# **7. Annexes**

# **I. Calculating comparable poverty trends in Nepal**

Poverty in Nepal has been measured using surveys of living standards conducted periodically by the Central Bureau of Statistics (CBS). Three rounds of the Nepal Living Standards Survey (NLSS) had been conducted in 1995/96, 2003/04 and 2010/11. Poverty headcount rates were 42 percent in 1995, 31 percent in 2003, and 25 percent in 2010. While the estimates from the first two rounds of the NLSS are comparable, the same is not true for the most recent estimate. This is due to two reasons: refinements introduced to the survey instrument in the 2010 NLSS and methodological changes in the way the poverty lines were calculated in 2010.

The most important change introduced in the 2010 NLSS was the way food consumption data were collected.<sup>24</sup> In addition to asking the households about their consumption of food items during a “typical month” (as in the first two rounds of the NLSS), the 2010 NLSS also enquired about food consumption during “the last 7 days”. This focus on the most recent consumption was in accordance with international best practice to minimize the so-called “recall bias” in estimating food consumption (Beegle et al. 2012). This had direct implications on the way poverty is measured. While the official estimates for 1995 and 2003 were based on a “30 day recall” for food consumption, the 2010 estimate relied on a shorter, “7-day recall” horizon.

Second, there was a major revision in the way poverty lines were calculated following the 2010 NLSS. In simplest terms, a poverty line is a threshold expressed in monetary terms below which individuals are deemed poor. This threshold pertains to the minimum amount of Nepalee Ruppe to satisfy minimum caloric requirements and basic needs for nonfood goods and services. In 1995, the official poverty rate of 42 percent was based on the poverty line of Rs. 5,089 per person per year. In 2003, the poverty line of Rs. 7,696 was used after adjusting for inflation between the two survey rounds.<sup>25</sup> This is to ensure that the same standard of living is used to identify the poor across the two survey rounds so that Rs. 7,696 in 2003 should afford the same basket of goods and services Rs. 5,089 afforded in 1995.

If the original poverty line was used to estimate poverty in 2010 after inflation adjustments, the poverty line would have been Rs. 14,316 and the resulting poverty rate would have been as low as 12.5 percent. This, however, was not adopted as the official poverty rate because of the growing perception and mounting evidence about improving living standards in Nepal. Overall economic well-being in Nepal had improved so much that the definition of what it meant to be poor in 1995 became obsolete by 2010. Some of what used to be luxury became necessity. For example, in 2010, Nepalis on average consumed more expensive food items such as meat and eggs and less cereals than 15 years ago. They also spent more on nonfood goods and services than they did in 1995.

In order to reflect the evolving way of life and the current consumption patterns in Nepal, a new poverty line was estimated using consumption data from the 2010 NLSS.<sup>26</sup> The new poverty line was set at Rs. 19,262, an increase in real value by 35 percent compared to the original poverty line in 1995. The poverty rate using the new poverty line was 25 percent in 2010. This is based on

> 24 Another notable change in the 2010/11 NLSS was the introduction of 12 Analytical Domains to stratify the population, in contrast to 6 strata previously used in the 1995/96 and 2003/04 NLSS.

> 25 Another adjustment was made to reflect changes in demographic composition of an “average household” to revise the minimum caloric threshold.

> 26 See World Bank (World Bank 2013) and Annexes for more details.

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