Document of The World Bank OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILE COPY Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A COTTAGE AND SMALL INDUSTRIES PROJECT November 5, 1981 Report No. P-3145-NEP This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS Currency Unit - Nepalese Rupee (NR) Since September 19, 1981 US$1.00 = NRs 13.2 NRs 100 = US$7.58 FINANCIAL YEAR July 16 - July 15 ABBREVIATIONS AND ACRONYMS ADBN - Agricultural Development Bank of Nepal CC - Cottage and Small Industry Coordinating Committee CIDB - Cottage Industries Development Board CSI - Cottage and Small Industries CIED - Cottage Industries Export Development Division, TPC CIEPD - Cottage Industries Export and Product Development Fund, TPC DCA - Development Credit Agreement DCVI - Department of Cottage and Village Industries ISC - Industrial Services Center M - Million MOI - Ministry of Industry NTL - National Trading Limited NRB - Nepal Rastra Bank PA - Project Agreement TPC - Trade Promotion Centre UNDP - United Nations Development Programme

3 NEPAL FOR OFFICIAL USE ONLY COTTAGE AND SMALL INDUSTRIES PROJECT Credit and Project Summary Borrower: Kingdom of Nepal Beneficiaries: Nepal Rastra Bank (NRB) - Cottage and Small Industries (CSI) Fund; Agricultural Development Bank of Nepal (ADBN), Nepal Bank Limited, and Rastriya Banijya Bank; and cottage and small industries receiving credit through the above credit institutions. Amount: Special Drawing Rights 5.7 million (US$6.5 M equivalent as of date of negotiations). Terms: Standard Relending The Government would relend about US$4. 5 M equivalent to Terms: the NRB for the account of the CSI Refinance Fund on the following terms: (i) two percent and four percent interest per annum for subloans refinanced by the NRB-CSI Refinance Fund of up to NRs 20,000 and over NRs 20,000, respectively; (ii) repayment on the basis of a fixed amortization schedule over 14 years, including a three years grace period; and (iii) Government to bear the foreign exchange risk. The CSI Refinance Fund would provide refinance to credit institutions for CSI subloans on the following terms: (i) refinancing up to 80 percent of subloan amount; (ii) interest per annum of five percent and seven percent for loans up to NRs 20,000 and over NRs 20,000, respectively; and (iii) term would be parallel to the term of the individual subloans. The credit institutions would provide term credit to CSI borrowers on the following terms: (i) 11 percent interest per annum; (ii) term ranging from 18 months to seven years, including a maximum of one year grace period; and (iii) minimum of 20 percent equity contribution for subprojects over NRs 5,000 and ten percent for Performance Contractors. These initial rates and terms are subject to at least annual review and revision to ensure that the final on-lending rate is positive in real terms and consistent with the interest rates applicable to term loans for industry. Project The project aims to generate employment, raise incomes Description: and increase foreign exchange earnings through expanded production and exports of cottage and small industry products. The project would upgrade private and public sector technical, marketing, and credit services and redirect Government incentives affecting the cottage and small industry sector. As a first phase program, the project would focus on the Kathmandu Valley and the Gandaki Zone, testing, developing and improving the various institutions and services. By clarifying the This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization

4 - ii - responsibilities of the various agencies, including an expanded role for the private sector, and providing significant technical assistance and training, the project would reduce the risks associated with undertaking such multi-component ventures. Each component includes a strong monitoring and evaluation system, which should facilitate response and corrective action in the face of unforeseen difficulties. Estimated Cost of Project: US$ Million Equivalent Component Local Foreign Total I. Credit Term Credit for CSI & Agents NRB - Revolving Fund Subtotal II. Commercial and Technical Services Trade Promotion Centre Cottage Industries Development Board Emporium Industrial Services Center Subtotal III. Technical Assistance & Training Base Cost IV. Contingencies TOTAL PROJECT COST Financing Plan: US$ Million Equivalent Local Foreign Total IDA Government/NRB UNDP Credit Institutions/Beneficiaries Estimated US$ Million Equivalent Disbursements: IDA FY Annual Cumulative Staff Appraisal Report: No NEP, dated October 29, 1981

5 INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE KINGDOM OF NEPAL FOR A COTTAGE AND SMALL INDUSTRIES PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Kingdom of Nepal for Special Drawing Rights (SDR) 5.7 million (US$6.5 million equivalent) on standard IDA terms to help finance a Cottage and Small Industries Project. Of the proceeds of the credit, about US$4.5 million would be onlent to the Nepal Rastra Bank (NRB) for the account of the Cottage and Small Industries (CSI) Refinance Fund. The United Nations Development Programme (UNDP) is expected to provide a grant of US$2.0 million equivalent for technical assistance and training (para 53). PART I - THE ECONOMY 2. The most recent economic report, "Nepal - Policies and Prospects for Accelerated Growth" (Report No NEP) was distributed to the Executive Directors on October 15, The principal findings of the report and recent developments are described below. Country data are shown in Annex I. 3. By almost any standard, Nepal is one of the least developed countries in the world. Per capita income is estimated at $140 (1980) and health and education standards are well below the average for South Asia: life expectancy at birth is about 44 years, infant mortality is 150 per thousand, and adult liberacy is only about 20 percent. The population, estimated to be 14.3 million (1980), is growing at a rate in excess of two percent per year. About 95 percent of the population live in rural areas. 4. Population density with respect to arable land has reached alarming levels and is threatening to overwhelm the resource base of the economy. Cultivation has been extended beyond economically feasible and ecologically safe limits in the Hills, and together with denudation of forests to meet housing and fuel needs, soil erosion has become a critical problem. Firewood and water have become more difficult to obtain as the forests are reduced and springs and streams dry up. This degradation of the agricultural base has made even the present low level of living standards difficult to maintain, and instances of food shortages and malnutrition have become commonplace. 5. Agriculture accounts for nearly 60 percent of Nepal's GDP and 75 percent of merchandise exports, and provides the main source of livelihood to over 90 percent of the population. Crop production accounts for about 60 percent of agricultural output, livestock for 30 percent, and forestry for ten percent. Rice is the predominant food crop (planted on about half the total cropped area), followed by maize, potatoes, wheat and millet; cash crops (oilseeds, jute, sugar and tobacco) are grown on about ten percent of the cropped area. About 25 percent of total rural incomes arise from nonagricultural activities. Cottage industries are one of the more important of these, engaging over one million people on a part time basis, and providing basic consumer goods in the many small isolated markets where such goods would otherwise not be available.

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