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Fiscal policy and its implication for community forestry in Nepal/Politique fiscale et ses implications dans la foresterie communautaire au Nepal/La politica fiscal y sus implicaciones en la silvicultura comunitaria de Nepal.


The Community Forestry (CF) program in Nepal began in 1978 as an attempt by the government and aid agencies to provide an alternative way for the Department of Forest (DoF) to manage national forest by involving local people (Gilmour and Fisher 1991). However, a legal and procedural base for local people to organize themselves into a Community Forest Users Group (CFUG) as an autonomous forest management institution was provided only after 15 years by the Forest Act of 1993. Up to now, nearly 1.67 million ha forest (out of 5.5 million ha national forest) has been managed under community forest by 17,808 CFUGs (CFD 2013).

The Ministry of Forest and Soil Conservation (MFSC), in coordination with the National Planning Commission, is responsible for formulating forest policies. DoF, one of the five departments under the MFSC, is mainly responsible for planning, implementation and coordination of forestry development activities, and supporting the MFSC on policy formulation (DoF 2012). Similarly, Community Forestry Division (CFD) under DoF is accountable to implement and facilitate the CF program at national level. At district level, District Forest Offices (DFOs) are responsible to plan and to implement the forestry programs within the district, including handing over of national forest to CFUGs. DFOs are considered to be carriers of forest policy in the field.

Implementation of CF program has been supported by many non-governmental organizations (NGOs) and donor agencies. Among the NGOs, the Federation of Community Forest Users in Nepal (FECOFUN) is the largest one and is working as an advocacy and lobbying organization to protect the rights of CFUGs. It has been an influential player in the forestry sector policy development (Ojha et al. 2007). Other organizations and donor agencies involved in the CF program have contributed to the program by providing financial and technical assistance (Gautam et al. 2004). However, in spite of the involvement of many organizations, the policy formation, implementation and field reality seem to be weakly connected in the forestry sector (Larsen et al. 2000). This situation has created inconsistencies and confusions in the provisions mentioned in policy documents, and consequently raised several issues and challenge in their implementation.

The forest policies which affect the sustainable management and utilization of community forests in Nepal are grouped under regulatory and fiscal policies (Kanel and Dahal 2008). The Forest Act of 1993 and the Forest Regulation of 1995 are the prime policy documents in forestry sector, and compared to regulatory policy, they are less explicit in terms of fiscal policy (Kanel 2001). Fiscal policies are substantive tools (Kanel 1998), which affect the day-to-day management and use of community forests. However, they are less durable than regulatory policies because some fiscal instruments such as rates of taxes and subsidies are formulated annually during the budget appropriation process. Since fiscal policies affecting forestry sector in Nepal are not clearly laid out in forest acts and regulations, even most of the decision makers involved in the forestry sector are not aware of the fiscal policy instruments. Many studies argue that community forest management is protection oriented and all the efforts to date have been concerted towards handing over the accessible forests and building the capacity of the forest users to sustainably manage the forests. Thus, the policy and legislations to date have given less priority for revenue generation through the sale of forest products, and hence the fiscal policy. Only a rare literature exists which superficially discusses the fiscal policy implications (e.g. Kanel 1998, Kanel 2001, Kanel 2006, Bampton and Cammaert 2007, Kanel and Dahal 2008, Kunwar et al. 2009). In this paper, we have described the inconsistent and unclear fiscal policy provisions and discussed some of the most pertinent issues in the management of forest resources. We have provided the field reality to some of these issues observed in the three hilly districts (Parbat, Baglung and Dolakha) of Nepal. We expect that findings from this study are applicable to other CFUGs in the hilly region of Nepal.


Review of Policy Documents

We have reviewed the current forest policy documents: the Master Plan for the Forestry Sector (HMGN 1989), the Forest Act (HMGN 1993), the Forest Regulation (HMGN 1995), the Forestry Sector Policy (HMGN 2000), the Herbs and Nontimber Forest Products (NTFPs) Development Policy (HMGN 2004), Community Forestry Inventory Guidelines (DoF 2000 and DoF 2004) and Community Forestry Development Program Guideline (DoF 2009). Likewise, we have also reviewed some of the other policy documents which mention the provisions related to the fiscal policy of Nepalese forest, and these include: Three-year Interim Plan of 2011-2013 (NPC 2011), the Local Self Governance Act (LSGA 1998) and the Local Self Governance Regulation (LSGR 1999). Operational plans, constitutions and relevant records of the studied CFUGs were also reviewed in detail.

Field Study

A field study was conducted between April and November of 2008 in eight CFUGs from three districts located in hilly region of Nepal. The CFUGs (Bhodkhore, Jhauri and Hampal from Parbat; Gorucharan, Bongakhani and Watawaran Samrakchhan from Baglung; and Kalobhir and Bhitteripakha from Dolakha) that are being involved in forest product trade and/or in forest-based enterprises, and familiar of the fiscal policy instruments were selected for the study. During the field visit, three to five group (each group consisting of 7 to 10 participants) discussions in each of the CFUG were conducted. Separate discussions were held with groups of executive committee of CFUG, users involved in income generating activities or forest-based enterprises, and socioeconomic groups of CFUGs. A checklist was used to track the discussions on a given issue and each group discussion lasted for approximately an hour.

Semi-structured interviews and frequent informal discussions were conducted with DFO staff at district and range-post levels. Similar interviews were conducted with individuals from District Development Committee (DDC), Village Development Committee (VDC) and district branch of FECOFUN, and other NGOs which supported the studied community forests management at the time of field study. A total of seven forest product traders at local and district levels, and two to four members from executive committee of each CFUG were also interviewed. In addition, CF experts at national and district levels were consulted during and after the study period, and their opinions formed the basis for formulating the policy recommendations. The information collected by different methods and from different sources was crosschecked through triangulation to improve the reliability of the results.


Based on the review of the available documents and our findings from the eight CFUGs in the studied districts, the most pertinent issues related to fiscal policy in CF are listed below.

1. Legal Responsibility in Controlling Forest Resources

According to LSGA, the local government is responsible to prepare plans and programs on district forests and implement or cause to implement them. However, according to the Forest Act, DFO has the authority to hand over any part of a national forest to a user group within the district in the form of a community forest, and thus has a control over the CF program. This shows a contradiction in the legal responsibility on the control of district forest resources. Likewise, a contradiction in controlling taxation system on forest products is also observed (Paudel et al. 2009), as the LSGA provides authority to local government (DDC) to levy a local tax on forest product, while the Forest Act allows the central government to collect tax on them. Personal communication with individuals from DFO and DDC in the studied districts show that the local government units and the DFO follow legal provisions from their own domain. It seems that there is an urgent need of amendment in these acts, defining clear legal responsibilities of central and local government units regarding the control over forest resources.

2. Revenue Sharing between Government Units and


There is a contentious issue regarding the way revenues from the sale of forest products are shared between the central and local governments, and the CFUGs (Kanel and Dahal 2008). Although LSGR has mentioned that the DDC gets 10% of revenue obtained by the government as royalty from forest products, it does not specify the forest type, and whether it is only from the government-managed forests or if it includes community forests as well. There is confusion on revenue sharing which is collected from Terai CFUGs as well. The Forestry Sector Policy (HMGN 2000) mentions that 40% of the income from commercial sale of timber must be deposited in the government account (central government) but shares to local government units are not addressed. After this policy came into effect, the DFOs began collecting a flat rate of 40% tax from such sales based on gross revenue but it is frequently referred to by forestry officials as a royalty (Bampton and Cammaert 2007). The policy led to a conflict between the NGOs, particularly the FECOFUN, and the government forest bureaucracy, and is acting against a smooth implementation of CF program (Gautam et al. 2004). After it was strongly opposed by FECOFUN, the government reduced the tax rate from 40% to 15% in 2004, and restricted this tax rate only to two timber species--Sal (Shorea robusta) and Khair (Acacia catechu). However, the local government units who are supposed to get 10% of that revenue (according to LSGA) do not get any share of this income (Kanel 2006). In addition to these unclear provisions in sharing revenue obtained from the sale of forest products, confusion exists on how the revenue from NTFPs of community forest should be shared between the government and CFUG (Dhungana and Dahal 2004).

During the field study, different perspectives on revenue sharing were observed. While CFUGs claimed that they should capture the total revenue on their CFUG, local government units consider that they should have a share as well on the revenue generated because management of forest resources falls within their jurisdiction. Likewise, DFO staff expressed that as the government hands over a part of the national forest to the communities in the form of community forests, the government should also get some revenue from the community forests in return. To avoid disputes, it is recommended that policy provisions be amended by clearly defining the share of revenue obtained from community forests between government units and CFUGs. Involving concerned stakeholders in policy development would be useful (as can be seen in the above illustration in tax reduction).

3. Multiple Taxation in Forest Products Trade

The government has imposed tax in forest products trade at different forms and levels. CFUGs that sell surplus forest products have to pay 13% of royalty as Value Added Tax (VAT) on products sold, excluding medicinal and aromatic plant products (MFSC 2005). In Terai, CFUGs pay an additional 15% tax on the gross revenue obtained from the sales of two timber species (Sal and Khair). In case of NTFPs the custom offices levy 5% duty on their market price at the export point (Note: In this study, NTFPs, the plant-based forest products other than timber, fuelwood, and fodder are considered referring to the OPs of the studied CFUGs).

Multiple taxations on forest products are also prevalent at district level. The LSGR gives authority to local government (DDC) to collect the tax on local forest products. Accordingly, the DDCs collect certain amount of tax from the local forest products. In addition, they get 10% of revenue obtained by the central government as royalty from forest products. The LSGR clarifies that when one DDC takes export tax on its local forest products, others cannot charge the same. However, in practice traders have been paying levy at each district check posts while transporting the products through several districts (Kunwar et al. 2009). This way, traders end up paying more money than they legally have to pay as tax.

During the field study, traders raised another concern related to taxation system that different DDCs are collecting varying amounts of tax for the same quantity and quality of forest product. For example, for 1 Kg of Lokta (Daphne spp.) paper traders have been paying NRs 5, 10 and 20, respectively in Solukhaumbu, Ramechhap and Dolakha districts as an export tax (US$1 was approximately equal to NRs 70 during the data collection period). Such differences in tax rates in different districts on the same forest products favour traders who purchase products from districts with low tax amounts. From the field study, it was found that traders prefer to buy products from the district with a low tax rate and in places where they have to pay high tax rate, they bargain to reduce the product price. This has affected the forest product trade in the region. In this context, it seems necessary to design a simple, fair and transparent taxation system to promote the forest products trade.

4. Forest Products Sales and Distribution

According to the Forest Act and the Regulation, CFUGs can independently sell and distribute the forest products which are available pursuant to the OP by fixing their prices. However, they have to inform the concerned DFO about the sale rate of the products. In the studied CFUGs, most of the forest products are consumed by users themselves, either in free of charge or is levied a price based on the consensus and it is usually found to be lower than the market price. Occasionally, while they are selling the timber outside of CFUGs, they are even given in lower price than in the market. Similar result was found by previous studies (Pokharel 2008, Dhakal and Masuda 2009). DFOs staff from the studied districts said that such a low pricing practice of CFUGs is not good for themselves to get optimum benefit from their community forest.

Internal distribution system of forest products is found to be more favourable to better-off households. The timber is distributed based on need of users, and the need is defined in terms of the construction or renovation of houses/shades. The better-off households frequently use more of it compared to poor. Although some of the CFUGs have provision to provide timber for poor households in free of charge (e.g. studied CFUGs from Dolakha) or in subsidized price (NRs 15.--for poor and 50.-per cubic feet for rich household in Bhodkhore CFUG from Parbat), hardly few poor households take this benefit because of their inability to construct/renovate houses or shades. Similar result is found in a study conducted by Overseas Development Group, Nepal in 2003 in fourteen CFUGs in Nawalparasi and Rupandehi districts, where mainly rich households with larger houses purchase timber in subsidized price (Bampton and Cammaert 2007). Although the firewood is equally distributed to all households, the supply to poor was found to be inadequate because poor use firewood extensively for household purposes compared to better-off households who could use alternative source of energy (e.g. biogas). In case of NTFPs, all users have an equal access, if NTFPs are collected for subsistence use (e.g. Timur-Zanthoxylum armatum and Nigalo-Arundinaria falcata) and all users get them for free. However, for NTFPs collected for commercial purpose (e.g. Lokta-Daphne spp, Argeli-Edgeworthia gardnery), the buyer has to pay a fixed amount of royalty to the concerned CFUG.

Overall, better-off households are more benefited from community forest products than poor. Although it may be difficult to design a pro-poor targeted system of benefit-sharing, it is strongly recommended to make this system more favorable to poor so that they can get fair benefit from community forest. This in turn would help improve the livelihoods of poor, and in poverty reduction in a longer run.

5. Revenue from NTFPs Trade

The trade in NTFPs from Nepal is huge and important to a large number of rural collectors (Larsen et al. 2000). Nepal records that more than 150 species of NTFPs are traded in local and international markets. In the fiscal year 2011/12, DoF has listed 165 NTFPs that generated a royalty of approximately NRs. 24 million (DoF 2012), and around 100 of them have high commercial value (Subedi 2006). There is a huge potential of a large revenue generation and forest-based economic development if we could promote the trade of high value NTFPs. The MPFS has included 'wood-based industries and NTFPs development program' as one of the six primary programs to contribute to the economic development through industrialization and to enhance the distribution of NTFPs to local and foreign markets. Irrespective of the priorities of MPFS, forestry sector policy provisions and management practises are not fully supportive of MPFS.

In case of community forests, there are some concerns on optimum revenue generation from NTFPs, and most prevalent one is the lack of provisions for their management and marketing in OPs. According to Paudel et al. (2009), many of the CFUGs whose OPs do not sufficiently account for NTFPs management and marketing have not been able to collect royalty from the NTFPs trade, and this has lowered their gross revenue. At the time of field study, most of the OPs of community forests of Baglung district had expired and as a consequence those CFUGs faced difficulties to sell the forest products. Some of the CFUGs with functioning OPs yet did not have a management plan for NTFPs, and could not sell them. The situation in Dolakha district is little different in that the functioning OPs lacked detailed management plan of all potentially commercial NTFPs. As an example, royalty rate of mushroom was not mentioned in their OPs due to which CFUGs could not collect revenue from the sale of this species that has good local market (Gauli and Hauser 2011). Lack of OPs revision on time and inclusion of NTFPs management plan was found mainly due to insufficient number of qualified forest technicians (Pers. Comm. DFO staff), a mandatory provision in CF Inventory Guideline of 2000 (DoF 2000). The guideline failed to address the problem of how the necessary forest technicians could be supplied (Ojha et al. 2007). In the revised guideline of 2004 (DoF 2004), it allowed social workers at local level to perform community forest inventory and revise OPs. Because this guideline was prepared by DoF, involving NGOs, FECOFUN and CFUGs, it seems to be compatible with field reality. During our field study, such a practise of allowing social workers to conduct forest resources inventory was seen in the CFUGs of Parbat and Dolakha districts, where FECOFUN and other NGOs have trained local resource person (LRP) to perform OPs revision.

In order to be efficient in collecting optimal revenue from NTFPs, in addition to revising OPs with the inclusion of NTFPs management plan, sustainable harvesting skill, NTFPs storage system, access to the market also have to be improved. It seems to be difficult to solve all these problems by CFUGs themselves. Therefore, the governmental and non-organizations which are supporting the community forests management are strongly suggested to facilitate CFUGs for sustainable and market-oriented management of commercial NTFPs and for them to be optimally benefited.

6. Ban on Sale and Export of Some Commercially Valuable NTFPs

The government has authority to impose ban on only the products from government-managed forests (HMGN 1995). However, in practice, NTFPs that are managed and harvested from community forests are also banned to export in unprocessed form. Such a ban on export of NTFPs by CFUGs in the unprocessed form that are cultivated or managed in community forests is not mentioned in any of the policy documents. A total of nine species are banned for export in unprocessed form, and they are Cordyceps sinensis, Nardostachys grandiflora, Valeriana jatamansi, Parmelia species, Taxus baccata, Abies spectabilis, Rawolfia serpentine, Cinamomum glaucescens and Silajit (mineral exudates). In addition, the government has also imposed a ban on collection, use, sale and export of Juglans regia and Dactylorhiza hatagirae. It seems that the government has banned the export of NTFPs either in raw or in processed form for conserving the species from a threat of extinction. However, the ban is not successful in conserving these species; illegal trade and smuggling has taken place instead (Subedi 2006). Moreover, the government made the processing mandatory without performing a detailed study on the species and as to why they need to be protected (Kunwar et al. 2009). Our observations tell us that CFUGs are not fully aware of their legal rights to deal with the banned species, and cannot therefore defend the governmental bans. Moreover, due to that ban they are compelled either to do processing themselves or find processing industries to prepare NTFPs of export quality, and either of these options seem to be difficult for them. This has affected the sale and export of commercial NTFPs which are abundant in community forest. For example, in the study sites, Parmelia species is abundant among the banned species in most of the community forests, but CFUGs could not sell it due to the lack of their access on processing technology. Such a situation not only lowers the forest revenue but also discourages CFUGs in NTFPs management. Hence, CFUGs are strongly suggested to be aware of and follow their legal right about the sale of forest products from their own forests.

7. CFUG Fund Mobilization

According to the Forest Act and the Regulation, the CFUGs can have a fund of their own collected through the sale of forest products and other sources such as membership fees, fines, and grants, and at least 25% of the fund has to be spent on forest development activities (HMGN 1999, amendment of the Forest Act of 1993). According to Kanel and

Niraula (2004) and Pokharel (2008), majority of CFUGs are

spending greater share of their fund in community development activities like school buildings, road construction, temple and other infrastructure developments. Among the studied CFUGs, those from Parbat and Baglung districts had higher expenses of their fund in community development activities (e.g. about 50%) and forest development works (e.g. about 30%), but negligible amount is invested in income generating activities (IGAs). In contrary, CFUGs from Dolakha, in addition to other IGAs, are also being involved in NTFPs-based enterprise of their district through raw material supply and share investment. These CFUGs were found to be more aware of IGAs and their benefits in fund-raising and they have also developed fund mobilization guideline, allocating 20% of the fund in enterprise development. This has helped them to boost their fund, opposed to those CFUGs from Baglung and Parbat districts.

It was found that the studied CFUGs from Parbat and Baglung are conducting 'revolving fund program' with the financial support from donor organizations (e.g. Livelihood and Forestry Program) mainly for investing in IGAs. At the time of study, only few poor users were found to be slightly benefited from that program, which did not contribute much to the CFUG fund. Likewise, in some of those CFUGs, external organizations have provided skill development trainings related to IGAs, however, users who participated on these training could not utilize that skill as a profession mainly due to budgetary constraint. As for example, in Bhodkhore CFUG, Parbat there is sufficient raw material and trained forest users to make Sal leaf plate that has good local market. But the CFUG is not running the enterprise mainly due to its inadequate finance to purchase the moulding machine.

The Forest Regulation allows CFUGs to plant NTFPs that can be the source of income generation. Additionally, the Forestry Sector Policy (HMGN 2000) mentions that local communities be encouraged to grow commercial forest crops and to establish forest-based enterprises outside of the community forest, but it does not mention about the management of financial and technical resources required to CFUGs to establish such enterprises. Recently the CF Program Development Guideline (DoF 2009), and current Three-Years Interim Plan (NPC 2012) mention that 35% of the CFUG fund must be spent for poor users, either in terms of money or good, and such provisions seem to be favorable for poor users to invest in the IGAs.

It seems that investing a greater portion of CFUG fund in economically viable IGAs can provide direct economic return to CFUGs in sustainable manner. Hence, providing technical and financial supports to CFUGs on proper mobilization of CFUG fund and on establishment of forest-based enterprises is crucial to improve the financial situation of CFUGs through IGAs.

8. Forest Certification

CFUGs can benefit from certification in a number of ways. Typically, it is a minimum standard for export of high-value forest products in international markets, particularly to Europe and United States. With a target for NTFPs certification, 14,145.15 ha (of 22 CFUGs) community forest land from Dolakha (including the studied CFUGs) and Bajang districts were certified in between 2002 to 2005 under Forest Stewardship Council group certification scheme, and it involved high cost (USAID donation alone was $500,000). Due to the high cost of compliance with the recommended actions identified during evaluations and audits, and a lack of financial support from the government, forest certification in Nepal has been a slow process. Calculations show that the certification cost in Nepal is US$ 35.5 per ha, which is higher in comparison to other countries (Kandel 2007). The forests which would have the quality to be certified have not been able to get certification. For example, Jhauri CFUG of Parbat has not been certified though the process began in 2002 by Integrated Human Ecology Project under a NGO known as Seed Tree Nepal. Even after certification, high cost is involved in auditing, monitoring and management of certified forests (discussion with CFUGs from certified forest of Dolakha), which is difficult to manage by CFUGs with poor financial status. Focus group discussions with CFUGs from Dolakha show that users are aware that their certified products are being sold to international markets but they do not have linkage to it, and therefore are compelled to sell their products to local traders in lower price.

The MPFS mentions to enhance distribution of medicinal plants and NTFPs to local and foreign market. Additionally, the Forestry Sector Policy of 2000 has emphasized to promote the commercialization of NTFPs and export them to foreign country after value-adding, but this policy and MPFS do not mention about forest certification. In addition, financial aspect is not mentioned in the Herbs and NTFPs Development Policy (HMGN 2004) and Three-year Interim Plan (NPC 2011) that have addressed the issues of certification. Hence, a clear policy for forest certification and its financial resource arrangement must be in place in order for the process to be progressive.


The review of the policy documents and the findings from the study area indicate that there are issues to address implementation of fiscal policy related to CF of Nepal. Several contradictions and confusions in the legal provisions related to fiscal policy in CF are evident in taxation, revenue sharing and control over forest resources. In practice, inadequate finance of CFUGs, insufficient support from external organizations, and a lack of awareness of the manifold economic potentials of timber and non-timber products have resulted in poor investments in IGAs, a slow progress in forest certification and consequently poor benefits for CFUGs from commercial trade of valuable forest products. In addition, lack of incorporation of NTFPs management and marketing plan in OP has also hindered most of CFUGs to take optimum revenue from NTFPs trade. Nepal, with its CF program, is one of the best examples in the world for people-oriented forest policy; however the existing policies and legislation related to CF do not optimally support the sustainable and market-oriented management of the forest resources.

One specific direction for policy reform could be to remove ambiguous and restrictive policies, for example the ban to export commercial NTFPs in unprocessed form. Likewise, inconsistencies and contradictions regarding control over the forest resources and taxation system, and revenue sharing among the government units and CFUGs, should be made clear and consistent through amendments in policy provisions. The authors recommend making regulatory provision more favourable for poor users on forest products distribution and investment of CFUGs fund in IGAs; and provision of financial and technical support to CFUGs for forest certification and marketing linkage in foreign countries. Recently, with the involvement of NGOs, FECOFUN and CFUGs, the government has made few favourable provisions which include OPs revision with the help of social workers and allocation of 35% of CFUGs fund for poor users' livelihoods improvement. It shows that a good coordination among government units, CFUGs and NGOs and their active involvement in the policy development process can help to make the fiscal policy consistent and unambiguous, and mitigate the aforementioned issues. Hence, we recommend that existing issues on fiscal policy should be constantly identified and addressed in time through multi-stakeholders participation processes.


The authors acknowledge Bishnu P. Acharya, Bidhur Khadka Shyam K. Shrestha and Ganesh K. Thapa for information collection; Dr. Suman Pokhrel, Sony Baral and Dr. Kalyan Gauli for their comments and Dr. Birendra Sapkota for reviewing the paper and providing valuable suggestions.


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A. PAUDEL (1) and G. WEISS (2)

(1) Graduate student at University of Toronto, Faculty of Forestry, 33 Willcocks Street, Toronto, M5S 3B3, Canada

(2) Professor at University of Natural Resources and Applied Life Sciences, (BOKU), Department of Economic and Social Sciences Vienna, Austria

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Author:Paudel, A.; Weiss, G.
Publication:International Forestry Review
Article Type:Report
Geographic Code:9NEPA
Date:Sep 1, 2013
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