(C/NF) NEPAL'S FINANCIAL SITUATION AND CAPITAL

C O N F I D E N T I A L KATHMANDU 002251

SIPDIS

NOFORN
SIPDIS

E.O. 12958: DECL: 08/18/2016
TAGS: PINR ECON EFIN EINV PTER NP
SUBJECT: (C/NF) NEPAL'S FINANCIAL SITUATION AND CAPITAL
FLIGHT (C-NE6-01062)

REF: A. SECSTATE 124899


B. KATHMANDU 1652

Classified By: Ambassador James F. Moriarty. Reasons 1.4 (b/d).

SUMMARY
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1. (C) The continuing extortion and intimidation of
businesses in Nepal by the Maoists has created a significant
problem for foreign- and Nepali-owned businesses in Nepal.
Maoist activities against business have continued despite the
cease-fire Code of Conduct. This threat has caused many
businessmen and industries in Nepal to relocate, or consider
relocating, to another country, mainly India. Legal
restrictions on movement of capital have forced many
businessmen to find creative ways to transfer capital out of
Nepal. Businesses have lost faith in the ability of the
Government of Nepal (GON) to protect them, and most
businesspeople do not believe the GON will be able to address
security issues anytime soon. End Summary.

Foreign Investment Under Threat: Businesses Relocating
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2. (C) Many businesses and industries have been adversely
affected by the Maoists, especially since the GON dropped its
terrorist designation from the Maoists in May, allowing the
Maoists to operate openly and freely throughout the country.
Maoist extortion, intimidation and coercion of businesses
appears to have increased despite the cease-fire Code of
Conduct signed between the Government of Nepal (GON) and the
Maoists in May, which bars such activities. Increasing
numbers of manufacturing and service industries in Nepal,
both domestic- and foreign-owned, have either been forced to
close down by the Maoists or chosen to relocate to other
countries where the investment atmosphere is better.
Although many of the affected industries were initially
located in southern and southeastern Nepal (Birgunj and
Biratnagar),businesses in Kathmandu and eastern Nepal have
also been affected. Industry in western Nepal had been
affected extensively earlier in the Maoist insurgency.


3. (C) This is a partial list of Maoist-caused closures since
the beginning of the current cease-fire in April 2006 (Note:
Point twelve of the 25 point Code of Conduct for the
cease-fire states that, "both sides shall create an
environment for regular operation of...industrial
establishments." End Note.):

-- In early May, the Maoist-affiliated All Nepal Trade Union
Federation-Revolutionary (ANTUF-R) began to intensify efforts
to enforce unreasonable "standards" for employees and
facilities, extort money, and force appointment of local
Maoists as permanent employees at most manufacturing and
service industries in Nepal.

-- In May, ANTUF-R, supported by Maoist militias, forced
dozens of manufacturing industries situated near Birgunj (on
the Nepal-India border) to shut down operations indefinitely
because the industries could not keep up with Maoist
extortion demands.

-- On May 19, ANTUF-R intensified physical violence and
extortion, demanding approx. USD 1.3 million in "tax" from
Dabur Nepal, a joint India-Nepal venture that manufactures
hygiene products and fruit juices, forcing Dabur to close
down operations.

-- In late May, ANTUF-R went after dozens of Indian-owned
industries in Birgunj, demanding that the businesses fire all
Indian employees. Many of the industries decided to close
down and transfer operations to India.

-- From May to August, approximately 70 percent of the nearly
250 carpet factories in Nepal shut down due to increasing
ANTUF-R activities and demands. Sources stated that, in
early 2006, most carpet industries in Nepal were doing
"relatively well," but that there had been a significant drop
since ANTUF-R activities began in earnest. Most of the

carpet factories that have remained open are no longer
producing carpets but only trading in remaining stock.

-- From May to August, a majority of the textile factories in
Nepal closed down. Some of these factories closed down due
to the termination of Nepali textile quotas in early 2006,
but the majority were forced to close because of Maoist
pressure. On June 22, nearly 50 textile industries in
Birgunj closed indefinitely due to a dispute between
management and ANTUF-R. Out of approximately 400 textile
factories in Nepal, only five or six currently remain in
operation.

-- In late July, The Maoist-affiliated All Nepal Hotel and
Restaurant Workers Union (ANHRWU) forced two Indian nationals
working at casinos in Kathmandu to quit their jobs.

-- On August 13, ANTUF-R forced an indefinite closure of all
tea estates and factories in eastern Nepal. The closure
affected 115 tea estates, 40 tea-processing plants, and
40,000 workers and continues to cause a loss of approximately
USD 135,000/day.

Capital Flight: Many Informal Methods
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4. (C) Anecdotal evidence suggests that capital flight from
Nepal is increasing. Numerous sources told Emboff that they
have transferred assets and capital out of Nepal, but GON
regulations prevent legal transfer of capital. The main
method to illegally transfer funds out of Nepal is through
"hawala." (Note: Hawala is an informal process whereby money
is transferred through family or association networks from
country to country, but the money does not actually cross an
international border, like an informal banking system with no
records. End Note.) There are many hawala lenders in Nepal
who transfer money to India, Pakistan, the U.S., the Middle
East, and other places. Additionally, some businessmen
reported that they simply carried cases full of cash or
stashed money in trucks of goods across the porous border
between Nepal and India. These two methods are, by far, the
most frequently reported methods for transporting capital out
of Nepal.


5. (C) Some of the larger businesses are using legitimate
methods in illicit ways to transfer capital out of Nepal,
especially to India. Large businesses have reportedly
created shell corporations in India or other countries and
then placed large orders to import goods from those
corporations. When the imported goods arrive, the companies
either inflate the bills so they can transfer higher amounts
of money to their shell corporation, or bribe import
officials in Nepal to doctor the paperwork to make it look
like more items were imported. This allows them to transfer
large sums of money to their shell corporation in the other
country.


6. (C) Another businessman told Emboff that he and his family
have taken large amounts of jewelry and precious stones and
metals out of the country. They carried the valuables across
the border to India and sold them, investing in land or
businesses in India. This method of transferring capital
appears to be not as widespread as others.

No Faith In the Government
--------------


7. (C) Banwari Lal Mittal, Former President of the Nepal
Chamber of Commerce, told Emboff that Maoist union activities
had paralyzed operations in ninety percent of the factories
in the Birgunj and Biratnagar areas. Mittal complained that
security was a huge problem for businessmen in Nepal.
Maoists have attacked businessmen both in their homes and in
their place of business. Mittal claimed there had been no
protection provided by the GON against such attacks.
Birendra Bahadur Chhetri worried that the Maoists had branded
all businessmen as "class enemies" and that the Maoists would
continue to "extort and pressure industries until they bow to
Maoist demands or leave the country." Chhetri stressed that
the Maoists were "not sparing any sector, be it foreign

employment, hotels, tourism, or transportation.


8. (C) One businessman said that "wise businessmen are
leaving Nepal immediately and foolish nationalist businessmen
are holding out hope for a better business climate in Nepal."
Most of the business leaders that Emboff spoke to shared
this sentiment. Businessmen did not have faith that the GON
would protect them, and did not believe that the GON could
stand strong against the Maoists and solve the problems
facing the business community. Most businessmen, both Nepali
and foreign, had begun to search for ways to transfer their
capital out of Nepal and into neighboring India to save their
businesses.

Comment
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9. (C) Capital flight from Nepal is not an entirely new
phenomenon, but continued pressure from the Maoists has
caused it to approach a crisis. With the fear by businessmen
that Maoists could enter into an interim government soon,
businesses are becoming increasingly concerned and looking
for a way out, to India or other countries. If this trend
continues, the economy of Nepal could plummet further,
putting pressure on the GON during this vital time of
transition.


10. (C) The GON has not taken effective action to stop Maoist
extortion and coercion of businesses in Nepal. It is
noteworthy that, despite the cease-fire, the Maoists continue
to extort and intimidate businesses with impunity. Fear
among businessmen continues to grow, and as more Nepali- and
foreign-owned businesses leave Nepal, the pressure will
increase on the GON to solve the problems. This could give
the Maoists an extra bargaining chip at the negotiation table
during peace talks.
MORIARTY