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PP RUEHWEB

DE RUEHKT #2596/01 2681046
ZNR UUUUU ZZH
P 251046Z SEP 06
FM AMEMBASSY KATHMANDU
TO RUEHC/SECSTATE WASHDC PRIORITY 3273
INFO RUEHNE/AMEMBASSY NEW DELHI 0274
RUEHKA/AMEMBASSY DHAKA 0191
RUEHIL/AMEMBASSY ISLAMABAD 3039
RUEHLM/AMEMBASSY COLOMBO 5041
RUEHBJ/AMEMBASSY BEIJING 4812
RUEHLO/AMEMBASSY LONDON 4435
RUEHML/AMEMBASSY MANILA 1719
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS KATHMANDU 002596 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
MANILA PASS TO PSPELTZ 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAID PGOV PTER NP
SUBJECT: ECONOMIC GROWTH UNLIKELY UNTIL RESOLUTION OF 
MAOIST INSURGENCY 
 
REFS: A. KATHMANDU 2251 
 
      ¶B. KATHMANDU 1920 
      ¶C. KATHMANDU 2268 
      ¶D. KATHMANDU 26 
 
SUMMARY 
------- 
 
¶1. (SBU) During a recent visit to Nepal, two INR economic 
analysts gained insight into Nepal's poor economic state. 
Industrialists in Kathmandu and the key border town of 
Birgunj explained how Maoist extortion and the activities 
of Maoist-affiliated trade unions had greatly disrupted 
their enterprises.  Entrepreneurs also complained that the 
Government of Nepal (GON) had yet to take any action 
against the Maoists to rectify the situation.  Business 
leaders asserted that the solution to the country's 
economic woes was up to the politicians.  They had 
surprisingly few opinions on the type of policies needed 
to mend the economy.  The head of the three-member panel 
the GON tasked with formulating a plan to handle the 
petroleum price crisis stressed that the GON lacked the 
political will to bring local prices in line with market 
prices.  In the absence of political stability, economic 
growth in Nepal is likely to remain low. 
 
MAOISTS' EXORTING, NO GON PROTECTION 
----------------------------------- 
 
¶2. (SBU) Visiting INR analysts were told by nearly 
everyone they met that the GON was not protecting 
businesses from Maoist extortion and Maoist-fostered labor 
unrest.  According to Narendra Raj Poudel, the Chief 
District Officer (CDO) in Birgunj (key town on the border 
with India), the Home Ministry had given no direction to 
him or the local police to protect businesses or factories 
because the GON did not want to be seen as breaking the 
cease-fire.  He added that he had recently been 
transferred to Birgunj from Chitwan (north-west of 
Birgunj), where he said the situation was the same. 
Businessmen did not appear to be taking any initiative to 
provide their own security. 
 
¶3. (SBU) Several business owners openly admitted to paying 
off the Maoists.  In the Kathmandu area, owners said the 
Maoists and their fronts were disciplined and kept 
reasonably good records so that they weren't hit up "too 
often."  Owners in Birgunj disagreed, complaining that the 
solicitations were constant and the various Maoist groups 
took no account of "receipts" issued by other Maoist 
groups. 
 
MAOISTS ENGAGED IN UNION BUSTING 
-------------------------------- 
 
¶4. (SBU) More damaging than the extortion, however, were 
Maoist efforts to politicize the labor unions.  Business 
leaders explained that to attract public support, Maoists 
would show up at factories and demand wage and benefit 
increases on behalf of the workforce and threaten violence 
if their demands were refused.  Labor would then transfer 
their loyalties to the Maoist unions, squeezing industry. 
Laxman Basnet, President of the Nepal Trade Union Congress 
(NTUC), who was somewhat dismissive of the Maoist's long- 
term chances, did admit that the Maoists were having some 
success in union busting. 
 
¶5. (SBU) Vice Chairman Bishnu Rimal of the General 
Federation of Nepalese Trade Unions (GEFONT) provided a 
radically different view.  He claimed that business owners 
were calling in the Maoists and negotiating with them to 
bust up the established unions.  After the Maoist demands 
were satisfied, the other unions would demand the same for 
their own membership, which the owners were now in no 
position to refuse.  He cited several specific instances 
and noted that the current President of the Federation of 
Nepalese Chambers of Commerce and Industry (FNCCI) often 
met with the Maoists. 
 
CAPITAL FLIGHT A SERIOUS PROBABILITY 
 
------------------------------------ 
 
¶6. (SBU) At a roundtable discussion with industrialists in 
Birgunj, one participant stated that 50 percent of the 
business owners in the town -- Nepal's industrial capital 
-- would sell if they could find a buyer (ref A).  His 
compatriot corrected him in gallows humor fashion by 
stating that 50 percent would simply close if the law 
permitted it.  Prominent leaders of the Marwari and Newari 
business communities in Kathmandu have acknowledged to the 
Ambassador that they are trying to get as much capital as 
quickly out of the country as possible. 
 
BUSINESS COMMUNITY LACKS VISION FOR ECONOMIC POLICIES... 
--------------------------------------------- ----------- 
 
¶7. (SBU) INR analysts heard that business input to the GON 
on economic policy was very weak.  At several meetings and 
roundtables, the plea was made for the diplomatic 
community to take the message to the GON because the 
business communities own efforts were ineffectual. 
Leaders of the two largest labor unions (the Nepali 
Congress-affiliated NTUC and the United Marxist-Leninist- 
affiliated GEFONT) had better access to senior leaders of 
their associated parties, but had no confidence that their 
requests or appeals would be acted upon either. 
 
¶8. (SBU) More depressing, however, was the utter lack of 
economic policy vision for the future offered by most of 
the business community when asked what they would request 
from a stable government should it emerge.  Rewat Karki, 
General Manager of the Nepal Stock Exchange, suggested 
reform of the manufacturing/industrial sector, including 
standardized accounting and more transparent business 
practices, while a few others suggested reforming the 
labor laws to allow "hire-and-fire" practices.  Most, 
however, indicated it was a "political decision."  Karki 
said that industrialists were adopting a "wait-and-see 
attitude" on further investment until they saw how the 
current political situation was resolved.  According to 
Karki, only the financial sector, including private banks 
and insurance companies, was showing a profit, while 
companies in the manufacturing/industrial sector were 
languishing. 
 
...BUT AGREE INEQUALITY INHIBITS ECONCOMIC GROWTH 
--------------------------------------------- ---- 
 
¶9. (SBU) Most businessmen mentioned that stark social 
inequality in Nepal was a serious problem that had to be 
solved in order to pave the way for long-term economic 
growth and reduce the appeal of the Maoists.  As a result, 
economic policy in the next couple of years might have to 
be focused on providing social services -- similar to the 
last budget which focused on welfare issues and lacked 
incentives for businesses or any mention of export 
promotion (ref B).  Rajendra Khetan, a leading 
industrialist, even expressed support for land re- 
distribution.  Most government officials and private 
businessmen acknowledged that Maoist ideology appealed to 
disadvantaged members of society -- people who have 
limited opportunities under the current social structure. 
 
NO POLITICAL WILL TO SOLVE PETROLEUM CRISIS 
------------------------------------------- 
 
¶10. (SBU) Bhanu Acharya, head of the three-member panel 
the GON tasked with formulating a plan to handle the 
petroleum price crisis (ref C), stated that the political 
parties recognized that the government could not afford to 
continue subsidizing petroleum prices.  However, the GON 
lacked the political will to bring domestic prices in line 
with market prices.  He noted that petroleum pricing was 
an extremely emotional issue in Nepal and that every price 
change had been accompanied by protests "for decades." 
Kerosene and cooking gas were the most sensitive, but 
increases in diesel and gasoline caused anxiety even among 
those who rarely used them because of fears that higher 
transportation costs would fuel inflation. 
 
¶11. (SBU) Acharya expected that the petroleum panel's 
report, which should be sent to the cabinet within the 
next few weeks, would lay out the reality of the 
situation.  (Note: The report was presented to the cabinet 
on September 21 and has not been made public yet.  End 
Note.)  He said it would likely recommend targeted 
subsidies by product --especially kerosene -- and 
recommend sufficient price hikes to begin to pay down the 
NPR 4 billion (USD 54 million) the Nepal Oil Corporation 
(NOC) owes Nepal's state-owned banks.  Then, based on the 
new pricing scheme, the GON would try to negotiate a 
better supply deal with the Indian Oil Corporation (IOC), 
which NOC owes NPR 8 billion (USD 108.1 million).  Acharya 
intimated that the panel report might provide the cover 
the government needed to begin to educate the public on 
the need for, and inevitability of, petroleum price hikes. 
 
TRADE WITH INDIA AND BEYOND 
--------------------------- 
 
¶12. (SBU) Prachanda Man Shrestha, Joint Secretary in the 
Ministry of Commerce, explained that the current trade 
regime with India was virtually free trade and that 
India's attitude toward Nepal -- traditionally that of a 
bully -- was changing.  The Indians, he noted, were 
playing fair by giving Nepal unhindered access to the 
Calcutta port to run trains from Calcutta to the Internal 
Cargo Depot (ICD) in Birgunj. 
 
¶13. (SBU) Shrestha opined that the South Asian Free Trade 
Area (SAFTA) had little real chance of success, because 
India's interests had turned toward trade with the 
Association of South-East Asian Nations (ASEAN).  This 
Indian interest, however, gave the Bay of Bengal 
Initiative for Multi-Sectoral Technical and Economic 
Cooperation's free trade agreement (BIMSTEC FTA) a real 
shot at emerging as the center of regional trade (ref D). 
The Joint Secretary noted that an increase in trade 
between Thailand and India via BIMSTEC would indirectly 
benefit Nepal's economy.  BIMSTEC had the added advantage 
of not burdening India and other members with baggage from 
the Indo-Pakistani rivalry. 
 
CHINA TRADE: HOW SERIOUS? 
------------------------- 
 
¶14. (SBU) Shrestha mentioned that Nepal, located between 
India and China, could not help but benefit from transit 
trade.  When it was suggested that Nepal was, in fact, far 
from the markets in both India and China, he grinned and 
said, "You're right.  Nepal is not between India and 
China, but between Tibet and Bihar."  (Note:  Bihar is one 
of India's poorest states.  End Note.)  More promising, he 
thought, was an East-West railway in Nepal that could 
foster India-Nepal-India trade.  (Note:  At a subsequent 
meeting at the Department of Industry, an official there 
confirmed that raising foreign investor interest in such a 
railway was a priority.  End Note.) 
 
COMMENT 
------- 
 
¶15. (SBU) Business leaders and government officials are 
preoccupied with the political situation and are waiting 
to make private investment and economic policy decisions 
until the Maoist insurgency has been resolved.  The key 
players in the political arena -- the Seven Party Alliance 
and the Maoists -- are far from reaching consensus on a 
common economic policy which could allow the economy to 
grow despite political uncertainty during this transition 
period.  In the absence of political stability, 
entrepreneurs are unlikely to resume investment, and 
economic growth will likely remain very low. 
 
MORIARTY