NEPAL'S TOURISM SECTOR UNDER THREAT, BUT SIGNS OF

C O N F I D E N T I A L SECTION 01 OF 06 KATHMANDU 001481 SIPDIS STATE FOR SA/INS AND INR STATE ALSO FOR CA/OCS/ACS STATE FOR DS/IP/SA AND DS/DSS/OSAC LONDON FOR POL/GURNEY NSC FOR GREEN E.O. 12958: DECL: 07/27/2014 TAGS: ECON PREL PTER ASEC CASC PINS NP SUBJECT: NEPAL'S TOURISM SECTOR UNDER THREAT, BUT SIGNS OF RECOVERY? REF: A. IIR 7 112 1005 04 ¶B. KATHMANDU 949 ¶C. 03 KATHMANDU 2020 Classified By: Ambassador James F. Moriarty, reasons 1.4 b,d. -=-=-=- SUMMARY -=-=-=-= ¶1. (C) The eight-year Maoist insurgency in Nepal has taken a tremendous toll on the already impoverished Nepalese economy. The impact of the insurgency is most visible in Nepal's floundering tourism sector. The Maoists have reneged on repeated assurances not to target Nepal's struggling tourism with high-profile attacks against three hotels, the murder of two tourist entrepreneurs, and increasing the extortion network against Nepali businesses and tourists. To date, tourists have not been intentionally harmed by Maoist action, but have been detained, threatened and extorted by the Maoists. Official figures from 2003/04 show some signs of an improvement within the tourism sector over the previous year's figures. However, when compared to the traditional base year of 1998/99, the sector still has a ways to go before full recovery. END SUMMARY. -=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=- Vulnerable to Internal and External Threats -=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=- ¶2. (U) Several incidents over the past five years have contributed to a decline in the travel and tourism industry. These include the 1999 Indian Airlines hijacking, the 2001 royal family massacre, the 2001 September 11th attacks, 2002/03 Severe Acute Respiratory Syndrome (SARS),and, most importantly, continued escalation in Maoist violence and general political instability in the country. In addition, news reports from July 2004 indicated that the Royal Nepal Army released a "threat analysis" revealing that Maoists could attempt to hijack an Indian Airlines airplane to pressure the Government of India to release Maoist cadres recently arrested in India. These internal and external threats adversely affect the tourism industry, one of Nepal's main sources of income. Tourism comprises over 10 percent of Nepal's Gross Domestic Product (GDP). -=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=- Recent Targeting of the Tourism Sector -=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=- ¶3. (C) Despite repeated assurances that they would not target Nepal's struggling tourist sector, the Maoists recently engaged in high-profile attacks on two tourist hotels and separately murdered two tourist entrepreneurs during the Spring 2004 tourist season (REF B). To date, the Maoists' tactics in their attacks against tourist facilities have involved ordering all tourists and staff out of the hotel prior to setting off a pressure cooker bomb, or setting fire within the premises. ¶4. (C) In addition, in March 2004 rumors surfaced that the Maoists planned "unspecified" action against the tourist sector for June 7-9. Although the Embassy confirmed the Maoists' intentions against the tourism sector, the Maoists called off the strike and no action against the tourism sector occurred in this timeframe. To date, tourists have not been intentionally or physically harmed by Maoist action, but have been detained, threatened and extorted by the Maoists. ¶5. (U) FISHTAIL LODGE, POKHARA: On May 14, the Maoists forced the mostly Indian tourists staying at the Fishtail Lodge in Pokhara to leave the premises and then detonated a bomb. According to police reports from the incident, the bomb caused approximately USD 40,500 in damage. The Maoists allegedly targeted Fishtail Lodge because of its connections to the royal family. (NOTE: The lodge was owned by the late-Princess Jayanti, killed in the royal massacre in June ¶2001. END NOTE) The lodge is run by a trust with no American investment, and proceeds provide medical treatment to children with heart disease. No injuries were sustained in the attack and there were no Americans staying at the lodge at the time of the attack. ¶6. (U) HOTEL GAIDA, CHITWAN: On May 17, the Maoists detonated a bomb in a hotel storeroom at the Hotel Gaida Wildlife Camp in Chitwan. This is the second time that the Maoists have targeted the hotel. (NOTE: The first attack occurred in October 2003. (REF C). END NOTE) According to news reports from the event, approximately 42 tourists (mostly Indians and Chileans) were staying at the hotel when the incident occurred. However, the damage was not discovered until the next morning; reports indicate that at the time of the blast most "were enjoying a dance party." The hotel is owned by Dipak Bikram Shah and Prabhu Shah, distant relatives of the King. There were no Americans staying at the hotel at the time of the attack. ¶7. (U) GHANDRUK (located north of Pokhara): On 10 May, the Maoists reportedly abducted five prominent tourist entrepreneurs from Ghandruk and later murdered two of the hostages. (Ghandruk is located north of Pokhara and is a trekking stop on the Annapurna circuit.) To date, the remaining three hostages have not been released. According to news reports, Pokhara in the second half of May 2004 saw a 90 percent drop in arrivals as a result of the frequent politically-motivated strikes ("bandhs") and transport stoppages. -=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-= But, This is Not the First Time . . . -=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-= ¶8. (U) These recent examples are not the first time that Maoists have attacked tourist facilities. The first (and not widely known) Maoist attack against a tourist facility occurred on 28 September 2002 at the Begnas Lake Resort and Village outside of Pokhara. According to a news report at the time, the Maoists entered the resort, ordered the tourists out and set off a IED which caused an estimated NRs. 30 million (equivalent to USD 38,000) in damage. There were no reported injuries during this attack. ¶9. (SBU) HOTEL GAIDA, Chitwan has been the target of two Maoist attacks. The first attack occurred on October 16, 2003 when six armed Maoists entered the premises of the Gaida Wildlife Camp, a popular tourist resort owned by a relative of the royal family. After ordering all of the guests out of the bungalows, the Maoists announced that they intended to burn down the resort. Despite unsuccessful efforts by the local manager and German tourists to dissuade them, the insurgents poured kerosene on seven of the 25 cabins, burning them down. None of the tourists or employees at the resort suffered any injuries. No Americans were at the resort at the time of the attack. (According to a report from the Australian Embassy, an Australian film crew who had been staying at the lodge were ordered to leave by the Maoists just before the incident.) Arup Rajoria, head of King Mahendra Trust for Nature Conservation, later told then-Ambassador Malinowski that the resort had been experiencing "labor problems" with members of its staff for some time before the attack. Although the resort is located only two miles from an Army encampment and from the National Park headquarters, Rajoria said that the Maoists had cut the lodge's sole telephone line before the attack, making it impossible for management to contact the authorities for help. -=-=-=-=-=-=-=-=-= Extortion Network -=-=-=-=-=-=-=-=-= ¶10. (C) In addition to these direct attacks against facilities, Maoist tactics include the systematic targeting for extortion of tourist related businesses and tourists. According to Narendra Bajracharya, President of the Hotel Association of Nepal, the Maoists have intensified their extortion efforts over the last six months (January - June 2004). Tourist entrepreneurs are forced to pay "protection money" and "taxes" to the Maoists. The extortion amount ranges from NRs 500,000 to NRs 1 million (approximately USD 6,800 to USD 13,500) per year for small hoteliers. Four and five-star hotels on average pay between NRs 2 to 3 million (approximately USD 27,000 to USD 42,000). In addition, commission agents of large projects financed by international funding agencies or donor countries can be targeted for as much as NRs 5 to 6 million (approximately USD 67,600 to USD 81,000). Dinesh Shrestha, Managing Director of ICTC Private Limited (one of the top ten Nepali business houses which handles a wide array of commission agent work in Nepal), admitted to Bajracharya that ICTC recently paid NRs 6 million (USD 81,000) in "protection money" to the Maoists. Deepak Mahat, President of the Trekking Agents Association in Nepal, indicated that he received an extortion threat from the Maoists demanding that he pay his annual taxes directly to the Maoists and not to the government. Mahat said he has not yet paid, but "might not have a choice" because of death threats for not conceding to the Maoists demands. He has requested assistance from police and local security forces; however, he was allegedly told there was nothing the GON could do to assist, suggesting that "he should do what he had to do to survive." ¶11. (SBU) During a subsequent conversation, Janak Kumar Khatri, Section Officer in the Tourism Industry Division of the Ministry of Culture Tourism and Civil Aviation refuted the media's characterization of the Maoist's extortion ring being widespread and said the threat was being exaggerated. According to Khatri, to date written complaints had not been lodged with his division and therefore, the problem "must not be that widespread." ¶12. (C) Bajracharya indicated that most trekking and mountaineering firms build in a miscellaneous fee to cover extortion into the price of organized treks. For example, organized group treks to Kailash Mansarovar (located in Tibet, but trekkers must cross through Humla in northwestern Nepal to reach this part of Tibet) now include a standard USD 100 to cover the expected cost of Maoist extortions. ¶13. (SBU) To track reported Maoist incidents, the U.S. Embassy's Consular Section has developed a "radar screen" trekking incident database compiled from first-hand American Citizen reports and reports from a network of other diplomatic missions. The report compiled from the most recent trekking season indicates that more trekking and tourist areas in Nepal are affected by Maoist violence than previously; tourists are expected to pay an extortion fee to the Maoists (fee varies by location) for which they receive a receipt; and, recent security engagements between the GON security forces and Maoists have put tourists at risk. (NOTE: The updated database of incidents has been e-mailed to SA/INS and CA/OCS/ACS. END NOTE.) -=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=- =-=-=-=-=-=- Impact of Maoist Enforced Strikes and Political Protests -=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=- =-=-=-=-=-=- ¶14. (U) From January to June 2004 there have been 24 Maoist-enforced or political party strikes within the Kathmandu Valley alone. This figure does not account for regional strikes that occurred outside the Valley. A study conducted by the Nepal Tourism Board indicates that one day of strike translates on average to 60 percent trip cancellation rate. (NOTE: The Nepal Tourism Board surveyed 65 tourist service providers, including travel agents, hotels, lodges, and trekking agents. END NOTE.) In addition, the Nepal Rastra Bank and Finance Ministry figures during Nepal's fiscal year 02/03 indicate that the tourism sector (hotel, trade and restaurants) contributed approximately USD 568 million of gross domestic product earnings. Based on this information, a Nepal Rastra Bank survey estimates that the sector could possibly lose about USD 1.6 million for each day of strike. ¶15. (SBU) Similarly, in March 2004, the Nepal Tourism Board indicated that the tourism sector loses an estimated USD 385,000 per day for each day of strike. Tek Bahadur Dangi, CEO of Nepal Tourism Board, indicated that the GON had formed a Tourism Crisis Coordination Committee headed by the Minister of Tourism and Civil Aviation and a Tourism Crisis Action Unit, headed by the CEO of the Nepal Tourism Board, to address a broad range of problems tourists might face while in Nepal from being stranded during bandhs or natural disasters. Ideally, the committee and unit would be the front line of defense for tourists encountering problems while visiting Nepal; however, when asked for more specific details on how information is gathered and situations are monitored, Dangi explained that the unit is ad hoc and "not functioning" at the moment. -=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=- =-=-=-=-=-=-= . . . Despite All This, Are There Signs of Recovery? -=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=- =-=-=-=-=-=-= ¶16. (U) Overall, 2003 figures proved to be significantly better for the tourism industry than 2002. Tourist arrivals increased by 19.8 percent from approximately 275,000 to 330,000. Overlapping this period, the first half of the Nepali fiscal year (FY) 03/04 continued to show strong growth, with tourist arrivals increasing 36 percent over the same six month period the year prior (NOTE: Nepal's fiscal year runs July-July. END NOTE.) ¶17. (SBU) Tourist receipts more than doubled during the first half of 2004, although this figure may be inflated by remittances from Nepali workers abroad processed through Nepalese travel agents. Using flight arrival data, total tourist arrivals in the first five months of 2004 are 49 percent higher than the corresponding period in 2003. This seems to suggest that improvement over 2002 tourist arrival numbers are significant and that the pace of improvement has accelerated throughout 2003 and into the first five months of ¶2004. Although this demonstrates significant improvement over the prior year, 2002 was the worst recorded year for tourism in Nepal for over a decade. The current number of tourist arrivals, 330,000, is essentially at 1994 levels and still 160,000 below the peak year in the tourism sector, ¶1999. Even with 36 percent growth in tourist arrivals the first half of 2004, tourist arrivals are 62 percent below the corresponding peak arrival period of 2000. ¶18. (SBU) From a revenue perspective, total foreign exchange earnings from tourism in the worst year, 2002, totaled USD 102.28 million. Revenue exchange earnings increased by USD 133.22 million in FY02/03 but remained substantially below the 178.15 million generated by tourism in FY98/99. To put this in perspective, tourism has represented between 8-21.4 percent of total foreign exchange earnings during the last decade and between 1.9 and 4.1 percent of the GDP. Currently, it represents near lows in both categories. Using a base year of FY98/99, Nepal has lost approximately USD 130 million in revenue due to reductions in tourism over the past three years. Nepal Rastra Bank (Central Bank) figures released in June 2004 indicated an 82 percent increase in foreign exchange earnings during the first six months of 2004 alone. Tek Bahadur Dangi, CEO of Nepal Tourism Board, refuted this figure, stating that with the tourists' average length of stay declining from 12 to 8 days over the past year and hotels decreasing tariff rates, the Central Bank's figure could not be accurate and is likely inflated by money transfers from Nepali workers abroad. ¶19. (U) There are important changes in the categories of tourists now traveling to Nepal. Despite increases in the number of total tourists, the number of trekkers and mountaineers declined in both 2002 and 2003. The mountaineering sector was the only sector not significantly affected by the slump in tourism in 2002. However, the demand generated by the opening of new mountains may be the cause. Overall, the effect of mountaineering is small in regard to the total tourism industry, representing only slightly over one percent of tourist arrivals. However, mountaineers are disproportionately valuable in terms of revenue generation as they stay for longer periods of time and pay substantial peak/expedition fees to the Government of Nepal. While the average tourist in FY01/02 spent USD 371, the average mountaineer spent USD 7,863. A large portion of this, approximately USD 1,680 per mountaineer, went directly to the Government of Nepal in the form of climbing royalties. The Government of Nepal has become increasingly effective in the last three years in extracting revenues from mountaineer-visa royalty fees. Overall, one mountaineer has become the approximate revenue equivalent of 21 regular tourists, and thus a critical revenue source. ¶20. (SBU) Bhumi Lal Lama, General Secretary of the Nepal Mountaineering Association, stated that the GON's new policy was to direct 70 percent of the climbing permit fees directly into the government's coffers and 30 percent towards local development in the area of the climb. (NOTE: The GON's previous policy was to use a portion of all the mountaineering revenues for general rural development. END NOTE) This in essence means that each group climbing permit (6-12 individuals) for Mount Everest brings in revenues totaling USD 35,000 to the Government of Nepal's Treasury and USD 15,000 of local development funds targeted at the Everest region. The downside to this methodology is that more traditional climbing areas in Nepal (i.e., Everest) are likely to receive an over abundance of development funds at the expense of some of the less traditional climbing areas. Lama also lamented that traditional mountaineering communities might be adversely affected by the development, lose their traditional values and be overwhelmed by modern restaurants, hotels, bowling alleys and pool clubs. A case in point is Namche Bazaar, where in just five years time, the traditional Sherpa atmosphere has been inundated by pool clubs, restaurants and bars. ¶21. (U) Trekkers have represented between 21-27 percent of all tourists during the last decade, with 2002 representing a near low during this period. Most trekers in Nepal tend to stay for longer periods of time and can be expected to again be disproportionately valuable to tourism revenues. However, the average number of days per tourist visit has declined from a high of 12.3 days in 1999 to a last decade low of 7.9 days in 2003. The reduction in the percentage of trekers among the total tourist population presently reflects that decrease. The greater decline in the trekking sector versus tourism as a whole is largely attributable to the deteriorating security situation over the past two years. Almost all trekking regions, with the exception of Mustang, Manang and Langtang have been significantly affected by Maoist violence. With average tourist expenditures averaging approximately USD 47 per day, attracting longer-term tourists, such as trekkers, is critical to the economic recovery of the tourist sector. ¶22. (U) Narendra Bajracharaya, president of the Hotel Association of Nepal, stated that this decrease in longer-term tourists has had a detrimental impact on smaller hotels and lodges. "They are having difficulty surviving" and are struggling with less than 30 percent average occupancy. Five-star hotels, on the other hand, have slashed rates to attract tourists. As a result of this severe impact on non-star hotels, the Hotel Association of Nepal recently reached an agreement with four- and five-star hotels that they would not offer rooms below USD 60/night. Although, this policy is in writing and all hotels have signed on, the Embassy is aware of certain five-star hotels offering rooms to regular customers for as little as USD 30/night. ¶23. (SBU) Public investment in the tourism sector is the domain of the Ministry of Culture, Tourism, and Civil Aviation. Although specific numbers regarding public investment in tourism projects are not currently available, the Ministry's total budget declined by 10 percent over the past fiscal year as security expenses related to the insurgency have diverted public funding away from most other sectors. Private investment in the tourism sector continues to be strong with increases in both the number of hotel beds and hotels in both star and non-star categories every year since 1994. This has, however, certainly led to declining incomes for hotels/hostel owners during the past two years and will continue to do so until tourism rebounds to peak levels. With over 38,000 total tourist beds, overall vacancy rates were well over 50 percent during most months in FY01/02 and FY02/03. COMMENT -=-=-=-= ¶24. (C) Despite the Maoists' continued assurances not to disrupt or threaten the tourism sector, the industry remains a vulnerable, visible target. Although to date the Maoists have taken pains not to injure tourists, there always exists the possibly that Maoists tactics could change, particularly if their situation turns desperate. Attacks over the past few months directed at the tourism industry pose a growing concern that tourists could be caught in the wrong place at the wrong time. More startling are the Maoists' recent threats to use "more violent means" if peace talks do not occur, or fail. ¶25. (C) COMMENT CONTINUED. Businesses, including Nepal's tourist industry, are already hurting from recurrent bandhs, transport blockades and chronic political instability. Given the Maoist campaign of violence, it seems unlikely that the industry will be spared during the next trekking season. END COMMENT. MORIARTY