NEPAL: MAOISTS PARTNER WITH BUSINESS COMMUNITY

C O N F I D E N T I A L SECTION 01 OF 02 KATHMANDU 000463 SIPDIS SIPDIS E.O. 12958: DECL: 04/25/2017 TAGS: ECON EINV ELAB EAID PGOV PTER SCUL IN NP SUBJECT: NEPAL: MAOISTS PARTNER WITH BUSINESS COMMUNITY Classified By: Classified By: Ambassador Nancy J. Powell. Reasons 1.4 (b/d). Summary -------------- ¶1. (C) Over the last year, growing insecurity, labor problems and an uncertain political future led many investors in Nepal to hedge their bets. Over NRs 40 billion (USD 635 million) is thought to have been transferred out of the country over the last six months. With the news of the Maoist-led government, the Nepali stock market reacted and bank shares started to slide. The Maoists countered by calling a meeting with Nepal's business community on April 17, exactly one week after the Constituent Assembly (CA) election. The Maoists pledged their support for the private sector, promised to protect investments and private property and asked for the business community's advice in formulating the new government's economic policy. Some in the business community are cautiously optimistic, others less so, but nearly all are taking a wait-and-see approach. No one is ready to start re-investing -- but the good news is that they are not yet fleeing. Rumors of Capital Flight -------------- ¶2. (C) Economic indicators reveal a substantial amount of capital flight over the last six months. Nepal Rastra Bank (NRB),Nepal's central bank, reports an increase in trade with India of approximately seven to eight percent, but over the same time period the NRB has seen an increase in demand for Indian Rupees of over 45 percent. The difference suggests that approximately NRs 16 billion (USD 254 million) left the country in the last six months (legally). An additional NRs 20 billion (USD 318 million) is believed to have been transferred out through unofficial "hawala" channels. The fall in bank share prices the week of April 14, may be an omen of things to come. Many property owners in Nepal have already mortgaged their properties and taken as much cash as possible. In Kathmandu alone, over fifty percent of the properties are mortgaged and approximately half of these proceeds remain un-invested or have left Nepal. Should the real estate market crash, the banks will be in a tough spot. But for now, the Maoists seem to have saved the day and investors' confidence by convening a meeting to ask for the business community's support. The Maoists Convene a Business Meeting -------------- ¶3. (C) On April 17, exactly one week after the historic Constituent Assembly (CA) election, the Maoists held a town hall meeting lasting over 4 hours with members of Nepal's largest business chambers. In yet another surprise move, the Maoists used the meeting to request the assistance of the business community in formulating an economic agenda for the new government. The Maoists proclaimed that they wanted an "economic revolution" and would support the private sector's efforts. Some business executives called the meeting promising - others remain more cautious. The Maoists asked for just one chance to prove themselves and Maoist chairman Pushpa Dahal (aka Prachanda),told the crowd, "We are not a bunch of brainless idiots, but you must trust us and give us one opportunity." The Maoists promised to protect private property and investments and pledged to encourage and support foreign investment, but only so long as such investment was deemed beneficial to Nepal. The priority areas defined by the Maoists are hydropower, health, agriculture and tourism. The Maoists also promised to address corruption. Labor and Education - Tricky Issues for the Maoists -------------- -------------- ¶4. (C) One of the most critical concerns of the business KATHMANDU 00000463 002 OF 002 community - labor - dominated the conversation. The Maoists said that wages in the hotel industry should be doubled. The business community stressed the need to liberalize labor laws and explained that if the Maoists wanted the private sector to build employment opportunities, a more liberal labor policy was imperative. One industrialist suggested that a place to start was re-opening the factories that previously closed because of labor disputes. The Maoists pledged to reconsider the needs of the businesses. Private schools, another contentious topic, were also discussed. The Maoists strongly believe that education must be universal and that all schools should be equal. To achieve this, the Maoists explained all private schools would be closed and education would be nationalized. However, the Maoists agreed that a committee should be formed to address these issues and did not rule out the possibility of compensation to school owners. Comment -------------- ¶5. (C) The Maoists surprising election victory has left many wondering about the future of Nepal - but with more to lose than many, the business community is on edge. For now, the business community is taking a wait-and-see approach. They recognize that the Maoists are attempting to do their homework and several business groups are putting together a policy paper for the Maoist leadership. But no one is yet willing to bet their own money on the Maoists truly supporting a capitalist system. Questions of land reform and agricultural production are yet to be addressed. The Maoists will have a hard time realizing even a small percentage of the promises they have made so far. While Prachanda' pro-business remarks on April 17 were reassuring, his more militant comrades may have a difficult time after more then a decade spent pursuing a socialist utopia. If more militant leaders gain the upper hand, investors will flee and the economy will further collapse. Dismantling Nepal's monarchy may prove in the end much simpler than fulfilling Prachanda's call for an economic revolution. POWELL