RESTRICTED

Fll a~ CflDV Report No- AS- 101aIL ZIEJIJ UIJI 1

This report was prepared for use within the Bank and its afFiliated organizations.They do not accept responsibilily for its accuracy or completeness. The report maynot be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAI DEVELOPMENT ASSOCIATION

THE E;CONOMY OF NEPAL

Report of Bank Mission

February 28, 1964

Department of OperationsS.n1ith AR1i andi Middle East

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CO UR RENY EQ UiVA L ENT

1 Nepalese Rupee = U.S. $0.131 T.S. D!a = 7. ANo Rupeesaaa P AMA

160 Nepalese Rupees = 100 Ineian Rupees

Nepal's fiscal year ends on Ashad 31 (mid-July)

TABLE OF CONTENTS

Page

Maps of Nepal i

Basic Data iv

Foreword vi

Summary vii

CHAPTER I - DESCRIP'ION OF THE ECONOMTYThe Country and Its Natural Resources 1Institutional Framework 3Pattern of Economic Activity 5Production and Prices 8Publ.ic Finance 9Currency, Banking and Foreign Exchange 12

CHAPTER II - ECONOMIC DEVELOPiENT AND FOREIGN AID 17

CHAPTER TTT - PPOBT.EM$- OF FUTURE TRnlOTHGetting Things Done 24Basic Inforrm.+ato 25

Opportunities for Development 26A,,riculture and Irrigation OAForestry 30T oursm 30Manufacturing Industry 31VE1ec41r;rlc PoweVC-r 3Transport and Communications 3h

r1U rTT .'TD -177 r1rWTsTrT T TC -MTC\T Z'JJIfl.i 4. UJJA 4 V - 'VMJ' J VI 'J.JUL .'JNIJj

Tables in Text

1. Recorded Visible Foreign Trade of Nepal, 1960/61 62. Rul-1ar l o-vuverrzmienrt R'evenue andu Ehpenditure 103. Public Development Expenditure 11

. Asset-s and Liabilities of the Nepal Rastra Bank 135. Assets and Liabilities of the Nepal Bank Limited 156. U.S. and Indian Assistance to Mepal 21

4, P i; S A N_IE P A Le : o vr 0

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JiN UARY 1964 I BRD -1289 R~~~~~~~~~~~~~~~~~T-

,gD>huRIe \ / 1ffi__ t # \;NEPAL 'S 715 DISTRICTrS

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DEEME 196 A DR E S56

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BASIC DATA

Area

Total area : 54,362 sq. miles or 34.8 million acresCultivated area 13% (4.5 million acres)

Population (1961 census data)

Total population : 9,385,000Overall- population drensitv : 173 ner sq. milePresent rate of growth : L 8% per annum

Per capita income (unofficial estimate 1961) NRs 380 per annum(U.S. $50 equivalent)

Central government regular budget (1962/63 revised estimates)

Expend tu, r ci NRs 1241 m Til I ion

of which:A'd,inistration 146%Internal and external security 30%Social services 10%Royal household 5%Trading departments 5%Miscellaneous %

Revenue NRs 125 millionof which:

Land tax 42%Customs and excise duties 37%Forest sales 8%Trading departments 2%Miscellaneous 11%

Recorded visible foreign trade (1960/61)

Merchandise imports (c.i.f.) NRs 380 millionof which:

Minerals, fuels and lubricants 7%Machinery and transport equipment 5%Chemicals 4%Other manufactured articles 57%Food 11%Raw materials 5%Beverages and tobacco 4%Animal fat and vegetable oil 2%Other 5%

Merchandise exports and re-exports NRs 196 millionof which:

Food (mainly rice) 79/Raw materials (mainly timber) 17%Manufactured articles 2%Beverages and tobacco 1%Other 1$

Foreign assets of the Central Bank (Nepal Rastra Bank)as of mid-July 1963

Gold and convertible currencies NRs 123 millionIndian rupees NRs 119.5 million

- -vi

FOREWORD

This report is based on thefindings of the first Bank/IDAeconomic mission sent to Nepal inNovember 1963. The mission spenttwo and a half weeks in Kathmanduand also visited Biratnagar, Birganj,Hetaura, the Rapti valley and Pokhara.

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i. Nepal is still at a very early stage of economic development andits per capita income is one of the lowest in the worlds The marityof its 9F million inhabiltants live in isolated mountain communities and-ost P of t rest + i1 - 1. .i. 4j tj theC pl n l s tc -lo the InkTAJ;an4 frontier

Except in and around the capital of Kathmandu, modern technology has sowPar had 1 4i 4- 4- A 4 -4 __ - 4f he 4-ra+ A44-na -44- A -. A ;1-As 4 G >J. 04. OL LL u t-Ls IICLJ9O IJ10 UIl . i.L VL ±L 0C Q VW t * ±LEi .L' e 4.v. UU .J I

practised mainly on a subsistence basis, and the feudal system of landownership -Ld teur whc real ver .much- ofL ulthe %cowlJ- offrsth

cultivator little incentive to produce more. Rainfall is concentrated-i the s1ulmer months, there is practically LIU pItenlgiiL irrigation, and

usually only one crop is grown in the year.

ii. The ruler of Nepal, King Mahendra, has made the economic develop-ment of the country one of the principal aims of his Government. TheUnited States, India, the United Kingdom, the Soviet Union and a numberof other foreign governments and international agencies are assisting inthis effort and have initiated a wide range of projects directed mainlytowards building up the economic and social infrastructure. Totalforeign aid is probably equivalent to $1 -2 per head of population or 3-4per cent of the national income. Education and training, improvementsin government administration, the collection of information about theeconomy, the introduction of modem methods of transport and communica-tions, the eradication of malaria and the extension of health servicesare amongst the tasks which have rightly been accorded priority. Afar-reaching program of land reform is now being launched.

iii. WThile standards of economic performance in Nepal are inevitably lowby comparison with most other countries in Asia, the Government has takena number of important steps forward during the past decade. A system ofregular annual budgets has been introduced in Nepal for the first time,receipts from land taxation have been doubled in the last three years, thenucleus of an economic planning organisation has been established withinthe Government, an active industrial development corporation has beencreated, and the Government has increasingly interested itself in theprovision of services to agriculture. There has been a large increasein the number of children in school, and a university has been opened inKathmandu. Malaria has been eradicated from large areas of the country,some of which used to be almost uninhabitable on this account. Thefirst motorable road into the Kathmandu valley was completed in 1956, andseveral new roads have been constructed in the Terai and lower hills.Air transport has been developed and is playing an increasingly importantrole in opening up the economy.

iv. No one can say with any certainty what the trend of national incomehas been. Most of the population, who are directly dependent on agri-culture for their livelihood, have probably experienced little significant

- viii -

,provement in lv-;standards apart fro. one or two aescoet h.L.ILJLUV1I LI t/.LL - L.. VJ16 %I VW'.,. - v.aJ U - -. -.' *f 'c'*oSe to' the

main centres of economic activity. A small minority, particularly in theKat U I andu valley, has benefitted considerably from foreign aid which hasstimulated the growth of trade and services. The malaria eradicationcampaign has been a blessing to the people living in the areas previouslyaffected, but it must also be expected to result in an acceleration intlhe rate of' population gro-wth, which was previously quite low (probably-about ll per cent a year).

v. There are already signs that traditional attitudes are graduallybreaking down under the impact of new ideas as more and miore yo-ur.g peoplego to school and university or travel abroad. Many years more will beneeded, however, to equip Nepal with the trained manpower, knowledge ofpublic administration, management experience, economic information andother attributes of a developing society. The country;s capacity toinvest capital productively will be rather limited in the meantime. Water,timber and tourist attractions are three natural assets with which Nepalis unusually well endowed, and their exploitation should be prominentlyfeatured in any strategy of economic development. All three are in urgentneed of better organisation and management.

vi. Agriculture is still the mainstay of the economy and the only meansof livelihood for the mass of the population. Agriculture cannot be fullyand effectively developed without irrigation, and the extension of irriga-tion in the Terai should be accorded high priority in any long-term invest-ment plan. An urgent task in this field is the creation of an irrigationauthority capable of operating and maintaining the irrigation works nowunder construction or planned.

vii. The improvement of transport and communications within Nepal is anessential condition for accelerating the pace of economic growth. Roadtransport and civil aviation must inevitably be the backbone of thecountry's organised transport system, with ropeways possibly also playingan important role. The mission suggests that, before any more newtransport projects are started, the Government should arrange for an eco-nomic survey of the country's transport requirements and ways of meetingthem. The two principal tasks in the sphere of transport administrationare the creation of a road authority capable of taking over the maintenanceand improvement of existing highways and the reorganisation of the RoyalNepal Airlines Corporation. which should be run on a commercial basis as anindependent authority.

viii. By its achievements to date Nepal has established a good claim forcontiniued external support.. However, Nenal is not in a nosition toservice foreign exchange loans extended on Bank terms, and the scope forIDA ac-tivities i9 lim-ited for the moment by lack of suitable proiects andof organisations capable of implementing them. If these limitations canbe overcome, transport and irrigation appear the most promising areas forpossible IDA assistance. In the meantime the Bank may be able to make auseful contribution by wayr of teChnical assistance in one or both of thesesectors.

O nrRl:n T nCPTSl<TDUPEa

The Country and Its Natural Resources

1 Nepal is a land-locked predominantly mountainous kingdom lying betweenthe Gangetic plain and the Tibetan plateau. It i roughly 00 miles longand on average about 100 miles wide, with its axis running approximately fromwest-north-west to east-south-east. Tne country is divided into threeroughly longitudinal belts: the lowlands of the Terai bordering India, thehill region in the centre and the high Himalayas along the Tibetan border.The hills are divided by a few fertile valleys, that of Kathmandu being themain one. Nepal's area is officially estimated at 54t,362 square miles, oIwhich hilly and mountainous regions account for over four fifths and theTerai for JUSt under one fifth.

2. According to the census conducted in 1961, the total population ofNepal was then in the region of 92 million. Of these, roughly 3 millionlive in the Terai where the population density is greatest (around 300 persquare mile on average, with the eastern part of the Terai much more thicklypopulated than the western). About 6 million live in the hills where thepopulation density averages about 1h0 per square mile. These 6 millionpeople are distributed between the Kathmandu valley (half a million), thehills to the east of Kathmandu (2 million) and the hills to the west (31 mil-lion). The high Himalayan valleys are sparsely populated and are of littleeconomic importance.

3. The rate of population growth is officially estimated at 1.8 per centa year. The birth rate, particularly in the Terai, is presumably high.Since 1960 there have been some private efforts and public encouragementstowards family planning, but it is too early yet to notice any possibleimpact. However, mortality rates, particularly among infants are stillprobably higher in Nepal than in India, though the campaign for the eradica-tion of malaria in the Terai and lower hills must be having an increasingeffect on the population growth. If the rate of increase is not alreadyabove 2 per cent a year, it probably soon will be.

The Terai, Dart iunale, part cultivation. is simply an extension ofthe Gangetic plain, and there is no natural boundary in this area betweenIndia and Nepal except for a short stretch where the hills come down to thefrontier. The Terai is traversed by a few motorable roads and twso narrow-gauge railwavs; these generallv run from the Indian frontier to the iungle-covered foothills. The only motorable road from the Terai into the hills,of which the hill sention (Tribhinvan Raipath) was comnleted by the IndianGovernment in 1956, runs from the Indian border at Raxaul to Kathmandu, a___ arne'eP of about 12< mnilc.- There is a hrAnch gravpl rorad ahoiit QO miles

long, running down the Rapti. valley which lies southwest of Kathmandu.The Kathmandu road is accomp,anied for part of the way by a railway and formost of the rest by two ropeways, one constructed before the war and nowbeing replaced by the seconcd which has just been completed under the U.S. aid

program. Both road and ropeways end in the Kathmandu valley. Otherwise,except for mountain tracks, the 43-mile "jeepable" road to Trisuli is theonly land route leading out of this valley, The rest of the hill areas ofNepal are accessible only on foot or, in a few cases, also by air, It takes,for example, six weeks to travel on foot from Kathmandu to the villages nearthe headwaters of the Karnali river in the northwest of Nepal. The trek toTibet is shorter, only a few days from Kathmandu, and this has traditionallybeen an important trade route. China is now helping to convert it into amotorable rond, The 60-mil.e stretch from the Kathmandu valley to Kodari onthe Tibetan border will probably be "jeepable" within a year or two and willbe the- f iinal li nk rnn the Lhi--sa-Kathmandu road.

CL Poor commulnications within Nepal nnd between Nepal and the outsideworld explain more than any other economic factor the backward state of theeconom.y today and present one of the most intractahle nobstacles to itsfuture development. Nepal - particularly the Terai - has considerableagricultural potential MoUst of the Cont-r has an equable climateO Rain-fall, largely concentrated in the monsoon season (June - September), variesfrom about 30 inches a year in thne northwest to 70-80 inches in the south-

east. The three main river systems have a perennial flow, but the topographyLs such11 th. Uat huIiGey comm and oriLy a s!aL.L part of the cultivable V.. in t-heplain. Groundwater, however, is known to be easily accessible in extensiveareas of the TeIa -, and there may be considerable scope for jumn irrigationif and when power becomes available. Terrace farming is wid._.;pread in theaccessibLe areas of the hill.sn Rice, corn, millets and wheat are the staplecrops. Oilseeds, jute, sugarcane and tobacco are the main cash crops in'he Terai; fruits, especially citrus fruits, ad potatoes ar o in thehills. Almost every kind of fruit can be grown in some part of the country.Vegetables as a cash crop are important in the Kathxunadu valley.

6. One third of Nepal is covered by- forests which, though at presentpoorly exploited, constitute one of the country's most important resources.Much of the timber (sai in thre Terai nd Au-he foothils,o -"iin the hill

fir in the mountains) is of commercial quality. But the last two areas aredifficult to get at.

7. The mineral wealth of Nepal is largely an unknown quantity, but thestudies thus far undertaken have produced rather discouraging results, AUnited Nations geologist. who travelled all over the cculilt-ry, idenLiZieddeposits of iron ore and various other minerals, includirc. ritica. There arecertain structures in the foothills which suggest a porss biiity of oiL andnatural gas. A preliminary- survey of limestone deposits has been made nearHetaura. But there is no certainty as yet that any of these mineralresources can be developed commercially.

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8. The rivers of Nepal, many of them fed by the snows of the Himalayas,could generate a large amount of hydro-electric power besides providing waterfor irrigation. Two of these rivers, the Kosi and the Gandak, are beingharnessed by India for irrigation, power generation and flood control undertreaty arrangements which offer Nepal part of the benefits. A thirdriver; the Karnaii; is the subiect of an investigation now being conductedby the United Nations Special Fund at the request of the Nepalese Governmentto determine t-.he feasibilitv nf generating power it three alternative sites.Most of the power thus generated would be exported to India. The studywill not be completed before 196Q, and even on the most optnimistic assum-tions the first power would not be available before 1975.

9. One of Nepal's main obstacles to economic development - its mountains -

can also be turned into one of its principal econo-ic assets Nepal hasmuch to offer to the tourists who come in increasing numbers in spite of

4.1. 4 4~~~~-4 eb- 4 -1.4 - -4 - , -; ~ ;raulier inaudequaate facilitlies. r1she expansion ofL th1-e tCouristtrd Esi .yrespects the most promising way open to Nepal for raising rapidly its foreigne-xch'ange ea=nirngs an' it s natui ona -incor.e. -

Insui -u u ionai rrarwrework

10. Until 19)1 Nepal was governed by- a redieva autocracy w-hich wasprimarily concerned to protect its own powers and privileges, with littleregard for the generai weifare. Efforts were made to excilude foreigninfluences, and Nepal's principal contact with the outside world was throughthe Gurkha soldiers who have been recruited since the middle of the nnle-teenth century by the Indian Army. There was no modern administration andpractically no popular education. Over 90 per cent of the population wereilliterate. Government expenditures were mainly devoted to protecting theposition of the ruling family (the Ranas) and providing them with the ameni-ties of life. The numerous family palaces remain among the most conspicuousbuildings in Kathmandu, one of them now housing the main government officesand another serving in part as the countryts leading hotel.

11. Autocratic rule, concentrated on the small area of the Kathmanduvalley, offered few opportunities for the training of Nepalese in the businessof public administration, for the development of individual initiative andresponsibility or for the acquisition of technical and professional skills.The bulk of the population, half of them speaking no Nepali at all, continuedto live in isolated villages, with little sense of belonging to Nepal. 1/For lack of communications, the Ranas were forced to govern by remote controland relied on the support of local potentates to enforce their authorityoutside the Kathmandu valley. Nepal was - and is - a country of large land-lords and small tenant cultivators. The social structure is feudal andtribal, religious influences are strong, and caste plays an important role in

1/ Villagers in the hills, when they talk of Nepal, usually mean theKathmandu valley; they do not therefore think of themselves as livingin NeDal.

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society. Accort'-.-g tbo WMthe L0UD. JUnsu jutA11, nder 90 , per cent of thei oplaio

are Hindus and most of the rest Buddhists. However, each religion has beenstrongly influenced by centuries of. coexistence with the other.

12. unused to change, and litt'le prepared for rit the oUlde geneaItioLU n of

Nepalese are extremely conservative and orthodox. Social conformity is theorder of the day. The higher castes, who possess most of the property aridpower, have a vested interest in preserving the old ways of life and aregenerally uninterested in economic development. Attitudes to work arestrongly influenced by religious beliefs which are oriented towards anotherlife and attach little value to material achievement in this world. Opposi-tion to the slaughter of cows is a serious drag on agricultural productivity.Family and tribal attachments are strong, and government appointments,promotions and dismissals continue to depend to an important extent on patro-nage, notwithstanding the enactment some years ago of a civil service lawmodelled on British practice.

13e His Majesty King Mahendra, whose father assumed control of the Govern-ment after the overthrow of the Ranas in 1951, has given his country a leadin instituting social reforms and establishing economic development as anational goal. During his reign facilities for education and training havebeen greatly extended, a land reform act has been passed, important advanceshave been made in public administration, the budgetary system has beenimproved, taxation has been increased, industrial development has beenactively encouraged, and the Government has increasingly interested itselfin the provision of services to agriculture. A beginning has thus beenmade in these and other directions with the task of introducing the peopleof Nepal to the twentieth century. But it is only a beginning.

lh The Panchayat /system of government was instituted in 1962 in place ofthe parliamentary system which had been dissolved at the end of 1960. Underthis system, each of Nepal t s 3500 villages elects its own council, thesecouncils in turn send representatives to the 75 district Panchayats,representatives of the district Panchayats constitute 1 zonal Panchayats.and finally at the top of the pyramid there is the National Panchayat of125 members. The district Panchayats constitute the cornerstone of thesystem. The National Panchayat is convened from time to time by the King,normally at intervals not exceeding six months, in order to review thepolicies of the Government and to pass legislation. Ministers are appointedby His Majestv and not by the Panchayat. The Panchayat system is designedto serve as a means of enlisting the active participation of the people inthe formulation and execution of the economic development program. It isbased on a recognition of the fact that, in such a loosely knit country,getting things done in the villages depends first and foremost on localinitiative and leadership.

1/ A Panchayat is a locally elected council; it means literally a councilOrJ f.L4

150 The improvement of transport and communications within Nepal isessential for the effective administration of the country as well as for itseconomic development. The Government in Kathmandu cannot easily enforceits authority and carry out its normal functions in districts which even ingood weather take days or even weeks to reach. The maintenance of law andorder, tax collection, agricultural extension, medical care - all areobstructed by the difficulties of movement within the country. Nor canpeople living in outlying districts be expected to feel any sense of parti-cipation in the affairs of a government with which they have practically nocontact. His Majesty's Government therefore rightly attaches great import-ance to the development of air and surface transport and of modern means ofradio communication both within Nepal and between Nepal and the outsideworld.

Pattern of Economic Activity

16. Over four fifths of the population must be directly dependent onagriculture for their livelihood0 Only in the Kathmandu valley and in afew towns in the Terai are there alternative occupations in governmentservice, trade, transport and industry. In the whole of Nepal at the timeof the 1961 census, Kathmandu was the only town with more than 100,000inhabitants. Three other towns had over 30.000 (Patan and BhadSaon in theKathmandu valley and Biratnagar in the eastern Terai)^ Two more towms,both in the Terai. had over 10,000 (Nepalgani and Birganj). Over threequarters of the population are probably living in rural communities of fewerthan one thousand inhnb;tants. thbrnTh habitat is rat,her- morn concentra-;edin the Terai than in the hills. The standard of living in the Terai seemssome-what lower than thaf of adjacent India. Most of the land is stillsingle cropped. Social services are embryonic, and malaria, though recedingis still comemon The hllcs are healthierr but hardly richer. Thre theeconomy is still essentially oriented towards meeting the basic needs of thelocal population who have little or no contact with the world beyond themountains. While starvation is practically unknown, the usual diet ispoorlyi balanced. Severe local food shortages occur from,s time to tlme as

result of crop failures and lack of adequate storage and transport facilities.

17e Average per capita income has little meaning in such an unintegratedand largely subsistence economy. A Ford Foundation economist est-mated itin 1961 to be around MRs 380 a year ($50 equivalent) which for a popula;ionof 02- ;on--a'~ 4nco2metof LEillionJ would give a Xo'l national income of A,610 ln.tL.lli (.J4 7million equivalent). 1/ Adding to this some provision for depreciation andthe value oJf indirecJ. o 1IdgrJssLntLna.L PrL.u"t U d.b JIId prces work edout at rather over NRs 3,800 million or about $500 million.

1/ See "The Concept of Elasticity and the Growth Equation with Emphasis on.l u n 1 I s_*n _' 4T 'I _1 - TU T_ __ -- I _ * T, TT * -1 '__Ulie Iou.1.e V.L k Uapl I 141 -LJdaUp ' - ;uuu±ru icIv±Lupflu Ili L, y WUL1dJil U

Thweatt, Asia Publishing House, 1961.

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18. Nepal's external trad,e and pavments are conducted almost exclusivelywith India (see Table 1). There is some trade between Nepal and Tibet -

mainly Nepalese grain against Tibetan salt - but trade has dwindled sincethe Chinese occupation of Ti.bet, Much of Nepalts merchandise trade is un-recorded. particularlv in the ense of exnorts w,hich are nnrr nd in consider-able quantities on foot and by bullock cart across the border to India.There is a somnwhtt better onrecr rof importS hecause Nepal is entitled to arebate of central excise duties levied in India on goods exported to Nepal,nnc1 n _svstm h_c horin oczfnhliQire ftnv rnyo lc' cins +.nt.he frntn ioer

at the main points of entry.. A treaty providing for exemption from customsdui i res on n a1 reciprcal b 'asiJ, in -t s jexceA -jions, s n dt Ja i-

1960.

Table 1. Recorded Visible Foreign Trade of Mepal, 1960/61(NRs I 000)

DIPORTS EXPORTS,ndia Tibet Overseas T-otal Lndia Tibet Total

1. Food u,2 Iao h135 1`,6 5 ir, 29 30' i5l 833

2, Beverages andutobacco 16i174 - 53 16,227 1,302 8 1,310

3. AnLimal fats andvegetable oil 7,40' 1 309 7,797 626 27 653

4. Raw materials l8,4V73 448 18,921 3',192 37 3I,229

5. Minerals, fuels andlubricants 2L,L95 _ 3,548 28,043 6 71 77

6. Manufactured goodsexcept 7 233,280 236 1,618 235,13h 3,623 39 3,662

7. Machinery andtransport equipment 19,4h76 - 1,366 20,842 92 15 107

8. Not elsewherespecified 2,5L3 557 - 3,100 812 6k 876

9. Goods imported throughembassies andmissions 1,1h0 - 6,856 7,996 - _ _

Total 357,689 3,230 18,706 379,625 195,182./565 195,7L7J/

Source: Provisional figures of the CentralBureau of Statistics, HNG

a/ Includes NRs L.95 million exported overseas through India.

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19. While accurate data are lacking, it is clear that Nepal must have asubstantial deficit on visible trade which is mnre than cnvered bhy foreignaid (probably around $15-20 million equivalent a year) and by Gurkha pensions,leave nay nnd remittances ($2-3 millinn a vear frnm tA-i Bhritish Govermp,nt insterling and probably as much in Indian rupees from the Indian Government).There is apparently also a surplus on other invisible transactions, withreceipts from foreign government and tourist expenditures in Nepal exceedingcrnrmprnh nati+.1 outlc ays r Vby nlj N ese qkcnq. The ovra11 su .lus on cr

account has been used to finance an increase in official foreign exchangeassets wand nloprobablly om1-e ousfl ofpr-;t apt2o0 Foo ret. e.iJ aid h4I, as provided a st4-lus t4 i4t which hav r

~ '... ~ .4.h .LU'. d UJ4iiULL-Ui UVJ JJIljJO.L UD JLIA,1 L ~VU I

considerably over the past few years (from NRs 166 million in 1957/58 toD.ms 'An r.ll.on 4n 1404n14L __3 possblfy Ns 5vo-600 mlllion or eveni ,more in

1962/63). 1/ Manufactured consumption goods, particularly cotton textiles,1Z _~~~~ _ WL _u . - L -1_ u' e `ou Tw `T' _ _. MT ep_'Kerosene: sugar c--i. c4gae ues, cornstbD UAt dUaUL L Ult I1IU VI1 01 -

recorded imports. Some of these imports, though recorded as coming fromIndia and paid for in Ind:lan rupees, ha-ve a substaItial hard currenuy com-ponent. Imports of capital goods, which are comparatively small, comprisecemlient, steel, trucks, jeeps, office equipment, telephone and radio equipment,electrical equipment and other machinery financed mainly under the foreignaLu programs. A nign proportion of the imports go to the Kathmandu valleyand Biratnagar. Most of Nepalls exports come from the Terai which probablyhas a favourable balance of trade with the surrounding areas.

21. Nepal's recorded e)Torts are rising too, though much less than importsin absolute terms. Furthermore, better reporting might account for much ofthe increase (from NRs 73 million in 1957/58 to NRs 196 million in 196o/61).Food exports (mainly rice) represent three quarters of the countryts recordedexports. Timber and jute make up most of the remainder. While agricultura"commodities are exported to India from the Terai, identical comrmodities areimported from India to Nepal (sugar is the most notable item of dual trade).Nepal's visible exports to overseas (mainly jute and jute products) made upless than 3 per cent of aLl recorded exports in 1960/61.

22. The bulk of the resources available for use in Nepal go into privateconsumption. Current expenditures of the Government must account for lessthan 5 Der cent of GNP. Gross investment has been estimated (by the FordFoundation economist) at around 8 per cent of GNP, net investment at 2-3 percent. All such estimates, however, are necessarily subject to greatuncertainty. Public investment is reviewed later in this report. Privateinvestment outside agricuLture appears to be directed mainly into trade andtransport, housing and real estate. In general, it can be said that build-ings and equipment are poorly maintained.

1/ Owing to lack of staff and equipment, there are long delays in thepreparation of officia:L statistics. The latest recorded trade figuresrelate to 1960/61. The estimate given here for 1962/63 is an informedguess.

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23. Most of Nepal's industrial activity is of the cottage type. Nomore than 20,000 workers can be considpred aS industrially employed in thewhole country. Most Nepalese industrial ventures of any importance areeither in Biratnagar or along the way from India to the Kath!mandu valleyvSmall rice mills and oil presses are dotted around the Terai. Biratnagar,linked to Kathmnandul only by air, is priSnractiecallyr integrated with the economyof the Indian State of Bihar. It is Nepal's largest industrial town withtwo Jute mills, a sugar factory, a match factory, a Jute press, a m-tai-working shop, a button factory and a mechanical workshop. Most of theseare partlyr Indi-an o*.-ned, There used a-so to b-e a textile plart -d aplywood factory, but these were closed down some years ago. Over half theind'ustril workers of Biratnagar are In.dians, si4nce they bear the hFeatbetter than the hill people, and it is at present difficult to attractNepalese labour into stable employment outside agriculture.

2 .hue road from i,rganj o Kathr-nandu provides a natural axis -orindustrial development. Birganj, at the Indian border, has been more suc-cessfu'al3 sa commercial than as an industrial centre. A cigarette and amatch factory provide most of the industrial employment there. A Russian-aided sugar mill is being erected north of Birganj. In Hetaura, head ofthe new ropeway, there is a government-owned sawnmillo Just outside of theto-wn, lnd has been acquired for an industrial estate. Two similar indus-trial districts have already been set up in the Kathmandu valley at Patanand Balaju. At the latter a few metal, leather and woodworking shops arealready operating.

25. Kathmandu and Biratnagar are the only places in Nepal with a more orless regular electricity supply. Total generating capacity in the wholecountry is at present about 10,000 kilowatts.

Production and Prices

26. There are no reliable figures of agricultural production in Nepal.Production of paddy is believed to have been over 2 million tons in 1962/63and of maize under 1 million tons. These figures cannot be compared withany previous ones since the 1962 agricultural census was the first everconducted in Nepal. As there has probably been some increase in the areaunder cultivation over the past ten years, both in the Terai and in thehills, it seems reasonable to infer a slight upward trend in agriculturalproduction for the country as a whole. But the evidence is inconclusive.Industrial activity cannot have increased very much. The jute industry atBiratnagar has been operating at a fairly constant level (l1,OCO-15,000tons a year), and activity in the other agricultural processing industriesdepends on the size of the crop, which fluctuates from year to year. Atthe end of 1963, for examiple, there had been a poor sugar crop in theBiratnagar district, and the local sugar mill was having difficulty inbuying enough cane for crushing. In other industries, a few new units havebeen started up in recent years, but some have also closed down. The mainexpansion in economic activity in recent years has occurred in the Kathmanduarea, where the construction of the road to India and the rapid increase inforeign aid have generated additional income in transport, housing, nersonalservices and the wholesale and retail trades.

27, Prices in Nepal vary considerably from one district to anotherreflecting poor communications within the country. In the Kathmanduvalley prices are generally lower than in the hills. For example, at thetime the mission was in Pokhara, about 90 miles from Kathmandu, the pricesof rice and sugar were respectively five and six times higher than inKathm andu. The price of gasoline in Pokhara is us-ually more than doublethat in Kathmandu. On the other hand, the mission found that firewood inKathmanldIli I ;UzjcUs bsix timle as InUchI as iLn thie napiL valley, only U mfi les awayby air. Prices of most imported commiodities parallel Indian prices. Inthe Terai the-y are almost completely integrated with those of adjacent India.

280 At times the Government tries to control the prices of key commodi-ties. On the average, inasmuch as such an average is meaningful for Nepal,retail prices have certainly gone up during the last few years. An officialestimate of the retail price increase in the Kathmandu valley is 15 per centfrom 1960/61 (base year) to September/October 1963 for domestic goods and 8per cent for imported goods. This is probably an underestimate.

Public Finance

29. Financial and accounting procedures are still being developed inNepal. Regular annual budgeting was introduced only recently following acentury of secrecy in public finance. There are now two separate budgets,the regular budget and the development budget, of which details are givenin Tables 2 and 3. The development budget includes some expenditures of arecurrent nature. On the other hand, it excludes quite substantial capitalexpenditures on certain development projects which are directly financed bythe Government of India and other foreign or international agencies (seeChapter II).

30, Public revenues are obtained principally from two sources: foreignaid and taxation. Although the local Panchayats have some taxing power,they have not generally used it yet, and most taxes are shown in the centralbudget. In 1962/63 taxation represented about 3 per cent of lepal t s esti-mated national income. Provided that the tax base is widened to reachinto the areas where wealth lies, this proportion could be greatly increased.Custom and excise duties used to be the largest single domestic source ofpublic revenue in Nepal. Since 1962/63, according to the revised estimates,land taxes have taken the lead (12 per cent of total domestic revenue thatyear).

31, Land taxation in Nepal is obsolete and extremely complex. Itreflects an amazing lack of uniformity. There are manv tvnes of landtenure systems, and each has its individual tax status. Birta land wasexempt from all taxes until 1959. (luthi land revenue is bhetow.er1 on aprivate beneficiary (some years channelled through public coffers, someyears not) Raikar lnnd is normally taxable. Further complications arlsefrom assessment of the quality of the land, varying measurement systems,1Ink of records and complicated collection procedures Four steps havebeen taken to improve this situation: a cadastral survey has been launched,

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Birta land has been abolished, the yield of land taxes has been doubled,and an urban property tax has been instituted. The first two measures aremaking extremely slow progress. Only 121,000 acres out of L.5 millionhave been surveyed, registered and assessed in four years, and a very smallproportion of the total Birta land has been turned into Raikar land inthree years. The sharp increase in land taxes in 1962/63 has been borneeasily. Land taxes were based on the price of agricultural commoditiesseveral decades ago and had come to represent sometimes less than one percent and on the average 2-3 per cent of the total crop value.

Table 2. Regular Government Revenue nnd Exoenditure(NRs milliorn: fiscal years ending mid-July)

1959/60 1960/61 1961/62 1962/63 1963/64Actual. Ant.n AP+1unl Revised-r 'Rudget

Estimate EstimateDomestic R evenue

Customs and excise 32.h 39.8 46.3 L6.6 L9.9Land tax 16.2 21.0 27.2 52.9 54.0Forest sales 11.6 15.5 11.8 9.8 13.0Trading departments a/ 4.5 4.5 4.2 2.8 4.1Food sales 10.3 1.0 2.8 - -Others b/ 11.6 11.7 12.9 13.3 15.8

fl 4 4-.1 8fl04 r' *TIr' 4 1'*1-I ' _- a_ _J _L_: 4

iOua±. u'J*' 7)g) L'J.L Lc)O4

Regular Expenditures

PRo -1 househnold 58 7.7 C. '7 7.

Adninistration 28.5 09-7 51.9 56.9 15.0

Defence 14.5 17.2 17.5 24.7 27.5Public works 1.8 3.2 1.7 1.0Social services 8.4 9.1 10.0 13.0 16.3Food purchases -1 4.7 .=

Trading departments 4.7 5.3 5.h 6.1 6.0

Total 86.1 107.1 lO14L 124.3 11L.4

Balance of regular budget .5 -13.6 .8 1.1 22.4

Source: Ministry of Finance

/T Incleiis +hen the ropew--j post+l, telephor.e and radio SeMrices,

etc.b/ Includes m,in proceeds, road cess, etc. Also included is a small

amount of budgetary support from the Indian Government (about NRs 1.6million a year)

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32. Custnms and excise duties which grow with imports made up 37 per centof total domestic revenue in 1962/63. For most of these India is thecollecting agent. WP1hen the goods are produced in India) Nepal is entitledto a rebate of central excise taxes; even when they come from overseas,import duties are sometimes levied at the Indian port of entry (usuallyGnlcutta) and are then refiunded in riue couirsep to Nepn1_ There are variousroad charges in Nepal which delay traffic, but also contribute a significant-nmnin+. of' revenunen -nEarnincgs fronm +.his sourtce racnhped almosqt. NRs ) million_ _. _ ._ _ _ . . 11 I - _ . ..1, - - - - - - - -, - -

in 1962/63 and go into the general budget; they are not earmarked for theupkeep of roads. There are a few other taxes, most of them recentlyinstituted and so far yielding little. One of these is an embryonic incometYn (wtr at+. es v o+nrf )r +eo '30 per cent on r nnac aov-eu TNTRs A a year)> ,he

collection of which is not yet fully enforced, and a tax on Nepalese holdingsabroad which n b1 e ver;yv difficult to enforce.

a/

Table 3. Public Development Expenditure(NRILs I.mil.lion: .i -sca-.L years ending .i-Ju T.ly)

Five-Year Plan1956/57 to 1960/61 Three-Year Plan, 1962/63 to 19614/65

Total Pro- Actual % Total Pro- 1962/63 1963/64posed Ex- Expendi- Spent posed Ex- Buaget Ravised Budgetpenditure .ure penditure Estimate Estimate Estimate

D/

Administration 68.1 26.7 39 50.5 13.8 8.1 15.1Agriculture and

forestry 27.9 6.9 25 51.6 13.7 8.3 15.0irrigation and

drinking water 41.1 13.1 32 64.o 17.0 883 15.3Transport and

communications 209.5 9h.9 45 143.5 33.8 11.6 41.9Electric power 53.1 13.3 25 91.0 25.0 11.9 18.9Industry, miningand tourism 5(7. 10.3 18 152eU 23 o 1U0. 308.

Health 30.5 16.0 52 37.0 11.1 9.5 13.8Education 50.4 21.3 42 11l.7 16.3 11.0 17.7Others 38.h 11.8 31 38.7 10.9 9.0 5.0

Total 576.3 214.3 37 670.0 165.5 88.0 180.9

Source: Ministry of Finance

a/ Refers only to the development budget and excludes expenditures financed byforeign aid agencies outside the budget.

b/ Includes land reform, cadastral survey, public administration, cooperatives and,for the 3-year plan, Panchayat development.

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33. Resort to mint proceeds as a source of revenue is equivalent toinflationary financing and is gradually being dropped. Forest sales area profitable venture for the Government and accounted for 8 per cent ofdomestic- revpnie in 1962/63= The trading departments of the- Government(electricity, railways, ropeway, postal services, etc.) are nearly alloperating ata loss, in the case of electricity a very substantial one;none of them keep proper accounts. One of the two railways (Janakpur -.jTa.rnanc7r), which hasc no- en competition f'r-om rdnnfl +rar.yr may be earnina

enough to cover its operating expenses, but that is without providing forde-preciation and inte-re-st on. capital.e

34. Tn 19621,/6 '1^- 1-14t half t.Ae oresti evne a set nge

administration. Internal and external security come next on the list ofregular expentudi lUJr (30 per cent). Most4. ofth othe4[ e,eIditu± inld

in the regular budget is for social services - education, health andmiscellaneous bu.ildng a_ etiiv_tis_ 2 a_uuulnu _ peu_ on -pulu _ __ _steadily increasing. Food relief expenditures vary considerably from yearto year; nlr case of a reported local scaru-cIty grains are bo-ught anld flown(if possible) to the famine area. Some grain is also sold - at subsidisedprices - to the needy on various iestivais.

3S. Tne regular buaget nas been Kept in balance in eacn oI tne past twoyears, and a special effort is being made during the current year toachieve a surplus which can be used for financing development. Strictercontrols are being imposed on government expenditures, and a start hasbeen made with the introduction of administrative economies for which thereis ample scope. Revenues have shown a steady upward trend since 1960/61.However, Nepal is still almost entirely dependent on foreign aid forfinancing its development expenditures (see Chapter II). The Governmenthas also in recent years resorted on a small scale to borrowing from thebanking system in order to meet a part of the local currency costs ofdevelopment. The total amount of Treasury Bills outstanding to date isNRs 20 million.

Currency, Banking and Fcreign Exchange

36. Indian and Nepalese currencies, freely convertible since 1960(NRs 160 = IRs 100), are both in circulation in Nepal. The Nepaleserupee has for some years been the sole legal tender in the Kathmandu valley,while the Indian rupee still predominates in the Terai. On the basis ofcomparisons with nearby India, Indian rupees were estimated in 1961 toaccount for slightly under two thirds of the total currency in circulation.However, the Nepalese authorities are trying to extend the Nepalesecurrency area to the whole of the country. Since August 1963 the Nepaleserupee is the only legal tender in the main valleys and in sizeable partsof the Terai, as well as in some hill areas. Furthermore, all Indiancurrency deposits with the Nepal Bank Limited, Nepal's only commercialbank, had to be converted into Nepalese currency deposits by September 1963.Consequently the amount of Nepalese notes in circulation iumDed from NRs 1LOmillion in July 1963 to NRs 175 million in October 1963, and the total

Table 4. Assets and Liabilities of the Nepal Rastra Bank(NRs miiiion)

Mid-July Mid-July Mid-July Mid-july Mid-July1959 1960 1961 1962 1963

Assets 133.3 17h.7 235.1 291.5 313.8b/

1. Foreign assets j 119.9 161.8 209.5 239.4 260.6(a) Inconvertible currency:-' 56.9 82.1 119.3 125.0 113.4

(b) Convertible currency 18.1 41.6 52.1 76.3 99.9(c) Gold 21.1 140.0 1L.0 14.0 23.2(d) Silver 23.5 23.5 23,5 23.5 23.5(e) Demonetised silver coirns 0,3 o.6 o.6 o.6 o.6

2. Holdings of Treasury coins 11.2 9.6 18.7 23.3 26.5

3. Advances to Government - - - 13.8` 15.5

4. Advances to private sector Ol 0.1 0.5 0.2 2.9(a) NP advances Ol 0.1 0.2 0.2 0.5(b) IR advances - - 0.3 - 2.4

5. Other assets 2c1 3.2 644 1L.8 8.2(a) NR assets 0Ol 2.4 3.7 bL. 40(b) IR assets 2.0 0.8 2.7 10.8 142

Liabilities 133.3 17L.7 235.1 291.5 313.8

1. Notes in circulation V6.6 67.6 107.8 124.8 lbo.5

2. Government deposits 67.0 61.4 70.7 86.5 94.0(a) MR. deposits 26=3 61-L 70-1 86.5 9h.O(b) IR deposits 40.7 - o.6 - -

3. Bank and others 6.1 29.9 33.7 55.9 k8.5(a) P.i deposits 2:0 26.6 25.7 39.5 LO.5(b) IR deposits L.1 3.3 8.0 16.4 8.0

4. Capital and reserves 10.7 11.3 13.5 15.8 15.8

5. Other liabilities 2.9 4.5 9.4 8.5 15.0(a) Ar liabilities 2.5 3.3 78 2,9 (b) IR liabilities 0.4 1.2 1.6 5.6 6,1L

Source: Nepal Rastra Bank

a/ Mainly Indian rupees.b/ Gold and foreign exchange holdings were revalued in 1960 to their present

level - gold from NRs 150 per tola (11.6 gram) to NRs 100 and Indian currency

to IRs 100 = NRs 160.c/ NRs 7 million in Treasury Bi-!ls and NRs 6.8 million in a non-interest bearing

bond sold to the Rastra Bank to open the Government's IBRD account and bought

back in October 1962.d/ Includes net profit for 1962/63.

- 14 -

supply of Nepalese money wit.h the nilhlie- inluelina demnnri depoltsdenominated in Nepalese currency rose from NRs 210 million in July 1963 toNR. h 250) millinn hv Nnrnmhnr 1Q6I Thenq+.vn R:nklc hnlrHnax nf' Tnr1in-currency have more than doubled over the past four years; they amnountedto NRs 113 million in July 1963 tn.d incevase fivr+her +to MP 128 mlllion inSeptember. The circulation of Indian currency has almost certainlydecreased - by n -n-nown quanti+y = but i4 is still accepted by mostmerchants and circulates in most of the country. Some deposits, insteadof bceing cor.verted hiave been transferred 4 to A Inia br-1- Tn practice

Indian currency has a status intermediate between national currency and

37. I Si-Lnce no figrsiU LeaUvallalUe uo I.niua, curreni u 1 cirUUlUaU1i in

Nepal, it is impossible to say what has been happening to the total moneysupply, except that it must have been increasing fairly steadily for someyears. The overall balance of payments surplus, which has been madepossible by foreign aid, haS been one factor contributing to the increasein money supply. There has also been an expansion of bank credit both tothe Government and to the private sector (see Tables b and 5). Theincreased demand for money has stemmed mainly from the higher tempo ofeconomic activity associate(i with foreign aid and from the growing monetisa-tion of the economy. Though prices have been rising, the virtuallyunrestricted import of goods from India has acted as a check on inflation.

38. The Nepal Rastra Banlc (see Table 4) was entrusted in 1956 with someof the functions of a Central Bank; it also engages in commercialactivities. The Bank now has the sole right of note issue, and notesissued by the Bank have to be covered up to 50 per cent by gold, silver andforeign exchange, including Indian currency. However, a substantial partof the money in circulation in Nepal consists of coins minted under theresponsibility of the Ministry of Finance. These are the normal means ofpayment in most of the hill areas. The Rastra Bank has bought a smallquantity of Treasury Bills from the Government (about NRs 15 million), andthis is the only form of government security which exists at present.There have been talks of a bond flotation, to which the Rastra Bank wouldbe a major subscriber.

39. The Nepal Bank Limited, Nepal's only other bank with 28 offices,engages mainly in the financing of imports and exports (rice, jute, etc.).It also makes personal loans against the security of silver, gold orjewellery, and some crop loans, for a total amount outstanding of NRs 74million in November 1963. In a country where land is the main asset,but where there are practically no property records, the Nepal Bank alwaysrequires that its loans be secured by movable property. It chargesinterest of 51 to 7 per cent, its loans are for a maximum duration of oneyear, and the interest paid on deDosits varies from 1- Der cent to h percent. The Nepal Bank Limited is largely government controlled; it israther conservatively run 'but due to its virtual mononolv is able todistribute dividends.

- 15 -

hO. The government emnloveest nrovident fund was given legal autononvin 1962. With its total assets of NRs 12 million, much of them kept inliiiird nr quasi-liqid fmn forr Trc f invPrfmPnt,t po-sib1itiesj it. is a

potential source of long-teim finance for development.

Table 5a Assets and ITiabilit-ieso f the Nepal Bank Lim.ited(NRs million)

Zf-T;4- T-,1 ? -; A_ TU y M -;A -A ul -1- 7.-; M 1 A T,,-1 M; A.-T-1 ,r*J4.L.41J IA..LJ * 4L4- U I 4 1.WL5 , y I1J. -S1 t...L-J 11.LS..t|J

1959 1960 1961 T196 1963

Assets 56.3 84.5 89.2 101.0 115,6

1. Foreign assets 18.4 37,8 24.2 25,8 12.51 It Tr _l: - '1 a -% "I <1 n A n 1) 1n H ~ Z- % r\da ± *lU±ll Uurreurluy LU ) J. 1 U C) . f 4.3 eW 1U_)

(b) Others 0.1 0.8 0.5 2.2 2.0

2. Advances to private sectorand invvestments 34.2 31.9 45.3 57.8 63.5

(a) Indian currency 26.8 26.0 38.0 L2.1 45@5(b) Others 7.4 5.9 7.3 15.7 18.O

3. Cash in till(Nepalese currency) 1.5 5.2 5.7 5.5 22.0

4* Deposits with Rastra Bank(Nepalese currency) 1.4 7.5 8.8 5.8 8.o

5. Unclassified assets 0.8 2.1 5.2 6.1 2.8

Liabilities 56.3 84.5 89.2 101.0 115.6

1. Capital and reserves 6.4 7.o 8.2 8.5 10.4

2. Fixed and savings deposits 17.1 22.2 30.0 34.4 39.5(a) Indian currency 11.7 15.4 19.8 20.1 22.0(b) Nepalese currency 5.4 6.8 10.2 1h.3 17.5

3. Demand deposits 30.4 45.3 45.1 44.6 61.0(a) Indian currency 2404 34.3 28.7 26.o 26.5(b) Nepalese currency 6.0 11.0 16.4 18.6 34.5

4. i-argin account 0.3 1.2 1.6 4.2 3.5

5. Unclassified liabilities 2.1 8.8 4.3 9.3 1.2

Source: Nepal Rastra Bank

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4L* Total foreign assets held by the two banks have increased fromNRs 200 million in mid-July 1960 to NRs 273 million in mid-July 1963.vWithin this total, holdings of gold and convertible currencies have risenduring the same period from NRs 56 million to NRs 125 million (equivalentto just over $16 million). It is understood that some foreign exchangeis also held by the Governmient outside the banking system. I5ost foreignaid, both from the United Stoates and India, is paid in Indian rupees, andthis has been an important I'actor in maintaining a fixed rate of converti-bility between the Nepalese rupee and the Indian rupee. Less than halfthe total amount of U.S. aid is now paid in dollars. British, Russian andChinese aid is mostly provided in the form of goods and services rather thancash, but the Chinese are understood to be paying for part of the localcosts of the Kathmandu-Kodari road in sterling. One of the main sourcesfrom which Nepal earns convertible currencies is the payment of Gurkhapensions and leave allowances by the British Government and remittances totheir families by the Gurkhas themselves. Another source is the expendi-tures of foreign embassies in Nepal. A small amount of foreign exchangeaccrues from the export of jute and jute goods outside India and fromexpenditures by foreign tourists, though the latter have in the past beenmainly paid in Indian rupees.

L2. While transactions with India are virtually free from exchangecontrol, efforts have been made to regulate transactions in convertiblecurrencies. Government permission is required to buy foreign exchange,and exporters are now required to surrender the foreign exchange they earn,except for a portion (ranging from 35 to 75 per cent) which may be retainedfor expenditure on specifiedi items,

- 17 -

CHAPTR II. ECONOMvUC DEVESLOPMID'MT ANID FRELliG-N AID

43a Nepal's First Five-Year Plan ended in July 1961. Expenditure ondevelopment during this period is believed to have risen from NRs 15million to NRs 76 million a year (2 per cent of GNP). After an intervalof one year, a Three-Year Plan was initiated in July 1962, and the actualexpenditure during the first year is officially put at NRs 88 million.This is possibly an overest-imate. There are, however, certain quite sub-stantial aid-financed deveLopment activities which do not appear in thedevelopment budget at all. Details of Plan allocations and expendituresby main sectors are given in Table 3.

Lh4 The Five-Year Plan, as originally conceived, was way beyond thecountry's capabilities, and little more than one third of the proposedallocation was spent. The Three-Year Plan is much more realistic.According to the official summary, its main purpose is to "make availablebasic data on the economy, to modify the existing organisational structureand to lay down the infrastructure as will be required for consistenteconomic growth..... One of the main tasks of the Plan is to make adequateprovision for the improvement in the conditions of the peasants..... Ifthe land system is allowed to continue in its present form, the vastmajority of the people will remain apathetic towards any plan. It is,therefore, one of the main tasks of the Plan to take measures necessaryfor introducing changes in the present land system..... Improvements inthe administrative machinery of the State is another main obiective ofthe Plan..... A sound assessment of the country's physical and manpowerresources is essential s. The- undertaking of surveys of rinurnos istherefore considered to be an integral part of this fpreparatoryt Plan....The lack of trained nersonnel is one of the main hottlenecks in the execu-tion of development programmes, and so training has been accorded highpriority in the Plan."!

L5e The hunman nnd institutional factors discussed in Chapter Iinevitably impose severe limits on the pace of economic progress and socialchange and on standards of economic performance. A Cooperative Bank hasbeen established, land reform legislation has been enacted, and a programhas been formulated for the grnrunl rorgannist+Aon no' ailr startingwith three districts, one in the eastern Terai, one in the Rapti valleyand the third in the western hills. A beginning has been made with agri=cultural research, the supply of improved seeds and the creation ofa,grricultural extension sc.v ices. Buh it u-i ll. bne m.anry ye arUts LU.befe C ntyfar-reaching changes occur in established systems of land ownership and

MI n u, -n +heU Ca CrrUan LIt Uy WIcLh±1 WitC t Lhe U.Ltivator obtUaiLns credLi ol "i

traditional farming practices. Similarly with the collection of basic

- 18 -

economic data. The Governmentts statistical bureau, operating undergreat handicaps with few trained personnel and practically no equipmentknot even a telephone in the office), has recently carried out apopulation census and an agricultural census and is planning an industrialcensus in the near future. There are also programs, in which the UnitedStates is assisting, for carrying out the cadastral survey and a soilsurvey, making an inventory of forest resources and collecting hydro-logical data. From these seeds much may grow, but for the moment theeconomic and technical data available to the Government are extremelysketchy and frequently unreliable.

46. Some very concrete achievements can be recorded in spite of thesedifficulties. For example:

(a) The percentage of the total population in school increasedfrom an estimated .1 per cent in 1951 to about 241 per centin 1961. This does not include a substantial efforttowards adult literacy, Tribhuvan University was openedin Kathmandu in 1959. The total number of Nepalese incollege increased from 250 in 1951 to L,900 in 1961, ofwhom 15 per cent were women.

(b) Malaria has been eradicated from large areas of thecountry, including the Rapti valley, which used to bealmost uninhabitable on this account. The target datefor complete eradication is 1970. Whereas a decade agothere were virtually no hospitals or dispensaries inNepal, there are now about 800 hosnitnl beds - half ofthem in the Kathmandu valley.

(c) The Nepal Industrial Development Corporation, establishedin 19N9 has proved itself an effective agency forstimulating local industry. By the middle of 1963 ithad approved transaetions totalling nver NRs 31 million;of which NRs 1.0 million had been disbursed. Projectsassisted include the- modemrisation of one of the Jutemills at Biratnagar, the construction of a 110-room hotelin Kathrmandu and two sugar factories in the Terai. TheCorporation has also established a small industrial estateat Bala1u, outside Kathm.andu, where four uit c alreadyin operation and a further five under construction.

(d) The first motcorable road into the Kathmandu valley wascompleted in 1.956. Linked with this is a _2-mle roadalong the Rapti valley which has helped in opening up anew area to agriculture. A road has , -'uit l

Biratnagar with Dharan, which is one of the main pointsof entry to the eastern hills0 a modern ropeway has justbeen installed between Hetaura and Kathmandu. Air

transport is also being developed, and the Royal NepalAirlines Corporation, with a flee+ of five nrG3S ndr

several smaller planes, is playing an important rolein ca nying fmright and passenge-r overroutes which

would require days or weeks to traverse by surfacet- r an s p r4

(e) Ele4kicit supplies 4H, te val-h,land- vale and -L, ;) IW iU 1 Jt.;L ± 0L.y_PJJ$J t.5D .-LI Ul .U 1 i fd L4ifid1 U V IL.L1ZJy cuL,'-

Biratnagar halve been considerably improved, and powerprojects no-I Ln hand ni LL IIffriln parts of. l UII coLAtUry

should result in a trebling or quadrupling of presentUinsualled capacity over the next five years.

(f) General progress in agriculture and irrigation has beenless striking, but a number of useful projects have beenundertaken in different parts of the country, incluaingthe establishmTient of an agricultural school, thecreation of the nucleus of an extension service, thelaunching of a seed propagation and distribution scheme,the setting up of a smalU dairy industry centered in theKathmandu valley and the hill areas to the northeast andthe establishment of several promising horticulturalstations.

47. The Government, as already noted, has recently directed its effortstowards mobilising larger domestic resources for development. Not onlyhave taxes been increased, but there have also been some economies inadministrative expenditures, and it is hoped that in 196 3/ 6 4, for thefirst time, there will be a significant surplus on the ordinary budget.Receipts from land revenue have been practically doubled over the pasttwo years and those from customs duties have been increased by nearly50 per cent in four years.

h8. Foreign governments and the agencies of the United Nations play acentral role in Nepal's economic development. No reliable figures ofaid disbursements are available, but it would appear that Nepal iscurrently receiving in the region of $15-20 million equivalent a year ingrants and loans from all sources, including technical assistance.Practically none of this aid goes in support of the regular budget. Onlya part of the expenditures financed out of aid - quite possibly the lesserpart - is included in the official development budget; this is true ofmost forms of technical assistance, of certain Indian-aided projectswhich are carried out directly by the Indian Government (e.g. the Trisulihydro-electric scheme) and of some Chinese aid. Moreover, a sizeablepart of the aid extended is used to meet the local exoenses of the foreignaid missions. This is particularly true of the United States.

h9. The level of aid has risen sharply in recent years. In the periodf-romn 1951 tofn e totalI aied d1qhisbursment.s hnvp. nrnhn-blv -yhen of fthe- ordenr

of $100 million, of which rather over half has come from the United States,about one third from India and the rest frrm a large nuimber of different.countries and institutions. Among these, China, the Soviet Union andthe United Kingdom have -een the principal contributors.

20 -

0U. Much the largest donor of aid to Nepal is the United States and thesecond largest is India - and inasmuch as the major part of U.S. aid is nowbeing financed in Indian rupees out of PL 480 counterpart funds in India,it is India that contributes the greater part of the resources. Indiahas also provided most of the facilities offered for the training ofNepalese abroad. Details olC reported United States and Indian aid expendi-tures are given in Table 6; the mission has some doubts, however, whetherthese figures are an accurate reflection of actual disbursements. Untilrecently, all U.S. aid consisted of grants, but a small proportion nowtakes the form of loans to the NIDC repayable in foreign exchange - two15-year loans repayable mostly in Indian rupees and a 50-year loan repayablehalf in dollars and half in Indian rupees. Assistance from India hasconsisted entirely of grants.

51. The U.S. aid program is now concentrating on four priority goals:education and training; government management and institutional develop-ment; rural development; and what is called "investment generation",which embraces among other things assistance to the NIDC. forest inventorvand management, the development of forest products, power development andhydrological investigations. Earlier emphasis placed in the U.S. programon the development of roads, ropeways and air transport has been redirectedtowards building up a better institutional framework for the management oftransport, including the nucleus of a road organisation. Rural develop-ment includes support for the Panchavat system. agricultural extension nnritraining, rural credit and cooperatives, the cadastral survey, supply ofsuspension bridges and miscellaneous activities designedri tor imnroveconditions in the villages. The U.S. Peace Corps has placed about 100volunteers in Nepal; who are mainly engaged in acivities rela+ed toeducation and rural development.

52. The Indian Government built the Tribhuvan Rajpath and the civil air--port nt Kathmandu. More roads and airfields are under construction orplanned for the future. Irrigation, drinking water supply and power arethe other prirnipal areas of Indian ra+-viries The Government ofIndia is constructing the Trisuli project which is intended to generate9;000 kilowatts of power by IQ65 or 1966 with an ultiate installed capacityof 21,000 kilowatts, of which 18,0CO kilowatts will be firm power. Indiahnsq alsozr) +lnder n to provide Nepal wit .10.rV kilowatts of power from,the Kosi project, along with canals which should provide irrigation for over

9 nn tJLL AI'ALnn,J.LOT-4± L -1 44UI--1 -tA1 P 4 UOI0,0 aces Tn -diin Mepal Jil indue course derlive solme luernefitsL

from the Gandak multipurpose scheme, which like the Kosi project is beingrnr1 rl c ni- tf+ hkr +),) ho-,i ,.ntr4-I-e E +- o4 -- c- .. VP A .... V1 V ¶

water supply and irrigation schemes have been initiated under the Indianaid program; there is also a fairly large scheme for providing additionpiped water for Kathmandu. Other areas in which Indian aid has made animportant contribution to developm,ent include aerial photography andmapping, higher education, horticultural and veterinary development schemes,a geological s-rvey and smaIll-scale inrdustries.

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Table 6. U.S. and Indian Assistance to Nepal(Actual expendit-ures FY 1959/60 through 1962/63,

forecasts for 1963/64, in thousands)

(A). U.S'. Program ($ equivalent)(U.S. fiscal years ending June 30)

a/Sector 1959/60 1960/61 1961/62 1962/63 1963/64

Agriculture and forestry 209 306 925 1,111 834Industry nnd mTining h/ 282 2PO9 I,)41 l1,323 I-i06Transport and communicat:ions 223 4,546 4,389 3,352 1,620Social Se,ices r nnr rromnmT.rni+.v

development 826 1,2L6 3,174 3,795 3,6LoOther c/ 823 751 1,520 1,732 1,88)L

U.S. sub-total 2,363 7,098 ll,h29Sll1,313./ 9,O8L

(B). Indian Program (Indian Rupees)(TndiAn fisc21 yvers enriing March 31)

Agriculture and forestry 31 Q92 386 )LQR 1 7Pf1,Irrigation and power g/ 2,887 7,027 9,659 11,09h 38,210-/Induqstry and mining I 26 I-19Q On20 I,9)8Transport and communications 1,905 h,h51 4,696 1,737 '2,082Socaml setnl7e-n ar.d con.nltyvj _

development 2,938 4,191 3,898 1,003 952C+h , /, 9 7C a~ 1 90 a not a -R), z PtA

Indian sub-total 10,518 19,753 22,859 18,136 T8,7801J

Indian sub-total in OOC ofU.S. $ equivalent 2,209 4,1h8 1i,800 3,809 10,24L

Total U.S. and Indian ai.d in'000 of U.S. $ equivalent 14572 11,26 16,229 15,122 19,328

Sources: U.S. AID Nepal - Indian AidMission

a First year of the U.S. Indian rupee aid.b/ Includes Nepal Indust-rial Development Corporation.c/ Includes technical support and engineering services.d/ 50% U.S. $, 50% Indian rupees.e/ 48% U.S. $, 52% Indian rupees.f/ 43% U.S. $, 57% Indian rupees.L/ Includes drinking water supply.h/ Includes aerial photography and mapping.i/ Admittedly overestimated.

- 22 -

53. Both the Soviet Union and China have extended grants tor Nnnal in theform of consumer goods whiclh are sold on the local market, thereby provid-ino +. n. rC,n-vrcr.v+ - .r vr 1 +I I r, i - e-oncr fP,v fi n rnej n r .Io 1 ppnI r q t.c: ofing h- _ _ .... t wi _ loc ca n e c -- fi- -i t &,rprojects aided by the two countries. A Soviet loan equivalent to $2.7million a-d repayable Jn goods or foreign -change is beir.gused to con-struct the sugar factory near Birganj, a cigarette factory at Janakpur and

a~~~L dr-LetIc I station aout 20Tiles east of Katmand Ch hatalked of assisting with a number of industrial projects, including a cement. Uactory.U a pu.L J nUd pdap.er .cit UU1o-y aLdU a. LUdUll1e LdsIUhoU L.LUu1Jo H

none of these projects has yet materialised, and the idea of building thecement anld paper hactories has apparently been abandoned altogether. Theprincipal Chinese-aided project is the Kathmandu-Kodari road, on which con-struction is now in fUii swing.

5. 4 id from the United Kingdom has included a loan f 800UU,CUU, mosu ofUwhich is being spent on the supply of equipment for diesel power plants atH1etaura, Birganj and various other places. A British grant of £1 millionhas been distributed over a range of smaller projects, including thereorganisation of the electrical distribution system in the Kathmandu valley,the supply of vehicles and broadcasting equipment and assistance for healthand education; one third of the grant has still to be committed. TheUnited Kingdom is also considering schemes for the resettlement of Gurkhasoldiers returning to Nepal.

55. Other countries which have assisted Nepal in a smaller way areAustralia, Canada, Israel, NJew Zealand and Switzerland. Israel has madea particularly valuable contribution in helping to develop the NationalConstruction Company of Nepal, while assistance from Switzerland has beenconcentrated mainly in some of the mountain valleys. Germany made aloan of DM 2 million to the NIDC in November 1963, and Japan has offeredassistance to Nepal equivalent to $1 million. The World Health Organisa-tion has made a substantial contribution to the malaria eradicationcampaign. The United Nations and its other specialised agencies have beenactive in the technical assistance field. For example, the Food and Agri-culture Organisation has played an important role in the collection ofeconomic and technical data and in the preparation of irrigation and resettle-ment schemes; the International Civil Aviation Organisation is providingtechnical guidance for air transport; and the International Labor Organisa-tion has supplied an expert on vocational training. The Ford Foundationhas helped with economic planning, agricultural reorganisation and thedevelopment of cottage industries.

56. When so much aid is extended from so many different sources and forso many different reasons, effective control and coordination of develop-ment activities becomes extremely difficult. Projects are proposed togovernment departments by one aid agency or another, and there is seldomany independent evaluation of their merits. Some of the money spent istherefore inevitably wasted. But Nepal is not to be blamed for acceptingwhat is freely offered, and if foreign aid is considered as a whole, there

- 23 -

can be no doubt that it has enabled the country to make greater progressduiring the past five yrears tIh,n wouldotheise have been ss There

has, however, been a very marked concentration of aid activities - and of~'4IUI~L J.L~UJ±~ ~ 1JIIid±~Uj - ' LV L I - 6O'-forcign aid personn.ell - in 4the TKa+>,-andu, valleCy and a-long the roadI afledn

up to it. Alnost half the Government's development budget for the currentycar is to bOe spent- in 4the -a,lt zon -hc - rbace the -atk 4-n- area.The deeomn effort has not~L1 lJ LM-UI 1 LhL LpVIIV dteeIILJ y ItQ Uelsie D. UIiIO.Il.U CL I'CL

The development effort has not penetrated very deeply elsewhere.

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CHAPTER III. PROBLEi'S OF FUTURE GROWTH

Getting Things Done

57. Economic development in Nepal, whether at the national or locallevel, is first and foremost a matter of finding individuals with a realdesire to get things done, and with the political skill and drive requiredto overcome the built-in obstacles to action. Such people are beginningto emerge in growing numbers in government and outside it, and they needto be gi v en the 1>'lest ,,-Po-rt+ -A --nr---r-ntn This i mplies a n.rea4

ness on the part of the highest authorities to make appointments on thebasi;s ofl rn.-erit and toW back, efi_ ec and;-4 iner4 gintth posto~V.L4 -~ 1J4 II~± .1 V O..L,-L V'4I II, 4 ~ L1L.-LIV 4. rLU ± -LQ j aCdL6CL LIC U VI&L l V l)VoJJ24 -L J-L ±l

which any honest and energetic public servant is liable to encounter. Thesuccess ofP every d ev elp,et proec -- 4 Nepal, 4uli or_ 4rvt, ili~~ ~JJ. ~~VeLy UV VLJjJIi1=JIV H±¶JJt:UU _L1L I4UJJct_L,9 f1JULJ±JALk Ut JiJ.1_VctU1:5 L'_±i.L _L_J.

the last resort depend on getting the right man to run it and supportinghim. in his job. Those proJects which have already made a good star-t -the Nepal Industrial Development Corporation, for example - owe theirsuccess to the quait-y of ;heir managemen-t. Poor managurieent, far morethan any lack of technical know-how, is the usual reason why other projectshave ±aiLeUg

58. Attempts to bring in management from abroad to run enterprises inNepal have generally failed. Most of the appointments made under the U.N.OPEX scheme have now been t;erminated. Various proposals have been putforward for placing enterprises in Nepal under foreign management teamsarmed with full executive authority, but none has yet been acted upon,,Given the right people on both sides, such arrangements may work in parti-cular cases, but the dice are loaded rather heavily against them. It istrue that Nepalese management, however capable, is almost invariably in-experienced to begin with. Even so, the mission is inclined to doubtwhether the right answer to this problem can be found by putting foreignersin charge. Nepal's recent experience rather suggests that an able andenterprising Nepalese manager, supported by one or two foreign advisers,can generally accomplish more.

59. The central governme!nt administration in Nepal is not at presentconditioned to getting thirngs done. It is overstaffed, cramped by a massof rules and regulations and hesitant of accepting responsibility. Publicenterprises, if they are tc be operated in a businesslike way, must beseparated from government and organised as semi-autonomous authoritieswith independent accounts 2nd freedom from day-to-day political inter-ference. This has been recognised in principle, but little has been donein practice. A move to establish an independent electricity corporationhas so far made little headway. Posts and telephones, irrigation and

transport services continue to be operated departmentally, and standardsoi. eIIJ.LcenUy are low. Discussions are at prubestx L11 UIn sttUUI

up an organisation to run the new Kathmandu ropeway, but its status is notyet agreed. The Royal Nepal Alirlines Corporation operates nomilllay as anindependent company, but appears to have little control over its own fundsand is subject to constant departmental interference. A number of industrialenterprises, including the smaller of the two jute mills at Biratnagar andthe sawmill at Hetaura, are run as government companies. Those with goodpeople in charge appear to be doing quite well. But they have only alimited measure of autonomy.

60. The Government is giving attention to the training of the intermediatetechnicians who will be needed in increasing numbers in industry, power,transport and agriculture. More use might also be made of the technicalskills acquired in the army by returning Gurkha soldiers, of whom there maybe as many as 25,000 or more resettled in Nepal, Many of these men havebecome proficient in service trades as mechanics, electricians, drivers,radio operators, surveyors, storekeepers and so forth. Yet when they retirefrom the army and return to Nepal, they are given little or no incentive oropportunity to put their talents at their country's disposal. Consequently,the majority go back to their villages and quickly forget what they havelearnt. The pay which a skilled tradesman can earn, say, in Kathmandu isfar too low (about NRs 100 a month for a radio operator, for example) to makeit worth a man's while to leave his family in the hills and seek employmentaway from home; and there is usually no skilled employment for him in hisvillage. The British Government is now considering the possibility ofhelping to organise regional development schemes which would offer betteremployment opportunities for retired soldiers. The Government of Nepalmight also consider what extra inducements could be offered for skilledtechnicians to take up employment in government service and public enterprises

Basic Information

61. Little attention wa.s given prior to 1951 to the collection of economicand technical data about the country and its resources. Few investigationswere undertaken and few systematic records were kept. Consequently, Nepalhas had to start almost from scratch in building up information about landholdings, soil conditions, weather, hydrology, topography, mineral resources,forpe.t and so forth- This lack of basic data is a nprticularlv seriousimpediment to economic development in agriculture and forestry and theexplo±~-itatin of water resources;

62. Reference has already been made to the cadastral surey now beingcarried out with U.S. assistance; an area of about 500,000 acres has sofa.r been s rkeed bu ha~rdly more- thar. one -Pflfth hias alsor been -rregistrednr

and assessed. The first soil laboratory was established a few months ago.. I Vfa JLJl, ar±J.4,, .. ULL +1, l ±1t,- ..-lj -tt .1Ans, t¼a%.A~.~~a~.~tau ',W at,t- IJt.. -.*'in*. 1 V -1 -h -. 1 -+ -h h 1r* __- ---A 14rl-n m;o 1 o *m c e nr o

in the Karnali river basin as part of the pre-investment survey financedLi the U.N. S peLi £ , ad. the nIndian Gove..Lment has collected hydrological

- 26 -

data in connection with the Gandak and Kosi projects0 Detailed topo-graphical maps have been prepared by the Governrent of India for most ofthe country. A survey of forest resources is being conducted under theU.S. aid program. A Japarese team has investigated mica deposits,apparently with rather discouraging results, and the Chinese have investi-gated limestone deposits in the Hetaura district. Thus, bit by bit, thecountryts resources are being surveyed.

63. It is imperative that the process of collecting data should continue,and the Government rightly regards this work as a high priority in itsdevelopment program. There is some danger nevertheless that incompleteinformation may be advancedi as an excuse for inaction. Investigations andresearch should be concentrated in areas where practical results can beexpected in the foreseeable future and not be too widely dispersed. Itwill often be better to havte a partial survey completed quickly than a fullsurvey completed after a long delav.

Opportunities for Develonment

61. There are three natural assets with which Nepal is unusully wellendowed. These are water, timber and tourist attractions0 The latterinclude not only the magnixicent mountain scenery. hut the ennagingqualities of the people and their unique cultural heritage.

65. Water resources should be used to raise agricultural productionthronugh irrigation and al•1 > to provide power for both Nepal and IndianPower will help in lifting water for irrigation in parts of the Toraiwhere flow irrigation may prove im-practicable or at wny rate uneconomic.Equally$ the storage of water will provide a perennial flow for irrigationand for powY + er. But the en,ononmnic feasibC i 0A- o t - -- f mn aj o r storage resaer-vo ishas to be investigated. only in the lower Karnali river basin does there-,p-ear too be a practic ' _ Po s k;-I itY 0P' haresin water pow,~er on a really1 .'. '41 a- VJA.a. L~ 0WL _LW h LS hla4amess±ing wd.e. 1Vt2 tio thWLdlarge scale during the next fifteen years, and the Karnali project,becaulse of the topography of th-e country, is likely to have a very, ArAtcd

irrigation potential withirntepal,

66, Nepal's forests are the most extensive in the Indian sub-continentjiproperl y r,anaged, couldI provide the counrL wI ith one of its major

sources of income both through direct export of timber to India andP uaistian O uld th UtIrough tIhLe dUevetLopmIIIentu within L Nuepal ot processing industries.The combination in the western Terai of large forest reserves withpotentially cheap anu abundant electric power poinlts to the possibilityof the eventual development of pulp and paper manufacture on a large scale.More i1mmediate anld less a,bitious industrial opportunities may be found inthe establishment of sawimills, the manufacture of plpyood and sleepers,Lur-niture making and the extraction of gums and resins.

67. Tourism could be converted into the country's most spectaculargrowth industry, following on a more modest scale the example of suchcountries as Switzerland, Mexico, Spain and Greece. Thailand and Jordan

are today earning at least twenty-five times as much from tourism as Nepal.A-pro-4 -ately 50$000 f1round _-he=--rd ai tikt are -led 4ein sold-- -I-.Mp 1wil U I._L y P- V%JU) I L4 UL_Li..L:; WUL _LUY CL± UZ ~ CL' I U LL U±Ie U'y iz:U~Jir iDJ.LU

annually, and with a considerable potential market amongst Americans andT, -L -. . _ . _ 7 - __ - _ _ __ _~ ~_! _ ~1_ _ _- _

UIUJrpea1ri Visitl-Jng negIlu'JIl-UIt U1 '.UUIlUZlej La- J[VI-tLUL1g lUfK'Lv - H1Ub bO lIieL4U.Lun

well-to-do citizens of India and Pakistan - Nepal should be able to multiplymany times over the rin-nber OI foreign tourists visiting the country (atpresent estimated at around 7,000 a year). The development of tourismwould do much to stimulate activity in agricuiture, industry, transport ancthe service trades; it could also create more new jobs than any other formsof industrial investment. While the immediate impact would necessarily beconcentrated on a small area of the country (the Kathmandu valley andPokhara), some of the benefits would gradually spread out over a wider area.

68. The exploitation of these principal assets should be prominentlyfeatured in any strategy for the economic development of Nepal. Agri-culture is still the main,tay of the economy and the only means of liveli-hood for the mass of its population. But agricuiture cannot be effectivelydeveloDed without irrigation, and the extension of irrigation in the Teraishould be accorded high priority in any long-term investment plan. A highpriority in agricultural development should also be given to the improve-ment of transport, particularly in the hill areas, where opportunities forthe development of cash crops (e.g. fruits and potatoes) and of dairyproducts are at present severely limited by transport difficulties.

69. More generally, the improvement of transport and communicationswithin Nepal is one of the essential conditions for accelerating the paceof economic growth. Transport facilities have hitherto been developedin a piecemeal and haphazard fashion with the help of - and partly inresponse to the wishes of - various foreign aid agencies. No attempt hasbeen made to evaluate the costs and benefits of individual projects or tocoordinate investments in different modes of transport. Nor has sufficientregard been paid to the problem of maintaining the facilities created.Road transport and civil aviation must inevitably be the backbone of thecountry's organised transport system, with ropeways possibly also playingan important role. It may be doubted whether there is any future forrailways in Nepal, and opportunities for water transport are practicallynon-existent because of the rapid and uneven flow of the main rivers.Footpaths and bridal paths will remain for many years the only means oftravelling over large areas of the country, and the renlacement and improve-ment of suspension bridges in hill areas should receive more attention fromthe Government. But it is on mechanical transnort that the modernisationof the economy must largely depend.

70. The opportunities for development in individual sectors, and theproblems involved in taking advantave of them- are briefly discussed inthe following paragraphs. Very little is said in this report aboutPoinnt.ion ndir. trnining nr nhabout n+.hpr qnninl ervicesq horecnu +.thn micsiindid not study them in detail. A comprehensive report on education inNepal has recently been prepared by UTTNSCO.

- 28 -

Agriculture and Irrigation

71. In the absence of reliable agricultural statistics it is impossibleto sa- -hat the trend of a.ricult-al productivity over the past ten years

has been. The extension of cultivation into new areas (e.g. the Raptivalley) has, however, contributed some additional production. The Terniis potentially the richest agricultural part of the country, and it ishere that the main development effort should be exerted, with particularemphasis on irrigation. Land reform is in the long run a necessarycondition of satisfactory progress in agricult-e, but it is 1ikely to bea gradual process. Other measures should be pressed forward so far aspracticable 1-, th1e meart.,e

72. In two or three years from now, irrigation should be supplied toover 200,000 acres in the eastern Terai from the Kosi project. Theunite u Nations Special r ui has been -approaced for assist ance Jin carriJngout a study of irrigation possibilities in the central and eastern Terai -a study which would take at least four or five years. It is importantthat Nepal should in the meantime build up an authority capable of planning,executing, operating and maintaining small and medium-scale irrigation works.The present Irrigation Department has a number of trained engineers on itsstaff, but it is poorly organised and has practically no experience inoperation and maintenance. Nor is it linked closely enough with agricul-ture. Little is known about the water requirements of different crop

rotations, and projects have been taken up without any proper study of theproblems that will be involved in making full and efficient use of thewater supplied and also without considering the economic results. TheDepartment of Agriculture has recently been authorised to take up projectscosting less than NRs 30,000, and there may be something to be said forseparating irrigation from power and bringing all irrigation works under asingle Ministry of Agriculture and Irrigation. Alternatively, irrigationmight be put in charge of an independent board on which agriculturalinterests would be represented. Whatever the correct solution, it isclear that the present system is not working well, and the mission suggeststhat the Government should seek outside advice on the organisation of anew irrigation authority. This is urgent.

73. Apart from the Kosi scheme, the irrigation projects under construc-tion in Nepal aim only at, providing a supplementary water supply for rain-fed crops. Later on, the introduction of perennial irrigation in theTerai could lead to important changes in the cropping pattern. At present,it is commonly estimated that at least 80 per cent of the land yields onlyone crop each year (usually rice). A first priority in agriculturalresearch should be to establish suitable cropping patterns for the areasthat will eventually come under perennial irrigation. Particular atten-tion should be given to the cultivation of cash crops and to the improve-ment of yields which are still generally very low. Good prospects appearto exist for the extension of jute acreage in the eastern Terai. Aconsiderable expansion of sugar and tobacco cultivation will be needed tosupport the sugar factory at Birganj and the cigarette factory at Janakpur,

- 29 -

but it has not vet bhen demonstrated that sugar and tobacco can be growneconomically in these areas. India can be relied upon to provide aready market for almost anny agricultural surnlus which Nepal can produce0

7),. The provision of credit on reasonable and flexible terms must beanother principal long-term objective of agricultural policy. Cultivatorsall over Nepal are heavily indebted to lnnlrdS money-lenders andmerchants. Total organised credit extended in the past by the CooperativeDartIment of the Government cmounted to on.lr TNs 3.15 mil ion A Coonera-

tive Bank has now been established with an authorised capital of NRs 5milion m,ostly provided from U.S. aid funds, but its operations are to belimited to the districts in which land reform is being implemented. TheBank appears to be setting about its task in a businesslke way, and if itcan build up an adequate organisation, it may be desirable to extend itsactivities to other districts also. Its aim is gradually to establish anetwork of self-supporting cooperative societies which will borrow fromthe Bank at 3 per cent interest and lend to their members at 10 per cent.

75. Gradually, efforts are being made to provide other services dsupplies for agriculture - research, extension, grain storage facilities,improved seeds and seedllngs, insecticides, implements and so foLthIBest results to date appear to have been in the supply of improved seeds,although this is still on a very small scale. Shortage of adm-inistrativeand technical skills rather than of capital is the principal factor limit-ing the effectiveness of government action in agriculture. Givenx thislimitation, it is a mistake to disperse the available resources too widely.The mission gained the impression that too many projects had been initiatedalready, and that it would be wise to drop some and concentrate on thosewhich offer reasonable prospects of success. For example, the horticul-tural stations at Pokhara and Kathmandu seem to be doing excellent work,especially on citrus fruit, but the agricultural station at Pokhara is) byall accounts, a complete waste of money. Apart from anything else, theland on which the station has been established is unsuitable, and practicallynothing can be grown on it. The dairy industry, set up with assistancefrom New Zealand and Switzerland, is a good example of a small and carefullyplanned project concentrated on a particular region in the hills, which hasmade a real contribution tc) improving local conditions. Regional schemesof this kind frequently offer a more helpful approach to the economicdevelopment of the hill areas than the widespread and indiscriminate dif-fusion of poorly organised agricultural services. These services shouldbe directed to those districts and villages where, for one reason or another,there are real prospects of getting things done. Large areas of thecountry lie at present beyond the effective reach of agricultural improve-ment schemes, and money spent there is liable to be wasted.

76. The clearance of forest land for cultivation has been going on forgenerations in the Terai and lower hills. Following the eradication ofmalaria in the Rapti valley, a scheme was launched in the 1950s under theU.S. aid program for the development of agriculture in this valley, andseveral thousand families have been newly settled there. Many criticisms

have been made of this scheme, but although the preparations were admit-tedl, inadquaate, th1-, ad,,;+--n of -e tens o- thosa.ds of' acres of'

cultivated land to the countryls resources must be considered a real gain.Another set't. Lement sclheme is now being st0arted L with technical help fromFA0 and the Israel Government to the west of the Rapti valley where severalthousard people have been attrac4ted down from the hills by promises of freeland from the Government. The initial expenditures on the infrastructurereq-uired for this type oi development (e.g. Jungle clearance, preparationof the land, construction of roads, provision of drinking water) areinvariably hiLgh in relation to the beneitis that can be expected i. theshort run. However, the long-run gain to the economy, which cannot easilybe calculated in advance, may still justify the investment, so long as theproject is carefully prepared.

Forestr

77. After rice, timber is Nepal's most important export. The value oftimber at present exported to India is believed to be in the region ofNRs 30 million a year, and government forest revenues, derived mainly fromthe sale of concessions to private contractors, are running around Nhs 10-15million a year. With better forest management, improvements in transportand the establishment of timber processing industries, income from forestscould well be multiplied several times over in the next five or ten years.The forest resources survey now being undertaken should provide a basis forthe more efficient exploitation of the country's timber resources. In thehills, uncontrolled felling and burning of trees have created a need forreafforestation both to control erosion and to meet the demand for fuel.This is being attempted on a small scale, but not very much can be achieveduntil there are adequate means of protecting the forests against the depre-dations of man and beast.

Tourism

78. As already noted, tourism is potentially Nepal's most promisinggrowth industry. The two essential requirements for expanding the touristtrade are more and better hotels in Kathmandu and improved air comrnunica-tions with the outside world. At present Kathmandu has only 125 hotelbeds suitable for foreign visitors, none of them up to internationalstandards. A new 110-room hotel is under construction with financialassistance from the NIDC and should be opened within the next 18 months.A scheme is under discussion for a 200-bed hotel to be built and managedby an American company, but difficulties are being encountered in arrangingthe necessary financing. Chances of raising equity capital abroad appearto be slight, and if the Government wants to see the hotel industry developas it should, it may initially have to put up much of the capital. includ-ing land and foreign exchange. The Government should also be prepared toassist in the modernisat-Lon and exnansion of some of the existing hotels.The running of hotels should, however, be left to private enterprise, andfnrepi n management is inlispennsnbh1e for the simcess of any enternrisecatering to foreign visi-ors.

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79. Pokhara appears to be the only place outside the Kathmandu valleywhere there is immediate need and justification for better tourist accom-modation. The small hotel set up there by the Tourist Department is notproperly managed. No larg7e investment is suggested at this stage, andadequate comfort could be provided in tents or huts constructed of localmaterials. But good service, hygienic cooking and proper sanitation areessential,

80. Improvements in air communications with other countries depend onthe extension of the runway at Kathmandu to take modern turbo-prop aircraft.This project is being undertaken under the U.S. aid program and should becompleted by the end of 1965. The necessary transport facilities fortourists within Nepal could be developed at comparatively little cost.Some money will have to be spent on improving the roads in the Kathmanduvalley and providing more vehicles - and eventually more aircraft. It isparticularly important that existing restrictions on movement in and outof the Kathmandu valley should be removed. Special permits are nowrequired for journeys within Nepal, and tourists waste a lot of time andpatience in complying with the formalities.

81, The majority of foreign tourists visiting Nepal come in organisedgroups, and navment of their hotel and travel expenses is usually arrangedthrough travel agents in India. This has meant in the past that most ofthe cnnvPrt'hile fort-ipn PxohqngP hns accrued to Tndia. Nenal receivinz Dav-ment in Indian currency. Travel agencies are now being encouraged to setup in Nepal, and this shouid in time mnke it nnosihll for Nepal to receivemost tourist payments in convertible currencies.

82. The potential importance of the tourist industry as a source ofinncoma andl aTnrlmrman ntnllo foP-r anhle antd rdynamir di-r r-.ction by the Govern-

ment. Consideration shouLd be given to the appointment of a full-timeadviser from abroad to assist in working out and implementing a program ofaction covering all matters important for the development of the industry.Privn.at en+te is shourld bep given every enOncoraePment± to nprnvicde. the

facilities required, but the Government will often have to take the initia-tive if the right things ai-e to be done and done quicklyr

the fact that the domestic market is small and scattered, by the very.LimiLued idiLgenous supplie,J of fueel nLd. raw mateL rlals by t2 lack of

managerial and technical skills and by the difficulty of getting Nepaleseuo take uap fUact or-y employml1nto I ractihLca" .Ly ulthe only orgaUrdLOC.1.is .LDUs.try

that exists at present has been built up close to the Indian border by±lU.ldll USluI lUp LiCUfrb Ubliq iId±Ii±y ,L1IIU.LCU1 ± dUUUl ariu cdUterin11g Jma.lIl'y t,U t1he

Indian market. Lack of power has also been an obstacle to industrialdevelopment in thre past, but with thle new generating facilities now inhand this should be less of a problem in the future, so long as the facili-ties are operated efficienitly.

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84. Indian businessmen have recently indicated a renewed interest ininvesting in industry in Nepal, and specific projects discussed with theGovernment include a cotton textile mill and a cement factory (in placeof the now abandoned Chinese project). It may also be possible to attractsome investment from Pakistan with which Nepal recently signed a tradeagreement. Business in Nepal enjoys considerable tax advantages comparedwith neighbouring countries and sometimes has easier access to foreignexchange, particularly if it exports to countries outside India (throughthe operation of the fairly liberal foreign exchange retention scheme).

85. The lines of industrialisation which the Government and the NIDCare encouraging seem in general well adapted to the country's situation.Main emphasis is being placed on small and medium-scale units processingagricultural and forest products. The two industrial estates in theKathmandu valley seem to have been set up on sound lines. Assistance isbeing given for the modernisation of the jute industry at Biratnagar andfor the re-equipment of the mechanical workshops there; this last projectin particular seems to be fully deserving of support. The possibility ofestablishing a jute mill at Jhapa in the eastern Terai is being exploredin connection with the introduction of land reform in this district. Noideas of larve-scale industrial develonment should be entertained for thetime being, at any rate until cheap and abundant hydro power is available,which cannot be for at least another twelve vears.

Electric Pnwer

86_ Total installed capncityr in the whole of Nepal il at present about10,000 kilowatts, divided more or less equally between the Kathmandu valleyand Biratnagar, with one or two small and isolated diesel units elsewhere(e.g, at Birganj). Four fifths of all installed capacity consists ofthen al u1nits (mostly diesel gene-ratos) I nA onl yr one + r h of h,I-

5e-- - - -/ -- -* 4. --J -J ~4 -- j

electric plants. New installations under construction or committed shouldbyr 1945 ,o 10A7 add an.otlhle,r °0,0 klowtt -1-;,_- - capact-y i -n t

area, including Hetaura and Birgani which are to be inter-connected withKathmandu to form a sin-le distribution system. Th liows for 9,000kilowatts to be installed at the Trisuli station, where a further 9,000-12 000 IcilowLatts might IF-eJ added later on. Th- .- 4 Kosi p e flh is alsosupposed to be cornpleted within the next two or three years, will have acapacity of lo),ooO kilow4vatts to seve the aeca around Binji atnagar. The

Gandak project is supposed to provide 10,000 kilowatts of power in thewes-U-emL. T erai bI-4efiLore 4 en or- the 190s. Taken Uker r these schemes

should be adequate to meet foreseeable demands for power in the miaincernlres of econor.ic1 4 activity- at least4 -p 4to -1070 NonegneatnU~IIU. ~ I ~AJI4JJ L1 LL~ d _ ViA),) d.LL .IA-C2D U LAPJ UU .i,7f I'J@ ,'4 li4Z,W r,ULiB:1dU±iLg

projects should be started in the Kathmandu valley or Biratnagar for thenext few years unless t.here is a demonLstrated need for the s-upply of powerfor a particular industrial enterprise whose requirements cannot be metXI_ n 1:_ 4 4_-' -/ _ 2a:1 _ _ __ \ m L_ __ :_ _ _ _ __ lrom existinIg facilUtie (UanU t1-is s1eeU ulUikly). Thier -I a sUHehee

for the generation of 5C0 kilowatts of hydro-electric power at Pokhara.There may be one or two ouner places in the country wnere the installationof small units can be justified, but there seems to be no need for anyother major additions to generating capacity for the time being.

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87. Urgent attention needsv however, to be given to the organisation ofa transmission and distribuition system for the power to be generated at theKosi s1jation whIich11 could be.come avail.able an±y t4me after the begnninL of

1966. The Indian authorities will operate and maintain the plant, buttransm,iss io n aund d ist ribut. on ofL power W4> 4 ea w-Ll be th responsi

bility of the Nepalese Government, and so far as the mission could ascertain,noth-1i g has yet beert duonle to crea'A,e tuh'le necessary fac-llite4 fr.r'tpowere

88. Apart from this, the efficient development of power supplies in Nepalcalls for action nlder three main heads:

(a) tne immediate establishnentv of' a com-petent conuruiercialauthority to maintain and operate power facilities inthe Kathmandu vralley, Hetaura and Birganj - with asecond authorit'y to handle the distribution of powerin the Biratnagar area, including power from the Kosiproject;

(b) the rehabilitation and reorganisation of the presentdistribution system in the Kathmandu valley; and

(c) collection of technical and economic informationneeded to prepare a realistic program for the long-term development of the country's hydro power resources.

The mission understands that the British Government is being asked toprovide experts under the (,olombo Plan to assist in carrying out the firstof these tasks. The present Electricity Department is operating at a heavyfinancial loss, and there is a well established need for an independentelectricity authority to be run on a businesslike basis.

89. The pre-investment survey of the Karnali river basin now beingcarried out with assistance from the U.N. Special Fund is a starting pointfor the eventual development of hydro power on a large scale. The fullpotential of the Karnali r-iver has been tentatively estimated at 3,000,000kilowatts, and preliminary proposals have been put forward for a dam to beconstructed at Chisapani at the lower end of the valley to store water fora power plant with an installed capacity of l,400,000 kilowatts. Theconsulting firm engaged in the study estimates that the first power mightbecome available at this s-ite around 1975. The economic justification ofthe project must depend on a market being provided in India for most ofthis power, and this is a matter on which a detailed agreement will have tobe worked out between the two Governments before any major investment canbe undertaken. Preliminar-y indications are that power could be suppliedat a cost which would compare very favourably with most other generatingfacilities in Northern India.

Transport and Communications

90. Transport requirements within Nepal have to be considered from manydifferent angles:

(a)' n,"vr4er.

4-enrs a,,misraI~ ~tio rv4 ,, +,1. nai nal u nnification;

markets for agricultural products;

(c) exploitation of forest resources;

(d) tourism;

(e) other industrial development, particularly in theKathLrarindu valley and the Terai,; and

Ij ) ti-ie develo-p-r-et 0± bULocial sCI'ViCv csuh as rIuniurland educatiorn.

Plans for the development of modern transport facilities should be basedon a careful assessment of the likely demands for particular facilities inparticular areas and the costs of Droviding them. The comparative costsof alternative modes of transport should be examined with regard not onlyto the initial investment, but also to the problem involved in maintainingit. When a new facility is created, steps should be taken to ensure thatthere is an organisation capable of running and maintaining it. None ofthese things have been done so far, Consequently, scarce resources are indanger of being frittered away on projects which have little or no economicjustification.

91. There are at present about 300-4L00 miles of motorable roads in thecountry, generally following the traditional north-south trade routes, andtwo new roads have recently been put in hand - a road from Kathmandu toKodari on the Tibetan border, which is being built by the Chinese, and aroad from Butwal to Pokhara in the western hills, which is to be built bythe Indian Government. The Soviet Union is reported to have agreed tohelp with the construction of a road from Kathmandu to Janakpur. Thesewill all be costly projects. In addition, the Government is considering anumber of other projects, including the construction of a 650-mile "East-West Highway" in the Terai 1/, the extension of internal air services withmore facilities for the use of short take-off and landing aircraft and theconstruction of a 12-mile aerial ropeway in the eastern hills. There isurgent need for these projects to be carefully evaluated so that a proper

1 The alignment proposed for the East-West Highway (see transport map)would include the present road along the Rapti valley and one or twoother short stretches of existing roads. In all, about 70 miles out ofthe 650 miles may already be said to exist, and preliminarv work hasbeen done on some other sections.

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order of priorities can be established. Only then will it be possible todraw up a realistic investment program which is consistent with Nepal'sfinancial and administrative capabilities. The mission suggests there-fore that, before any more new projects are started, the Government shouldarrAnge for nn onnn-nTic su:rvey OTf the conntrvls transnort. requirements andways of meeting them.

92. Air transport has a big future in Nepal, and the Royal Nepal AirlinesCorporation has the making of an efficient and profitable under+tking- Ttshould be freed from government interference, its accounts should be put inorder, and the traffic department should be reorganised. The presentmanagement should be given every encouragement to put operations on a com-mercia-2.l basis. Some Sel-TIA-icS Mrlay +v he subsidised Ieega .-rnh,i7 ancce

services or relief services to famine areas), but these subsidies should beoely duc-lared ardu carried1 on the GOvernm entu-s budget-, not- deie to the.

Corporation, There appears to be a good case on economic grounds forUi.Ldirig uap IetIer Lacia-LtULes fLor the LLIaitence UoL act n. 1 U L andu,

thereby eliminating the heavy cost and delays involved in sending aircraftuo India for aririual overvaul. vlUi±en tLhU naUULniaiiuu airUptis. sex'ten

the RNAC will have to invest in more up-to-date aircraft if it is to main-Ualn a sxiare of the international traffic between Nepal anu n,eighLbouingcountries. Ideas of establishing a "prestige" airline with an extensiveoverseas network should be firmly rejected. However, the exte-n to whichthe Corporation might profitably engage in the transport of Gurkha troopsto and from South-East Asia and Hongkong is worth a detailed investigationin conjunction with the construction of all-weather runways at Biratnagarand Bhairawa. This traffic at present involves about 5,OCO passengermovements a year.

93. The second main task of transport organisation is to create a roadauthority capable of taking over the maintenance and improvement of exist-ing highways. Nepal should not be content to entrust effective resDonsi-bility for construction and maintenance of roads to the different foreignaid agencies, and the development of a unified road administration shouldbe a principal objective of government transport policy. The Americanshave been helping in this field, but their activities are confined to workon certain roads built under the U.S. aid program.

94e Telecommunications within Nepal should be greatly improved with thecompletion of a radio network that has been installed with American aid,A thousand line automatic telephone exchange is operating in Kathmandu, andcommunications are being established with outlying areas by means of shortwave radio sets; six area stations are linked with Kathmandu, and 50satellite stations will be linked with the area stations. Nepal's onlyradio communication with the outside world at present is through the IndianEmbassy in Kathmandu. A project is now in hand to establish a micro-wavelink between Kathmandu and Dacca in East Pakistan. The intention is thata similar connection should be established with West Pakistan.

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CHAPTER IV. CONCLUSIONS

95. Nepal is making progress, but the runt"y isz still at the ver erlyr

stage of development where opportunities for the fruitful investment ofcapital are lnv~ mi +A ved +'A by trdliona~l ,++attitudes,, anr 1,,-rreontuc institu=z,- - -~+

tional framework, lack of trained people and large gaps in the infra-cr -rnn+r' - +4 Th ens,a fh, tnm;s+ + - - et hr. o,y gradu y ve1 rr

come, and until they are overcome Nepal's capacity to absorb externalc_alpiitall must be rated as comparat-ive-ly -10w 7'rone- iS +etllyntte

main problem at the moment.

96. Nepal is not an integrated economy, but a collection of more orI _ V -1- : L. - - - -- _ _ _ 4.1 -f - - - - -__w_.LCOD separaIe dl, J0iUII|iCteS, v0 Wil-LUII till Aflct:1UhdLU1UU Vd±±C,Y * ULU UIIU ilUdCd

around Biratnagar are the most advanced, partly because they are also theleast isolated. A national developrment progra, must try and build upthe economies of selected areas, both in the plains and in the hills,with the ultmrate objectlIve of linkiKng them together, bit by- bit, to forma single economic unit. A middle course has to be found between theover-concentration of investment in a few areas on the one hand and itsexcessive dispersal on the other. This is not an easy course to follow.In practice, while a disproportionate amount of the money being spent ondevelopment is going to the region around Kathmandu, there are certainrespects in which the development effort is being spread too widely forit to be effective - in agriculture and irrigation, for example. Themission suggests that better results could sometimes be achieved by givingmore attention to integrated schemes for the development of particularlocalities (the cheese-making project is a good example).

97. Investments in infrastructure, particularly in transport, have tobe kept in balance both with the growth of production and with the develop-ment of administrative and technical skills. No doubt, production wouldbenefit considerably if Nepal could be equipped with a system of modernroads linking all parts of the country. But the cost of building such asystem would be prohibitive and the task of maintaining it once builtwould be far beyond Nepal's present capabilities. A properly selectiveapproach to investment in transport (and power) requires a careful andrealistic assessment of the economic and administrative possibilitiesbefore new projects are taken up.

98. Agricultural production will remain the principal determinant ofthe growth of national output. No significant expansion can be expectedfor the next four or five years. But if advantage can be taken of theadditional supplies of water that should become available for irrigationfrom the Kosi river and from works in other parts of the Terai, a basis

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should be laid for the extension of double cropping and a marked improve-r.ert I 2 .Ltt.L in4 agrculura ..ls4A OUartn V.n4 the lJIe 1960s U. ''L .. F.lrst, however,

an authority must be created and trained to maintain and operate the newirrigation Lac.l-l-lUes _ln suchi a wa-y as -tIo Wri-Lg tUhe mnaxdir neit tthe cultivator. Agricultural research and extension services, togetherw'-ith credi"t V_iite -hul als be deueloped ' 3- 1-- -- A--I--, 44--41 -wt -i as -ne of 4heir-.LUIIL.L ~U±U L.UU ±L-L. ±eLU0 OL1ULLLU tLovLiu Ut ~V'CJ_UPUU W.-LU11 U11.Q L dD uJlI, '-. VI.-

primary objectives.

99. Land reform, and the services needed to make it effective, will ben1 Thr long run an essential preconditJion i.orI the prcriotlon of a hiea'thiyagricultural economy in the hills as well as in the Terai. The landreform program should be pushed forward just as fast as the Goverrierln t hasthe human and financial resources to implement it - and initially this maynot be very fast at all. Much harm could be done if exaggerated expecta-tions were aroused, or if other measures for improving farming conditionswere made to wait upon radical changes in existing systems of land owner-ship and tenure. Equally, however, the enforcement of the AgriculturalReorganisation Act is a signal test of the Governmentis determination tobreak with the past and adapt itself to the task of economic development.If the Act were left to become a dead letter like its predecessor, Nepalwould have very little chance of ever providing its rural population withan acceptable standard of living.

100. Tourism and forest industries appear to offer the best opportunitiesfor quickly increasing the national income. They are also the mostpromising ways of earning additional foreign exchange. If their develop-ment can be coupled with the gradual expansion of agricultural productionin the Terai and selected areas of the hills, Nepal should be able in thecourse of the next ten years to achieve a moderate increase in per capitaincome. Other forms of industrial development are likely to be ofsecondary importance in contributing to national income during this period.But thereafter, if cheap sources of power can be developed - and stillmore so if new mineral wealth is discovered - the range of economic oppor-tunities open to the Nepalese people should be progressively widened.

101. The economy has adapted itself over the past five years to theregular inflow of foreign aid on a fairly substantial scale. It isimportant that this aid should be continued. Business confidence andthe chances of attracting local and foreign capital into industry in Nepaldepend on the maintenance of unrestricted trade between India and Nepal,and this would be endangered by any sharp change in aid flows. It is, ofcourse, equally important that the countryts internal finances shouldcontinue to be prudently managed and the currency kept on a stable footing.The Government will need to find more local funds for development as theinvestment program gathers momentum, and these should be obtained throughfurther increases in taxation and not by borrowing from the banking system.At the same time. savings institutions should be gradually developed sofar as there are people to organise and administer them.

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102. It is easy enough to criticise the ways in which many developmentactivs ties hamVe been c-a= ied cut -n Ne- I . to + polnt+ out - ¶st,k thn

have been made. It is nevertheless in many respects remarkable that thecon+r shoulda progressed s ar in so short a time Leyels of

economic performance, while still low in comparison with most other~.UJ.I -~;. _L ft ± 11 L. 1Cd1V~ t: ..AJoIIO LU.:; L U±Ly .U)ijJI.v LJt~u Uu Ll±I UiIL-,Pa U L L V r _ -

The Government has initiated a series of social and administrative changeswhich, if carried throu,h, will provide a basis for increasing productionand trade. Many more years will still be required to create the pre-conditions for rapid and sustained economic growth, and no spectacularadvance is to be expected in the short run. But by its achievements todate Nepal has established a gooa claim for continued external support.

103. The only help wnich the Bank or IDA might be able to give at presentwould be in the sphere of technical assistance. Nepal is not in aposition to service foreign exchange loans extended on Bank terms, and thescope for IDA activities is limited for the moment by lack of suitableprojects and of organisations capable ol- implementing them. if tneselimitations can be overcome, transport and irrigation appear the mostpromising areas for possible IDA assistance.