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.

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SUMMARY
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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.

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Vulnerable to Internal and External Threats
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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).

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Recent Targeting of the Tourism Sector
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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.

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But, This is Not the First Time . . .
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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.

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Extortion Network
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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.)

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Impact of Maoist Enforced Strikes and Political Protests
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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.

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. . . Despite All This, Are There Signs of Recovery?
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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
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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