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C O N F I D E N T I A L KATHMANDU 000884 
 
SIPDIS 
 
SIPDIS 
 
DEPT FOR SCA/INS 
 
E.O. 12958: DECL: 04/03/2016 
TAGS: ECON EFIN PTER PGOV PREL NP
SUBJECT: FINANCE MINISTER DISCUSSES SHAKY LOAN 
 
REF: A. KATHMANDU 637 
 
     ¶B. KATHMANDU 665 
     ¶C. KATHMANDU 676 
 
Classified By: Ambassador James F. Moriarty. Reasons 1.4 (b/d). 
 
Summary 
------- 
 
¶1. (C) On March 31, the Ambassador and International Monetary 
Fund (IMF) Resident Advisor Sukhwinder Singh met with 
Minister of State for Finance Roop Jyoti to urge His 
Majesty's Government of Nepal (HMGN) to refrain from 
proceeding with a shaky loan deal (ref A).  Jyoti stated that 
he "heard" our concerns, but asked us to understand HMGN's 
pressures, and lack of options.  Jyoti said Nepal could take 
precautions to ensure that the loan was genuine, but noted 
that HMGN needed money, especially as India's four percent 
additional customs duty was crippling export industries. 
Thus, Jyoti claimed, he was forced to seriously consider the 
loan, though he appeared sobered by the Ambassador's message. 
 End Summary. 
 
IMF Also Urges HMGN Not To Pursue Shaky Loan 
-------------------------------------------- 
 
¶2. (C)  On March 31, the Ambassador and International 
Monetary Fund (IMF) Resident Advisor Sukhwinder Singh met 
with Minister of State for Finance, Roop Jyoti, to urge His 
Majesty's Government of Nepal (HMGN) to refrain from 
proceeding with the shaky loan deal that Jyoti first outlined 
to the Ambassador on March 8 (ref A).  Instead of HMGN 
pursuing this and other private loans of dubious origin, 
Singh urged HMGN to work with multilateral donors, such as 
the World Bank (WB) and Asian Development Bank (ADB) to 
obtain necessary funds.  (Note: Jyoti informed us an 
Australian-based organization had also approached HMGN to 
offer a similar loan.  End note.)  Singh noted that a country 
with Nepal's level of income should not borrow on commercial 
terms.  However, HMGN could talk with IMF about ways to raise 
economic growth and lower debt, which in turn would lead to 
access to more money from the WB and ADB. 
 
Minister Hears Caution, but... 
------------------------------ 
 
¶3. (C) Stating, "you are friends, you give good advice, you 
have hesitation; I hear you," Jyoti promised he would "try to 
deal with this the proper way," but asked the Ambassador and 
Singh to "please understand" the situation of Nepal.  Saying 
he did not want HMGN to lose face over the loan, or to 
jeopardize future generations of Nepalis, Jyoti explained 
that having good relations with bilateral and multilateral 
donors was important for Nepal.  He stated, "if you feel it 
is not worth the risk, then we can drop it."  Jyoti commented 
that it was possible that nothing would come of the loan 
proposal.  However, he stated that Nepal could make good use 
of the money.  He explained that the best way to ensure the 
loan was above board was to be open and involve bilateral and 
multilateral donors.  He also acknowledged that he did not 
want future generations of Nepalis to be trapped into paying 
for a loan that the government had not used properly and 
responsibly, including the possibility that future 
governments could misappropriate the loan money. 
 
...Argues Precautions Can Safeguard HMGN on Loan 
--------------------------------------------- --- 
 
¶4. (C) Jyoti stated that HMGN could put conditions on the 
loan and trap those involved if the money was later found to 
be tainted.  He acknowledged that the people offering the 
loan had no track record and no background, and were only 
acting as agents for non-resident Indians.  However, he noted 
that the people offering the loan had assured him that they 
would pass scrutiny.  Jyoti explained that the Central Bank 
would hold the original loan guarantee document, and would 
only pass it to the loaners once the Central Bank received 
the money, and the loaners had identified themselves and had 
passed scrutiny.  HMGN would hold the three agents involved, 
two Indians and one Nepali, in custody until the loaners 
passed scrutiny. 
 
HMGN Needs Money for Security 
----------------------------- 
 
¶5. (C) Jyoti stated that HMGN was "not getting what we need" 
from other sources of financing and that HMGN was "squeezed 
at all sides and from all angles."  He pointed out the 
impracticality of certain multilateral donor conditions, such 
as pursuing bank defaulters, that made it difficult for HMGN 
to pursue other means of getting money.  (Note:  Pursuing 
willful defaulters is one of the World Bank's four conditions 
related to the Poverty Reduction Support Credit (PRSC). 
Jyoti had told a March meeting of bilateral and multilateral 
donors that HMGN was moving forward with measures that would 
resolve long-standing donor concerns about the integrity of 
Nepal's banking system (ref C).  End note.)  He also 
commented that the Maoists were closing down the country, 
causing economic growth and revenue to decline.  Maoist 
extortion and kidnapping were making people poorer.  He 
highlighted Maoist action forcing industries to sign 
unsustainable "workers' agreements" that promised not to fire 
people and to increase wages.  He noted that past governments 
had acted irresponsibly in not planning to alleviate the 
current power crisis (ref B), which also hurt the economy. 
He stated that he did not want to be responsible for 
"something like the current power crisis," and wanted to 
ensure that Nepal had access to money as an "option for the 
future," referring perhaps to a possible future in which 
multilateral donors would not lend to Nepal.  Jyoti stressed 
that Nepal's urgent need was for money for security, as even 
development projects needed security or the money would end 
up going to the Maoists.  However, the international 
community would not give or lend money to Nepal to enact 
needed security measures, he complained.  Jyoti concluded 
that, given the pressures and lack of options, HMGN needed to 
seriously consider the loan. 
 
Ambassador Again Cautions Loan Is A Bad Idea 
--------------------------------------------- 
 
¶6. (C) The Ambassador again explained that all indications 
were that this loan was not bona fide.  He noted that the 
front people were insignificant, but clean, and that we were 
finding it difficult to unravel who was behind the loan.  He 
stated that the front company did not have a track record or 
assets comparable to the size of the loan.  Together, all 
indications were that the loan was not legitimate and should 
be avoided, he advised.  He stressed that the US felt 
strongly that HMGN should not go forward with the loan. 
Singh reiterated that HMGN should consult with multilateral 
donors to pursue multilateral sources of funding. 
 
Indian Additional Customs Duties Hurting 
---------------------------------------- 
 
¶7. (C) Jyoti lamented that India had suddenly initiated a 
four percent across the board additional customs duty (ACD) 
as of March 1.  As the Indian Finance Minister had not taken 
Jyoti's call on March 30 or 31, Jyoti concluded that India 
wanted to "let Nepal face an economic crisis."  Jyoti 
explained the importance of India as a market for Nepal's 
exports, and noted that any legal action by Nepal through 
Indian courts or through the World Trade Organization would 
take years and cost too much for Nepal to afford.  Jyoti 
noted that the four percent ACD was the make or break margin 
for many industries.  He added that if the export sector of 
the jute industry alone was forced to close then over 20,000 
people would be out of work.  There was no doubt in Jyoti's 
mind that those people would go out on the streets to 
protest, thus "crippling the government" if India continued 
to charge the additional customs duties. 
 
Comment 
------- 
 
¶8. (C) Jyoti obviously wants to pursue the loan for all the 
reasons he outlined.  That said, undoubtedly he heard our 
clear warning.  The Deputy Governor of the Central Bank, who 
also attended the meeting, also appeared to have strong 
reservations about pursuing the loan. 
MORIARTY