NEPAL'S NEW CENTRAL BANK GOVERNOR WARNS OF

C O N F I D E N T I A L SECTION 01 OF 03 KATHMANDU 000181 SIPDIS E.O. 12958: DECL: 03/16/2019 TAGS: ECON EFIN PINR NP SUBJECT: NEPAL'S NEW CENTRAL BANK GOVERNOR WARNS OF "LOOMING CRISIS" DUE TO GLOBAL ECONOMIC DOWNTURN Classified By: Charge d'Affaires, Randy W. Berry. Reasons 1.4 (b/d). Summary -------------- ¶1. (C) The recently appointed governor of Nepal's central bank, Deependra Kshetry, expressed serious concerns about the impact of the current global economic crisis on Nepal's already weak economy during a wide-ranging meeting with Acting Deputy Assistant Secretary of State Michael Owen on March 2. Kshetry, who was appointed head of the country's central bank six weeks ago, warned of a "looming crisis" in remittances and a downturn in tourism, two of the country's most powerful economic engines. He said rapidly increasing inflation and the plummeting value of the Nepali rupee are also adding to the country's economic woes. In discussing his rise to governor following a 30-year career at the NRB, Kshetry lent credence to the claims of many observers that his predecessor was a victim of politically motivated corruption charges. Global Economic Downturn Felt Sooner Than Expected -------------- -------------- ¶2. (C) Since the onset of the international economic crisis last fall, many government officials have maintained that the impact on Nepal would be delayed, and minimized, by the fact that the Nepali economy is not as well integrated into the global economic system as others in the region. However, Deependra Kshetry, the recently appointed governor of the Nepal Rastra Bank (Nepal National Bank or NRB),the country's central bank, acknowledged that the shock waves from international economic crisis are already being felt in Nepal during a March 2 meeting at the NRB with Acting Deputy Assistant Secretary of State for South and Central Asia Michael Owen. While addressing a broad range of economic and financial issues, Kshetry expressed serious concerns about the possible extent of damage the international economic crisis will cause to Nepal's economy. "Looming Crisis" with Remittances -------------- ¶3. (C) Among Kshetry's chief concerns in the "looming crisis" with remittances from foreign workers. Currently, the some NRs 150 billion (USD 1.9 billion) in annual remittances account for slightly more than 17 percent of Nepal's gross domestic product (GDP). The most recent data released by the NRB indicated that remittances increased by 65.3 percent during the first six months of the current fiscal year (mid-July 2008 to mid-February 2009),but Kshetry cautioned that this trend is not sustainable because of declining overseas employment opportunities for Nepali workers. He pointed out that, in the face of economic downturn, many foreign businesses are "retrenching" by downsizing their work forces, particularly in countries favored by Nepali workers, such as Malaysia. According to Department of Foreign Employment data released in late February, the number of workers leaving for Malaysia, which, excluding India, is the second most favored destination had dropped to 1,553 during the seventh month of fiscal 2008/2009. In the previous month 2,873 workers left for Malaysia. (Comment. A decline in remittances could cause serious and widespread financial troubles. Remittances are used as collateral for many bank loans. They are also commonly used to finance land purchases, especially in rural areas, and housing construction and to pay school fees. End comment) Tourism Is Slowing -------------- ¶4. (U) Another of Kshetry's worries is the future of Nepal's tourism industry. He noted that airlines, hotels and other tourist-related businesses have been reporting cancellations spurred by international economic downturn. On the same day KATHMANDU 00000181 002.2 OF 003 as his meeting with A/DAS Owen, the Nepal Tourism Board (NTB) announced that visitor arrivals at Tribhuvan International Airport in Kathmandu, Nepal's only international airport, declined by 16.2 percent in February compared to last year. Arrivals in January declined by 15.8 percent compared to last year, according to the NTB. The economic contribution of tourism is difficult to measure because the impact of tourist spending is not always direct, but some analysts estimate that it accounts for a slightly smaller percentage of Nepal's GDP than do remittances. High Inflation, Declining Rupee Add to Economic Woes -------------- -------------- ¶5. (SBU) Kshetry pointed out that, while one economic engine (tourism) has begun to sputter and another (remittances) faces a "looming crisis," Nepalis are being forced to cope with two other significant economic problems -- high inflation and the declining value of the national currency. According to the NRB, overall prices increased by 14.4 percent during the six months of FY 2008/2009. Food prices increased by 18 percent, with the price of some essential commodities rising by more than 35 percent. The bank reported that, since the beginning of the current fiscal year, the value of the Nepali rupee vis-a-vis the U.S. dollar has fallen more than 20 percent. In mid-July, the exchange rate for USD 1 stood at NRs 68.50; the current exchange rate is 82.45. Kshetry said, "These internal challenges (inflation and currency devaluation) are magnified by external challenges" resulting from the global economic downturn. Although he identified inflation and currency devaluation as two of the biggest challenges that central bank faces, he did not discuss any specific plans the NRB has for addressing these issues. (Comment. The Nepali currency has been declining because it is pegged to the Indian rupee, which has weakened considerably.) When asked what economic sectors had the greatest potential for growth under the current condition, Kshetry singled out agriculture. Hints Charges Against Predecessor Politically Motivated -------------- -------------- ¶6. (C) In June 2007, the Commission for the Investigation of Abuse of Authority accused previous Governor Bhattarai and one of the NRB's executive directors of embezzling USD 51,500 from a World Bank-funded project. After a special court established to hear the case could not reach a verdict, it was moved to the Supreme Court. In March 2008, a Supreme Court judge found Bhattarai and the executive director guilty, a ruling Bhattarai has appealed to a three-member Supreme Court panel. Many observers believe that the charges against Bhattarai were politically motivated, and Kshetry lent credence to this view. "He didn't do anything wrong," Kshetry said. In his view Bhattarai was a victim of impossibly difficult monitoring standards the previous government had set for the project under question. Biographic Information -------------- ¶7. (C) Kshetry, 59, was appointed governor of the NRB at a cabinet meeting on January 16. He had worked for the bank for nearly 30 years and was serving as executive director of its (Currency) Issue Department when he retired in April 2007. Following his retirement, he served one year as a member of the National Planning Commission, during which he played an important role in the development of Nepal,s three-year Interim Plan. Kshetry replaced Bijaya Nath Bhattarai, who was removed as governor after being accused of embezzlement in June 2007. He will complete Bhattarai's remaining term -- roughly 13 months -- after which he will be eligible for reappointment to a full five-year term. As governor, Kshetry will serve as chairperson of the seven-member Board of Directors of the bank, which, in addition to setting monetary and fiscal policy, regulates Nepal's embryonic banking and KATHMANDU 00000181 003.2 OF 003 financial sectors. Alexander Pitt, Resident Representative of the International Monetary Fund, who has worked extensively with the NRB, praised Kshetry for being "honest, reform-minded, and capable," adding that the new governor is popular with the NRB's staff and his close ties with the Minister of Finance will be important if economic reforms are to move forward in Nepal. BERRY