ECONOMIC GROWTH UNLIKELY UNTIL RESOLUTION OF

UNCLAS KATHMANDU 002596

SIPDIS

SENSITIVE
SIPDIS

MANILA PASS TO PSPELTZ

E.O. 12958: N/A
TAGS: ECON EFIN EAID PGOV PTER NP
SUBJECT: ECONOMIC GROWTH UNLIKELY UNTIL RESOLUTION OF
MAOIST INSURGENCY

REFS: A. KATHMANDU 2251


B. KATHMANDU 1920

C. KATHMANDU 2268

D. KATHMANDU 26

SUMMARY
--------------


1. (SBU) During a recent visit to Nepal, two INR economic
analysts gained insight into Nepal's poor economic state.
Industrialists in KATHMANDU and the key border town of
Birgunj explained how Maoist extortion and the activities
of Maoist-affiliated trade unions had greatly disrupted
their enterprises. Entrepreneurs also complained that the
Government of Nepal (GON) had yet to take any action
against the Maoists to rectify the situation. Business
leaders asserted that the solution to the country's
economic woes was up to the politicians. They had
surprisingly few opinions on the type of policies needed
to mend the economy. The head of the three-member panel
the GON tasked with formulating a plan to handle the
petroleum price crisis stressed that the GON lacked the
political will to bring local prices in line with market
prices. In the absence of political stability, economic
growth in Nepal is likely to remain low.

MAOISTS' EXORTING, NO GON PROTECTION
--------------


2. (SBU) Visiting INR analysts were told by nearly
everyone they met that the GON was not protecting
businesses from Maoist extortion and Maoist-fostered labor
unrest. According to Narendra Raj Poudel, the Chief
District Officer (CDO) in Birgunj (key town on the border
with India),the Home Ministry had given no direction to
him or the local police to protect businesses or factories
because the GON did not want to be seen as breaking the
cease-fire. He added that he had recently been
transferred to Birgunj from Chitwan (north-west of
Birgunj),where he said the situation was the same.
Businessmen did not appear to be taking any initiative to
provide their own security.


3. (SBU) Several business owners openly admitted to paying
off the Maoists. In the KATHMANDU area, owners said the
Maoists and their fronts were disciplined and kept
reasonably good records so that they weren't hit up "too
often." Owners in Birgunj disagreed, complaining that the
solicitations were constant and the various Maoist groups
took no account of "receipts" issued by other Maoist
groups.

MAOISTS ENGAGED IN UNION BUSTING
--------------


4. (SBU) More damaging than the extortion, however, were
Maoist efforts to politicize the labor unions. Business
leaders explained that to attract public support, Maoists
would show up at factories and demand wage and benefit
increases on behalf of the workforce and threaten violence
if their demands were refused. Labor would then transfer
their loyalties to the Maoist unions, squeezing industry.
Laxman Basnet, President of the Nepal Trade Union Congress
(NTUC),who was somewhat dismissive of the Maoist's long-
term chances, did admit that the Maoists were having some
success in union busting.


5. (SBU) Vice Chairman Bishnu Rimal of the General
Federation of Nepalese Trade Unions (GEFONT) provided a
radically different view. He claimed that business owners
were calling in the Maoists and negotiating with them to
bust up the established unions. After the Maoist demands
were satisfied, the other unions would demand the same for
their own membership, which the owners were now in no
position to refuse. He cited several specific instances
and noted that the current President of the Federation of
Nepalese Chambers of Commerce and Industry (FNCCI) often
met with the Maoists.

CAPITAL FLIGHT A SERIOUS PROBABILITY

--------------


6. (SBU) At a roundtable discussion with industrialists in
Birgunj, one participant stated that 50 percent of the
business owners in the town -- Nepal's industrial capital
-- would sell if they could find a buyer (ref A). His
compatriot corrected him in gallows humor fashion by
stating that 50 percent would simply close if the law
permitted it. Prominent leaders of the Marwari and Newari
business communities in KATHMANDU have acknowledged to the
Ambassador that they are trying to get as much capital as
quickly out of the country as possible.

BUSINESS COMMUNITY LACKS VISION FOR ECONOMIC POLICIES...
-------------- --------------


7. (SBU) INR analysts heard that business input to the GON
on economic policy was very weak. At several meetings and
roundtables, the plea was made for the diplomatic
community to take the message to the GON because the
business communities own efforts were ineffectual.
Leaders of the two largest labor unions (the Nepali
Congress-affiliated NTUC and the United Marxist-Leninist-
affiliated GEFONT) had better access to senior leaders of
their associated parties, but had no confidence that their
requests or appeals would be acted upon either.


8. (SBU) More depressing, however, was the utter lack of
economic policy vision for the future offered by most of
the business community when asked what they would request
from a stable government should it emerge. Rewat Karki,
General Manager of the Nepal Stock Exchange, suggested
reform of the manufacturing/industrial sector, including
standardized accounting and more transparent business
practices, while a few others suggested reforming the
labor laws to allow "hire-and-fire" practices. Most,
however, indicated it was a "political decision." Karki
said that industrialists were adopting a "wait-and-see
attitude" on further investment until they saw how the
current political situation was resolved. According to
Karki, only the financial sector, including private banks
and insurance companies, was showing a profit, while
companies in the manufacturing/industrial sector were
languishing.

...BUT AGREE INEQUALITY INHIBITS ECONCOMIC GROWTH
-------------- --------------


9. (SBU) Most businessmen mentioned that stark social
inequality in Nepal was a serious problem that had to be
solved in order to pave the way for long-term economic
growth and reduce the appeal of the Maoists. As a result,
economic policy in the next couple of years might have to
be focused on providing social services -- similar to the
last budget which focused on welfare issues and lacked
incentives for businesses or any mention of export
promotion (ref B). Rajendra Khetan, a leading
industrialist, even expressed support for land re-
distribution. Most government officials and private
businessmen acknowledged that Maoist ideology appealed to
disadvantaged members of society -- people who have
limited opportunities under the current social structure.

NO POLITICAL WILL TO SOLVE PETROLEUM CRISIS
--------------


10. (SBU) Bhanu Acharya, head of the three-member panel
the GON tasked with formulating a plan to handle the
petroleum price crisis (ref C),stated that the political
parties recognized that the government could not afford to
continue subsidizing petroleum prices. However, the GON
lacked the political will to bring domestic prices in line
with market prices. He noted that petroleum pricing was
an extremely emotional issue in Nepal and that every price
change had been accompanied by protests "for decades."
Kerosene and cooking gas were the most sensitive, but
increases in diesel and gasoline caused anxiety even among
those who rarely used them because of fears that higher
transportation costs would fuel inflation.


11. (SBU) Acharya expected that the petroleum panel's
report, which should be sent to the cabinet within the
next few weeks, would lay out the reality of the
situation. (Note: The report was presented to the cabinet
on September 21 and has not been made public yet. End
Note.) He said it would likely recommend targeted
subsidies by product --especially kerosene -- and
recommend sufficient price hikes to begin to pay down the
NPR 4 billion (USD 54 million) the Nepal Oil Corporation
(NOC) owes Nepal's state-owned banks. Then, based on the
new pricing scheme, the GON would try to negotiate a
better supply deal with the Indian Oil Corporation (IOC),
which NOC owes NPR 8 billion (USD 108.1 million). Acharya
intimated that the panel report might provide the cover
the government needed to begin to educate the public on
the need for, and inevitability of, petroleum price hikes.

TRADE WITH INDIA AND BEYOND
--------------


12. (SBU) Prachanda Man Shrestha, Joint Secretary in the
Ministry of Commerce, explained that the current trade
regime with India was virtually free trade and that
India's attitude toward Nepal -- traditionally that of a
bully -- was changing. The Indians, he noted, were
playing fair by giving Nepal unhindered access to the
Calcutta port to run trains from Calcutta to the Internal
Cargo Depot (ICD) in Birgunj.


13. (SBU) Shrestha opined that the South Asian Free Trade
Area (SAFTA) had little real chance of success, because
India's interests had turned toward trade with the
Association of South-East Asian Nations (ASEAN). This
Indian interest, however, gave the Bay of Bengal
Initiative for Multi-Sectoral Technical and Economic
Cooperation's free trade agreement (BIMSTEC FTA) a real
shot at emerging as the center of regional trade (ref D).
The Joint Secretary noted that an increase in trade
between Thailand and India via BIMSTEC would indirectly
benefit Nepal's economy. BIMSTEC had the added advantage
of not burdening India and other members with baggage from
the Indo-Pakistani rivalry.

CHINA TRADE: HOW SERIOUS?
--------------


14. (SBU) Shrestha mentioned that Nepal, located between
India and China, could not help but benefit from transit
trade. When it was suggested that Nepal was, in fact, far
from the markets in both India and China, he grinned and
said, "You're right. Nepal is not between India and
China, but between Tibet and Bihar." (Note: Bihar is one
of India's poorest states. End Note.) More promising, he
thought, was an East-West railway in Nepal that could
foster India-Nepal-India trade. (Note: At a subsequent
meeting at the Department of Industry, an official there
confirmed that raising foreign investor interest in such a
railway was a priority. End Note.)

COMMENT
--------------


15. (SBU) Business leaders and government officials are
preoccupied with the political situation and are waiting
to make private investment and economic policy decisions
until the Maoist insurgency has been resolved. The key
players in the political arena -- the Seven Party Alliance
and the Maoists -- are far from reaching consensus on a
common economic policy which could allow the economy to
grow despite political uncertainty during this transition
period. In the absence of political stability,
entrepreneurs are unlikely to resume investment, and
economic growth will likely remain very low.

MORIARTY