VZCZCXRO2779
PP RUEHBI RUEHCI
DE RUEHKT #0479/01 1220504
ZNR UUUUU ZZH
P 010504Z MAY 08
FM AMEMBASSY KATHMANDU
TO RUEHC/SECSTATE WASHDC PRIORITY 8407
INFO RUEHBJ/AMEMBASSY BEIJING PRIORITY 6455
RUEHLM/AMEMBASSY COLOMBO PRIORITY 6770
RUEHKA/AMEMBASSY DHAKA PRIORITY 2059
RUEHIL/AMEMBASSY ISLAMABAD PRIORITY 4806
RUEHLO/AMEMBASSY LONDON PRIORITY 6021
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 2385
RUEHSA/AMEMBASSY PRETORIA PRIORITY 0109
RUEHCI/AMCONSUL KOLKATA PRIORITY 4148
RUEHBI/AMCONSUL MUMBAI PRIORITY 3842
RUEHGV/USMISSION GENEVA PRIORITY 2037
RUCNDT/USMISSION USUN NEW YORK PRIORITY 3183
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHMFIUU/DEPT OF HOMELAND SECURITY WASHINGTON DC PRIORITY
RHMCSUU/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RHEFDIA/DIA WASHDC PRIORITY
RUEKJCS/SECDEF WASHDC PRIORITY
RHMFIUU/CDR USPACOM HONOLULU HI PRIORITY

UNCLAS SECTION 01 OF 05 KATHMANDU 000479 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EEB/TPP/ABT/ATP JANET SPECK, SCA/RA LEO GALLAGHER 
AND SCA/INS 
 
E.O. 12958: N/A 
TAGS: EAGR EAID ETRD ECON PGOV PREL PREF IN NP
SUBJECT: RESPONSE: IMPACT OF RISING FOOD/COMMODITY PRICES - 
NEPAL 
 
REF: SECSTATE 39410 
 
Introduction 
------------ 
 
¶1.  Nepal's population is particularly vulnerable to food 
insecurity and the rising cost of food equates to increased 
hunger in Nepal.  Over the last few decades Nepal has become 
a food deficit country.  Yields per hectare have not kept 
pace with the population growth.  In fact, Nepal has the 
lowest yield per hectare for rice and wheat in South Asia. 
Even during a good or normal harvest year, millions of 
families struggle to meet basic food needs.  Nepal relies on 
imports from neighboring countries and foreign aid to meet 
the food gap. Nepal's food security has been further 
complicated by the temporary ban on the export of non-basmati 
rice and wheat the Government of India instituted to meet its 
own domestic demands. 
 
 
¶A.  DEMAND 
 
Essential Foods and Price Increases 
----------------------------------- 
 
¶2.  Market prices for key commodities in Nepal -- including 
rice, lentils, pulses, wheat, cooking oil and various fruits 
and vegetables -- have risen sharply over the last few 
months, and the prices of many food items have doubled in the 
past year. For example, the retail price of short grain rice 
in December of 2007 was NRs 24 per kilogram; in March 2008 it 
was NRs 30.  (Note:  During this period, 1 USD was 
approximately NRs 63.  End note.)  In the same time period 
the price of most cooking oils rose by over 50 percent - 
mustard oil in December of 2007 was NRs 102 per liter; in 
March of 2008 it was 150 per liter.  Soybean oil and 
sunflower oil have risen even more - going from NRs 95 and 90 
to NRs 150 and 160 respectively.  During the same period the 
price of chicken rose from NRs 130 per kilogram to NRs 165 
per kilogram. 
 
Nepal Is a Net Importer of Food 
------------------------------- 
 
¶3.  Nepal, a net importer of food, was only 81.7 percent 
self-sufficient in 2006/07, according to the World Food 
Program (WFP).  The percentage of domestic consumption 
satisfied by domestic production varies by year and by 
district depending on the total cereal production.  The 
cereal shortage in 2007 was estimated at approximately 
225,000 metric tons because of the impact of drought and 
flood, particularly in the Terai (Nepal's southern plain 
areas).  That much of the country is in deficit in food 
production is also evident in the very high prevalence of 
undernourishment that is found across the country.  The WFP 
crop and food supply assessment found that an estimated 40.7 
percent of Nepal's population is undernourished. Moreover, 
food consumption data from the Nepal Living Standard Survey 
indicate that the real food shortage may actually be much 
higher than what is calculated using crop production 
statistics.  The impact of the lack of food is most obvious 
in Nepal's children.  The last National Demographic Health 
Survey found that 39 percent of children under five were 
underweight.  Chronic malnutrition affects 49 percent of the 
children under five in Nepal and wasting, a measure of acute 
malnutrition, has increased in the past five years to 13 
percent.  In some areas in the Terai, it is as high as 17 
 
KATHMANDU 00000479  002 OF 005 
 
 
percent, which is an emergency situation according to World 
Health Organization standards. 
 
Coping Strategies 
----------------- 
 
¶4.  Nepal has relied heavily on India to fill its production 
gap, and the ban on the export of non-basmati rice and wheat 
the Government of India reinstituted in April 2008 to meet 
its own domestic demands has exacerbated the crisis in Nepal. 
 The WFP reports that many households are already adopting 
severe coping strategies that they would normally undertake 
only during lean seasons in a low crop production year: 
migrating earlier, selling assets, cutting the number of 
meals, using savings or seeking credit to purchase food, 
selling land and even taking children out of school.  The 
poorest simply go without. 
 
Who is Most Affected 
-------------------- 
 
¶5.  Rising food prices will be most strongly felt in urban 
areas.  But as most agricultural producers in Nepal are net 
food consumers (e.g. they consume more than they produce) the 
effect of rising prices will also be strongly felt in rural 
areas, particularly in those areas characterized by deeply 
embedded and widespread poverty and food insecurity.  Those 
in the mid- and far-western regions of Nepal, who have little 
access to markets and rely almost solely on their own crop 
production, may be the least affected by market increases, 
but they remain extremely vulnerable to drought.  In 
contrast, the most vulnerable populations in the Terai - 
including the landless, women and children - who rely heavily 
on the market will be the most affected by rising market 
prices. 
 
 
¶B.  SUPPLY 
 
Domestic Production Not Responding to Rising Prices 
--------------------------------------------- ------ 
 
¶6.  There is no evidence that domestic agricultural 
production is responding to changes in prices, nor has there 
been an increase in investment, domestic or foreign, in food 
production.  The agricultural model and land used remain 
largely unchanged.  Higher commodity prices in theory should 
lead to higher crop production and increase the income for 
local farmers.  However, since the majority of farmers are 
deficit producers and have to buy, on balance, most of their 
food, the outcome is likely to be negative.  With limited 
investment in the agricultural sector, low use of fertilizer 
and pesticides, lack of farm mechanization and unavailability 
of additional land to bring under cultivation, immediate 
increases in agricultural production are unlikely to take 
place. 
 
Food Stocks 
----------- 
 
¶7.  There is no change in the food inventories/stocks, and 
the Government of Nepal (GON) possesses limited buffer stocks 
of key staples through the Nepal Food Corporation (currently 
4,000 metric tons of rice stored domestically, as part of the 
food security reserve of the South Asian Association for 
Regional Cooperation, with provisions to draw more from the 
regional reserve).  The GON has limited capacity to manage or 
 
KATHMANDU 00000479  003 OF 005 
 
 
control buffer stocks.  Should the situation worsen, the new 
government will face significant challenges to mounting an 
effective response to the domestic food crisis. 
 
Political Instability and the Lack of Security Affect Supply 
--------------------------------------------- -------------- 
 
¶8.  Political instability and the lack of security over the 
past decade created many bottlenecks in supply chains of 
almost all goods and services.  The lack of electricity 
production capacity forced processing and manufacturing 
facilities to operate around a load-shedding schedule of up 
to 40 hours per week.  In addition, many areas in the Terai 
experienced over 60 days of bandhs (strikes) in 2007 during 
which transportation and the movement of goods halted.  The 
trickle-down effects included lower production, lost wages 
and lost profits.  Higher input costs also affected food 
prices and production.  In addition to rising energy and 
transportation costs, Nepal's traders have also raised the 
price of commodities to recoup money that in many cases they 
were forced to "donate" to various political parties. 
 
Weather Severely Affects Supply 
------------------------------ 
 
¶9.  Weather is another factor severely affecting the food 
supply.  Drought and other natural disasters in 2006 resulted 
in a national 13 percent cereal production deficit.  In 2007, 
Nepal was hit again with drought and massive monsoon 
flooding, but the rice paddy harvest bounced back with an 
estimated 17 percent increase over the previous year's 
production.  WFP reported in April 2008 that winter crop 
production levels were down by 20 to 40 percent in the hill 
and mountain districts of far- and mid-western Nepal.  Crop 
production levels in these areas were worse in 2008 than in 
2007, mostly because of lack of rainfall and damage from 
hailstorms.  These poor production levels are likely to place 
further upward pressure on the prices of rice and wheat and 
will dramatically affect the nearly 8 million poor who rely 
upon the winter crop to cover their food needs until the 
summer harvest. 
 
 
¶C.  POLITICAL IMPACT 
 
No Food Price Protests 
---------------------- 
 
¶10.  There have not yet been public protests or violence in 
response to rising food prices.  Results from the April 10 
Constituent Assembly (CA) election, in which the Communist 
Party of Nepal - Maoist outperformed every other party, 
indicate that the Nepali people expect change.  If the new 
Maoist-led government is unable to respond  effectively to 
the growing food crisis, protests, violence and continuing 
political instability would be likely.  The most vulnerable 
populations in the Terai are largely members of low-caste and 
ethnic groups who have grown increasingly vocal and violent 
over the last year.  These groups have for most of the past 
year been at odds with the Maoists and are likely to be 
demanding and impatient.  Food scarcity would make the 
reintegration of internally displaced persons and Maoist 
ex-combatants into both urban and rural areas more difficult 
as establishing sustainable livelihoods becomes harder in the 
face of growing food unavailability. 
 
 
 
KATHMANDU 00000479  004 OF 005 
 
 
¶D.  ECONOMIC IMPACT 
 
Nepal a "Moderate Loser" 
------------------------ 
 
¶11.  The World Bank has recently estimated that Nepal will be 
a "moderate loser" in terms of the impact of 2007-2008 food 
price increases on its trade balance -- meaning that Nepal is 
likely to lose less than one percent of GDP.  Despite being a 
largely agricultural economy, the agricultural sector is 
deeply inelastic and is poorly positioned and slow to respond 
to agricultural price increases.  In Nepal, agricultural 
production is likely to increase less than one percent for 
every ten percent increase in price given the many 
constraints that inhibit agricultural efficiency in the 
country and discourage investment. 
 
Government Challenged To Handle Resources 
----------------------------------------- 
 
¶12.  The GON is facing rising trade and budget deficits -- in 
part from the high costs of the peace process and CA election 
-- and is finding it increasingly difficult to manage 
resources for even the most pressing priorities.  The trade 
balance deficit, particularly with India, is large and 
increasing.  Additional resources required to cover rising 
food prices are not available; rising food prices will 
therefore have serious effects on the overall economy. 
 
 
¶E.  ENVIRONMENTAL IMPACT 
 
No Impact on Environment 
------------------------ 
 
¶13. Rising prices of food and other commodities in Nepal have 
yet to have an impact on the environment.  There has been no 
change in levels of deforestation, the availability and 
quality of water, soil conservation, or related issues. 
 
 
¶F.  GOVERNMENT POLICY RESPONSE 
 
Food Security a Priority for GON 
-------------------------------- 
 
¶14.  The GON has committed itself to make both agriculture 
and food security a priority in its Interim Plan for the next 
three years; however, it has yet to develop a concrete plan 
of action.  The GON is also considering implementing a wheat 
export ban of its own similar to the one India has imposed. 
The ban is likely to affect transfer of foreign wheat more 
than domestically produced wheat given the overall deficit in 
domestic wheat production.  Whether the Maoist-led government 
will be able to achieve food security is questionable. 
Political challenges, aside, much of Nepal's crop land 
remains rain-fed and prone to natural disasters -- which can 
severely impact crop production, food availability and 
access, particularly for the most vulnerable populations. 
 
 
¶G.  IMPACT ON POST PROGRAMS 
 
Food for Bhutanese Refugees 
--------------------------- 
 
¶15.  Rising food prices are already having a significant 
 
KATHMANDU 00000479  005 OF 005 
 
 
effect on emergency operations in Nepal, most notably WFP's 
program to supply food to the 108,000 Bhutanese in refugee 
camps awaiting a durable solution to their situation.  WFP is 
the sole provider of food to the camps, and the refugees are 
wholly dependent on their rations from WFP.  WFP estimates 
that it will need an additional USD 8 million to meet current 
program needs in the camps for this calendar year, and USD 
14.5 million total to meet the needs for all of its programs 
in Nepal.  Seed prices are also affecting the UN Food and 
Agriculture Organization's recently-launched emergency 
agricultural support program. 
 
USAID Agricultural Development 
------------------------------ 
 
¶16.  USAID has an ongoing agricultural development program 
working with poor farmers in Nepal's central, mid-western and 
western regions.  The program helps farmers produce 
high-value crops with the use of micro-irrigation and a 
value-chain approach to enable farmers to take advantage of 
off-season opportunities.  The overall goal of this program, 
which started in 2003, is to reach approximately 70,000 poor 
families (over 400,000 people) and increase their incomes by 
more than 50 percent by the end of the program in 2009. 
Plans are currently in place to develop a follow-on 
agricultural program.  Addressing food insecurity in Nepal 
will be one of the areas considered in the new design. 
Furthermore, in FY2007 and FY2008, USAID contributed over USD 
7 million of food through its Food for Peace Program to WFP 
for Nepal's most vulnerable populations. 
 
 
¶H.  POLICY PROPOSALS 
 
Recommendation to GON 
--------------------- 
 
¶17.  Post recommends that the GON focus on the effective 
allocation of resources in post-conflict development.  The 
peaceful reintegration of ex-combatants into society will 
also be essential to economic growth that meets the 
expectations of the Nepalese people.  The GON should improve 
infrastructure -- including rural roads, reliable 
electricity, and telecommunication networks -- to make the 
production and distribution of agricultural commodities more 
efficient. 
 
Recommendation for U.S. Policy 
------------------------------ 
 
¶18.  Post suggests that Washington consider increasing 
funding available for existing and future agricultural and 
economic development projects in Nepal -- and other countries 
facing food shortages.  Post does not have any 
recommendations for changes in U.S. policy toward Nepal in 
regards to food security. 
POWELL