NEPAL SCENESETTER FOR AUGUST 25-28 VISIT OF CODEL

UNCLAS SECTION 01 OF 04 KATHMANDU 002195

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: OREP AMGT ASEC AFIN NP
SUBJECT: NEPAL SCENESETTER FOR AUGUST 25-28 VISIT OF CODEL
KOLBE

REF: STATE 116910

SUMMARY AND INTRODUCTION
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1. Your visit comes at a critical moment in Nepal's history.
Many in the country hope that Nepal is perhaps closer to
establishing lasting peace than it has been at any other time
during the 10-year-old Maoist insurgency. On August 9, the
Nepalese Prime Minister GP Koirala and the Maoist leader
Prachanda signed identical letters to UN Secretary General
Kofi Annan requesting a greatly enlarged UN role, notably
including monitoring of the Maoist combatants. The letters,
however, did not address the central issue of separating the
Maoist from their weapons. Meanwhile, drafters have nearly
completed an interim constitution which could lead to an
interim government with Maoist participation and elections
for a constituent assembly perhaps as soon as April 2007.
The government continues to insist, however, that the Maoists
will not be allowed to enter the government until they are
separated from their weapons. The nationwide elections would
be the first in nearly a decade. The coalition government is
struggling to deal with multiple challenges, including an
ailing Prime Minister, the difficulties of maintaining
internal cohesion within a seven-party coalition, continued
Maoist violence, limited financial resources and a battered
economy.


2. Your trip comes on the heels of a very successful visit
August 12-14 of Senator Arlen Specter. Your visit will
bolster a friendly democratic government that is badly in
need of U.S. support. End Summary and Introduction.

THE SPA AND THE MAOISTS RULE THE SCENE
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3. The Seven-Party Alliance (SPA) and the Maoists have
dominated the political scene since King Gyanendra reinstated
Parliament on April 24. Since then, the King has largely
disappeared from the public eye. The SPA - a coalition of
political parties that opposed the King's February 2005
takeover - and the Maoists have had great difficulty
transforming the alliance they formed against the King's
dictatorship into an agreement on a working system of
government. While demanding a share of power in Kathmandu,
the Maoists refuse to abandon their campaign of violence. In
the meantime, the SPA has been hard pressed to merge the
diverse views of its member parties into a common voice. It
also faces challenges because of repeated hospitalizations of
Prime Minister and center-right Nepali Congress (NC)
President GP Koirala. No other party leader in any party
commands the same nationwide standing and it is unclear who
could or would succeed him.

CAREENING TOWARD DEMOCRACY
--------------


4. The April pro-democracy movement and the reinstatement of
the 205-plus-member House of Representatives, the lower house
of Parliament, led to a dizzying pace of transformation.
MPs returned to the seats they last held in 2002 and agreed
to work toward constituent assembly elections. During the
following month, the House of Representatives issued decrees
that limited the powers of the King and declared Nepal a
secular state. The House also stripped the Nepal Army of the
"Royal" moniker and placed it under parliamentary control.
The GON and Maoists created negotiation teams to lead the
peace process dialogue. On May 26, the GON and Maoists
signed a 25-point Code of Conduct to govern each side's
unilateral cease-fire.

A PEACE PROCESS ON TWO LEVELS
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5. The GON and Maoist negotiation teams planned high-level
"summit" meetings to work through the formal peace process,
but many decisions have sprung from informal meetings between
Maoist and SPA leaders. Tensions have arisen between the two
largest SPA parties, the NC and the Communist Party of
Nepal-United Marxist Leninist (CPN-UML -- the largest
center-left party),and the other SPA parties because the
other parties feel excluded from decisionmaking. PM Koirala
has also faced public criticism for allegedly conducting
private negotiations with the Maoists. These private talks
led in mid-June to an eight-point agreement that was widely
criticized by SPA members. That document did, however, lead

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to the creation of the Interim Constitution Drafting
Committee and the National Monitoring Committee for the
Cease-fire Code of Conduct.

ALL EYES ON ARMS MANAGEMENT
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6. Management of the Maoist arms, specifically separation of
the Maoist combatants from their arms, remains perhaps the
primary issue in the peace process. The identical letters to
the Secretary General PM Koirala and Prachanda signed on
August 9 set forth a strong role for the UN. In addition to
requesting the UN to continue its work monitoring human
rights in Nepal (Note: the UN's human rights office here is
the largest in the world),the letters requested that the UN
also assist in monitoring the cease-fire Code of Conduct,
monitor Maoist combatants and their weapons, monitor the
Nepal Army in its barracks, and supervise and monitor
Constituent Assembly elections (which could come by April
2007). What the letter did not do was indicate whether the
combatants would be separated from their arms. Most in the
SPA agree that Maoists cannot join an interim government
until they are separated from their weapons. The GON hopes
that the UN will be able to convince the Maoists to agree to
such a move.


7. Meanwhile, the Nepali authorities and journalists
continue to receive reports of Maoist extortion, kidnappings,
and other violations of the May 26 Code of Conduct. There
are even periodic news reports that the Maoists might
initiate another people's movement if they are not admitted
soon into an interim government.

ECONOMIC WOES
--------------


8. Nepal's GDP grew only 1.9 percent in FY 2005/06, while
inflation increased to 8 percent annually. Approximately USD
1 billion in foreign remittances pumped into the economy last
year increased per capita income to USD 322, a nominal growth
of USD 20. The GON, sapped by the Maoist insurgency and
faced with nurturing a fledgling democracy, lacks sufficient
financial resources to kick-start economic activity. On July
12, Finance Minister Ram Sharan Mahat announced an ambitious
USD 1.97 billion budget for FY 2006/07, which he said was
aimed at institutionalizing the democratic system and
establishing peace through constituent assembly elections.
The budget included USD 325 million in foreign grants, a 72
percent increase over the previous year. Whether the GON
will be able to implement the budget hinges on how the peace
process unfolds. Final commitments from many donors depend
on the GON and Maoists reaching an internationally accepted
peace.


9. Political turmoil and the Maoist threat have created a
hostile business environment. Foreign direct investment has
decreased nearly 50 percent since 2000. Nepal is primarily a
subsistence agriculture economy, but its industrial base has
provided employment to the growing number of poor flocking to
the cities. If Nepalese businessmen flee the country instead
of trying to work within the current unstable situation, the
Nepalese economy will suffer and further hurt the poorest of
the poor.

TIBETAN AND BHUTANESE REFUGEES
--------------


10. Nepal hosts two refugee populations of note, Tibetan and
Bhutanese. The USG is currently funding an expansion of the
Tibetan Relocation Center located in Kathmandu to make it
possible to provide shelter to transiting Tibetans as they
wait for processing by UNHCR here in Kathmandu.


11. Over 100,000 Bhutanese refugees have been living in
seven camps in southeastern Nepal since the early 1990s.
Donor countries continue to discuss with the GON options for
a durable solution to the Bhutanese refugee issue, including
repatriation, local integration, or resettlement of Bhutanese
refugees. The GON recently agreed to allow UNHCR to conduct
a re-registration of the camps, a necessary step to lay the
foundation for future solutions.

A Half-Century Of Development Assistance And Today's USAID
Program For Nepal
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12. In 1951, the closed Hindu Kingdom of Nepal opened to the
outside world. Shortly thereafter, the USG sent our first
development assistance to Nepal. The relationship has
prospered since, with the United States consistently one of
the leading donors in Nepal. Historically, economic
assistance through USAID addressed Nepal's poverty and its
manifestations, prioritizing health programs, agriculture and
natural resources, and other social sector assistance with
major success. For example, the rate of child (under five)
mortality has dropped by over 40 percent in the 15 years
since USAID introduced community-based child health care
modalities. USAID was also responsible for the formation of
community forest user groups (CFUGS) that have enabled
Nepalis to take charge of their major resource and materially
slowed deforesetation. The CFUGS (over 1700 nationwide) have
weathered the storms of civil war and remain an important
factor in local self-governance. After the initial advent of
democracy in the early 1990s, USAID stepped up assiatance
with parliamentary training programs. USAID also developed
innovative HIV/AIDS activities that have helped to hold the
epidemic to the rate of one-half of one percent in the
general population despite higher rates in particularly
at-risk groups.


13. Intensification of the Maoist threat from 2000 on caused
the US Mission to reassess the nature of Nepal's problems.
USAID introduced strong program elements to mitigate the
effects of the conflict and to focus on governance issues
such as political party development and the rule of law. The
popular uprising of April 2006, has created new opportunities
that Post is eager to grasp. USAID is transitioning into a
new strategy for Nepal that targets the goals of stability
and security, a multi-sectoral approach which aligns projects
to advance the peace process, restore the rural economy
shattered by war and terror, and prevent the now-contained
HIV/AIDS plague from invading the general population through
migrants fleeing the conflict. At the same time, this
strategy seeks to bolster the legitimate forces of the
central government, empowering GON institutions to rule well,
combat corruption, and provide the social services that the
rising voice of the population justly demands.


14. The USAID program for 2006 has an overall level of
approximately USD 45 million, including the core USAID
mission programs, new activities by the Office of Transition
Initiatives (OTI),and a regional Office of Foreign Disaster
Assistance (OFDA) program. About USD 40 million will finance
USAID's three strategic objectives for Nepal: A) enhance
stability and security, B) strengthen governance and protect
human rights, and C) build capacity of critical institutions.
The lion's share of the program budget goes to enhancing
stability and security, including components to support the
peace process, offer workforce training for unemployed youth,
the disadvantaged and the displaced, mitigate conflict and
aid victims of conflict, protect the livelihoods of the poor,
restore war torn infrastructure through projects such as
road-building, and reduce the transmission and impact of
HIV/AIDS with its potentially destabilizing effects.


15. To strengthen governance and protect human rights, USAID
supports activities to reduce trafficking in persons,
strengthen civil society and democratic political parties,
and support UN and GON efforts to protect human rights. USD
13 million has been allotted to improve critical governmental
institutions, including the agencies and local networks that
address child survival, health, and nutrition; maternal care;
family planning; and the courts and civil society
organizations that advance the rule of law and combat
corruption. Most recently USG assistance has been augmented
by a new program through USAID/OTI that will assist the peace
process through media outreach. Lastly, USAID hosts a
regional OFDA unit that has, over the past year alone,
responded to the Tsunami, the Pakistan earthquake, and even
seconded staff for the Katrina response.

MILITARY AND SECURITY ASSISTANCE
--------------


16. Ensuring law and order is a key responsibility for every
government. We look forward to discussing these issues with
you in more detail on your arrival.

CONCLUSION
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17. Let me add in conclusion how delighted I am that you and

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the rest of your delegation, including Rep. Fred Upton and
his spouse Amey, Rep. Brian Baird, Rep. Ander Crenshaw and
his spouse Kitty, Rep. Wayne Gilchrist, and their staffs,
will be coming to Kathmandu. We look forward to welcoming
you to Nepal and trust you will find your time here well
spent.
MORIARTY