-agepop. 13 26 36 40 41 53Female 4 12 23 29 34

Pupil-teacher ratio: primary pupils per teacher 29 38 39 61 39Pupil-teacher ratio: secondary 21 .. .. 26 20Pupils rewehing grade 4 %O of cohort .. .. ..

Repeater rate: primary % of total cnroll .. 21Illiteracy °%of pop. (age 15+) 81 78 74 54 41 19Female %offem. (age 15+) .. 89 87 69 53

Newspaper circulation per thou. pop. 7 8 7 26 .. 74World Bank International Economics Department. Apni 1995

- 37 -ANNEX 5Page I of 3

NEPAL - Key Economic Indicators

Actual Estimate ProjectedIndicator 1991 1992 1993 1994 1995 1996 1997 1998

National accounts(as % GDP at current market prices)

Gross domestic product 100 0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Agriculturea 45.9 43.6 40.9 40.9 39.2 39.8 39.0 38.2

Industrya 16.9 19.8 20.0 19.9 20.0 19.7 19.7 19.8

Services' 31.7 31.6 33.4 32.7 33.2 33.2 33.5 33.7

Total consumption 90.4 89.2 88.5 87.6 91.0 91.3 90.8 89 4Gross domestic investment 20.8 21.2 21.2 20.5 20.0 21.4 23.2 24.5

Government investment 7.2 6.9 6.9 5.6 5.5 6.1 7.1 8.1Private investment 11.7 12.7 12.9 13.7 13.1 15.3 16.0 16.4

(includes increase in stocks)Exports (GNFS)b 11.8 16.0 18.1 23.9 24.0 25.2 27.0 27.0Imports(GNFS) 23.1 26.3 27.7 32.0 35.0 37.9 41.0 40.9

Gross domestic savings 9.6 10.8 11.5 12.4 9.0 8.7 9.2 10.6Grossnationalsavingsc 11.5 13.0 13.7 14.6 11.5 11.7 12.7 14.5

Memorandum itemsGross domestic product 3704 3500 3769 4048 4446 4398 4360 4693(US$ million at current prices)

Grossnationalproductper 208.1 202.4 197.0 201.9 213.0 213.1 211.6 209.7capita (US$, Atlas method)

Real annual growth rates(%, calculated at 1985 prices)

Gross domestic product at 6.4% 4.1% 3.4% 7.1% 3.0% 6.0% 5.1% 5.1%market pricesGross Domestic Income 6.6% 5 5% 3.7% 7.4% 1.4% 6.6% 5.8% 5.6%

Real annual per capitagrowth rates (%, calculatedat 1985 prices)

Gross domestic product at 3.7% 1.5% 0.9% 4.6% 0.6% 3.4% 2.6% 2.5%market pricesTotal consumption 2.3%O 1.7% 0.8% 4.4% 2.3% 4.0% 2.5% 1.7%Private consumption 1.5% 3.4% -0.2% 3.9% 2.3% 4.3% 2.5% 1.6%

(continued)

- 38 -ANNEX S

Page 2 of 3

NEPAL - Key Economic Indicators

(Continued)

Actual Estimate Projected

Indicator 1991 1992 1993 1994 1995 1996 1997 1998

Balance of Payments(USSm)

Exports(GNFS)b 437.3 570.3 675.4 965.2 1068.1 1107.8 1178.3 1266.6

Merchandise FOB 227.6 321.4 380.2 392.1 359.2 354.4 368.2 390.7

Imports(GNFS)b 854.1 920.6 1055.5 1278.4 1555.8 1667.2 1788.9 1918.9

Merchandise FOB 714.9 748.9 863.4 1048.1 1313.3 1394.0 1482.5 1589.0

Resource balance -416.8 -350.3 -380.1 -313.1 -487.7 -559.4 -610.6 -652.3

Net current transfers 60.5 61.0 75.6 76.5 107.5 129.3 154.4 184.6

(including official current transfers)Current account balance -292.0 -235.9 -219.3 -163.0 -267.8 -309.8 -335.3 -343.7

(after official capital grants)

Net private foreign direct 0.0 0.0 0.0 0.0 0.0 15.0 15.0 27.0

investmentLong-term loans (net) 193.7 171.5 120.4 172.5 176.3 157.3 192.6 201.5

Official 138.6 106.7 158.5 160.8 194.6 169.3 204.7 212.6

Private 55.1 64.8 -38.1 11.7 -18.3 -12.0 -12.0 -11.0Othercapital(net,including 225.4 143.8 263.3 125.0 99.2 107.3 131.7 133.0

errors and omissions)

Change inreservesd -127.0 -79.5 -164.4 -134.6 -7.7 30.3 -4.0 -17.8

Memorandum itemsResource balance (% of -11.3% I10.0%/o -10.1% -7.70/o -11.0% -I2.70/o 14.0/o -13.9%

GDP at current marketpnices)Real annual growth rates(1985 prices)Merchandise exports 24.5% 37.9% 14.6% -0.3% -12.1% -7.0% 1.9% 3.9%

(FOB)Primary 30.3% 52.7% 10.6% -22.3% -13.9%/o -5.4% 6.7% 5.0%

Manufactures (Garments) 2.3% 77.7% 11.3% 37.3% -18.2% -15.2% -15.2% 0.0%

Merchandise imports 10.2% 7.6% 11.8% 20.2% 13.8% 2.9% 5.0% 5.1%

(CIF)

Public finance(as % of GDP at current

market prices)'Current revenues 8.9 9.0 8.8 9.8 11.1 11.4 12.1 12.8

Current expenditures 11.7 10.0 10.2 10.3 10.7 10.9 10.8 10.4(Continued)

- 39 -

ANNEX 5Page 3 otf3

NEPAL - Key Economic Indicators(Continued)

Actual Estimate Projected

Indicator 1991 1992 1993 1994 1995 1996 1997 1998Current account surplus (+) -2.8 4.9 -1.4 -0.5 0.4 0.5 1.3 2.4or deficit (-)Capital expenditure 7.8 7.7 7.8 6.5 6.8 7.3 8.4 9.5Foreign financing 7.9 6.0 6.3 5.8 5.4 6.0 7.0 6.9

Monetary indicatorsM2/GDP (at current market 31.3 30.6 34.0 35.0 35.9 37.0 38.5 40.0prices)GrowthofM2(%) 19.5 21.1 27.7 19.6 14.2 17.6 16.8 15.9Private sector credit growth / 55.7 59.2 52.9 99.7 89.8 97.3 93.7 90.6total credit growth (%)

Price indices( 1985 =100)Merchandise exportpnce index 139.2 142.6 147.3 153.3 158.6 168.7 172.0 175.6Merchandiseimportpriceindex 125.0 121.7 125.5 128.9 139.6 144.2 146.0 148.9Merchandisetermsoftradeindex 111.4 117.2 117.3 119.0 113.6 117.0 117.8 118.0

Real exchange rate (1985=100) 78.5 80.0 75.4 74.1 72.3 80.5 87.7 87.7

(US$/LCU)1

Consumerprice index 9.8% 21.1% 8.8% 9.0% 7.6% 7.5% 6.6% 5.3%(% growth rate)

GDP deflator 9.5% 19.2% 10.9% 8.6% 8.1% 7.6% 7.0% 6.0%(% growth rate)

a. If GDP components are estimated at factor cost, a footnoote indicating this fact should be added.b. "GNFS" denotes "goods and nonfactor services."c. Includes net unrequited transfers excluding official capital grants.d. Includes use of IMF resources.e. Should indicate the level of the government to which the data refer.f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.

- 40 -

ANNEX 6Page I of I

NEPAL - Key Exposure Indicators

Actual Estimate Projected

Indicator 1991 1992 1993 1994 1995 1996 1997 1998

Totaldebtoutstandingand 1771.3 1801.9 2003.8 2319.8 2388.3 2540.9 2686.8 2812.5

disbursed (TDO) (US$m)a

Net disbursements (US$m)a 122.0 82.2 168.6 196.1 175.6 152.5 197.5 200.6

Total debt service (TDS) 66.9 67.9 71.0 82.3 82.1 88.4 91.7 100.4

(UJS$m)a

Debt and debt service indicators

(%)TDO/XGSb 334.8 276 8 258.7 216.5 197.2 200.1 197.0 189.6

TDO/GDP 47 8 51.5 53.2 57.3 53.7 57.8 61.6 59.9

TDS/XGS 12.6 10.4 9.2 7.7 6.8 7.0 6.7 6.8

ConcessionaliTDO 90.5 92.3 92.8 92.2 94.2 95.2 95.7 96.4

IBRD exposure indicators (%)

IBRD DS/public DS 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Preferred creditor DS/public 47.0 46.9 47.5 56.1 52.5 56.9 59.4 55.8

DS

IBRDDS/XGS 0.0 0.0 0.0 0,0 0.0 0.0 0.0 0.0

Share of BRD portfolio 0.0 0.0 00 0.0 0.0 0.0 0.0 0.0

IFC (USSm)

Loans (.0 0.0 0.8 0.0 0.0 31.0 15.0 15.0

Equity and quasi-equity /c 0.0 0.0 0.4 0.0 0.0 3.2 0.0 0.0

MIGA

MIGA gutarantees (US$zn) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short-

tenn capital.

b. "XGS" denotes exports of goods and services, including workers' remittances.

c. Includes equity and quasi-equity types of both loan and equity instruments.

- 41 -ANNEX 7

Page I of 2

Status of Bank Group Operations in NepalLBRD Loans and IDA Credits in the Operations Portfolio

Last ARPP

Onpmal a tuol in L SS rillons Difference between Supervuson rmtngi

Project Fscal actual cod expected Development Overanl

ID year Borrower Purpose IDA Cnncellanons L-ndLibred dib,ti-aentea (ibjeet,es Statw

NP-PA-10310 1988 HMOIN MAHAIKALI FRIGATION 11 413 8 22 -0 I 5 5

NP-PA-10326 1989 HMG/N MUNIC. DEV & EARTHiQ RECONSTR 41 5 19 93 0 6 -21 6 U U

NP-PA-10330 1989 lIMG/N HILLCOMMUNITY FORESTRY 30 5 1 '00 6 95 12 1 S S

NP-PA-10333 1989 HMG/N ENGINEERING EDUCATION * 4 9 19 " 6 S S

NP-PA-10335 1989 HMG/N EARTHQUAKE SCHOOL REHABILITATION 22 3 9l -0 4 S S

NP-PA-10348 1990 HMGON BR1AIRAWA LULMBINI III IRRIGATION 4 2 2292 -I I S s

NP-PA-10370 1991 HMOIN URF3WATERSUPPLY&SANITATION 600 5994 -260 U u

NP-PA-10392 1992 HMG/N POWER SECTOR EFTICIENCY 650 4036 -270 U U

NP-PA-10395 1992 HMG/N BASIC & PRIMARY EDUCATION 30 6 18 12 -1 0 S S

NP-PA-10396 1992 HMG/N TELECOMMUNICATIONSV 550 35 19 -147 HS HS

NP-PA-10406 1993 lIMG/N SLNSARIMORANG HEADWORKS 280 1276 -116 1S S

NP-PA-10454 1994 HMO/N FIIGHEREDUCATION 200 186 -38 S S

NP-PA-10460 1994 HMG/N POPULATION & FAMILY HEALTH 26 2752 -66 5 I

NP-PA-10475 1994 lIMG/N ROAD MAINTENANCE & REHABILITATION 505 4687 -193 S S

Actvea Loans Closed Loans Total

Totaldbseed 21641 _7591 19232

Ofwluchhrepad 0 3152 1 52

Tohl n OWheld by IDA 493 57 680 37 1173 94

Amowt cold 0 0 0

Of which repid 0 0 0

Total indsburaed 31005 0 31005

a. Actwa dabsements to date mnwu mtended diba.eetncti to dale ua pro]ecled at apprasal

b Ratwng of 1-4, ee OD 13 05 Annex D2, Prcpa'ari.on oflrgri-te.t-atto ewms-r (Form 590, Faowmng the FY94 nunal Review of Portfoho Pe-fornune- (ARPP),

a i.ter-based sytem wll be wed (HS=h'igMy satisfactory, S-*factoy, U= f,cty, HUhg afacto, see Prcpaed fproeenr n Project oed Portfolho

Perfort,Racet.ang,feahdologp(SecM94-901),Aagut23, 1994 LasARPP Ff95

e Follong the FY94 ARPP, Iimplienlslhon Progress' wl be reported here

NoteDwbsacenent data u a of April 8, 1996

- 42 -.ANEX 7

Page 2 of 2

Statement of IFC Investmentsas of April 7, 1996

A4mount in USS millions

Fiscal Obligor Business Loan Equity TotalYear

1975 Soaltee Hotel Linmted Hotels and Tourism 2.7 0.43 3 131983 a/ Mining and Extraction of Metals and Other Or Industry 4.97 4 971993 Soaltee Hotel Lirmted Hotels and Tourism 0.75 0 02 0 771996 Hinal Power Power 28.00 3.00 31.00

Total gross comnimtments b/ 36.42 3.45 39.87

Les cancellations, terriations, repayment & sales 7.97 0.00 7 97

Total comnrutments now held by IFC 28.45 3.45 31.90

a/ Investments which have been fully cancelled. termnaited, written ofI sold, redeemed or repaid.

b/ Gross conumitments consist of approved and signed projects

c/ Held comirutments consist of disbursed and undisbured investment.

Annex Cl

NEPAL- National Accounts Page 1 of 4

Part A: Current Price Data(in millions of local currency units)

Base-case (most likely) projection

Atlas GNP per capita S213 0 ( 1995)

Midyear population. 21.39 millions ( 1995)

Actual Estimate Projection

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2005

Grossdomesticproductatmarketpnces 1034160 1205010 1494850 1713860 1994160 2220180 2532249 2847350 3172178 3521012 3868277 6065012Net indirect taxes 65320 74870 97020 129300 168090 184854 222093 263291 299286 332672 576176GDP at factor cost 1139690 1419980 1616840 1864860 2052090 2347394 2625257 2908887 3221726 3535605 5488835

Agriculture 553680 651560 700900 816210 870720 1007784 1110679 1212640 1323960 1431863 2068469Industry, ofwhich 20362 0 29624 0 34294 0 39718 0 44421 0 49770 3 56129 9 62710 6 70062 8 77538 5 125684 5

Manufacturing 78940 128220 146180 172270 188270 210942 237896 265787 296948 328632 532690Services 38239 0 47218 0 57300 0 651470 737160 84190 7 95327.8 106914 2 119713 8 132835 8 2163521

Resource balance -13559 0 -15412 0 -16481 0 -16153 0 -24354 0 -32206 4 -39874 2 -44086 1 -51627.2 -51611 2 -63720 0Exports (GNFS) ' 10886 0 14226 0 23909 0 30948 0 47671 0 53344 0 63776 1 76955 6 85608 2 96282 4 106605 4 178071 2Imports(GNFS) 218200 277850 393210 474290 638240 776980 959825 1168298 1296943 1479097 1582166 2417912

Total expenditure 1143490 1340600 164897 0 1879670 2155670 246372 0 285431 3 324609 2 361303 9 403728 4 438438 9 6702212 1

Consumptionexpenditures 952730 1089860 1332780 1516640 1746160 2020700 2312364 2586425 2836866 3143038 3395328 515334.2 4>Govemment 110850 119080 149000 181290 204470 227138 254388 281467 31098.6 339605 520270Pnvate 979010 1213700 1366640 1564890 1816240 2085226 2332036 2555399 2832053 3055723 4633072

Grossdomesticinvestment 190760 250740 316190 36303.0 40951.0 443020 541949 659667 776173 894246 989061 1548869Totalgovernmentinvestment' 8683.0 10331 0 117690 110840 122280 155583 202974 25540.7 301762 322959 37931 5Total pnvate investment' 140970 189450 221600 272550 290828 386365 456692 520766 592484 666102 1169554

Total fixed investment 227800 29277.0 339280 383390 413108 50305 3 614893 72641 8 83904.6 928506 1454041Total investment n stocks 2294.0 23420 2375 0 26120 2991 2 38896 44774 49755 5520.0 6055 5 94829

Domestic savuigs 115150 16207.0 19722.0 24800.0 199480 219885 260925 335312 377974 47294.9 911669+ Net factor income 1934.0 2147.0 27150 3231 0 38620 53700 306.8 1233 52.9 -864 -2400 -23540+Netcurrenttransfersd 1720 218.0 4820 581 0 4950 2720 7441.8 100807 124754 14961 5 174002 34694.4= National savings 138800 194040 23534.0 29157.0 255900 297371 362964 460594 52672.5 644551 1235073

Grossnationalproduct 1053500 1226480 1522000 1746170 2032780 227388.0 253531.7 2848583 3172707 3520148 386587.7 604147.2Gross national disposable income 105522.0 122866.0 152682.0 1751980 2037730 2276600 2609735 294938.9 329746.1 3669763 4039879 6388416

a OGNFS" denotes 'goods and nonfactor services.'b Gross domestic fixed capital formation onlyc. Derived as a residual; includes increase in stocksd. Total net unrequited transfers excluding official capital grants

Annex Cl

NEPAL - National Accounts (continued) Page 2 of 4

Part B: Shares of Gross Domestic Product(percentages calculated using current price data)

Base-case (most likely) projection

Actal Estimate Projection

1990 1991 1992 1993 1994 1995 1996 1997 19f 1999 2000 2005

Gross domestic product 100.0 100 0 100.0 1 0 0 100.0 100.0 100.0 1000 100 100 0 100 0

Net rndirect taxes 5 4 5.0 5.7 6.5 1.6 7 3 7 8 8 3 8 5 8.6 9.5

Agriculture value added 45.9 43.6 40 9 40 9 39 2 39 8 39.0 38.2 37 6 37 0 34 1

Industry value added 16 9 19 8 20 0 19.9 20 0 19 7 19 7 19 8 19 9 20 0 20 7

of which Manufacturing 6.6 8.6 8 5 8 6 8 5 8 3 8 4 8 4 8 4 S 5 8 8

Services value added 31 7 316 33.4 32.7 33.2 33 2 33.5 33 7 34 0 34 3 35.7

Resource balance (X-M) -11 3 -10 3 -9 6 -81 -11.0 -12.7 -14.0 -13 9 -14 7 -13.3 -10.5

Exports (GNFS) 118 16.0 18.1 23.9 240 252 270 270 27.3 27.6 29.4

Imports (GNFS) 23.1 26 3 27 7 32 0 35 0 37.9 41.0 40 9 42 0 40 9 39 9

Total expenditurc 111.3 110.3 109.7 108.1 111.0 112.7 114.0 1139 1147 113.3 1105

Govenmuent consumption 9 2 8.0 8.7 9.1 9.2 9.0 8.9 8 9 8.8 8.8 8.6

Private consumption 81.2 81.2 79.7 785 818 82.3 81.9 806 80.4 79.0 764

Government investment 7 2 6.9 69 5.6 5.5 6.1 7.1 81 8 6 8 3 6 3

Private investment 11.7 12.7 12.9 13.7 131 153 160 164 16.8 172 193

Gross domestic savings 96 108 115 124 90 87 9.2 106 107 122 150

Gross national savings 115 130 13.7 14.6 11.5 117 127 145 15.0 16.7 20.4

Memorandum ItemsGDP deflator 1776 1945 231.8 257.0 279.1 301.6 3245 3472 368 1 3901 409.6 510.5

Consurnerpriceindex 100.0 109.8 133.0 144.7 1577 1697 1824 194.4 204.7 216.0 225.4 274.5

Total GDP (million current USS) 3704 3 3500 0 3769 2 4048.2 4445.7 4398.5 4359.9 4693 5 5037 1 5400 5 7604.4

Conversion factor used (LCUIUS$) 32 5 42.7 45.5 49.3 49.9 57 6 65 3 67 6 69 9 71 6 79 8

Percapitagrossnationalproduct 208.1 202.4 1970 2019 2130 2131 2116 209.7 2136 2230 2786

(Atlas method in 1985 USS)

a. 'GNFS' denotes 'goods and nonfactor services

Annex Cl

NEPAL - National Accounts (continued) Page 3 of 4

Part C: Constant Price Data(in local currency, constant 1985 prices)

Base-case (most likely) projection

Actual Estmate Projection

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2005

GDPatmarketpnces 582430 619520 644960 666840 714470 736170 780340 820039 861878 902505 944301 1188127GDPatfactorcost 550510 585900 612660 631870 676580 690231 730407 763426 798024 833819 871481 1085707

Agnculture 27774 0 28372 0 28070 0 27896 0 29910 0 29706 0 31399 2 32341 2 33311 5 34310 8 35340 1 40968 9Industry,ofwhuch 89040 100200 117060 122630 132870 136750 144682 152494 160729 169408 178556 232262

Manufacturing 3192 0 37560 4958 0 5266 0 58340 5909 0 6251 7 6589 3 6945 1 7320 2 7715 5 10036 1Services 183730 201980 214900 230280 244610 256421 271733 287519 304181 321303 339523 443756

Resource balance -60191 -6755 3 -7328 1 -7449 2 -7243 6 -8017 3 -9397 8 -10682 3 -11621 3 -13126 9 13050 0 -15496 7Exports(GNFS) 56760 65145 84548 100715 149695 161150 157735 159237 163449 169502 175841 219133Imports(GNFS) 116951 132698 157829 175207 222131 241324 251713 266060 279662 300771 306342 374100

ToLalexpenditure 642621 687073 718241 741332 786906 816343 874318 926862 978090 I033774 1074801 1343094

Consumption 53994 7 56673 3 59110 5 61061 3 65325 9 68425 1 72917 5 76557 8 79860 5 83859 9 86890 8 108403 7Goverrment 51140 57700 51600 58770 65728 68745 70977 74588 78394 82089 85891 108069Pnvate 48880 8 50903 3 539505 55184 3 58753 1 61550 5 65819 8 69098 9 72021 1 75651 0 78301 7 97596 9

Grossdomesticinvestment 102673 120340 127136 130719 133647 132093 145143 161285 179485 195174 205894 259057 7'Total government investment 42886 41673 4154.0 42378 36174 36459 41690 49653 59093 65897 67267 63477Totalrpnvaternvestment 48624 67657 7617.6 79793 88949 86714 93806 101225 109171 117229 125706 177335

Total fixed investment 9151 1 10933 0 11771 5 122171 12512 3 123174 13572 8 15145 5 16922 8 18448 8 19472 5 245004Totalchawgesinstocks 11163 11010 9421 8548 8524 8919 9416 9830 10257 10687 11169 14053

Temns-of-trade(TT)effect 1587 2797 1142.0 1361.0 1621 8 4532 951 7 1601 7 21149 26286 30570 56379Gross domestic income 58401 7 62231.7 65638.0 680450 730688 740702 78985 8 836056 883027 928791 97487 1 1244507Domesticsaving(TTadjusted) 44069 5558.4 6527.5 69837 77429 56451 60682 70478 84421 90192 105963 160469

Net factor income 1,086.9 11004 1182.6 12743 14098 17793 940 352 143 -221 -588 -4717GNPatmarketprices 59,3299 630524 656786 679583 72856.8 75396.3 78128.0 820391 86202 1 902284 94371 3 118341 0

a. 'GNFS' denotas 'goods and nonfactor services

Annex C1

NEPAL - National Accounts (continued) Page 4 of 4

Part D: Annual Growth Rate(calculated Ibum data In constant 19S5 prices)

Base-cas (most likely) projechon

Actal Esimate Projecdion

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2005

GDP at market prices 64% 4.1% 3.4% 7.1% 3.0%/6 60% 5.1% 51% 47%/ 46% 45%Agnculture 2 2% -1.1% -0 6% 7.2% -0 7%/ 5 7%/ 3 0/ 3 0% 3.0% 3 0% 3 0%Industry, of which 12 5% 16.8% 4.8% 8.4% 2 9% 5 8% 5.4% 54% 5 4% 5.4% 5 4%

Manufacturing 17 7% 32.0% 62% 108% 13% 5.8% 5.4% 5 4% 5.4% 54% 5.4%Services 9 9% 6.4% 7 2% 6 2% 4 8% 6 0% 5 8% 5 8% 5 6% 5 7% 5 4%

Exports (GNFS) 14.8% 29.8% 19.1% 486% 77% -2 1% 10% 2 6% 3 7% 37% 47%Imports (GNFS) 13.5% 1S.91/6 110% 26.8% S6% 43% 5 7/a 5.1% 715% 19% 54%

Total expenditure 69% 45% 32% 6.1% 37% 7.1% 60% 55% 57% 400% 4.7%,0Consumption 5.0% 4.3% 3.3% 7 0% 4 7% 6.6% 5 0% 4.3% 5 0% 3 6% 4 4%Investment 17.2% 5 6% 2.8% 2 20/ -12% 9.9°/c 11 1% 11.3% 8 7% 5 5% 6 2%

Gross domestic income 6.6% 5.5% 3 7% 74% 1 4% 6 6% 5 8% 5 6% 5 2% 5.0 % 4 8%Gross domestic saving 24 3% 2.0%h 4.4% 8 9% -15 2% -1 5% 6 4% 16 2% 10% 18.0% 6 0%

Per capita growth ratesPer capita GDP (mp)b 37% 15% 09% 46% 06% 3.4% 26% 25%30 21% 19% 20% pPer capita GNP (mp) 36% 1.6% 1.0% 46% 10% 1 1% 25% 2.5% 21% 19% 201/. CYPer capita total consumption 2.3% 1.7I% 0.8% 4.4% 2.3% 4 0% 2.5% 17% 2 4% 0.9% 1 9%/aPer capita private consumption 1 5% 3 4% -0.2% 3 9% 2 3% 4 3% 2.5% 1 6% 2.4% 0 8% 1 9%

a 'GNFS denotes goods and nonfactor services'b. 'mp denotes rmarke prices'

Part E: Period Average Indicators

Actual Estsmate Proijection

1985-90 1990-95 1995-100

Marginal national saving rate 23. 0% 22.6% 65 9%/

Incremental capital-output ratio 4.4 40 3.9

Import elasticity 1.0 34 tO

Annex C2

NEPAL- Exports and Imports Page 1 of 2

Base-case (most likely) projection

Actual Estimate Projection1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2005

A Value in current pnces CUSS millions)

Total merchandise ecports (FOB) 2271 3209 3797 3942 3584 3544 3682 3907 4210 4540 6495

Ptuscipalprimaiyproduct.s 44.4 777 694 312 501 538 571 609 678 754 1237Food 30.3 455 410 263 327 351 376 396 441 491 799Pulses 76 271 231 74 91 98 105 110 123 137 222HidesandSkiris 65 SI 54 45 83 89 97 103 114 127 216

Carpets 1148 1650 2110 1935 1545 444 1559 1677 1805 1942 2670Garments 415 762 864 1206 1027 905 789 808 828 845 950

Othergoods 264 20 129 411 SI I 656 756 813 900 996 1637

Total merchandise imports (C�F) 7140 7478 8622 10644 13121 13940 14825 15890 17523 18293 25128Food 867 945 1007 1338 1563 1648 1686 1775 1969 2062 2798Ot1�erconsuxnergoods 00 00 00 00 00 00 00 00 00 00 00

POLbandotherenergy 700 853 843 988 941 988 1037 1117 1225 272 1724lntermediaiegoodsnei' 1557 1880 2033 1811 2303 2417 2507 2668 2942 3074 4362

Primatygoods 00 00 00 00 00 00 00 00 00 00 00Manufacturedgoods 2174 2420 3046 4452 5722 6118 6605 7111 7838 8181 11182

Capitalgoods 1842 1380 1694 2055 2591 2770 2990 3219 3549 3704 5063

B Value in constant 1985 pnces CUSS millions)

Total merchandise exports (FOB) 1631 2250 257.9 2571 2260 2101 2140 2225 2338 2458 3146Food 294 441 399 247 284 299 328 345 372 402 591Pulses 74 263 224 69 79 83 91 96 104 112 164HidesandSkins SI 41 41 30 51 53 58 61 66 72 105Carpets 775 1080 1354 1221 937 843 885 930 976 1025 1259Carments 281 499 555 761 623 528 448 448 448 448 448Otherexpoits 156 -73 06 241 286 295 329 345 371 4430 578

Totalmerchandiseimpcsrts(CIF) 5712 6145 6869 8259 9396 9609 10155 10674 11479 11692 14278Food 841 917 980 1259 1360 14(10 1471 1546 1663 1694 2069Othercomumergoods 00 00 00 00 00 00 00 00 00 00 00

POLandotlierenergy 924 1239 131 I 1684 1596 1642 1725 1813 1950 1986 2426

lntermediategoodsnei 1234 1503 1538 1210 1399 1439 1512 1589 1709 1741 2125Primarygoods 00 00 00 00 00 00 00 00 00 00 00

Manufacturedgoods 1469 1583 1954 2810 3470 3571 3750 3941 4239 4317 5272

Capitalgoods 1245 903 1087 1297 1571 1617 1698 1784 1919 1955 2387

(continued)

a includes prunaiy prodacts not specifically identifiedb POL denotes crude oil and denvatesc n e i * denotes not elsewhere included

Annex C2

NEPAL - Exports and Imports (continued) Page 2 of 2

Base-case (most like)y) projecnon

Actual Estimate Projection1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2005

Memorandum itemsExpoTtvolumegrowthrate 24.5% 379O/1 146% -03% -121% 70o/o 19/o 3.9% 51% 5.2% 51%Irnportvolumeggrowthrate 10.2% 76% 11.8% 202% 13.8% 29% 5 0/. 51% 75% 1.9%/ 54%

C. Pnce Indices (1985 = 100)

Merchandise export 139.2 142.6 147.3 153.3 158.6 1687 172.0 1756 180I1 1847 206 5Merchwidise impon 125.0 121.7 125.5 128.9 139.6 1442 146.0 1489 1526 1565 1760Merchandisetemssoftrade 1114 117.2 117.3 119.0 113.6 1170 117S 1180 1180 118.0 1173

D Non-Factor Seivices (1985=100)

ExportsofNFSd-volumeindex 137.0 1763 204.5 3946 459.9 4622 464.5 4738 4880 502.6 6174ExportsofNFS priceindex 104.1 96.0 98.2 98.8 104.8 1128 120.7 1279 1356 142.4 1774

Imponsof NFS-volume index 197.7 3099 3619 4624 4744 5308 5790 608.6 6545 6666 814 1InportsofNFS -priceindex 81.2 639 61.2 57.4 589 612 62.9 64.5 661 677 758

d. NFS denotes nonfactor services. 4pOD

Annex C3NEPAL - Balance of Payments Page 1 of 2

(USS millions at current prices)Base-case (most likely) projection

Asctal Estimate Projection1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2005

TotalexportsofGNFS' 4373 5703 6754 9652 10681 11078 11783 12666 13774 14883 22327Merchandise (FOB) 227 6 321 4 380 2 392 1 359 2 354 4 368 2 390 7 421 0 454 0 649 5Nonfactor services 2097 2490 2952 573 1 7089 7534 8102 8760 9564 10343 15832

TotalinlportsofGNFS 8541 9206 10555 12784 15558 16672 17889 19189 21160 22089 30316Merchandise(FOB) 7149 7489 8634 1048 1 13133 13940 14825 15890 17523 18293 25128Nonfactorservices 1392 1717 1920 2303 2425 2732 3064 3299 3637 3796 5188

Resource balance 416 8 -350 3 -380 1 -313 1 487 7 -559 4 -610 6 -652 3 -738 6 -720 5 -798 9

Net factor income 122 139 82 119 54 53 1 9 08 -1 2 -34 -295Factorreceipts 26 3 26 3 33 4 35 9 41 6 35 2 33 5 339 348 36 5 47 3Factorpayments 141 124 252 240 361 299 31 6 33 1 360 399 768

Interest (scheduled) 00 00 00 00 00 29 9 30 1 301 30 3 30 5 37 4ToLal Intrest paid b -0 3 0 0 0 0 0 0 0 0 29 9 30 1 301 30 3 30 5 37 4Net adustments to scheduled inerest 0 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Otherfactorpayments 141 124 252 240 361 00 15 30 57 94 394

Net pnvate cunrent transfers 53 8 49 7 62 9 66 5 91 0 115 3 139 5 168 7 196 5 224 6 409 9Currentreceipts, of which 65 4 54 2 65.9 70 4 101 4 126 7 1521 182 5 211 7 241 3 436 8

Workcers'remittances 654 542 659 704 1014 1267 1521 1825 2117 2413 4368 1Currentpayments 117 45 30 40 104 114 126 138 152 167 269 p

Netofficialcuruenttransfers 67 113 128 100 165 139 148 159 175 183 251

Current account balance -344 1 -275 4 -296.2 -224 7 -374 7 -424 8 454 3 -466 9 -525 8 481 0 -393 4

Officialcapitalgrants 52.1 396 769 61 7 1069 1150 1190 1232 1275 1320 1567

Private investment (net) 0 0 0 0 0.0 0 0 0 0 15 0 15 0 27 0 37 0 38 0 85 0Direct foreign investment 0.0 0 0 0.0 0 0 0 0 15 0 15 0 27 0 37 0 38 0 85 0Portfolio investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

NetLT'borrowing 1937 1715 120.4 1725 1763 1573 1926 201 5 2372 1835 1564Disbursemnentsb 157.6 132.1 187.1 1948 2276 2073 2457 2636 3002 2545 2439Repayments(scheduled) 263 32.4 32.7 457 519 500 530 620 630 710 876

Total principal repaid' 25.2 31.7 321 457 519 500 530 620 63.0 710 876Net adustinents to scheduled repaymnents 1.1 0 7 0 6 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Net other LT inflows 62.3 71 8 -340 23 5 06 0 0 00 0 0 0 0 0 0 01

(continued)a. Goods and nonfactor servicesb -istoncal data from Debt Reporting System (DRS). other data projected by country operations division staffc 'LT' denotes 'long-term"

Annex C3

NEPAL - Balance of Payments (continued) Page 2 of 2(USS nulbens at current prir)

Base-case (most likely) projecton

Actual Estimate Projec*on1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2005

Adjustments to scheduled debt service 14 0.7 0.6 0.0 0 0 0 0 0 0 0 0 0.0 0 0 0 0Debtservicenotpaid 1.4 07 06 00 0.0 00 0.0 00 00 00 00Reduction in arrears/prepayments )00 0.0 0.0 0 0 0.0 00 0 0 0.0 0 0 0 0 00

Othercapitalflows 225.4 1438 263.3 125.0 992 1073 1317 1330 1664 1469 984Net short-tern capital 1.1 -19 1 16 3 42.8 00 0.0 0 0 0 0 0.0 00 0.0Nctcapital flowsnedi. 225.4 1438 2633 125.0 992 1073 131.7 1330 166.4 1469 984Errors and ornissions -1 1 19 1 -16 3 -42.8 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Change m net international reserves -127 0 -79 5 -164.4 -134 6 -7 7 30 3 4 0 -17.8 42 2 -19 4 -103 0(- indicates increase in assets)

Memorandum itemsTotal grossreserves,ofwhich 451.0 5183 699.9 752.2 7040 6693 6785 695.5 731.0 7445 10447

Total reserves minus gold 397.0 4674 640.2 693.6 697 1 6620 6708 6876 723.0 7363 1035 8Gold (at year-end London price) 54.0 50 9 59.7 58.6 6 9 7 3 7 7 7 8 8.0 8 2 8 9

Total gross reserves (in months'imports G&S') 6.2 6 7 7 8 6.9 5 3 4 7 4 5 4 3 4.1 4 0 4 0

Exchange ratesAnnual averagc (LCU USS)' 32.5 42 7 45.5 49 3 49 9 57 6 65 3 67 6 69.9 71 6 79 8At endyear (LCU/USS) 42.7 43 2 49 2 49.9 56 9 61.4 66 4 68 7 70 8 72 5 80 5 1Index real average exchange rate (1985 =100) 78.5 80 0 75.4 74 1 72 3 80 5 87 7 87.7 87 7 87 7 87 7 Ci,

Curreni Account Balance as % GDP -9.3 -7 9 -7.9 -5 5 -8 4 -9.7 -10 4 -9 9 -10 4 -8 9 -5.2 1

d. *n.e i denotes not elsewhere included'e. 'G & S- denotes 'goods and servicesf. 'LCU- denotes 'local currency units."g. The index of the real exchange rate reflects USS/LCU, so as increase is an appreciation at the real exchange rate.

Annex C4

NEPAL - External Debt Stocks and Flows Page 1 of 3(USS millions *t current prices)

Base-case (most likely) projection

Actal' Estinate' Projecaion'1991 1992 1993 1994 1995 199C 1997 1998 1999 2000 2005

A Gross disbursements

Public&publiclyguaranteed 1576 1321 1871 1948 2276 2073 245.7 2636 3002 2545 2439Official multilateral creditors, ofwhich 1240 1177 136.2 1526 179.6 168 0 176 7 1826 2066 1764 1896

IDA 49.1 709 69.3 691 78.6 766 70.9 657 772 624 1050IBRD 0.0 00 00 00 00 00 00 00 00 00 00

officialbilateralcreditors 334 137 505 422 470 383 689 810 936 781 544Prrvate creditors, of whjch 0 2 0 7 04 00 10 1 0 0 0 0 0 0 0 0 0 0 0

Bonds 00 00 00 00 00 00 00 00 00 00 0

Pnvate creditors nonguaranteed 0 0 0 0 0 0 0 0 00 00 00 0 0 0 0 0 0 0 0Total LTbloandisbursements 1576 1321 1871 1948 2276 2073 2457 2636 3002 2545 2439

NeISTScredit I I 191 163 428 00 00 00 00 00 00 00DrawmgsfromlINF 00 80 78 82 00 30 126 65 03 00 00Totaldisburscments(LT+ST+Mff) 1587 1210 2112 2458 2276 2103 2583 2701 3005 2545 2439

B AmortizationsPublic & publicly guaranteed 31 3 37 7 40 5 44 2 45 0 50 0 53 0 62 0 63 0 71 0 87 6

Officialmulilateralcreditors,ofwhich 127 167 168 227 190 240 270 280 30.0 390 590IDA 29 3.2 37 62 69 80 90 110 130 160 300IBRD 00 00 00 00 00 00 00 00 00 00 00 0-

Official bilateral creditors 61 80 11 4 11 3 130 130 140 230 230 240 286Pnvatecreditors,ofwwhich 125 130 123 102 130 130 120 110 100 80 00

Bonds 00 00 00 00 00 00 00 0.0 00 00 00

Pnvat creditors nonguaranteed 0 0 0 0 0 0 0 0 00 00 0 0 0.0 0 0 0 0 0 0Total LT loanamortization 313 377 405 442 45 0 500 530 620 63 0 710 876

Repayments to IMF 5 4 1 1 2 1 5 5 70 7 8 7 8 7.5 7 2 61 5 0Total amortization (LT+IMF) 36 7 38 8 42 6 49.7 52 0 57.8 60 8 69 5 70 2 77 1 92.6

C. Net disbursementsPublic&publiclyguaranteed 1263 944 1466 1506 1826 1573 1927 201.6 2372 1835 1563

Oflicialmultilateralcreditors,ofwhich 111 3 101.0 1194 129.9 1606 1440 1497 1546 176.6 1374 1306IDA 46 2 67 7 65 6 62 9 717 68 6 61.9 54 7 64.2 464 75 0IBRD 0.0 00 00 00 00 00 00 00 00 00 0

OlErcial blateral creditors 27 3 5 7 39.1 30 9 34 0 25 3 54 9 58 0 70 6 541 25 7Pnvat creditors, of which -12.3 -12 3 -11 9 -10.2 -12 0 -12 0 -12 0 -110 -100 -8 0 00

Bonds 00 00 00 0.0 00 00 00 00 0.0 00 00

(continued)a HMstoncai data from Debt Reporng System (DRS), other data projected by country operations division staffb 'L denotes long-term. ST' denotes 'short-tenm.-

Annex C4NEPAL - External Debt Stocks and Flows (continued) Page 2 of 3

(USS millions et current prices)BEe-case (most likely) projection

Aatal' Estimate' Projection'1991 1992 1993 1994 1995 1996 1997 199D 1999 2000 2005

Private creditors nonguaranteed 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 0 0.0 0 0 0 0Total LTrloannetdisbursements 126.3 94.4 1466 150.6 1826 1573 192.7 2016 237.2 1835 1563

NetSTVcredit 1.1 -191 163 42.1 00 000 0 0 00 GO 00 00Net credit from IMF -5.4 6 9 5.7 2 7 -7 0 -4. 4 S -1.0 -6 9 -6 1 -5.0Total netdisbursements (LTI-ST+IMF) 122.0 822 168.6 1961 1756 152.5 1975 200.6 230.3 1774 151 3

D Interest and charges

Public & publicly guaranteed 26.8 28 1 27.5 30 2 29.2 29 9 30 1 30 1 30 3 30 5 37 4Official multilateral creditors, ofwhich 11.3 135 14.3 166 16.2 178 188 19.8 207 21 5 265

IDA 5.0 56 6.0 62 69 77 82 8.6 90 93 116iBRD 00 00 0.0 00 0.0 00 0°0 0.0 00 G 00

Official bilateral creditors 5 2 5 1 5 7 7.5 7.1 7 6 8 1 8 4 8 7 91 11 IPnvate creditors, ofwhich 10.3 9.5 75 6.1 5.8 45 3.2 20 0.9 00 -02

Bonds 000 0.0 00 0.0 00 000 0.0 00 00 00 0.0

Private creditors nonguaranteed 0.0 0.0 0.0 0.0 0 0 0.0 0.0 0.0 0.0 0.0 0.0Total interest on LT loans 26.8 28.1 27 5 30.2 29 2 29.9 30 1 30 1 30 3 30 5 37.4

Interest on ST eredit 2.6 0 8 0.7 2 3 0 0 0 0 0 0 0 0 0 0 0 0 0.0 IInterest on IMF drawings 0.8 0.2 0 2 0.1 0.9 0 7 0.8 0 8 0.8 0 7 0.6 U Total interest (LT+ST+IMF) 30.2 29 1 28.4 32.6 301 30.6 309 309 31.1 31 2 38.0

E Extemal debt (DOD)c

Public&publiclyguaranteed 1707.4 1752.8 19339 2202.2 23076 2464.2 26053 27323 2868.2 29804 3717.7Official multilateral creditors, of which 1391.9 1449.2 15878 1804.6 1897.6 2041.2 2165.2 22825 2408.4 25102 3139.9

IDA 718.6 764.9 8321 892.0 9637 1032.3 1094.2 11489 1213.1 12595 1600.4IBRD 0.0 0.0 00 0.0 00 00 00 00 0.0 00 0.0

Official bilateral creditors 219.5 220.9 2763 3367 357.0 3820 411.1 431 8 451.7 4702 579.8Privatecreditors,ofwMich 96.0 82.7 69.8 60.9 530 41.0 290 18.0 80 00 -20

Bonds 0.0 00 0.0 0.0 00 00 00 0.0 00 00 0.0

Privatecreditors nonguaranteed 0.0 0.0 0.0 0.0 0 0 0.0 0 0 0.0 0 0 0 0 0 0TotaiLTDOD 1707.4 17528 1933.9 22022 2307.6 2464.2 2605.3 2732.3 2868.2 2980.4 37177

ST debt 25.4 5 5 20.7 62.6 26.0 26 0 26 0 26 0 26 0 26.0 26 0Use of IMF cTedit 38 5 43 6 49 2 55.0 54.7 50 7 55.5 54 2 47.0 409 8.8

Total DOD(LT+ST+IMF). of wich: 1771 3 18019 2003 8 2319.8 2388 3 25409 2686.8 2812 5 2941.2 3047 3 3752.5Principal arrears 6 0 7.9 5.6 2 8 0 0 0.0 0.0 G0 0.0 0 0 0.0Intcrest arrears 4.4 3 6 2.5 1.6 0.0 00 0 00 0 0 0.0 0 0

(contimued)a Histoncal data from Debt Reporting System (DRS), other data projected by country operations division staff.b. 'LT denotes long-tenM' ST denotes 'shon-term"c. 'DOD' denotes 'debt outsanding and disbursed"

Annex C4

NEPAL - External Debt Stocks and Flows (continued) Page 3 of 3(USS millionm at cument prices)

Base-case (most likely) projection

Ac,al' Estimate' Projecdlon'1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2005

F. Debt and debt burden indicators(based on data in parts A-E)

Total debt service (USS millions) 669 679 710 82.3 82.1 88.4 917 100.4 101.3 1083 1307

Interest(LT+ST+IM W) 30.2 291 284 32.6 301 306 30.9 309 31.1 31.2 380

Principal (LT+IMF) 36.7 38.8 426 49.7 52.0 578 608 695 702 771 92.6

Total DOD' and TDSdDOD/exports(XGS')ratio 3348 2768 2587 2165 1972 2001 197.0 1896 1811 172.5 1381

DOD/GDPratio 478 51.5 532 573 53.7 578 616 59.9 584 564 493

TDS/exports(XGS)ratio 126 104 9.2 7.7 68 7.0 67 68 6.2 6.1 48

13RD exposure indicators:}RD DSI public loan DS 0 0 0 0 0.0 0 0 00 00 00 0o0 0o0 0o0 00

PreferredcreditorDS/publicDS 47.0 469 475 56.1 52.5 569 594 55.8 579 621 69.7

IBRDDS/exports(XGS) 00 0.0 0.0 00 00 00 00 00 00 00 00

Country share m 1BRD portfolio 00 00 00 0.0 0 0 0 0 0.0 0 0 00 0 0 0.0

G. Debt and debt burden indicators(based on post-DDSR data for countries withprojected debt worksouts, based on adjusted datafrom Annex C7) (i

TDS after DDSR (USS millions) 82.4 892 933 102.8 1045 1124 1401

Interest (LT + ST + IF)b 30 4 31 4 32 5 33 3 34 3 35.1 42 9

Principal (LT + IMF) 52 0 57 8 60 8 69 5 70 2 77 3 97.2

Memorandum ItemsFactor payments / exports (XGS) ratios

Interest payments / exports 0.0 0 0 0 0 0 0 0 0 2 4 2 2 2.0 1.9 17 14

Total factorpayments /exports 2 7 1 9 3.3 2 2 3 0 2 4 2 3 2 2 2 2 2.3 2 8

a. Historical data from Debt Reporting System (DRS); other data projected by country operations division staffb 'LT' denotes 'long-term." "ST' denotes shont-term.c. 'DOD' denotes 'debt outsanding and disbursed'd 'TDS' denotes 'total debt service 'e 'XGS' denotes 'exports of goods and services," which comprises exports of goods, nonfactor services, factor receipts, and workers' reiuttancesf 'DS' denotes 'debt service '

Annex C5

NEPAL - Public Finance Page 1 of 2(at current prices and exchange rates)

Base-case (most likely) projection

Actual Estimate Projection1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Govemrnment budget (millions LCUs) /a

Total current revenues 10729.9 135127 151484 195808 245674 288676 344529 406039 464774 52221.7Direct taxes 13458 1549.8 1972.9 28138 37954 4558.0 54100 63444 77462 92839Indirect taxes 68305 8325.8 9689.6 125576 158584 184854 222093 26329.1 299286 33267.2

On domestic goods and services 3786 2 4966 9 5744 6 7302 6 8840 3 10299 8 12333 9 15374 6 17679 7 20164 2On intemational trade 3044 3 3358 9 3945 0 5255 0 7018.1 8185 7 9875 4 10954.5 12248 9 13103 0

Nontax receipts 25536 36371 34859 42094 49136 58242 68336 79304 88025 96707(of which current grants)

Total Current Expenditures 14127 8 14880.2 17530 8 20615 2 23785 2 27692 6 30753 2 33117 5 36271 8 38855 1Interestonextemal debt 4975 722.7 8790 10205 11070 14601 1756.4 1903.9 20578 21856Interestondomesticdebt 11709 1867.4 20836 19364 22316 3518.7 3558.0 30669 31155 27090Transfers to pnvate sector 00 0.0 00 0 0 0 0 0.0 0 0 0 0 0.0 00Transfers to other NFPSb 00 0.0 00 00 0 0 0 0 0.0 0.0 0 0 00Subsidies 1374 4 382 1 -331 8 -470 7 -0 4 0.0 0.0 0 0 0.0 00

Consumption 110850 11908.0 149000 181290 204470 227138 254388 281467 31098.6 339605Wages and salaries 38350 3945.0 5005.0 50940 5996.0 59960 6415 7 68007 7208 7 7569.1Otherconsumption 72500 79630 9895.0 130350 144510 167178 190231 213461 238899 26391.3

Budgetary Savings -33979 -13675 -23824 -1034.4 7823 1175.0 36998 7486.4 102055 133666 t

Capital Revenues 0.0 0 0 00 0.0 0 0 0 0 0.0 0.0 0 0 0.0Total Capital Expenditures 94220 115380 13366.9 129822 151576 18576.2 23924.9 299945 34948.2 37929.0

Capital transfers 7390 1207.0 1597.9 18982 2929.6 30178 36275 4453.8 4772.0 56332Budgetaryfixed investment 8683.0 10331 0 117690 11084.0 122280 15558.3 202974 25540.7 301762 32295.9 1

Overall balance (- = deficit) -12819.9 -12905.5 -15749 3 -14016 6 -14375 3 -17401 1 -20225 2 -22508 1 -24742 7 -24562 4

Sourcesof financing(+) 128199 12905.5 15749.3 140166 14375.3 17401 1 20225.2 22508.1 24742.7 245624Official capital grants 2164.8 16438 3793.3 2393.6 28767 3310.3 3886.7 4163.1 44563 4726.2Net extemal borrowing 7296 7 7281.8 6920.9 9163.6 9033.4 11935.8 160434 17815.8 20984.5 182271

Netdisbursements(cash) 7296.7 7281 8 69209 9163.6 9033 4 11935.8 16043.4 17815.8 20984 5 18227.1Adjustments to scheduled pnncipal repayments (-) 00 00 0.0 00 00 00 0.0 0.0 0.0 0.0Adjustments to scheduled debt service(+) 0.0 0.0 0.0 00 0.0 0.0 0.0 0.0 0.0 00

Netmonetarysystem 2881.0 2181.0 4444.0 36.0 17092 1395.9 1530.9 24662 3415.4 2309.0Netotherdomesticborrowing 477.4 1798.9 591 1 2423.4 7560 759.1 -1235.9 -1937.0 4113.5 -700.0

(continued)a. 'LCUD denotes 'local currency unit."b. 'NFPS' denotes 'nonfinancial public sector*

Annex C5

NEPAL - Public Finance (continued) Page 2 of 2(at current prices and exchange rates)

Base-case (most likely) projection

Actual Estimate Proj ecdon1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Shares of GDP (%)

Current revenues 89 9.0 88 98 11 1 114 12.1 128 132 135Current expenditures 117 100 102 10.3 107 10.9 108 104 103 100Budgetay savings -28 -0.9 -14 -05 04 05 13 2.4 29 35

Capital revenues 0 0 0.0 0.0 0 0 0 0 0 0 0 0 0 0 0 0 0 0Capital expenditures 7 8 7 7 7 8 6 5 6 8 7 3 8 4 9 5 9 9 9 8Overall Balance (- = deficit) -10 6 -8.6 -9 2 -7 0 -6 5 -6 9 -7 1 -7 1 -7.0 -6 3

Official capital grants 18 1 1 2 2 1 2 1 3 1 3 1 4 1 3 1 3 12Net extemal borrowing 61 4 9 4 0 4 6 41 4 7 5 6 5 6 6 0 4 7Monetary system credit 2 4 15 2 6 0 0 0 8 0 6 0 5 0 8 10 0 6Other domestic financing 0 4 1 2 0 3 1 2 0 3 0 3 -0 4 -0 6 -1 2 -0 2

Government Debt (DOD /c at the end of the year, in (millions LCUs, unless noted))

Extemal debt 595053 709239 874208 1019668 1125860 1395082 1682514 1834490 1999303 2134760Extemaldebt(in USSmillions) 18292 16606 19226 2070.0 22285 22707 25321 26686 28253 29444Debttomonetarysystem 168210 190020 234460 234820 251912 258266 27357.6 298238 332392 355482Other domestic debt -56081 1 -680920 -875889 -969958 57669 72865 60506 41136 00 -6999 lTotalgovemmentdebt 202452 218339 232779 284530 1435441 172621 3 2016596 2173864 2331695 2483243Total govemment debt as percent ofGDP 168 14.6 136 143 647 682 708 685 66.2 642 <n

Tax burden indicators (%) I

Direct taxes/GDP I I 10 12 14 17 18 19 20 22 24lndirecttaxesondomesticG&Sd/GDP 31 3.3 34 3.7 40 41 43 48 5.0 5.2Indirect taxes on domestic G&S / private consumption 3 9 4.1 4 2 4.7 4 9 4 9 5.3 6 0 6 2 6 6Taxeson intemationaltrade/merchandcseiunpo,ts 131 105 10.0 10.2 107 102 102 102 100 10.0

c 'DOD' denotes debt outstanding and disbursed'b. 'G&S' denotes 'goods and services -

Annex C6

NEPAL - Monetary Survey Page 1 of 2(In nillilna of local cumnqe units)

Base-case (most likely) projechon

Actual ELimate Proj eie1991 192 1993 1994 1995 199 1997 1998 199 2000

A. Annual Flows:

Net foreign assets 6812.8 4640.7 8332.6 7093.1 8623.5 -1133.3 1015.0 2009.2 37962 2243.6Netinternationalreserves 4132.2 3394.4 7473.7 6631.6 385.0 -1743.1 262.2 1201.5 2952.6 1392.3Othernetforeign assets 2680.6 1246.3 858.9 461.5 8238.5 610.4 752.8 807.6 8436 851.3

Domestic credit 4829.0 7118.0 7796.0 8423 1 14049.7 19441.1 19373.9 204933 21667.1 18431 6To govemMenL 21885 2884.4 3862.8 899 13571 1333.4 1322.2 2106.9 35020 2382.8

Govemment budget 2881.0 2181.0 4444.0 360 1709.2 1395.9 1530.9 2466.2 3415.4 2309.0OtherNFPS' -692.5 703 4 -581.2 53.9 -352 1 -62.5 -208 8 -359.3 86 7 73.7

To rest ofthe economy 2640.5 4233.6 3933.2 8333.2 12692.6 18107.8 18051.8 183863 18165.1 160488Private scctor 2688.6 42163 4121.0 8397.7 12610.9 181574 18156.2 18566.0 184267 16048.8Other financial institutions -48 1 17.3 -187.8 -64 5 81 7 49 6 -1044 4179 6 -261 6 0 0

Total assets = liabilities 11641.8 117587 161286 15516.2 226732 18307.8 20389.0 22502.4 254633 20675.2

Money and quasimoney 6160.1 7958 1 12651.9 114546 9940.7 14069 2 15726 5 17373.7 19821 7 14469.4Net other liabilities 54817 3800.6 34767 4061.6 127325 4238.6 4662.5 5128.7 56416 6205.8

B End of Year Stocks.

Net foreign assets 16151 7 20792.4 29125.0 36218 1 37080 6 44715.3 49416.7 53181.1 58600.4 623247 7mNet intemational reserves 15390.0 201822 28647.9 35260.6 35185.9 375593 40887.7 435437 47833.7 50417.9Other net foreign assets 761.7 610.2 4771 957.5 18947 7156.0 8529.1 9637.3 107667 11906.8

Domestic credit 344910 416090 49405.0 578281 71877.8 90938.9 110312.8 1308061 152473.2 1709048Togovemment(NFPS) 18156.9 21041 3 24904.1 249940 26351 1 26917.9 282401 30347.0 338490 36231.8

Goveurnentbudget 16821 0 19002.0 234460 23482.0 251912 258266 273576 29823.8 332392 355482Other NFPS 13359 2039.3 1458.1 1512.0 11599 1091 3 8825 5232 609.9 6836

To rest ofthe economy 16334.1 20567.7 24500.9 328341 45526.7 64021.0 820727 100459.1 1186241 1346730Private sector 155S24 19798.7 239197 32317.4 44928.3 63475.3 81631 5 1001974 118624.1 1346730Other financial institutions 751 7 769.0 581.2 5167 5984 5456 441.3 261.6 00 0.0

Total assets liabilities 506427 62401.4 78530.0 94046.2 1089584 135654.1 1597295 183987.1 211073.6 2332295

Money and quasimoney 37712.5 45670.6 583225 69777.1 79717.8 93787.0 1095135 126887.1 146708.8 161178.2Net other liabilities 12930.2 16730.8 20207.5 24269.1 292406 41867.2 502161 57100.0 643648 72051.3

(continued)a. 'NFP'S- denotes "nonfinancial public sector.-

Annex C6NEPAL - Monetary Survey (continued) Page 2 of 2

(in millions of local currency units)Base-case (most likely) projection

Actual Estnmate Projecdon1991 1992 1993 1994 1995 1996 1997 1998 1999 ioo0

C. Factors accounting for monetary expansion (as % MQMb)

Net foreign assets 42 8 45 5 49 9 51 9 46 5 47 7 451 41 9 39 9 38 7Credit to govenmient (NFPS) 481 461 42.7 358 331 287 258 239 231 22.5Credit to rest ofthe economy 433 450 420 471 571 683 749 792 809 836Net other liabilities (-) 34 3 36 6 34 6 34 8 36 7 44 6 45 9 45 0 43 9 44 7

Total increase in MQM 100 0 100 0 100 0 100 0 100 0 100 0 100 0 100 0 100 0 100 0

D. Money, credit and pnces

M2/GDP 31 3 306 340 350 359 370 385 400 41 7 41 7Annual growth rate MQM 195 211 277 196 142 17.6 168 159 15.6 99Annualgrowthrateppnvatecredit 20.9 271 208 351 390 413 286 22.7 184 135lncrease in private credit as % of tncrease i domestic credit 55 7 59 2 52 9 99 7 89 8 97.3 93 7 90 6 85 0 87 1

Interest rates (historical only)Nominal end-penod discount rateReal end-penod discount rate

b 'MQM' denotes "money and quasi money U*

IMAGING

DRAFI'CONFIDENTIALReeport No: 15E1:I8 NEPType: CAS