NEPAL'S TOURISM INDUSTRY: WHERE IS THE BOTTOM?

UNCLAS SECTION 01 OF 02 KATHMANDU 000206

SIPDIS

LONDON FOR POL/ERIEDEL

E.O. 12958: N/A
TAGS: ECON ETRD CASC NP
SUBJECT: NEPAL'S TOURISM INDUSTRY: WHERE IS THE BOTTOM?

REF: 2002 KATHMANDU 680

Summary
=======


1. Nepal's tourism industry recorded a 28 percent decline in
international arrivals for 2002. Domestic air travel appears
to have declined more dramatically due to the security
situation. The country's hotels and airlines are feeling the
pressure and are cutting costs and restructuring their debts
to avoid bankruptcy. The country's financial institutions
have significant investment in Nepal's tourism industry and
may be a secondary casualty if tourists do not return.
January 2003 did see a slight rise in arrivals, particularly
from India, the US, and Japan. It is too early to speculate
if this means a turn around. End summary.

Symptoms of Decline
===================


2. Nepal's tourism industry recorded a steep decline in
visitors for 2002, making this once giant contributor to
Nepal's economy a sector of economic depression (reftel).
Overall arrivals through Nepal's Tribhuvan International
Airport dropped from 298,000 in 2001 to 216,000 in 2002, a 28
percent decline. Pokhara's Tourist Information Center,
located in the mountain resort city in central Nepal, reports
only 25,000 arrivals in 2002, one-third of 2001's visitors.
The decline is troubling news for Nepal's battered economy,
since the tourism industry provides one-third of overall
government revenues and 3 percent of Gross Domestic Product.

Investors and Lendors Keep Hotels Limping Along
============================================= ==


3. To cope with the drop in clientele, Nepal's hotels and
restaraunts have laid off and deferred salaries to employees,
reduced room rates, delayed payments on bills and taxes, and
are competing vigorously when given the opportunity to bid on
event contracts. The cumulative effects of the downward
spiral have taken their toll, forcing hoteliers to:
-- Fix minimum room prices through the Hotel Association of
Nepal to eliminate "unhealthy" competition;
-- Establish payment plans with the Nepal Electricity
Authority to spread current electricity bills over a
twenty-month period; and
-- Seek agreements with lenders to make reduced payments at
no interest.


4. According to a local bank executive, the leniency extended
to hotels and restaraunts does not pose a liquidity problem
as yet. He estimates that the larger banks may be able to
carry these assets on the books for at least one more year,
but may be forced to liquidate them if the decline continues.
As the bank in question has lent nearly 20 percent of its
capital to the nation's tourist hotels (including the
Soaltee, Shangri-La, Hyatt Regency, and the Fulbari luxury
hotels),the collapse of the tourism industry may put also
put it and other financial institutions at risk.

Airlines Reducing Their Fleets and Flights
==========================================


5. Nepal's remaining six domestic airlines are also suffering
from the industry's overall decline. The drop in arrivals to
Kathmandu with onward travel within the country are putting
the airlines in the red. In 2002, it is estimated that
airlines lost USD 3.1 million in business (a 16 percent
decline) causing:
-- Necon Air to lose three of its planes because it was
unable to maintain its lease agreements and maintenance
schedules, and to reduce its flights from six destinations to
two;
-- Mountain Air and Gorkha Air to go out of business after
they could no longer make the lease payments on their small
airfleets; and
-- Shangri-La to reduce its fleet by two planes and eliminate
66 percent of its regional flights.
The remaining airlines cannot sustain themselves on domestic
passengers alone. Flights that would normally provide USD 67
per passenger for tourists fetch only a fixed USD 20 for
Nepali passengers. According to Bikas Rana of the Airline
Operators' Association of Nepal, the remaining domestic
airlines may be forced to close, if foreign tourists do not
return in number.

Where's the Bottom?
===================


6. The worldwide decline in tourism combined with Nepal's
security issues have hit the economy hard. Tourism operators
are asking, "Where is the bottom?" Nepal's Tourism Board
reported the first ray of hope in January, with tourist
arrivals growing by 19 percent (a total of 16,103 visitors)
for the month over the same period last year. While an
improvement, the numbers are still off the high levels
recorded in 2000 and 2001. The Tourism Board's report
provided an indication of arrivals by tourists' country of
origin as follows:
-- India up 38 percent to 5,535;
-- US up 24 percent to 1,364;
-- UK up 24 percent to 1,329;
-- Japan up 23 percent to 1,285;
-- Taiwan up 48 percent to 634;
-- China up 53 percent to 446; and
-- Germany down 24 percent to 494.
(Note: The Government of Nepal has made an effort to attract
Chinese tourists to Nepal, including making the Chinese Yuan
convertible to Nepalese Rupees in June 2002. End note.)

Comment
=======


7. Tourism, garments, light industry, and agriculture are the
four pillars of Nepal's economy. The lack of a diversified
industry poses the risk of economic collapse if even one
should fail. For tourism, which supplies one-third of
government revenues, the implications of failure are
especially ominous. Should it fail, the over-investment of
the nation's financial institutions in tourism-dependent
markets may undermine their solvency. Investors and
operators can only hope that the announcement of a cease-fire
and January's rise in tourist arrivals indicates light at the
end of the tunnel.
MALINOWSKI