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UNCLAS SECTION 01 OF 02 KATHMANDU 000456 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PREL PGOV PHUM PTER EAID KDEM IN NP
SUBJECT: NEPAL: SCENESETTER FOR A/S BLAKE 
 
Introduction 
------------ 
 
¶1. (SBU)  U.S. Mission Kathmandu warmly welcomes you to 
Nepal.  Your visit follows A/S Boucher's visit in February 
2009, and is the first since the Maoist-led government fell 
in early May and a new government was formed May 23. 
 
Political Situation 
------------------- 
 
¶2. (U) On May 23 members from 22 of the 24 political parties 
represented in the Constituent Assembly (CA) elected veteran 
Communist Party of Nepal - United Marxist Leninist (UML) 
leader Madhav Kumar Nepal as Prime Minister.  (Note: The 
election was necessitated by PM Dahal's resignation on May 4 
after President Yadav thwarted his attempt to fire Chief of 
Army Staff Katawal.)  MK Nepal and two other senior UML 
leaders (placeholders at Defense and Finance) were sworn in 
on May 25; negotiations to fill out the cabinet are ongoing. 
The new government faces a daunting set of challenges - 
including poor security, a weak economy, and unresolved peace 
process issues, notably how to proceed with integration and 
rehabilitation of Maoist combatants.  Meanwhile, the 
government is faced with keeping the large, unwieldy 
coalition intact amidst intra-party bickering and differences 
over key constitutional and policy issues.  The need to come 
to some broader political arrangement with the Maoists, who 
are now in opposition, further complicates matters. 
 
Security Situation 
------------------ 
 
¶3. (SBU) The law and order situation in Nepal, especially in 
the Terai, continues to be poor.  The previous government 
appointed teams to negotiate with the various armed groups. 
While some of the groups sent delegates to talks, little 
progress was made.  The Maoist-affiliated youth wing, the 
Young Communist League (YCL), continues to engage in illegal 
activities such as threats, extortion and extra-judicial 
killings throughout the country.  The YCL also clashes with 
the police and other party-affiliated youth wings such as 
UML's Youth Force. 
 
Economic/Development Situation 
------------------------------ 
 
¶4. (U) One of the poorest countries in the world, the World 
Bank estimates Nepal's per capita GNP at $340.  There are 
huge discrepancies in social and economic standing depending 
upon geographic location, gender, ethnicity and caste.  GDP 
growth in FY 2008/09 is projected to be 3.5 per cent, 
slightly better than the 10-year average.  Insufficient 
physical infrastructure, lack of a skilled workforce, 
domestic labor-management disputes, chronic load-shedding 
(which reached 16 hours per day last winter), frequent 
general strikes, poor security, and political instability all 
contribute to a challenging economic environment.  With 
unemployment around 40 per cent, the country's most valuable 
export is labor; an estimated 3 to 4 million people are 
employed abroad, half of them in India.  Remittances account 
for approximately 25 per cent of GDP and are a major source 
of spending on consumer goods, land/housing, health services, 
and education.  Agriculture's overall contribution to GDP has 
diminished in recent years, but still provides a livelihood 
for about three-fourths of the population.  A severe drought 
this past winter reduced agricultural production, placing 
more than 2 million people at high risk of food insecurity. 
Rising food prices have helped push inflation to 11.9 per 
cent during the first nine months of FY 2008/09. 
 
Military Issues 
--------------- 
 
¶5. (SBU) The collapse of the Maoist-led government stalled 
recent limited progress by the Peace Ministry in formulating 
plans for the discharge of the disqualified and minors from 
People's Liberation Army (PLA) cantonments.  The Special 
Committee for Supervision, Integration and Rehabilitation of 
Maoist Army Combatants (SC), which was headed by PM Dahal and 
 
KATHMANDU 00000456  002 OF 002 
 
 
included representatives of the four largest parties, is on 
hold.  The Technical Committee, established in April 2009 to 
provide options for integration and rehabilitation to the SC, 
has not convened since the collapse of the previous 
government. The new Defense Minister has announced she 
intends to grant term extensions to eight Nepal Army (NA) 
brigadier generals, whose extension was the subject of 
dispute, along with NA recruitment, between the previous 
Maoist Defense Minister and the Army Chief.  Prime Minister 
Nepal has said that he will decide this issue and the future 
of the Army Chief once the full cabinet is in place.  Several 
related cases are currently pending in the Supreme Court. 
 
USG Role 
-------- 
 
¶6. (SBU) Diplomatically, the USG continues to encourage all 
parties to participate in the peace process and constitution 
drafting.  (Note:  The new constitution is supposed to be 
finished by May 2010.)  We work closely with the rest of the 
international community, notably India, the EU, especially 
the British, and the United Nations.  The U.S. provides 
assistance of approximately USD 70 million a year, with the 
largest amount in health, but also funds for peace and 
democracy and a new five-year program envisioned to boost the 
economy. 
 
Conclusion 
---------- 
 
¶7. (SBU) You may wish to stress to the government and 
political leaders you meet that the United States fully 
supports Nepal's transition into a peaceful, stable, 
prosperous democracy.  You may further choose to emphasize 
that, while the U.S. is encouraged by the formation of a new 
government, we believe it is necessary for all parties to 
maintain a commitment to the peace process and drafting the 
new constitution, and, in the meantime, to begin to address 
the other economic and law-and-order concerns that affect the 
lives of Nepal's citizens. 
POWELL