GON SEEKS HELP FROM DONORS

1. (SBU) During a May 17 donor meeting, Finance Minister Ram
Sharan Mahat outlined the Government of Nepal's (GON)
immediate needs, which included budgetary support and new
investment in public works and services. He urged donors to
make financial commitments to the government's next fiscal
budget that would be announced in early July 2006. The
Finance Minister asked donors to be flexible in their giving
due to the difficult political conditions in the country.
Donors expressed willingness to support Nepal. However, some
international donors proclaimed the need for peace with the
Maoists before they could make monetary commitments. The
Ambassador instead stressed the need to support development
and the return to democracy in Nepal regardless of the
outcome of the GON's peace talks with Maoists. In contrast
to the cautious approach of several European representatives,
the Danish and Norwegian Ambassadors announced renewed
support to Nepal. End Summary.

FINANCE MINISTER OUTLINES EIGHT PRIORITY AREAS...


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2. (SBU) In his opening remarks, Finance Minister Ram Sharan
Mahat outlined Nepal's bleak economic condition as detailed
in a White Paper recently released by the Ministry of Finance
(septel), and highlighted the government's current needs.
Mahat acknowledged the government's primary concern was the
political process, but said that the economic agenda could
not be ignored as the economic and political agendas were
linked. The Finance Minister listed eight immediate needs of
the government as:
-- the revival of projects previously terminated or
downsized;
-- the commencement of new projects that were postponed after
the February 1, 2005 royal takeover;
-- budgetary support to meet the liquidity crisis estimated
to be a budget deficit of USD 71.8 million (5.1 billion
Nepali rupees);
-- funds for the relief and rehabilitation for conflict
victims;
-- reconstruction of destroyed public infrastructure;
-- new investment in public works and services;
-- development of medium-sized power projects; and,
-- the development of community based infrastructure and
income generation projects.

...STRESSES NEED FOR BUDGETARY SUPPORT, TRADE/TOURISM
CONCESSIONS


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3. (SBU) Mahat stressed the importance of Nepal's next fiscal
year budget and urged donors to make financial commitments in
line with the GON's needs in time to be included. Nepal's
next fiscal year begins on July 15, 2006 and the annual
budget is normally released a few days prior. The Chief of
the International Monetary Fund (IMF) in Nepal, Sukwinder
Singh, noted that the IMF's Poverty Reduction Growth Facility
(PRGF) program would end in four months and challenged donors
to decide how much they would donate for Nepal's next fiscal
budget so the GON could decide the limits of what it could
achieve. He also encouraged donors to decide what role they
wanted the IMF to play in Nepal. Ken Ohashi, Country
Director of the World Bank (WB) in Nepal, said that if the
PRGF terminated without any follow-on program, WB lending
would also have to decrease. Ohashi called on the GON to
define its development priorities and said the WB could
support the GON's next fiscal budget if priorities were
properly defined. The Finance Minister also requested
friendly countries to revise travel warnings claiming Nepal
an unsafe destination and requested "particularly the United
States of America and European Nations" to provide duty-free
access for Nepalese garments.

DONORS WISH TO SUPPORT GOVERNMENT PRIORITIES, WANT PEACE
BEFORE MAKING COMMITMENTS


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4. (SBU) Many donor representatives stated that donors should
focus on funding the priorities of the new government. Mark
Mallalieu, head of the United Kingdom's Department for
International Development (DFID) office, stated on behalf of
the United Kingdom, Denmark, Norway, Switzerland, Canada,
Netherlands, Finland and Germany, that donors should

coordinate their actions to help the peace process, not
hinder it. Mallalieu emphasized that the overarching need
for donors was to help with the peace process and "do no
harm." He stressed the need for the government to "widen the
development space" through negotiations with the Maoists.
The Ambassador called for donors to support development and
the GON's efforts to return to democracy regardless of the
outcome of peace talks with the Maoists. He said the United
States would assist the GON to the "extent possible" with the
restoration of peace in Nepal. Matthew Kahane, Resident
Coordinator for the United Nations (UN), said the UN was
ready to support the peace process and hoped the government
would follow the Basic Operating Guidelines previously agreed
upon by development partners. Mahat appreciated donor
sentiments to support the priorities of the new GON, however,
he stressed that, given the difficult political conditions,
donors needed to be flexible to help the GON restore peace in
Nepal. He stressed that the people of Nepal needed to see
some action and improvements in their lives due to government
action but noted that it would be difficult for the
government to take necessary action without considerable
donor commitments. Mahat said the government would soon be
talking with the Maoists on a code of conduct to observe
under the current ceasefire and that the GON would strive to
ensure that development work was protected under that code.

DENMARK AND NORWAY ANNOUNCE AID COMMITMENTS


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5. (U) The Danish Ambassador announced that the Danish
government would provide USD 21 million (1.5 billion Nepali
Rupees) for a rural energy project and USD 7 million (500
million Nepali Rupees) to support the government's peace
process. The Norwegian Ambassador stated his government had
agreed to restore funding levels to what they were prior to
the February 1, 2005 royal takeover.

COMMENT


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6. (SBU) The reluctance of many donors to make any financial
commitments until the new government has brokered a peaceful
solution to the Maoist insurgency could hinder the GON's
ability to provide services and win the hearts and minds of
the Nepali people in a timely fashion. Financial commitments
are needed sooner rather than later to support the
government's peace process and we should continue to work
with the donor community to urge them to reconsider their
positions.
MORIARTY