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UNCLAS SECTION 01 OF 04 KATHMANDU 002195 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: OREP AMGT ASEC AFIN NP
SUBJECT: NEPAL SCENESETTER FOR AUGUST 25-28 VISIT OF CODEL 
KOLBE 
 
REF: STATE 116910 
 
SUMMARY AND INTRODUCTION 
------------------------ 
 
¶1.  Your visit comes at a critical moment in Nepal's history. 
 Many in the country hope that Nepal is perhaps closer to 
establishing lasting peace than it has been at any other time 
during the 10-year-old Maoist insurgency.  On August 9, the 
Nepalese Prime Minister GP Koirala and the Maoist leader 
Prachanda signed identical letters to UN Secretary General 
Kofi Annan requesting a greatly enlarged UN role, notably 
including monitoring of the Maoist combatants.  The letters, 
however, did not address the central issue of separating the 
Maoist from their weapons.  Meanwhile, drafters have nearly 
completed an interim constitution which could lead to an 
interim government with Maoist participation and elections 
for a constituent assembly perhaps as soon as April 2007. 
The government continues to insist, however, that the Maoists 
will not be allowed to enter the government until they are 
separated from their weapons.  The nationwide elections would 
be the first in nearly a decade.  The coalition government is 
struggling to deal with multiple challenges, including an 
ailing Prime Minister, the difficulties of maintaining 
internal cohesion within a seven-party coalition, continued 
Maoist violence, limited financial resources and a battered 
economy. 
 
¶2.  Your trip comes on the heels of a very successful visit 
August 12-14 of Senator Arlen Specter.  Your visit will 
bolster a friendly democratic government that is badly in 
need of U.S. support. End Summary and Introduction. 
 
THE SPA AND THE MAOISTS RULE THE SCENE 
-------------------------------------- 
 
¶3.  The Seven-Party Alliance (SPA) and the Maoists have 
dominated the political scene since King Gyanendra reinstated 
Parliament on April 24.  Since then, the King has largely 
disappeared from the public eye.  The SPA - a coalition of 
political parties that opposed the King's February 2005 
takeover - and the Maoists have had great difficulty 
transforming the alliance they formed against the King's 
dictatorship into an agreement on a working system of 
government.  While demanding a share of power in Kathmandu, 
the Maoists refuse to abandon their campaign of violence.  In 
the meantime, the SPA has been hard pressed to merge the 
diverse views of its member parties into a common voice.  It 
also faces challenges because of repeated hospitalizations of 
Prime Minister and center-right Nepali Congress (NC) 
President GP Koirala.  No other party leader in any party 
commands the same nationwide standing and it is unclear who 
could or would succeed him. 
 
CAREENING TOWARD DEMOCRACY 
-------------------------- 
 
¶4.  The April pro-democracy movement and the reinstatement of 
the 205-plus-member House of Representatives, the lower house 
of Parliament, led to a dizzying pace of transformation. 
MPs returned to the seats they last held in 2002 and agreed 
to work toward constituent assembly elections.  During the 
following month, the House of Representatives issued decrees 
that limited the powers of the King and declared Nepal a 
secular state.  The House also stripped the Nepal Army of the 
"Royal" moniker and placed it under parliamentary control. 
The GON and Maoists created negotiation teams to lead the 
peace process dialogue.  On May 26, the GON and Maoists 
signed a 25-point Code of Conduct to govern each side's 
unilateral cease-fire. 
 
A PEACE PROCESS ON TWO LEVELS 
----------------------------- 
 
¶5.  The GON and Maoist negotiation teams planned high-level 
"summit" meetings to work through the formal peace process, 
but many decisions have sprung from informal meetings between 
Maoist and SPA leaders.  Tensions have arisen between the two 
largest SPA parties, the NC and the Communist Party of 
Nepal-United Marxist Leninist (CPN-UML -- the largest 
center-left party), and the other SPA parties because the 
other parties feel excluded from decisionmaking.  PM Koirala 
has also faced public criticism for allegedly conducting 
private negotiations with the Maoists.  These private talks 
led in mid-June to an eight-point agreement that was widely 
criticized by SPA members. That document did, however, lead 
 
KATHMANDU 00002195  002 OF 004 
 
 
to the creation of the Interim Constitution Drafting 
Committee and the National Monitoring Committee for the 
Cease-fire Code of Conduct. 
 
ALL EYES ON ARMS MANAGEMENT 
--------------------------- 
 
¶6.  Management of the Maoist arms, specifically separation of 
the Maoist combatants from their arms, remains perhaps the 
primary issue in the peace process.  The identical letters to 
the Secretary General PM Koirala and Prachanda signed on 
August 9 set forth a strong role for the UN.  In addition to 
requesting the UN to continue its work monitoring human 
rights in Nepal (Note: the UN's human rights office here is 
the largest in the world), the letters requested that the UN 
also assist in monitoring the cease-fire Code of Conduct, 
monitor Maoist combatants and their weapons, monitor the 
Nepal Army in its barracks, and supervise and monitor 
Constituent Assembly elections (which could come by April 
2007).  What the letter did not do was indicate whether the 
combatants would be separated from their arms.  Most in the 
SPA agree that Maoists cannot join an interim government 
until they are separated from their weapons.  The GON hopes 
that the UN will be able to convince the Maoists to agree to 
such a move. 
 
¶7.  Meanwhile, the Nepali authorities and journalists 
continue to receive reports of Maoist extortion, kidnappings, 
and other violations of the May 26 Code of Conduct.  There 
are even periodic news reports that the Maoists might 
initiate another people's movement if they are not admitted 
soon into an interim government. 
 
ECONOMIC WOES 
------------- 
 
¶8.  Nepal's GDP grew only 1.9 percent in FY 2005/06, while 
inflation increased to 8 percent annually. Approximately USD 
1 billion in foreign remittances pumped into the economy last 
year increased per capita income to USD 322, a nominal growth 
of USD 20.  The GON, sapped by the Maoist insurgency and 
faced with nurturing a fledgling democracy, lacks sufficient 
financial resources to kick-start economic activity.  On July 
12, Finance Minister Ram Sharan Mahat announced an ambitious 
USD 1.97 billion budget for FY 2006/07, which he said was 
aimed at institutionalizing the democratic system and 
establishing peace through constituent assembly elections. 
The budget included USD 325 million in foreign grants, a 72 
percent increase over the previous year.  Whether the GON 
will be able to implement the budget hinges on how the peace 
process unfolds.  Final commitments from many donors depend 
on the GON and Maoists reaching an internationally accepted 
peace. 
 
¶9.  Political turmoil and the Maoist threat have created a 
hostile business environment.  Foreign direct investment has 
decreased nearly 50 percent since 2000.  Nepal is primarily a 
subsistence agriculture economy, but its industrial base has 
provided employment to the growing number of poor flocking to 
the cities.  If Nepalese businessmen flee the country instead 
of trying to work within the current unstable situation, the 
Nepalese economy will suffer and further hurt the poorest of 
the poor. 
 
TIBETAN AND BHUTANESE REFUGEES 
------------------------------ 
 
¶10.  Nepal hosts two refugee populations of note, Tibetan and 
Bhutanese.  The USG is currently funding an expansion of the 
Tibetan Relocation Center located in Kathmandu to make it 
possible to provide shelter to transiting Tibetans as they 
wait for processing by UNHCR here in Kathmandu. 
 
¶11.  Over 100,000 Bhutanese refugees have been living in 
seven camps in southeastern Nepal since the early 1990s. 
Donor countries continue to discuss with the GON options for 
a durable solution to the Bhutanese refugee issue, including 
repatriation, local integration, or resettlement of Bhutanese 
refugees.  The GON recently agreed to allow UNHCR to conduct 
a re-registration of the camps, a necessary step to lay the 
foundation for future solutions. 
 
A Half-Century Of Development Assistance And Today's USAID 
Program For Nepal 
--------------------------------------------- ------------- 
 
 
KATHMANDU 00002195  003 OF 004 
 
 
¶12. In 1951, the closed Hindu Kingdom of Nepal opened to the 
outside world.  Shortly thereafter, the USG sent our first 
development assistance to Nepal.  The relationship has 
prospered since, with the United States consistently one of 
the leading donors in Nepal.  Historically, economic 
assistance through USAID addressed Nepal's poverty and its 
manifestations, prioritizing health programs, agriculture and 
natural resources, and other social sector assistance with 
major success.  For example, the rate of child (under five) 
mortality has dropped by over 40 percent in the 15 years 
since USAID introduced community-based child health care 
modalities.  USAID was also responsible for the formation of 
community forest user groups (CFUGS) that have enabled 
Nepalis to take charge of their major resource and materially 
slowed deforesetation.  The CFUGS (over 1700 nationwide) have 
weathered the storms of civil war and remain an important 
factor in local self-governance.  After the initial advent of 
democracy in the early 1990s, USAID stepped up assiatance 
with parliamentary training programs.  USAID also developed 
innovative HIV/AIDS activities that have helped to hold the 
epidemic to the rate of one-half of one percent in the 
general population despite higher rates in particularly 
at-risk groups. 
 
¶13. Intensification of the Maoist threat from 2000 on caused 
the US Mission to reassess the nature of Nepal's problems. 
USAID introduced strong program elements to mitigate the 
effects of the conflict and to focus on governance issues 
such as political party development and the rule of law.  The 
popular uprising of April 2006, has created new opportunities 
that Post is eager to grasp.  USAID is transitioning into a 
new strategy for Nepal that targets the goals of stability 
and security, a multi-sectoral approach which aligns projects 
to advance the peace process, restore the rural economy 
shattered by war and terror, and prevent the now-contained 
HIV/AIDS plague from invading the general population through 
migrants fleeing the conflict.  At the same time, this 
strategy seeks to bolster the legitimate forces of the 
central government, empowering GON institutions to rule well, 
combat corruption, and provide the social services that the 
rising voice of the population justly demands. 
 
¶14. The USAID program for 2006 has an overall level of 
approximately USD 45 million, including the core USAID 
mission programs, new activities by the Office of Transition 
Initiatives (OTI), and a regional Office of Foreign Disaster 
Assistance (OFDA) program.  About USD 40 million will finance 
USAID's three strategic objectives for Nepal: A) enhance 
stability and security, B) strengthen governance and protect 
human rights, and C) build capacity of critical institutions. 
 The lion's share of the program budget goes to enhancing 
stability and security, including components to support the 
peace process, offer workforce training for unemployed youth, 
the disadvantaged and the displaced, mitigate conflict and 
aid victims of conflict, protect the livelihoods of the poor, 
restore war torn infrastructure through projects such as 
road-building, and reduce the transmission and impact of 
HIV/AIDS with its potentially destabilizing effects. 
 
¶15. To strengthen governance and protect human rights, USAID 
supports activities to reduce trafficking in persons, 
strengthen civil society and democratic political parties, 
and support UN and GON efforts to protect human rights.  USD 
13 million has been allotted to improve critical governmental 
institutions, including the agencies and local networks that 
address child survival, health, and nutrition; maternal care; 
family planning; and the courts and civil society 
organizations that advance the rule of law and combat 
corruption.  Most recently USG assistance has been augmented 
by a new program through USAID/OTI that will assist the peace 
process through media outreach.  Lastly, USAID hosts a 
regional OFDA unit that has, over the past year alone, 
responded to the Tsunami, the Pakistan earthquake, and even 
seconded staff for the Katrina response. 
 
MILITARY AND SECURITY ASSISTANCE 
-------------------------------- 
 
¶16.  Ensuring law and order is a key responsibility for every 
government.  We look forward to discussing these issues with 
you in more detail on your arrival. 
 
CONCLUSION 
---------- 
 
¶17.  Let me add in conclusion how delighted I am that you and 
 
KATHMANDU 00002195  004 OF 004 
 
 
the rest of your delegation, including Rep. Fred Upton and 
his spouse Amey, Rep. Brian Baird, Rep. Ander Crenshaw and 
his spouse Kitty, Rep. Wayne Gilchrist, and their staffs, 
will be coming to Kathmandu.  We look forward to welcoming 
you to Nepal and trust you will find your time here well 
spent. 
MORIARTY