FINANCE MINISTER DISCUSSES SHAKY LOAN

C O N F I D E N T I A L KATHMANDU 000884

SIPDIS

SIPDIS

DEPT FOR SCA/INS

E.O. 12958: DECL: 04/03/2016
TAGS: ECON EFIN PTER PGOV PREL NP
SUBJECT: FINANCE MINISTER DISCUSSES SHAKY LOAN

REF: A. KATHMANDU 637


B. KATHMANDU 665

C. KATHMANDU 676

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

Summary
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1. (C) On March 31, the Ambassador and International Monetary
Fund (IMF) Resident Advisor Sukhwinder Singh met with
Minister of State for Finance Roop Jyoti to urge His
Majesty's Government of Nepal (HMGN) to refrain from
proceeding with a shaky loan deal (ref A). Jyoti stated that
he "heard" our concerns, but asked us to understand HMGN's
pressures, and lack of options. Jyoti said Nepal could take
precautions to ensure that the loan was genuine, but noted
that HMGN needed money, especially as India's four percent
additional customs duty was crippling export industries.
Thus, Jyoti claimed, he was forced to seriously consider the
loan, though he appeared sobered by the Ambassador's message.
End Summary.

IMF Also Urges HMGN Not To Pursue Shaky Loan
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2. (C) On March 31, the Ambassador and International
Monetary Fund (IMF) Resident Advisor Sukhwinder Singh met
with Minister of State for Finance, Roop Jyoti, to urge His
Majesty's Government of Nepal (HMGN) to refrain from
proceeding with the shaky loan deal that Jyoti first outlined
to the Ambassador on March 8 (ref A). Instead of HMGN
pursuing this and other private loans of dubious origin,
Singh urged HMGN to work with multilateral donors, such as
the World Bank (WB) and Asian Development Bank (ADB) to
obtain necessary funds. (Note: Jyoti informed us an
Australian-based organization had also approached HMGN to
offer a similar loan. End note.) Singh noted that a country
with Nepal's level of income should not borrow on commercial
terms. However, HMGN could talk with IMF about ways to raise
economic growth and lower debt, which in turn would lead to
access to more money from the WB and ADB.

Minister Hears Caution, but...
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3. (C) Stating, "you are friends, you give good advice, you
have hesitation; I hear you," Jyoti promised he would "try to
deal with this the proper way," but asked the Ambassador and
Singh to "please understand" the situation of Nepal. Saying
he did not want HMGN to lose face over the loan, or to
jeopardize future generations of Nepalis, Jyoti explained
that having good relations with bilateral and multilateral
donors was important for Nepal. He stated, "if you feel it
is not worth the risk, then we can drop it." Jyoti commented
that it was possible that nothing would come of the loan
proposal. However, he stated that Nepal could make good use
of the money. He explained that the best way to ensure the
loan was above board was to be open and involve bilateral and
multilateral donors. He also acknowledged that he did not
want future generations of Nepalis to be trapped into paying
for a loan that the government had not used properly and
responsibly, including the possibility that future
governments could misappropriate the loan money.

...Argues Precautions Can Safeguard HMGN on Loan
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4. (C) Jyoti stated that HMGN could put conditions on the
loan and trap those involved if the money was later found to
be tainted. He acknowledged that the people offering the
loan had no track record and no background, and were only
acting as agents for non-resident Indians. However, he noted
that the people offering the loan had assured him that they
would pass scrutiny. Jyoti explained that the Central Bank
would hold the original loan guarantee document, and would
only pass it to the loaners once the Central Bank received
the money, and the loaners had identified themselves and had
passed scrutiny. HMGN would hold the three agents involved,
two Indians and one Nepali, in custody until the loaners
passed scrutiny.

HMGN Needs Money for Security
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5. (C) Jyoti stated that HMGN was "not getting what we need"
from other sources of financing and that HMGN was "squeezed
at all sides and from all angles." He pointed out the
impracticality of certain multilateral donor conditions, such
as pursuing bank defaulters, that made it difficult for HMGN
to pursue other means of getting money. (Note: Pursuing
willful defaulters is one of the World Bank's four conditions
related to the Poverty Reduction Support Credit (PRSC).
Jyoti had told a March meeting of bilateral and multilateral
donors that HMGN was moving forward with measures that would
resolve long-standing donor concerns about the integrity of
Nepal's banking system (ref C). End note.) He also
commented that the Maoists were closing down the country,
causing economic growth and revenue to decline. Maoist
extortion and kidnapping were making people poorer. He
highlighted Maoist action forcing industries to sign
unsustainable "workers' agreements" that promised not to fire
people and to increase wages. He noted that past governments
had acted irresponsibly in not planning to alleviate the
current power crisis (ref B),which also hurt the economy.
He stated that he did not want to be responsible for
"something like the current power crisis," and wanted to
ensure that Nepal had access to money as an "option for the
future," referring perhaps to a possible future in which
multilateral donors would not lend to Nepal. Jyoti stressed
that Nepal's urgent need was for money for security, as even
development projects needed security or the money would end
up going to the Maoists. However, the international
community would not give or lend money to Nepal to enact
needed security measures, he complained. Jyoti concluded
that, given the pressures and lack of options, HMGN needed to
seriously consider the loan.

Ambassador Again Cautions Loan Is A Bad Idea
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6. (C) The Ambassador again explained that all indications
were that this loan was not bona fide. He noted that the
front people were insignificant, but clean, and that we were
finding it difficult to unravel who was behind the loan. He
stated that the front company did not have a track record or
assets comparable to the size of the loan. Together, all
indications were that the loan was not legitimate and should
be avoided, he advised. He stressed that the US felt
strongly that HMGN should not go forward with the loan.
Singh reiterated that HMGN should consult with multilateral
donors to pursue multilateral sources of funding.

Indian Additional Customs Duties Hurting
--------------


7. (C) Jyoti lamented that India had suddenly initiated a
four percent across the board additional customs duty (ACD)
as of March 1. As the Indian Finance Minister had not taken
Jyoti's call on March 30 or 31, Jyoti concluded that India
wanted to "let Nepal face an economic crisis." Jyoti
explained the importance of India as a market for Nepal's
exports, and noted that any legal action by Nepal through
Indian courts or through the World Trade Organization would
take years and cost too much for Nepal to afford. Jyoti
noted that the four percent ACD was the make or break margin
for many industries. He added that if the export sector of
the jute industry alone was forced to close then over 20,000
people would be out of work. There was no doubt in Jyoti's
mind that those people would go out on the streets to
protest, thus "crippling the government" if India continued
to charge the additional customs duties.

Comment
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8. (C) Jyoti obviously wants to pursue the loan for all the
reasons he outlined. That said, undoubtedly he heard our
clear warning. The Deputy Governor of the Central Bank, who
also attended the meeting, also appeared to have strong
reservations about pursuing the loan.
MORIARTY