Poverty Reduction Strategy Paper Progress Report

This paper examines Nepal’s Poverty Reduction Strategy Paper Progress Report. Recurrent expenditures remained high owing to the high military and security expenditures. The expansion of rural credits through rural credit institutions, both in the government and nongovernment sectors, the technical support and social mobilization campaign by different nongovernmental agencies, and poverty reduction programs in the government have helped improve employment opportunities in agriculture, resulting in a better life of the common people.


This paper examines Nepal’s Poverty Reduction Strategy Paper Progress Report. Recurrent expenditures remained high owing to the high military and security expenditures. The expansion of rural credits through rural credit institutions, both in the government and nongovernment sectors, the technical support and social mobilization campaign by different nongovernmental agencies, and poverty reduction programs in the government have helped improve employment opportunities in agriculture, resulting in a better life of the common people.

Section I: Introduction


With the implementation of the PRSP/Tenth Plan in fiscal year (FY) 2002/ 03, the Government of Nepal is committed to bringing out an annual performance review of the plan to its people and to those who take keen interest in the development of Nepal. The plan was actually a Millennium Development Goals (MDGs)-centred Poverty Reduction Strategy Paper (PRSP) focussing on four strategically important areas, namely, broad-based sustained growth; improvement in the access and quality of infrastructure, social and economic services in the rural areas; targeted programmes for social and economic inclusion of the poor and marginalised communities; and good governance to improve service delivery, efficiency, transparency and accountability. The district features of PRSP are listed in Box 1.1.

This report, therefore, is the fourth in the series of reports it has brought out annually. The present report presents the fourth year progress report of the plan as well as the achievements of the plan in the last four years of its implementation and the key issues that it confronted during its implementation. The detailed review of PRS implementation will be undertaken in the next years progress report.

Distinct features of the PRSP (Tenth Plan)

  • ■ The Tenth Plan prepared and implemented as a full fledged Poverty Reduction Strategy Paper (PRSP);

  • ■ Consistent with the MDGs, the Tenth Plan targets to reduce the level of poverty and enhance social and human well-being of the people;

  • ■ Due recognition of the role of community organisations (COs) and non-government organisations (NGOs) in the development process;

  • ■ Commitment to decentralisation and functional devolution;

  • ■ Use of log-frame as measure to institutionlise results based management in planning; to define institutional tasks and responsibilities;

  • ■ Prioritisation of development programmes/projects in terms of P1, P2 and P3, guaranteeing resources and intensive monitoring; and

  • ■ Elaborate monitoring and evaluation provisions, including a commitment to annual poverty monitoring, process monitoring and reporting.

Report structure

The entire report has been organised into 13 sections. The report begins with a broad review of the status and challenges of Nepal’s poverty reduction strategy and the MDGs. It is followed by the assessment of the economy and new initiatives taken to manage the economy. Section IV highlights the government’s efforts to mobilise revenue and realign public expenditure management in support of the PRSP and MDGs. Section V examines the performance in the economy for broad-based growth by major sectors and also the initiatives taken by the government in improving its performance, particularly the much-hyped status of financial sector reform and the status of privatisation of public enterprises (PEs). Section VI reviews performance in the social sector, particularly in education, health and safe drinking water. Section VII reports the performance in rural infrastructure and service delivery in the rural areas. Section VIII discusses performance in the social inclusion initiatives and the targeted programmes. Section IX deals with the performances in institutional reforms, especially the progress in the civil service reforms and good governance. This section also makes an assessement of the performance in the decentralisation and devolution of the central government tasks to the local units as well as the performance in the judicial reforms and anti-corruption measures. Section X assesses the conflict situation and its effect on growth as well as on development activities. The section also highlights the initiatives taken by the government in resolving the conflict and rehabilitating the people affected by the conflict. Section XI reports the status of poverty monitoring, both at the centre and the district level. This section also highlights the sectoral initiatives taken towards performance monitoring. Section XII assesses the resource needs and the progress made in aid utilisation. It also discusses the initiatives taken in aid harmonisation. Lastly, section XIII sums up the conclusions of the report.

Section II: Key National Objectives and Strategies

The national situation

Fiscal Year 2005/06 saw major developments in the political scenario of the country. The elected government was scrapped, parliament dissolved and a new government was formed by partially suspending the constitution. However, the security situation remained grim, with development activities remaining at a standstill. The local bodies remained devoid of elected officials, and the chief officers of the local bodies were given the authority to run the day to day works. Service delivery at the grass root level was, thus, severely disrupted. The Maoist armed insurgency continued unabated. The main political parties joined hands to fight against the direct rule and to restore democracy in the country. The political parties formed coalition with the Maoists to restore a democratic system.

Economic activity during the year remained at its lowest. Recurrent expenditures remained high due to the high military and security expenditures. Development works came to a complete halt as the security in the districts was not conducive. Government revenue stagnated, and borrowings exceeded the budgetary target. As most of the bilateral donors temporarily suspended their development assistance, the government faced a serious fiscal problem. Trade and investment growth remained at its lowest, and GDP growth continued at a lower level.

In this context, rescuing the economy from this difficult situation and sustaining the gains for achieving socio-economic targets, as outlined in the PRSP document, remain a major challenge. The current development process in Nepal has been rendered extremely difficult by the domestic peace and political situation. The ongoing conflict and a turn around in the political situation in the reporting period have the following implications on the national economy:

  • ■ Loss in infrastructure affecting service delivery and constraining economic activities,

  • ■ Reducing business confidence and discouraging private sector investment,

  • ■ Restricting government development expenditure,

  • ■ Weakening service delivery at the grassroots level,

  • ■ Affecting production, trade and transactions,

  • ■ Obstructing operations of NGOs and other development partners, and

  • ■ Pressure on urban utilities and mass migration.

The political uncertainty has compounded the problems, giving rise to fears of more instability in the future.

Poverty profile

NLSS 2003 shows very encouraging results, reporting a significant decline in poverty incidence from 42 per cent in 1995/96 to 31 per cent in 2003/04. Analysis of the dynamics of poverty and poverty profile, by comparing NLSS I and II, shows the decline in poverty is higher in the urban areas than in the rural areas; poverty declined in all the regions except in the rural eastern hills; and inequality increased at the upper end of the income distribution. However, the decline in poverty in the mid and far-western hills and mountains was not enough to bring it at par with the national average. Still, the level of poverty in these regions is far higher than the rest. Besides, comparative analysis shows improvements in the access of basic social and infrastructural services.

An in-depth analysis of the factors behind the decline in the level of poverty between the two survey periods shows such factors as increases in migration and remittances, diversification in agriculture - particularly the wave in commercial farming of agricultural products, such as off-season vegetables, horticulture and dairy products, poultry and other animal products, targeting the urban needs - to be the main reason for the improvement in the level of income in the rural areas, where poverty is concentrated. The expansion of rural credits through rural credit institutions, both in the government and non-government sector, the technical support and social mobilisation campaign by different non-governmental agencies and poverty reduction programmes in the government have helped improve employment opportunities in agriculture, resulting in a better life of the common people. The improvement in accessibility to the basic social and economic services, improvement in literacy and health-related indicators, including the decline in the level of fertility, can be regarded as another important and strong factor for the improvement in the poverty situation during the period.

Table 2.1 shows head count poverty, poverty gap and squared poverty in Nepal, exhibiting the population living below the poverty line, depth of poverty and the inequality among the poor, respectively. All three indicators show not only a consistent decline in poverty, but also a more rapid decline in poverty and inequality in Nepal over the eight-year period from 1995/96 to 2003/04.

Table 2.1

Poverty measurement, 1995/96 and 2003/04

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Source: Poverty Trends in Nepal Between 1995/96 and 2003/04

All these measures of poverty show poverty in the urban areas declining faster than in the rural areas, both in terms of depth and severity of poverty. This confirms that poverty in Nepal is more a rural phenomenon.

Table 2.2

Poverty by geographical region

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Source: Poverty Trends in Nepal Between 1995/96 and 2003/04

A comparison of NLSS I and II shows that the basic indicators contributing to poverty has undergone a significant improvement during the two periods (Box 2.1). Indicators, such as the percentage of households reporting less than adequate food consumption, clothing, health care, schooling have all gone down in NLSS II as compared to NLSS I, indicating improvements in the situation between the two periods. Similarly, marked improvements are noted in the health, education and other infrastructural access contributing to the decline in the level of poverty during the period.

NLSS results

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Source: CBS, 1996 and 2004

Poverty by ecological belts, during the two NLSS surveys, shows that it has gone down more rapidly in the mountain and Terai regions than in the hilly regions. Poverty in the mountain region went down annually at a rate of 5 per cent plus during the period. The declining rate in the Terai was about 4 per cent per annum, whereas, it has gone down by only 2 per cent per annum in the hills.

A comparison of NLSS I and II clearly shows that there have been some improvements in the access to the basic services of the people over these years.

The study has shown that poverty in Nepal ascribes to a combination of many factors, such as high illiteracy, poor health and sanitation, low productivity of food grains, high child malnutrition, poor access to basic services and a feudal social structure. The lower caste and the ethnic groups, as well as women in the remote areas, bear the major brunt of this high poverty profile. The levels of improvement would not only have sustained but also would have had spiralling effects on other spheres had the political/ security situation in the country been normal. The insurgency and the political uncertainty have obviously negated some gains. Further achievements would, thus, depend very much upon the resolution of the conflict and improvements in the political scenario.

On the other hand, there have been some improvements in health sector. The preliminary findings of the new Demographic Health Survey 2006 have recently been made public. A comparison has been made in the following table between DHS 2001 and 2006, and the change experienced in the basic health indicators is assessed. Comparison of the survey results illustrates the significant changes in the fertility rate, mortality and contraceptive use rate between 2001 and 2006. The results present a very encouraging trend (Table 2.3).

Table 2.3

Comparison of DHS 2001 and 2006

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*Refers to MMR of 1996Source: Nepal Demographic and Health Survey 2001 and 2006

Millennium Development Goals

As a signatory of the Millennium Declaration in September 2000, the Government of Nepal is committed to achieving the MDGs by 2015. The MDGs set quantitative targets for poverty reduction, and improvement in health, education, gender equality, the environment and other aspects of human development. The paucity of data makes it difficult to assess the performances so far made by Nepal on the MDGs. However, available data on the school enrolment ratio as well as the percentage of people having access to safe drinking water are encouraging (Table 2.4). Similarly, the results of NLSS II also show significant improvements in the head count level of poverty, food availability and consumption and health and nutrition related indicators. However, difficulties in continuing the grassroots level development activities and the worsening service delivery due to poor security caused by the insurgency, coupled with the deteriorating political situation, are threatening the gains so far made, leading to a big gap in the MDG targets and actual attainment to be made by 2015.

Table 2.4

Millennium Development Goals and Status 2005

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Source: NPC/UN Country Team of Nepal, 2005Nepal Demographic and Health Survey (Preliminary findings) 2006

It is obvious that long-term poverty reduction needs sustain economic growth. Therefore, technological advancement and capital accumulation, including human and social capital, are required. However, as noted earlier, the political scenario so far and the heightening insurgency that prevailed throughout the country threatened capital accumulation, besides leading to a decline in social capital. Similarly, large scale migration of educated youths is posing a serious threat to the available human resource. If all these are not corrected soon, they will pose a great threat to the attainment of the MDGs in Nepal.

A recent review of the progress towards the MDGs suggests that Nepal may be able to attain all of the MDGs except for the goals related to universal primary education and combating HIV/AIDS. It notes that bringing women and the disadvantaged population (Dalits, Janjatis) into the development mainstream is the key to accelerating progress towards the MDGs. While the achievements of Nepal in poverty reduction and improvements in the human development indicators are commendable, the diagnostics of the challenges ahead are uneven, with some sections more candid than others (IMF, 2006). The conflict situation is posing a great challenge in achieving the MDGs. The government will have to scale-up its efforts in the years to come. This will require more resources and unconventional but proven approaches. The lessons learnt by Sri Lanka and other conflict regions will be of great help to Nepal in meeting the MDGs.

A study on the MDGs Needs Assessment estimates the total financial requirements for attaining the selected MDGs and rural infrastructure target to be US$ 16.4 billion at 2004/05 prices for 2005-2015. The study estimates that out of the total financial requirements, about US$ 3.8 billion is expected to be borne by sources other than the public sector. Similarly, out of the total public sector requirement of US$ 12.6 billion, $ 4.8 billion will be borne by domestic resources and the rest will have to come from external assistance. That is an annual amount equivalent to US$ 800 million (at 2004/05 prices) will have to come from external bilateral donors and multilateral agencies if Nepal is to attain the MDGs. This calls for an increase of almost two times the present level of assistance Nepal is receiving.

Further in an effort to localize the MDGs, district level MDG progress reports have been prepared in five districts viz. Morang, Chitwan, Bhaktapur, Banke and Kanchanpur. These reports have clearly identified the status of the districts in terms of progress towards MDGs. Through consultative processes the district level targets have been set which has clearly led out the gaps to be addressed by 2015. Therefore, this exercise have been instrumental for finding ways to mobilise the governmental and non-governmental resources. A short note on the findings in Bhaktapur district has been presented in Annex 4. Similarly, MDG Needs Assessment was carried out in Rupandehi district and report has been already published. It has clearly highlighted the programmes and the resources required to attain the MDGs in Rupandehi by 2015.

Section III: Macroeconomic Performance and Challenges

Sustaining macroeconomic stability

Achieving macroeconomic stability by maintaining fiscal discipline was the main objective of the macroeconomic management policy of the PRSP/ Tenth Plan. However, the armed conflict exerted pressure on the government to allocate more resources for security purposes. The deteriorating growth performance reduced revenue growth during the review period. Even though the government made efforts to use the available resources more efficiently and effectively by adopting the MTEF as a tool, it could not increase the capital expenditure due to poor resource mobilisation and increased conflict.

The classification of the budget into current and capital, and the prioritisation of all programmes into P1, P2 and P3, and unit cost exercise have helped allocate the budget to priority sectors and to use the funds more effectively.

Economic growth: The economic growth rate, on average, remained less than targeted during the first four years of the PRSP. During this period, only 3.3 per cent GDP growth, on average, was achieved as against the low target of 4.3 per cent enunciated in the PRSP. Because of improved economic management, better agricultural performance and a recovery in the world economy, a positive growth was observed in the first year of the PRSP. The GDP at factor cost recorded 3.1 per cent growth in FY 2002/03 as against a negative growth of -0.3 per cent in FY 2001/02. A favourable monsoon, prudent economic policies containing inflation, recovery in tourism, and growth in trade, construction and service sectors helped to increase the GDP to 3.6 per cent in FY 2003/04. However, due to the re-intensification of the conflict and negative growth in the construction, trade, restaurant and hotels sectors, the GDP could only see 2.4 per cent growth in FY 2004/05. Similarly, low agricultural production due to bad weather conditions and a contraction in non-agricultural activities, due to the conflict and political instability, were responsible for the low growth of GDP (2.4 per cent) in FY 2005/06. Capitalising on cessation of insurgency and demonstrated resilience of Nepalese economy in peace time, economic growth is projected at around 5 per cent in the current FY 2006/07.

During the first four years of the PRSP, economic growth, on average, remained at 3.3 per cent contributed by growth in the agriculture sector at above 3.1 per cent and in the non-agricultural sector at 3.4 per cent.

Savings and investment: The investment to GDP ratio has increased annually from 24.2% in FY 02 to 30.3% in FY 06. The average of investment to GDP ratio during the first four years of the PRSP was 26.5% (Table 3.1). Of the total investment, private investment (including changes in stock) to GDP ratio has increased from 16.65% in 2001/02 to 24.6% in 2005/06 resulting into decline in public investment to GDP ration. Similarly, the Gross National Savings (GNS) has also been declining in this period. The GDS to GDP ratio has declined from 16.5% in 2001/02 to 13.3% in 2005/06.

Table 3.1

Performance of macroeconomic indicators in producer’s prices (2001/02-2006/07)

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Sources: CBS, 2005b and 2006; NRB, 2005; NPC, 2005a; and NPC, 2005b

Gross Domestic Savings (GDS) remained at over 12 per cent of the GDP during the first three years of the Tenth Plan and declined to 11.1 per cent in 2005/06. (Table 3.1). The reason for not encouraging growth in savings may be attributed to more expenditure on consumption and low saving habits of the Nepalese people, even though more saving avenues have emerged during this period. This clearly implies that, if the level of savings cannot be increased in the remaining period of the Plan, the saving target of the Plan will not be achieved.

Government Finance: Government finance statistics show that during the first four years of the Plan period, regular expenditure increased by 0.9 per cent of GDP. It increased from 11.5 per cent of GDP in 2001/02 to 12.4 per cent in 2005/06. But the development expenditure shows a declining trend. The development expenditure to GDP ratio declined from 7.4 per cent in 2001/02 to 6.8 per cent in 2005/06. The total expenditure to GDP ratio increased from 18.9 per cent to 19.2 per cent in 2005/06. More budget allocation to security was the main reason for the sharp increase in the regular expenditure, whereas the conflict and political instability were the main reasons for the declining trend in development and capital expenditure.

On the revenue front, it seems that revenue remained buoyant in the first three years of the PRSP. During this period, it increased from 11.9 per cent of GDP in 2001/02 to 13.4 per cent of GDP in 2004/05. However, its ratio to the GDP declined in 2005/06. The main reason behind this decline can be attributed to political instability, reduction of tariff rates on certain commodities in the middle of the fiscal year, and also bandhsand curfews imposed during the people’s movement, and the low economic growth.

Foreign aid during the first four years of the PRSP period rose slightly. Foreign aid to GDP ratio rose from 3.4 per cent in 2001/02 to 4.4 per cent in 2004/05. However, this ratio decreased to 4.0 per cent in 2005/06.

The slow increase in total expenditure and some growth in revenue and foreign aid have helped reduce the fiscal deficit from 3.6 per cent of GDP in 2001/02 to 1.7 per cent of GDP in 2004/05. However, it increased to 2 per cent in 2005/06 due to decrease in revenue and foreign aid growth.

Trade and balance of payments: Since 2002/03, a positive growth trend has been observed in the foreign trade front. Exports increased by 6.4 per cent in 2002/03 against a decline of 15.6 per cent in 2001/02. However, exports increased only by 4.2 per cent in 2005/06, compared to an increase of 8.9 per cent in 2004/05. As components of the GDP, exports accounted for 10.5 per cent in 2005/06 compared to 11 per cent in 2004/05. Of the total exports, export to India increased only by 5.4 per cent in 2005/06, compared to a high growth of 26.4 per cent in 2004/05. The decline in exports to India was due to imposition of an additional 4 per cent countervailing duty by India in March 2006. Exports to other countries rose by 1.8 per cent in 2005/06, in contrast to a significant decline of 14.5 per cent in 2004/05.

But imports increased significantly by 17.1 per cent in 2005/06, compared to a 9.7 per cent increase in 2004/05 as a result of the upsurge in imports, both from India and overseas. The imports to GDP ratio rose to 30 per cent in 2005/06 from 28 per cent in 2004/05. Out of the total imports, imports from India increased sharply by 23.3 per cent. The higher growth in imports as compared to exports has led to a significant increase in the trade deficit. However, a surplus in the current account has been observed, primarily because of the high growth in the inflow of remittances. In 2005/06, remittance income increased by 48.2 per cent and reached Rs. 53.46 billion. This had a positive impact on poverty reduction and in the balance of payments. The balance of payments in 2005/06 posted a significant surplus.

The gross foreign exchange reserves (as of mid-July 2006) increased by 27 per cent in comparison to a decline by 0.2 per cent (as of mid-July 2005). The main reason behind this increment was the consistent increase in workers’ remittances. In terms of the GDP ratio, however, it has declined to 24.8 per cent in 2005/06 from 25.05 per cent in 2001/02.

The foreign exchange reserves in 2005/06 was enough to cover 12.2 months of imports of goods. During the review period, the foreign exchange rate of the Nepali rupee vis-a-vis the US dollar depreciated slightly.

Monetary Situation: Even though the central bank (Nepal Rastra Bank) tried to use a tight monetary policy during the PRSP period, money supply (M1) and (M2) has shown steady increase except in 2004/05. Narrow money supply (M1) grew from 9.3 per cent in 2001/02 to 12 per cent in 2005/06. However, there was higher growth in broad money supply (M2). M2 grew from 4.4 per cent in 2001/02 to 13.5 per cent in 2005/9. Domestic credit grew very slowly in the first four years of the PRSP. It grew from 10.4 per cent in 2001/02 to 12 per cent in 2005/06.

The inflation rate was below 5 per cent during the first three years of the PRSP, but in 2005/06, it increased by 8 per cent. The reason for this higher percentage increase in the price level was increment in the price of petroleum products by 35.7 per cent, which also led to further increase in the prices of household goods and services as well as that of transportation services.

In FY 2005/06, the central bank made 64 interventions in the foreign exchange market. A total liquidity of Rs. 55.9 billion was injected through the purchase of the US dollar and Rs. 655 million was mopped up through the sale of the US dollar in FY 2005/06. Similarly, the central bank mopped up net liquidity equivalent to Rs. 18.7 billion through the treasury bills on a turnover basis in 2005/06. The government issued treasury bills worth Rs. 10.8 billion, 10-year development bonds worth Rs. 750 million and citizen certificates worth Rs. 250 million in 2005/06 to manage the liquidity of banks and other financial institutions.

Poverty Reduction Growth Facility: Since FY 2002/03 Nepal has been implementing the PRSP, which made Nepal eligible for borrowing from both the Poverty Reduction Growth Facility (PRGF) of the International Monetary Fund (IMF) and the Poverty Reduction Support Credit (PRSC) of the World Bank. In November 2003, Nepal began borrowing under the PRGF and also obtained a PRSC credit from the World Bank. The PRGF allows credit of up to US$ 73.9 million from the IMF, out of which Nepal drew the first trenches of US$ 10.6 million in November 2003. It also drew the second trenches. However, it has not borrowed thereafter owing to delays in meeting the “prior commitments” by the government. Nepal borrowed US$ 70 million from the World Bank in 2003.

Table 3.2

Percentage growth of macroeconomic indicators (2002/03-2006/07) (%)

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Sources: CBS, 2006; NRB, 2006 nad NPC, 2006

Public Debt Management: The public debt repayment amount is increasing each year in Nepal. More than 20 per cent of the total current budget has been allocated for repayment or debt servicing (principle plus interest) of domestic as well as foreign debts in 2006/07. Therefore, to manage this public debt, the government has initiated a macro modelling exercise to assess debt sustainability and provide a mechanism to keep updated records of source-wise and sector-wise public debts. It has also helped to estimate the debt repayment amount.

New initiatives in economic management

Initiatives in public expenditure management: Continued efforts have been made by the Government of Nepal to achieve macroeconomic stability. Various measures have been undertaken in the public expenditure management sector to ensure efficiency of public resources, and monetary and external sector stability, strengthen the financial system, governance and private sector development, and maintain fiscal discipline. Internalisation and institutionalisation of the MTEF exercise have been given more emphasis to ensure fiscal discipline and prudent expenditure management.

Action has also been taken to improve domestic resource mobilisation by broadening the tax base, clearing and settling tax arrears, narrowing tax exemption, revising customs valuation and strengthening the tax administration.

Reforms in monetary policy implementation: In the process of implementing the monetary policy, the bank rate and open market operations (OMOs) have been taken as key instruments. More indirect monetary instruments have been used to control inflation. On the basis of liquidity monitoring and forecasting framework and the monetary targets and direct purchase and sale, the Repo and Reserves Repo Auction System was introduced in 2004/05 as a secondary market. Moreover, a Standing Liquidity Facility to the commercial banks was also introduced to make available short term loans. The government has also prepared plans for diversifying exports and promoting foreign direct investment.

Initiatives in Financial Sector: The regulatory and supervisory capability of the central bank has been strengthened, and a programme for reforming state-owned banks has begun to show results. The contracts for external managers at the two commercial banks have been extended. The Bank and Financial Institutions Ordinance, 2005 further consolidates the finance sector, including the regulatory environment. The Central Bank Act has been revised. The government has enacted ordinances for secured transactions. The Secured Transaction Ordinance makes it possible for securing credit against moveable property. Under the old provisions, only immovable assets (land and buildings) could be used for the purpose. The amendments in the Company Act simplify investment procedures and clarify ownership rules and the role of the Company Registrar’s Office.

Initiations in Foreign Trade Sector: To enhance foreign trade, the treaty between Nepal and India was renewed on April 1, 2006. New provisions, protocol on implementation and memorandum have been added in the treaty. Similarly, an agreement was signed with China for customs free export of Nepalese goods to China on March 15, 2006. Moreover, preliminary work has been initiated towards making Nepal a transit point between India and China. Nepal has simplified procedures related to trade and investment.

Following the membership of the WTO, Nepal has amended some acts, and it is in the process of amending more acts, laws, policies, rules and regulations to make them more transparent in line with the multilateral trading system. To fulfil the provisions of the WTO, the Ordinance for amending Some Nepal’s Acts, Export and Import (Control) Act, Patent Design and Trademark Act and Copy Right Act have been amended and brought into effect in this process. Similarly, Competition Law, Anti-dumping Law, Counter-veiling Law and Intellectual Property Rights Law have been drafted. Moreover, acts relating to botanical resources, hereditary sources, conservation of botany, NSI Mark and New Industrial Policy have been drafted and discussed.

Initiations in Labour Sector: A new Labour and Employment Policy, 2006 replacing the Labour Policy, 1999 has been adopted. Its long-term objective is to create a favourable investment climate by enhancing workforce productivity, generating decent and productive employment opportunities, and ensuring worker rights. The policy also highlights the importance of generating additional jobs by setting up special economic zones and export-oriented industries. The policy also seeks to increase access for women, Dalits, Janjatis and people displaced by the conflict and to eradicate child labour. The Labour Act was approved in early 2006.

Section IV: Public Resource and Expenditure Management


Public Expenditure Management (PEM) has been the main concern and priority of the Government of Nepal. Various fiscal measures and reforms have been undertaken by the government to manage public expenditure for the achievement of the targeted goals in the past. A major breakthrough was made after the implementation of the Poverty Reduction Strategy Paper (PRSP) and Medium-Term Expenditure Framework (MTEF) simultaneously in FY 2002/03.

The main objective of the PRSP was to reduce poverty from 38 per cent to 30 per cent in the five-year time period of the PRSP/Tenth Plan, whereas the objectives of the MTEF were a) developing a consistent and realistic budgetary framework for achieving macroeconomic stability, b) improving budget allocation to PRSP priorities among and within sectors through close inter-linkages of projects/programmes, c) providing adequate fund to P1 projects with funding guarantee, d) increasing incentives for effective and efficient use of resources by implementing agencies and e) making the development budget more result-oriented by reducing low priority programmes/projects.

MTEF and fiscal performance

The MTEF has been instrumental in improving budget allocation to the priority sectors. Even in a situation of political instability and armed conflict, important achievements have been made in the field of public expenditure management by using the MTEF tool. During the first four years of the PRSP, the implementation of the MTEF has helped to align resources to PRS outputs. Moreover, it has also helped increase budget allocation to pro-poor programmes and projects, and to maintain fiscal discipline as well. However, public expenditure management reform by institutionalising and internalising the MTEF remains one of the major challenges in this process.

Fiscal Discipline and Macroeconomic Stability: Implementation of the MTEF helped to maintain macroeconomic stability in the first four years of the PRSP by improving fiscal discipline despite the political instability and armed conflict situation prevailing in the country.

During the Ninth Plan period, the total expenditure, on average, was 18.3 per cent of the GDP. Of this, the current expenditure, was 11.5 per cent of GDP. Security expenditure was 2.23 per cent and 1.39 per cent of principal payment. The capital expenditure was 6.79 per cent of GDP. The sources of financing the total expenditure were domestic revenue, foreign assistance and domestic borrowings. During the Ninth Plan period, the total expenditure was financed through domestic revenue (11.4%), foreign assistance (4.56%) and domestic borrowings (2.34%) of the GDP. During the plan period the current expenditure was limited to 11.5 per cent of GDP, which was at the level of domestic revenue.

Total expenditure as a percentage of GDP is static: After implementation of the MTEF and during the first four years of the PRSP, the total expenditure as a percent of the GDP, on average, increased only by 0.30 per cent and reached 18.6 per cent of GDP. The current expenditure was 11.5 per cent of GDP and the capital expenditure 7.21 per cent. The total expenditure was financed through revenue (12.65%), foreign assistance (3.9%) and domestic borrowings (1.3%) of GDP (Table 4.1).

Table 4.1

Government finance

(as per cent of GDP)

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Current expenditure as a percentage of GDP in increasing trend: The current expenditure, during the first four years of the PRSP, increased and now comprises 74 per cent of the total expenditure (11.8% of the GDP). Of which, debt payment is 2 per cent of GDP. Debt servicing is increasing with the maturity of loans taken in the early 1990s.

Capital Expenditure as a percentage of GDP in decreasing trend: Capital expenditure growth is on the decline; and it comprised 7.4 per cent of the GDP in 2006 as compared to 6.8 per cent of GDP on average during the Ninth Plan.

Revenue as a percentage of GDP increasing: In 2006, revenue was 12.6 per cent of GDP, up from an average of 11.4 per cent during the Ninth Plan; and aid expenditure (grants and loans) was 4 per cent of GDP.

After implementation of the MTEF, domestic borrowing as a percentage of GDP declined from 3.6 per cent in 2001/02 to 1.7 per cent in 2004/05 and made up less than 15 per cent in 2005/06. The over draft has been reduced significantly, resulting from conflict-related slow-down in budget use.

In FY 2006/07, the goal is to finance the total expenditure through domestic revenue of 13.3 per cent, foreign assistance of 6 per cent and domestic borrowings of 3 per cent of GDP.

Despite low economic growth, declining aid and increasing security expenditure and debt repayment, the government has maintained aggregate fiscal discipline during the PRSP period. The MTEF has been instrumental in operationalising the PRSP by prioritising projects and programmes according to resource availability. The government also increased pro-poor expenditure, which averaged around Rs. 21 billion in the Ninth Plan, to Rs. 37 billion in FY 2006 and is budgeted to be Rs. 54 billion, doubling of pro-poor expenditure in PRS. In FY 2005/06, the government has piloted the MTEF in three districts by providing trainings and preparing three district-level MTEFs.

Allocative efficiency - Improvement in inter-sectoral allocation: After the implementation of the MTEF, the allocation efficiency has also improved. The PRSP has emphasised increasing the budget allocations in the social and agricultural sector to achieve the poverty reduction objective. During the first four years of the PRSP, investment in the social sector increased. Investment in the social sector - education, health and drinking water/sanitation - is important for achieving the Tenth Plan objectives of reducing poverty and improving human development.

Social sector spending increased from 5.58 per cent of GDP in 2001/02 to 6.30 per cent of GDP in 2005/06 and is budgeted at 8.05 per cent of GDP in 2006/07 (Table 4.2). The two Sectorwide Approach (SWAps) in education and health sectors are expected to increase the investment share of these two sectors. In this period, per project allocation in priority projects has increased significantly. Per project development expenditure allocation increased from NRs. 66,427 thousand in 2001/02 to NRs. 126,619 thousand in 2005/06.

Table 4.2

Inter sectoral allocation

(as per cent of GDP)

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Source: Based on Budget Books

Compared to the social sector expenditure, spending in the economic sector has decreased from 4.9 per cent of the GDP in 2001/02 to 4 per cent of GDP in 2005/06. The decline is due to the completion of high-value investments in power and transport sectors in the early years of the PRSP/ Tenth Plan. Among other reasons for the low investment was the conflict related slow-down in implementation of development projects and limited large quick spending investment projects.

Although there is a general decline in economic sector investment, investments on transport and power have been increasing. Because of the conflict, the spending on highway construction has declined, while that on rehabilitation and maintenance has increased.

Rural development (agriculture, irrigation and forestry sectors) as a percentage of the GDP has been on the decline from an average of 1.8 per cent of the GDP in the Ninth Plan period to 1.3 per cent of GDP in the first four years of the PRSP.

Technical efficiency: Pro-poor and pro-gender budget is increasing. The main objective of the Tenth Plan is to achieve the poverty reduction target. To this end, the Plan has envisaged increasing pro-poor budget allocation. With the implementation of the MTEF, pro-poor spending has been increasing every year. Pro-poor expenditure as a percentage of the total expenditure has increased from 28 per cent in 2002/03 to 33 per cent in 2005/06 and is budgeted to increase to 38 per cent in 2006/07. The pro-poor expenditure, in nominal terms, increased from NRs. 23.84 billion in 2002/03 to NRs. 54 billion in 2005/06. In sectoral terms, pro-poor expenditure is increasing in the social sector. In 2004/05, the share of pro-poor social sector expenditure was 76 per cent of the total social sector spending, led by education (81% pro-poor expenditure in total education expenditure) and health (69% pro-poor expenditure in the total health spending). These two sectors have SWAp funding focused on increasing investment on primary school enrolment and expansion of essential health care services (Table 4.3).

Table 4.3

Sectoral pro-poor expenditure 2002/03-2006/07 in percentage of total expenditure

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Source: Based on Budget Books

In 2005/06, the pro-poor spending in the economic sector was 35 per cent of the sector’s total expenditure (or 7.7% of the total expenditure), and it is budgeted to reach 9 per cent of the total in 2006/07. Rural development (agriculture, irrigation and forest) and transport and power sectors lead in the pro-poor expenditure category within the economic sector. Although declining, income-generating activities (cash crops, poultry and livestock rearing) have helped the agriculture sector maintain pro-poor expenditure at 2 per cent of the total. Backed by a policy of providing subsidies to communities for power generation and distribution, rural electrification leads the power sector and accounts for 2 per cent of the pro-poor spending in the total expenditure, and this is expected to continue in the future.

Fig 4.1
Fig 4.1

Community and local bodies

Citation: IMF Staff Country Reports 2007, 176; 10.5089/9781451830071.002.A001

Funds controlled by the communities have grown. Aware of the need to have beneficiaries implement the programmes they pick - as articulated in the PRS - the flow of funds to such programm es has increased from a low base of 1.8 per cent of the total expenditure in 2001/02 to 5 per cent in 2005/06 and is budgeted to increase further in 2006/07. Block grants to VDC is doubled but based on performance.

The Ministry of Local Development began channelling resources to communities through the District Development Fund for the implementation of the government’s devolution policy from 2005/06. Prior to this, the fund was channelled through the line agency budget lines. In nominal terms, the average annual block grant to the local bodies is NRs. 2.5 billion.

Basic features of MTEF V

  • ■ Per unit cost of each major activity has been estimated and updated.

  • ■ Software was developed to prepare MTEF V, and capacity-building for internalising and institutionalising the MTEF exercises has been given main focus.

  • ■ Prioritisation criteria have been further clarified particularly in terms of understanding and interpretation.

  • ■ Programme budgeting is recommended for ensuring effectiveness of resources through better prioritisation, streamlining programmes/projects and linking output with cost.

  • ■ Pro-poor and pro-gender budget classification has also been continued.

  • ■ It has also incorporated sectoral plans/business plans that have linkages with both the MDGs and PRSP.

Besides ensuring predictability of funds to all priority projects, the funding guarantee to the PRS outputs in selected sectors (education and health) are the hallmarks of the MTEF’s achievements in 2005/06. The Fifth MTEF (2006/ 07–2008/09) continues the gender and pro-poor budget classification. The government has also completed sectoral “Business Plans” for seven sectors, namely, agriculture, irrigation, water supply and sanitation, education, health, rural roads and electricity sectors for aligning resources to the PRS outcomes through continued expenditure reforms.

Section V: Broad-Based Growth Performance


Agriculture is a major sector of the Nepalese economy. It contributes about 38 per cent to the total GDP of Nepal. Therefore, the agriculture sector has been given priority in the Tenth Plan which recognises that agricultural growth is essential for attaining broad-based growth. To achieve the targets of the agriculture sector of the Plan, the Agriculture Perspective Plan (APP) has been taken as the core strategy. The APP has put emphasis on the following five aspects:

  • (i) Controlled year-round irrigation,

  • (ii) Easing fertiliser supply,

  • (iii) Expanded provisions of modern inputs and need-based research and extension,

  • (iv) Linking potential production pockets with markets through rural agricultural roads, and

  • (v) Expansion of rural electrification.

The APP has also given emphasis to stronger private sector involvement in the delivery of inputs, services, research and marketing, and increased involvement of communities, farmer groups and cooperatives in the management of infrastructure and assets. It also envisages diversification and commercialisation of agriculture by raising cereal production in the Terai and the output of fruits, high-value crops including Non-Timber Forest Products (NTFPs) and livestock in the hill and mountain regions.

In the Tenth Plan, the production systems were to be more diversified, and agricultural growth was envisaged to increase by 4.1 per cent per annum and livestock by 4.9 per cent. Food insecurity and malnutrition were to be reduced. Market access for agricultural products as well as farmers’ incomes and consumption levels were to increase. However, the achievement made in the agriculture sector during the PRSP period of 2002/03-2005/06 has been less than targeted. In spite of the high priority laid on this sector, its annual growth has been 2.8 per cent, which is the major factor for the low growth rate of the country during this period.

In 2005/06, the Ministry of Agriculture and Cooperatives (MOAC) implemented 33 P1 and 11 P2 projects. The share of P1 projects, in terms of the development budget allocation, was 87.91 per cent. Among the P1 projects, five projects, namely, the Agriculture/Livestock Extension Programme, APP Monitoring, APPSP, Crop Diversification Project and Small Irrigation Special Programme shared 43 per cent of the development budget allocated to the sector

The District Agricultural Development Fund (DADF) is now underway in 20 districts, which is a new institutional approach under the Agriculture Perspective Plan Support Programme (APPSP). The selection of districts for APPSP implementation was based on the poverty and deprivation index. The District Extension Fund (DEF) and the Local Initiatives Fund (LIF) are two components of the DADF.

During the first four years of the PRSP, some important achievements have been made in the agricultural sector. The National Agricultural Policy, 2004 has been formulated and put into practice. Similarly, the following policies have been adopted to enhance the agricultural sector:

  1. Mobilisation of the private sector and NGOs as partner service providers on a contract basis.

  2. Monitoring, quality control and regulation of inputs supplied by the private sector.

  3. Transfer of subsidies in the form of grants on goods and services.

  4. Transfer of veterinary services to the private sector on cost basis.

  5. Devolution of extension services to local bodies.

  6. Involvement of cooperatives in commercial milk and vegetable production and market.

Moreover, various activities have been carried out in this sector, such as:

  • Study for establishment of agriculture resource centres.

  • Promotion of cooperative and contract farming.

  • Integration of irrigation and micro-irrigation with agricultural intensification for commercialising agriculture.

  • Empowerment of women and disadvantaged groups through targeted programmes.

  • Strengthening institutional capacity to meet the WTO requirements;

  • Development of market centres, and

  • Implementing a special package programme for the development of the Karnali Zone.

With the objective of reorienting the agricultural sector to create more responsive, productive and efficient service delivery to the rural poor, the MOAC has reviewed APP implementation and has formulated an Implementation Action Plan through the APPSP. However, to fulfil the commitments made to global and regional institutions, such as the WTO and the South Asia Free Trade Area (SAFTA), further reforms are required in agricultural sector policies.

The outcomes in the food and agriculture sector, in terms of intermediate indicators, during the first four years of the PRSP are given in Table 5.1 below. The intermediate indicators for food security show that the quantity of food sold increased by 25.03 per cent in 2005/06 compared to 2004/06.

Table 5.1

Major achievements in the food and agriculture sector

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Source: MOAC, 2006, *Status of first eighth months.

Similarly, the number of functioning farmer groups and use of improved seeds increased by 6.2 per cent and 23.76 per cent, respectively in 2005/06. Moreover, livestock production also increased. However, there has been a decline in the use of chemical fertilisers.

Progress in the implementation of the Agriculture Perspective Plan has, thus, remained uneven. Although agriculture has been given highest priority in the poverty reduction strategy, budget allocations to agriculture and irrigation have decreased. There are discrepancies in the APP and the APP support programme, which gives importance to the small farmers. Given the role of agriculture in poverty reduction, it is important that the government give more importance to the implementation of the programmes as underlined in the APP, including more allocation to agriculture and rural roads.


For agricultural growth, irrigation is the key element. Agricultural productivity increases the income of the households and provides food security. Therefore, irrigation has been accorded high priority in the APP as well as in the PRSP.

In the PRSP/Tenth Plan, the main objectives of the irrigation sector are:

  • To promote year round irrigation facilities on arable land of the country,

  • To ensure the sustainable management of developed irrigation systems and

  • To support non-conventional irrigation to channel benefits to the poor.

While about 43 per cent of the country’s net cultivated area of 2.64 million hectares is said to have access to irrigation, most systems are of the run-of-the-river type, and largely provide supplemental irrigation. Only about 40 per cent of these systems are capable of providing limited year-round irrigation. There is considerable pressure on irrigation systems resulting from structural and operational weaknesses, while there is also an urgent need to increase agricultural growth through higher yields, cropping intensities and diversification to high-value crops.

The Tenth Plan and the Agriculture Perspective Plan both have placed high priority to irrigation for increasing agricultural productivity, thereby, helping to reduce poverty. The long-term vision of the Tenth Plan in the irrigation sector is to increase agricultural production and productivity by extending irrigated land to 1,686,000 hectares by the end of the Twelth Plan through the development of year-round irrigation systems.

Physical Targets

Under a normal scenario, the Plan set a target of providing irrigation facility to an additional 241,000 hectares of land towards the end of the Plan period. The physical target under different irrigation systems is shown in Table 5.2 below.

Tabel 5.2

Physical targets of irrigation facilities in Tenth Plan

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Source: Tenth Plan (2002-2007), NPC 2002Note: Achievements include data of DOI only

The main strategies adopted by the Plan to achieve these objectives are to expand new irrigation facilities with focus on the APP where year-round irrigation is feasible and to rehabilitate and strengthen public and community-based irrigation systems focusing on the preservation and full utilisation of the existing irrigation systems. In the Plan, the expected outcomes envisage that 50 per cent of the total irrigated land will receive year-round irrigation facilities by 2005, while farmers/WUAs will be able to manage irrigation systems of up to 500 hectares during the same period.

Status of Irrigation Development

The Table 5.3 below shows the current status of irrigation development in the country. In the fourth year of the plan period, irrigation facilities had been made available to an additional 17,960 hectares of land. This data refers to the facility developed by the government only and do not include the irrigation facility provided by the ADB/N. It has been estimated that by the end of the fourth year of the current plan, a total of 1,168,144 hectares of land are irrigated. Up till the end of the fourth year, only 59,239 hectares of additional land have been irrigated as against the target of 241,600 hectares (only 25% of the target) by the end of the Plan period. If we add up the facility developed by the ADB/N, the total may go up a little. The progress will still be far short of the target and will be impossible to meet the Tenth Plan target. Current estimates of irrigated land indicate that only 44.3 per cent of the country’s net cultivated land of 2.64 million hectares have access to irrigation. Most of the facilities are of the run of the river type and largely provide supplemental irrigation. Only about 41 per cent of these systems are capable of providing limited year-round irrigation. Disaggregated information about the share of different institutional models of irrigation is lacking. Hence, it is very difficult to attribute the share of different irrigation systems operating in the country. Statistics show that in 2004/05 alone, 29 irrigation schemes were rehabilitated and handed over for management to the WUAs. The total transferred schemes were 84 by the end of the third year of the current plan No such data were available for 2005/06.

Table 5.3

Irrigation development in the Tenth Plan

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Source: Department of Irrigation, GoN/MoWR, 2006

In continuing with the development and implementation of small surface irrigation facilities in the hills and surface and groundwater irrigation facilities in the Terai during 2005/06, irrigation facilities were provided on an additional 9,793 hectares of land from 2,906 shallow tube wells (STW); 596 hectares from 16 deep tube wells (DTW) and 7,571 hectares from 46 surface irrigation schemes.

Though the government has a plan to initiate private sector management of large/medium scale GoN managed irrigation systems, no concrete measures could be taken towards this direction. Similarly, the government was committed to increasing the involvement of the NGOs and the private sector in irrigation development and management. But so far, not even a single scheme has been initiated by the NGOs and the private sector.

The problems faced in the irrigation sector, especially in the public systems, are:

  • ➨ inadequate capacity of the WUAs,

  • ➨ below-capacity performance of systems (only two-thirds of the total command area benefits from irrigation and 40% has year-round irrigation),

  • ➨ physical and technical deficiencies in irrigation systems,

  • ➨ low-water use efficiency,

  • ➨ poor operation and maintenance,

  • ➨ negligible cost recovery (less than 5 %),

  • ➨ inadequate maintenance funds (less than 50% in most cases), weak management, and

  • ➨ low investment by the private sector (e.g., in conjunctive use of groundwater, supplementary or non-conventional irrigation technologies).

The government is contemplating implementating non-conventional schemes using micro-irrigation technologies, which are both pro-poor and pro-environment. For this, a separate unit - New Irrigation Technology Programme (NITP) - has been established. The NITP intends to irrigate an additional 10,000 hectares of land within the Tenth Plan period (starting in 2005). A NITP feasibility study has been completed. Some INGOs had used non-conventional irrigation technologies in the past, but their interventions were of a scattered nature.

A six-year irrigation project, which has been approved by the Asian Development Bank (ADB) will be implemented in 35 districts of the Eastern and Central regions. The objectives of the project are:

  • ■ To improve agricultural productivity and sustainability of existing small and medium-size farmer managed irrigation systems that have low productivity and high incidence of poverty and to enhance the livelihoods of poor men and women and excluded groups.

  • ■ To empower water users’ associations, improve irrigation facilities, expand agriculture extension and targeted livelihood programmes for the poor, women, Dalits and Janajatis.

The Irrigation and Water Resources Management Project is being implemented with the support of the World Bank in 40 districts of the Western, Mid-western and Far-western regions. It seeks to assist in:

  • ■ Improvement and modernisation of farmer-managed irrigation systems in the hills, mountains and the Terai.

  • ■ Promoting groundwater irrigation in the plains using proven technologies and approaches for tapping groundwater.

  • ■ Improving services of public irrigation schemes in the Terai by transferring the management responsibility to WUAs.

Groundwater irrigation through shallow tube wells had achieved some targets. Six projects have supported the installation of 54,022 shallow tube wells (STWs). Two among these, the Community Groundwater Irrigation Sector Project (CGISP) and the STW programme of the Agriculture Development Bank, are still underway. Groundwater irrigation, mainly through the STWs, suffered a serious setback in the early years of PRSP implementation following the withdrawal of capital subsidy. The number of shallow tube wells installed under the CGISP has increased from 83 in 2000/01 to 1,501 in 2005/06 leading to a total of 6,090. Besides, the project has also completed 126 km. of roads under its farm-to-market road improvement activity. The STW installation has been increasing despite the withdrawal of subsidy.

Institutional Models and Role of Farmers/Water Users

The role of farmers in the development and management of irrigation systems in Nepal has been clearly documented, and its history is as old as rice cultivation in the country. Evidences show that farmers in Nepal organise themselves to invest in the construction and maintenance of their own irrigation systems. Planned irrigation development in the country began only after 1951 with the formation of the Department of Irrigation in 1952. A major change in the government approach to irrigation development came with the Seventh Five-Year Plan (1985-1990) that emphasised people’s participation in irrigation development and management. The irrigation working policy introduced in 1988 provided a new direction by mandating the participation of users at all levels of irrigation development from project identification, design and construction to operation and management.

The Irrigation Policy 2052 has been reformulated with necessary modifications, and a reformulated policy has been announced as the new Irrigation Policy 2060. The new policy seeks to increase users’ participation at all levels of irrigation development. The policy further seeks to transfer operation and maintenance of small and medium irrigation systems under government management to the users’ group. The policy also highlights the need to enhance the capacity of the users’ group through community mobilisation.

The Small Irrigation and Marketing Initiatives (SIMI) jointly promoted by Winrock International, International Development Enterprises, SAPPROS and CEAPRED in 2003 for providing integrated agricultural services seeks to reach out to about 27,000 households in seven districts of the Western and Mid-western Development Regions. In 2005/06, the irrigation sector implemented 15 P1, 7 P2 and 1 P3 projects with a development budget of about NRs. 2.44 billion. The share of P1 projects in terms of development budget allocation for FY 2005/06 was 88.08 per cent.

Currently, different institutional models prevail in the irrigation sector. Studies have documented the CBO-managed system, popularly known as the Farmers Managed Irrigation System (FMIS), as the best performer in terms of process evaluation while the NGO/CBO collaboration model as the best in terms of performance evaluation (NPC/SAPPROS/IFAD, 2002). This has been revealed by an assessment study carried out in 14 Terai and 32 hill and mountain districts of the country. The findings were based on the case studies of 26 projects from 14 sampled Terai districts and 35 cases from 32 sample hill and mountain districts. The findings further revealed that the unit cost of the CBO model of NRs. 16841/ha. is far less than the unit cost of NRs. 178,953/ ha. in the agency managed system. The strength of the best performing model is the high level of participation of the users in various project steps, low establishment and operational cost, quality structure and the provision of adequate O&M funds. In another evaluation study of 150 irrigation systems in Nepal, the performance of the CBO managed system was found better than the agency managed system (Lam, 1998). It is estimated that about 20,000 CBOs are involved in managing community irrigation systems in the country.

Some of the pertinent issues emerged during the reporting periods have been summarised hereunder.

In small irrigation schemes, pre-feasibility and feasibility studies of the project should be done rigorously. Some irrigation projects where community involvement is significant have remained non-functional due to shortage of water.

In many irrigation projects, community involvement is confined to maintenance alone. Their role in the construction stage has been minimal. Therefore, there should be full partnership of the beneficiary community in all stages of project design and service delivery.

The success of community-owned and managed programmes depends on the village context. Research findings have shown that communities having homogeneous groups have a higher success rate (Rao, 2002). Furthermore, the design should be sensitive and scaled to local realities, and the government should be committed to the projects. All these are likely to make the project more successful.


Infrastructure development plays an important role in the development of the country. Therefore, in the Tenth Plan, the government has given priority to strategic road networks, maintenance of major roads and highways and expansion of electricity and national communication infrastructure. However, in the medium term, it has been spelled out that a policy will be adopted to gradually reduce government involvement, especially in the areas where the private sector can increasingly take over, including roads, telecommunications and hydroelectricity, among others. The PRSP emphasises rural roads to link potential agricultural production pockets with markets and rural electrification for harnessing groundwater for year-round irrigation.

The main objectives of the road sector in the Plan are to develop and manage the road transport network to support the socio-economic development efforts and to promote private sector participation in the construction of new road networks and their maintenance. The major outcomes of the Plan are:

  • ■ Adding an estimated 1,025 kms of roads.

  • ■ An additional 10 district headquarters (HQ) to be connected by roads, and

  • ■ Active private sector participation in the construction and maintenance of roads.

During the first four years of the PRSP, only one additional headquarter has been connected by a road network. Thus, 61 district headquarters are now connected to the road network. In 2005/06, 219 kms of additional roads were constructed, and the total length of additional roads constructed reached 987 kms against a target of 1,025 kms in the PRSP.

In pursuance of the policy of handing over the local level infrastructure to the local bodies, the process has been initiated for handing over district roads to the local bodies through the DOLIDAR. Similarly, urban roads, except for the roads of the local bodies and strategically important roads are to be handed over to the concerned municipalities. With the objective of involving directly the users of the roads in their maintenance, a Road Board has been established through which regular maintenance of roads is being implemented for faster, safer and credible transport service with the tax levied on the road users.

In the Tenth Plan, in the information and communication sector, all the VDCs will have access to telecom services with penetration rising to 40 lines per 1,000 inhabitants. Broadcasting services will be available to all, and ICT services will be available in various urban areas. In the first four years of the PRSP, the number of new telephone lines distributed has increased from 219,000 in 2001/02 to 1,346,290 in 2005/06. Similarly, the number of VDCs with telephone facilities has decreased from 1,761 in 2001/02 to 1,386 in 2005/06 with 5.2 per cent penetration only. The total coverage of radio and television services has reached 100 per cent and 65 per cent, respectively.


The key objectives in the power sector in the Tenth Plan are to (i) expand electricity coverage in a sustainable and environment friendly manner by generating low cost power, (ii) accelerate rural electrification to promote economic growth and improve the living standards in the rural areas, and (iii) develop hydro power as an important export item.

The major expected outcomes of the Plan are:

  • ■ Proportion of people having access to electricity will increase from 40 per cent to 55 per cent by the end of the Plan period, and

  • ■ Adequate power will be supplied as needed to support economic growth.

The power sector is guided by a long-term vision (1997-2017), which emphasises pro-poor development by expanding power generation and distribution in the rural areas. The Tenth Plan intends to develop and expand alternative energy in the rural areas and reduce dependency on imported energy.

The percentage of households with electricity has increased from 40 per cent in 2001/02 to 48 per cent in 2005/06. Similarly, the number of VDCs covered by electricity has increased from 1,600 VDCs in 2001/02 to 2,000 VDCs in 2005/06. The installed capacity has reached 611 MW in 2005/06, which is less than 1 per cent of the total hydropower generation potential of the country. The total supply of electricity is expected to reach 2784.8 GWH, including production of 2464.8 GWH of hydropower, 20 GWH of thermal power and 300 GWH to be imported from India. Out of the total available power supply, internal consumption is estimated to be 2005.48 GWH and export to India 140 GWH.

Private sector participation in the production of electricity was encouraging in 2005/06. Projects constructed by the private sector have been commissioned and have come into operation. A number of small hydro plants are under construction. The upgrading and strengthening of the existing power grids have continued. The expansion of Electrification is being carried out in Kailali and Kanchanpur districts, while an additional 27 districts are being electrified under the Rural Electrification and Distribution System Strengthening Project. The sector had 15 P1 and 15 P2 projects in 2005/06 with a development budget of Rs.7.06 billion. In this sector, P1 projects shared 77.96 per cent of the development allocation to this sector in FY 2005/06.


Forests are important assets/resources of the country. The development of the forestry sector is important for promoting livestock, making compost fertiliser, conserving the environment and for watershed management by conserving groundwater resources. About 39.6 per cent of the land area, including 10 per cent shrub land, is under forest cover. The success of the community and leasehold forestry programmes has helped regenerate forests.

The Community Forestry Development Programme has benefited about one-third of all households of the country by increasing their access to forest resources such as fodder and firewood. The programme has also helped increase women’s participation in the user committees. All community forestry programmes in the hill and mountain districts (especially community and leasehold forest) have been effective in increasing women’s participation, raising access to forest resources for household use, and for conserving the environment and generating income. The area under community forests has increased from 1,028,473 hectares in 2001/02 to 1,187,184 hectares in 2005/06 (Table 5.4).

Table 5.4

Major achievements in the forestry

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Source: MOF, 2006

The Leasehold Forestry Programme being implemented in 26 hill districts is aimed at reaching out to landless families and has proven to be an effective means of reducing poverty. It has contributed to improving the income of very poor families, while also helping to restore environmental health. The area under leasehold forests has increased from 4,378 hectares in 2001/02 to 11,807 hectares in 2005/06. Similarly, the number of households under leasehold forests has increased from 9,070 in 2001/02 to 18,971 in 2005/06.

The successful conservation programmes have helped to slow down the degradation of land and forests. The area under conservation has also been expanded through the involvement and participation of people living in the buffer zones.

The Ministry of Forest and Soil Conservation implemented 16 P1, 13 P2 and 2 P3 projects with the development budget of NRs. 651.7 million. The P1 projects’ share was 64.9 per cent of the total development allocation to this sector for FY 2005/06.

Evaluation of the Hills Leasehold Forestry and Forest Development Project (HLFFDP) suggests that the programme has been able to reduce poverty and empower low income, landless groups. The HLFFDP began in four pilot districts in 1994 and was extended to 26 districts by 2000 end. An impact evaluation was carried out in 10 of the 26 districts.

Promoting non-agricultural growth

The growth of the non-agriculture sector is very important in accelerating and sustaining the overall growth of the economy. Even though some structural changes have been achieved during the first four years of the PRSP, the change observed has been very minimal. The non-agriculture sector contributes about 62 per cent to the Gross Domestic Product (GDP).

The Tenth Plan has emphasised continuation of transparent, simple and private sector-friendly economic policies in order to create a supporting environment for non-agriculture sector growth. The actions have focused on overall policy reform, including reforming the financial sector and other private sector development initiatives (Box 5.1).

Private sector development initiatives

  • ■ Labour Ordinance

  • ■ Secured Transactions Ordinance

  • ■ Securities Ordinance

  • ■ Company Ordinance

  • ■ Liquidation, Merger and Bankruptcy Ordinance

  • ■ Implementation of accounting and auditing standards

  • ■ Simplification of trade and investment procedures (ongoing), and

  • ■ Amendment of the Foreign Investment Act (on-going).

After the adoption of liberal and market oriented policies by the government, activities in the non-agriculture sector have become mostly dependent on the private sector. Moreover, the private sector led growth strategy adopted in the Tenth Plan has given more responsibility to the private sector in the overall development of the country. However, the government still dominates some key areas such as roads, electricity, telecommunication, drinking water and, to some extent, the financial sector.

The growth of the non-agriculture sector has been adversely affected by political instability, armed conflicts and external shocks during the first four years of the PRSP. The slowdown in development activities - and other economic activities, in general - has caused domestic demand to fall sharply. The government has taken steps to enhance industrial security and has introduced new policies - including the Build-Operate-Own and Transfer (BOOT) - for raising private sector participation in infrastructure building. However, the achievement so far has been very negligible. Moreover, the government has also taken steps to further open up the skies to allow more airlines to fly in and out of Nepal, which has helped to increase the connectivity and inflow of tourists to Nepal.

Public enterprises reform and privatisation

Since the early ’90s, when the government started adopting an economic liberalisation policy, the privatisation of public enterprises (PEs) has been the main concern of the government. The main objectives of privatisation of the PEs are to increase productivity of the privatised company, minimise the administrative and financial liabilities of the government, and to increase participation of the private sector in the economic development of the country.

Nepal has taken major steps to dismantle public sector monopolies and inefficient public enterprises. During the early years of the PRSP’s implementation, the public enterprise reform process was revitalised. A number of enterprises were identified for privatisation, leasing, liquidation, transformation into public companies, and for introducing performance contracts.

By 2005/06, 26 PEs had been either privatised or liquidated. Among the privatised PEs, 3 PEs were privatised by assets and business sale, 10 PEs by sale of equity, 9 PEs were liquidated and dissolved, the management of 1 PE was contracted out, and 3 PEs were privatised by assets sale and rental basis.

In FY 2005/06, the Lumbini Sugar Factory was given to the private sector to operate. Similarly, the land and building of Nepal Rosin and Turpentine Ltd. has also been leased out for 10 years and its assets have been sold. The agriculture limestone production plant, machineries and spare parts of the Agriculture Limestone Industry has been handed over to Hetauda Cement Industry, and a liquidator has been appointed to liquidate it.

The privatisation of Nepal Industrial Development Corporation (NIDC) by selling its equity has been approved by the government in principle. Moreover, the NIDC has been converted into a company as per the Company Ordinance, 2062, and it has been registered as a “B” class PE.

A Voluntary Retirement Scheme has been introduced in some of the PEs with a view to minimising the financial burden. Such schemes are to be introduced in other PEs gradually in the future.

Reforms in the telecommunications sector have been the most far-reaching. Nepal Telecommunication Corporation was converted into a public company in April 2004. A joint venture private operator has been allowed to provide basic telephone services in Kathmandu, and another private operator has been selected to provide telecommunication services in 534 VDCs in the Eastern region. Moreover, a private operator has also been permitted to provide mobile telephone services.

The government has announced a policy of involving the private sector in the construction and operation of small and medium scale hydroelectricity projects. Such projects would be supported through the Power Development Fund established in 2003. Also being implemented is a policy to involve communities and cooperatives in electricity distribution in the rural areas. Nepal Electricity Authority has begun distributing electricity to the rural communities through arrangements made under the policy.

Nepal has also approved a policy of involving the private sector in the import and distribution of petroleum products. Arrangements are also being finalised for handing over operations of the Nepal Water Supply Corporation in Kathmandu to a private operator.

An assessment of the assets and liabilities of Nepal Airlines Corporation is underway, with a view to transforming it into a public company. Besides, performance contracts have been introduced to improve the management at some public enterprises, including two large cement factories at Udayapur and Hetauda. The government has been focussing on updating the audit of public enterprises prior to privatisation. The accounts of 24 public enterprises were audited in 2003/04. Accounting standards and the regulatory environment have been improved in order to enhance the efficiency of public enterprises.

Financial sector reform

Financial sector reforms were initiated in the late ’90s in Nepal. The reforms have been one of the important components of the economic reform programme to provide healthy, competitive, effective and professional financial services. The Government of Nepal adopted a Financial Sector Strategy Programme on November 22, 2000. It is financed through grants and loans of the World Bank and DFID. It has three major components: 1) Strengthening Nepal Rastra Bank (NRB), 2) Restructuring Nepal Bank Limited (NBL) and Rastriya Banijya Bank (RBB), and 3) Capacity building of financial institutions.

Fig 5.1
Fig 5.1

Net profit of NBL and RBB

Citation: IMF Staff Country Reports 2007, 176; 10.5089/9781451830071.002.A001

Besides, it also includes restructuring of the publicly-owned Nepal Industrial Development Corporation and the Agriculture Development Bank, both of which are facing serious financial problems.

Achievements in restructuring NRB

Actions are underway to reengineer and restructure the NRB to enhance its capacity for regulating and supervising the financial sector. Following are the mean activities implemented or completed in the reform of the NRB.

  • In order to make the NRB more efficient by increasing productivity of the employees, a new organisational framework has been introduced at the central bank.

  • 571 staff have been retired under the voluntary retirement scheme and 11 under the compulsory retirement scheme.

  • New Human Resource By-laws 2005 have been introduced.

  • In order to improve the skills and efficiency of the staff, 30 of them have been offered on-the-job training, and 46 external auditors have been trained; a public relations officer has been appointed; information technology has been modernised; and the information system has been strengthened by using new software and hardware.

  • A new audit and accounting framework has been introduced, and the overall capacity of the NRB for supervision and regulation has been enhanced. A new law has also been enacted.

  • An integrated regulatory framework of international standards has been implemented. Similarly, off-site supervision manual has also been prepared and implemented.

  • A public relation officer has been appointed to regularly communicate and disseminate information regarding the performance of financial sector reform programme.

  • In order to moderise IT in the Bank an international IT consultant has been appointed to facilitate in the establishment of NRB IT Platform.

  • Under the Financial Sector Restructuring Project, 4 Bank Examination Experts, 2 Non-Bank Examination Experts, and a offi-site supervisor have already been appointed.

Achievements in Restructuring NBL and RBB

  • A comprehensive programme is underway to revamp two state-owned commercial banks - the Rastriya Banijya Bank and the Nepal Bank Limited (partially owned) - by lowering their Non-Performing Assets (NPA) to acceptable levels, streamlining staff and injecting modern management techniques.

  • As per the programme, international consultants were hired to manage the NBL and the RBB, and a series of measures have been taken to improve their performance.

  • The management contract of the NBL was extended on July 22, 2005 for two more years. Likewise, a similar contract for the RBB was renewed on January 16, 2005 for one year. Again on January 16, 2006 for two more years after its expiry. The banks have launched intensive debt recovery programmes, which have helped to reduce the NPA level. However, it still remain very high even though the NBL has been able to recover Rs. 7.61 billion and the RBB Rs. 6.79 billion.

  • The NBL has come a long way since 1999/2000, when its net loss was Rs. 2,698 million, to make a profit of Rs 1,730 million in 2004/05. Similarly, the RBB has also improved its finances, from a net loss of Rs 1,791 million to make a profit of Rs. 1,323 million, during the same period. Both banks have also reduced staff numbers by almost half after the reforms began.

Fig 5.2
Fig 5.2

Proportion of NPA of NBL and RBB

Citation: IMF Staff Country Reports 2007, 176; 10.5089/9781451830071.002.A001

In order to enhance the role of the private sector in economic activities, the government has simplified procedures on trade and investment. A labour and employment policy has been formulated, and a revised draft of the Labour Act has been prepared. The draft was prepared in consultation with the stakeholders and seeks to introduce provisions for allowing easy entry and exit.

Milestones in the financial sector reforms

  • ■. Unified prudential regulation has been issued,

  • ■. New bank supervision/inspection manual has been prepared,

  • ■. Bank and Financial Institutions Ordinance-2004 has been enacted,

  • ■. Insolvency and secured transaction laws have been enacted,

  • ■. Debt Recovery Tribunal has been established,

  • ■ Voluntary Retirement Scheme (VRS) at the NRB led to reduction of 983 staff. Staff size has been reduced from 5,269 to 2,979 at the NBL, and from 5,402 to 3,369 at the RBB,

  • ■ Personnel by-laws at the NRB, NBL and RBB have been prepared and are being implemented,

  • ■ The NPA of the NBL was reduced to 25.11 per cent in 2005/06 from 60.5 per cent in 2002/ 03; The NPA of the RBB was reduced to 45.34 per cent in 2005/06 from 60.1 per cent in 2002/03,

  • ■. All NPAs of the NBL and the RBB are fully provisioned

  • ■ Both the NBL and RBB registered net profits for the third consecutive year (NRs. 728 million at the NBL and NRs. 1688 million at the RBB in 2005/06), and

  • ■ Computerisation of the NBL covers 42 Branch Offices and RBB in 15 Branch Offices.

Two ordinances on secured transactions and the company law have been enacted. Nepal has also taken measures to improve and standardise the accounting, auditing and reporting system. Box 8 summarises some milestones in financial sector reforms.

Problems in restructuring of the NBL and RBB

The problems of Nepal Bank Limited (NBL) are as follows:

  • - Implementation of capital plan has not completed yet,

  • - Operational manual has not fully implemented,

  • - More efforts needed to achieve the NPA targets,

  • - Live operation activities under computerisation of banking transactions have not completed yet,

  • - It is still challenging task to complete preparatory activities for privatisation, and

  • - Preparation and implementation of successor plan.

Similarly, following problems were observed with Rastriya Banijya Bank:

  • - More efforts needed to achieve the NPA targets,

  • - Computarisation work not satisfactory,

  • - Implementation of capital plan has not completed yet,

  • - Operational mannual has not fully implemented,

  • - Expediting the restructuring of credit, and

  • - It is still challenging to complete preparatory activities for privatising the bank.

Section VI: Social Sector Performance


Education is a basic need of the people. The right to education has been enshrined in the interim constitution 2063 (yet to be promulgated) as well. In order to ensure this right, the country has launched a variety of educational programmes and plicies over time. In pursuance of this principle, the government in its current Tenth Plan has introduced the “Eduation For All” campaign with a view to universalising primary eduacation in the country. Major policy guidelines and strategies of the plan have been guided by this principle. Accordingly, priority was focused on this programme in the Plan, and a National Plan of Action 2001-2015 has been prepared.

Education in the Tenth Plan is guided by the Ninth Plan long-term vision of increasing access to education especially of the disadvantaged groups of people, raising the quality of education, decentralising educational services to the local communities, ensuring gender equality in education, and providing employment-oriented eduation. It is against this backdrop that the education policies and strategies were formulated in the Tenth Plan.

The major objectives of the education sector in the Tenth Plan are to (i) utilise education as the strengthened means for economical and social development for the eradication of poverty by developing human resources; (ii) make primary education easily accessible; (iii) develop and expand quality education in consonance with the needs of the country’s development; (iv) make all levels and programmes of education cost effective and qualitative; (v) generate medium level manpower and prepare for higher education by developing and expanding quality higher secondary education; (vi) supply the basic and medium level skilled technical manpower required for the country; and (vii) generate high level capable manpower that can compete internationally and contribute to the national economy for the overall development of the country.

The Tenth Plan fixed physical targets on a year-to-year basis. The targets are shown in Table 6.1

Table 6.1

Education sector physical targets of the Tenth Plan

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* Based on Population Census, 2001 and estimates for the end of the NinthPlan.

Due to the conflict situation, the education sector in the country has suffered a lot. The displacement of families put heavy pressure on enrolment in some schools, while in other schools, in other areas, the case was the reverse. Despite the conflict situation caused by the Maoist insurgency, the education sector has performed reasonably well. Access to education has improved. As a result of this, the enrolment has increased. The primary cycle completion rate in 2005/ 06 has, however, remained the same as that of the previous year. Achievement figures for all physical targets set in the Tenth Plan are lacking. Data are available for a few selected indicators. The achievements made in 2005/06 together with the previous years are shown in Table 6.2

Tabel 6.2

Major achievements in education sector

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Source: MOES, 2005


With a view to encouraging out of school children to enrol in schools, the GoN introduced a Welcome to School initiative. This initiative has been quite effective in motivating the targeted communities to send children to school. School outreach and flexible schooling are two other programmes which have been very supportive in bringing out of school children into the formal education system. These two programmes target special groups and areas. The results have been quite encouraging. Special scholarship programmes and school feeding schemes (mid-day meals) are also contributing a lot in increasing enrolment. It has been reported that educational interventions such as scholarships, student grants, free textbooks, and enrolment campaigns have contributed to universal participation in education and gender equity. It has been further observed that these programmes have resulted in a 22 per cent rise in enrolment in Grade 1 in the school year 2005 (DOE, 2006). Primary school enrolment has grown from 4,030,045 in 2004 to 4,502,697 in 2005 with an annual increase of 5 per cent The enrolment of girls at the primary level has increased from 1,865,012 in 2004 to 2,134,646 in 2005, definitely an impressive growth (DOE, 2006). The annual growth rate of primary school enrolment in 2004/05 is higher for girls (7%) than for boys (4.6%).

One of the reasons that could be attributed for the rise in the enrolment of girls is the provision of female teachers at the primary level. The MOES has introduced a policy of recruiting at least one female teacher in primary schools. As a result of this, the share of female teachers at the primary level has increased, though marginally, from 30 per cent in 2004/05 to 31.1 per cent in 2005/06, attaining the Tenth Plan target ahead. The Ministry has also supported the construction of separate latrines for girls. Schools having separate latrines for girls are estimated to have reached 11,341 in 2004/05. The number for 2005/06 is not available. Thus, the provisions of female teachers and separate latrines for girls have created a friendlier environment for girl students, leading to higher enrolment.

One of the goals of the EFA programme is to improve gender enrolment in education at all levels across the country. At the primary level, the gender parity index (GPI) in terms of gross enrolment rate (GER) was estimated at 0.86 in 2003, and in 2005 it reached 0.95, indicating almost equal enrolment between boys and girls. But at the lower secondary level, the GPI in the GER was 0.83 in 2003, which decreased to 0.81 in 2005. This indicates that more needs to be done to boost the enrolment of girls at the lower secondary level.

Data on the net primary enrolment rate reveals that it further increased in 2005/06. In 2004/05 the net primary enrolment rate was recorded at 84.2. In 2005/06, it reached 86.8. Yet it is 1.2 per cent short of the 2005/06 target of 88 per cent. With this trend it will be difficult to attain the Tenth Plan target of net primary enrolment of 90 per cent.

Scholarship Programme

The EFA programme has different scholarship programmes targeting different groups. They include Dalit scholarships; girls’ scholarships; scholarships for disabled children and martyrs’ children; and support to street children at the primary level. Besides, the DOE/MOES has also introduced different scholarships. In 2005 alone, 401,932 scholarships were awarded, half of them to girls, and 454,572 children received Dalit scholarships and included 171,380 girls. Similarly, 851 children received martyrs’ and conflict scholarship that included 454 girls. Likewise, 2,937 disabled children, including 383 girls, received scholarships.

The EFA programme has also introduced booster scholarships to bring children of parents with no primary schooling. This is an one time grant of NRs. 500 per child and is limited to primary school. The grant is provided to parents. Available statistics show that in 2005, 34,715 Dalits (49.3% girls), 29,926 Janjatis (58.2% girls) and 13,676 others (55.9% girls) received booster scholarships.

Cycle Completion Rate

The primary level cycle completion rate (the proportion of students enrolled in Grade 1 who eventually graduate to Grade 5) although recorded an impressive rise from 50.4 per cent in 2003/04 to 68 per cent in 2004/05, it has stagnated at 68 per cent in 2005/06. The percentage of students completing the primary level also remained unchanged at 78 per cent in 2005/06. These two performance indicators raise serious issues about the efficiency of primary education in the country.

Some other noteworthy achievements during the last one year is a three fold increase in the number of community learning centres - from 51 in 2004/05 to 150 in 2005/06. Similarly, the number of certified teachers has increased from 120,988 in 2003/04 to 229,489 in 2005/06. Those participating in women literacy classes reached 42,474 in 2005/06 as compared to 38,974 in 2004/05. An additional 66,500 females completed adult education in 2005/06. Furthermore, 9,095 neo-literates participated in post literacy income generating programmes. The literacy campaign has been expanded though increased involvement of CBOs/NGOs/LBs. It is, however, interesting to note that despite such improvements in the adult literacy programme, the adult literacy rate and adult female literacy rate have not increased in the last one year.

Another noteworthy improvement is in the area of teachers’ training. The percentage of trained primary teachers reached 45 per cent in 2005/06, a 10 per cent increase during the last one year. This rate is, however, quite low as compared to the Tenth Plan target.

Community Managed Schools

The role of the community in the development of education cannot be overemphasised. Communities have always been active and supportive of the development in education. However, the policy changes in the education sector gradually undermined the role of the community. This was more so after the introduction of the New Education Plan in 1971 where a number of measures were adopted. This heralded an era of state intervention in the school system. The state began to intervene in every sphere, thus weakening the community’s role in education.

Of late, there has been a realisation that the nationalisation of community schools was a mistake and that the community’s role in schools is a must. The government has, therefore, initiated the transfer of the management of willing schools to the community of parents and teachers. The government has been promoting this policy through various incentive schemes. Table 6.3 presents the status of the management transfer of community schools in the country.

Table 6.3

Districts covered and number of schools transferred to SMC by level, 2002/03-2005/06

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Source: DOE, Sanothimi, 2006