Identifier
Created
Classification
Origin
10KATHMANDU84
2010-01-29 08:18:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Kathmandu
how-toVZCZCXRO1117 PP RUEHCI DE RUEHKT #0084/01 0290818 ZNR UUUUU ZZH P 290818Z JAN 10 FM AMEMBASSY KATHMANDU TO RUEHC/SECSTATE WASHDC PRIORITY 1364 INFO RUEHBJ/AMEMBASSY BEIJING PRIORITY 7296 RUEHLM/AMEMBASSY COLOMBO PRIORITY 7672 RUEHCP/AMEMBASSY COPENHAGEN PRIORITY 0391 RUEHKA/AMEMBASSY DHAKA PRIORITY 3023 RUEHIL/AMEMBASSY ISLAMABAD PRIORITY 5711 RUEHLO/AMEMBASSY LONDON PRIORITY 6774 RUEHMO/AMEMBASSY MOSCOW PRIORITY 0153 RUEHNE/AMEMBASSY NEW DELHI PRIORITY 3490 RUEHNY/AMEMBASSY OSLO PRIORITY 0319 RUEHFR/AMEMBASSY PARIS PRIORITY 0199 RUEHCI/AMCONSUL KOLKATA PRIORITY 4958 RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY RUEHGV/USMISSION GENEVA PRIORITY 2534 RUCNDT/USMISSION USUN NEW YORK PRIORITY 3819 RUEKJCS/SECDEF WASHDC PRIORITY RHMFIUU/CDR USPACOM HONOLULU HI PRIORITY RUEAIIA/CIA WASHDC PRIORITY RHEHNSC/NSC WASHDC PRIORITY RHEFDIA/DIA WASHDC PRIORITY
UNCLAS SECTION 01 OF 02 KATHMANDU 000084
SIPDIS
SENSITIVE
E.O. 12958: N/A
TAGS: ECON NP
SUBJECT: NEPAL'S ECONOMY FACES MAJOR CHALLENGES
UNCLAS SECTION 01 OF 02 KATHMANDU 000084
SIPDIS
SENSITIVE
E.O. 12958: N/A
TAGS: ECON NP
SUBJECT: NEPAL'S ECONOMY FACES MAJOR CHALLENGES
1. (SBU) Summary: Nepal's economy, already damaged by a
decade of civil conflict, faces balance of payments and
liquidity problems, a real estate price bubble, slowing
remittance growth, and a shaky (and partially unregulated)
banking sector. The IMF, central bank and leading bankers do
not warn of an imminent economic or banking crisis, but they
acknowledge there are danger signs. End Summary.
Balance of Payments and Liquidity Challenges
--------------
2. (SBU) Nepal is facing its first balance of payments
deficit in many years. In the first quarter of the current
fiscal year, which began in mid-July, the deficit totaled Rs.
20.5 billion (about USD 280 million),compared to a Rs. 11.8
billion surplus in the same period last year. During a
January 26 meeting with the Charge, Krishna Bahadur
Manandhar, Acting Governor of the Nepal Rastra Bank (NRB),
the country's central bank, blamed the deficit largely on a
Government of India's decision to increase tariffs on gold
imports, while Nepal kept it tariff rate the same. Illegal
traders took advantage of this gap to import gold into Nepal,
then smuggle it across the open Nepal-India border. The
Government of Nepal (GON) has taken several steps, including
slowing the customs clearance process, to rein in gold
imports, which totaled 12.5 tons over the first six months of
FY 2009/10, more than triple the amount imported during the
same period last year.
3. (SBU) Nepal has also been experiencing a liquidity crunch,
which pushed interest rates to 11-13 percent, up from 5-7
percent last year. Manandhar linked the ongoing liquidity
crunch to the balance of payments deficit. The head of the
Nepal Banker's Association, Sashin Joshi, told Charge that
irresponsible bank lending also contributed to the liquidity
crisis, as bank lending exceeded deposits. Other factors
include the lack of government spending (the Maoist blockade
of parliament delayed passage of the budget vote for four
months) and last September's currency note shortage -- a
result of poor planning by the NRB. The latter decreased
confidence in the banking sector and led to more Nepalis
holding currency. To combat the liquidity crunch, the NRB
injected approximately Rs. 25 billion into the market, which
began to ease the credit crisis. IMF's representative in
Nepal, Alexander Pitt, is "confident" the NRB's interventions
will be effective. (Note: Pitt is the only expatriate IMF
staff in Nepal, and his office is inside the Nepal Rastra
Bank. End note.)
Remittances Still Increasing, but at Slower Rate
-------------- ---
4. (SBU) In recent years, banks have come to rely heavily on
the flow of remittances from Nepalis working abroad, Joshi
said. Last fiscal year, remittances, which amount to more
than 20 percent of GDP, grew by 65 percent, while the growth
rate so far this years has been just 6 percent. The dramatic
growth in remittances in recent years, IMF's Pitt reported,
has become "addictive" for banks, who rely on the flow of
hard currency for their operations. Banks are having some
difficulty adjust to the slower rate of remittance growth.
Pitt said that the continued strength of the Asian economies,
where many Nepalis work, has kept remittance flows from
dropping.
Banking Sector Exposed, Partially Unregulated
--------------
5. (SBU) The dramatic rise in real estate prices -- some
estimates suggest they have tripled in the past year --
creates risks for Nepal's banks. While the majority of
lending is for trade and manufacturing, some banks are
significantly exposed in the real estate market.
Additionally, as one prominent banker told the Charge,
regardless of their purpose, "all the loans are
KATHMANDU 00000084 002 OF 002
collateralized by real estate." It is unclear how many of
the real estate loans are purely speculative versus real,
according to IMF representative Pitt. NRB chief Manandhar
said his concern is not that real estate prices will begin to
fall, but rather the rate of increase will slow, which would
spell trouble for banks. Pitt agreed "danger signs are
there," but added a "mass banking collapse" is unlikely.
There is no deposit insurance in Nepal, increasing bank
instability, although the NRB has recommended to the GON that
they consider developing an insurance scheme.
6. (SBU) NRB's Manandhar is "seriously concerned" about the
growth of cooperatives, a Nepali financial institution
similar to credit unions. Cooperatives are beyond the
jurisdiction of the NRB, and while the Ministry of Finance
technically oversees the more than 15,0000 cooperatives, it
lacks resources and capacity needed for effective
regulations. Banker's Association President Joshi, who
estimates cooperatives' assets total Rs. 60 to 65 billion,
said managers of some of the large cooperatives invest
deposits largely in high-risk real estate deals, while
maintaining reserves as little as one percent. He cautioned
that, once the real estate market slows, cooperatives could
begin to fail, and, if one fails, it could create a panic.
Keep the Indian Currency Peg
--------------
7. (SBU) The IMF and NRB both strongly support the current
policy of pegging Nepal's currency to the Indian rupee.
NRB's Manandhar said allowing the Nepali rupee to float would
be a "lose-lose proposition." IMF's Pitt said the peg was a
"pillar of stability," adding the NRB does not have the
capacity to manage a floating exchange rate. Given the thin
market for Nepali rupees, the both argued, a floating
exchange rate would also invite speculation.
Macroeconomic Picture Generally Stable
--------------
8. (SBU) Despite the many economic challenges, Pitt reported
that Nepal's overall macroeconomic picture is generally
sound. This year's budget deficit may slightly exceed the
IMF recommended target of 2 percent, due to unbudgeted
demands such as increases in civil service salaries and
payments to former Maoist combatants, but revenues are doing
well. The IMF does not have a program in Nepal, but plans to
start discussions with Nepal on a precautionary program,
likely focused on financial sector reform. The next IMF
Article IV visit is scheduled for February 24.
ORDWAY
SIPDIS
SENSITIVE
E.O. 12958: N/A
TAGS: ECON NP
SUBJECT: NEPAL'S ECONOMY FACES MAJOR CHALLENGES
1. (SBU) Summary: Nepal's economy, already damaged by a
decade of civil conflict, faces balance of payments and
liquidity problems, a real estate price bubble, slowing
remittance growth, and a shaky (and partially unregulated)
banking sector. The IMF, central bank and leading bankers do
not warn of an imminent economic or banking crisis, but they
acknowledge there are danger signs. End Summary.
Balance of Payments and Liquidity Challenges
--------------
2. (SBU) Nepal is facing its first balance of payments
deficit in many years. In the first quarter of the current
fiscal year, which began in mid-July, the deficit totaled Rs.
20.5 billion (about USD 280 million),compared to a Rs. 11.8
billion surplus in the same period last year. During a
January 26 meeting with the Charge, Krishna Bahadur
Manandhar, Acting Governor of the Nepal Rastra Bank (NRB),
the country's central bank, blamed the deficit largely on a
Government of India's decision to increase tariffs on gold
imports, while Nepal kept it tariff rate the same. Illegal
traders took advantage of this gap to import gold into Nepal,
then smuggle it across the open Nepal-India border. The
Government of Nepal (GON) has taken several steps, including
slowing the customs clearance process, to rein in gold
imports, which totaled 12.5 tons over the first six months of
FY 2009/10, more than triple the amount imported during the
same period last year.
3. (SBU) Nepal has also been experiencing a liquidity crunch,
which pushed interest rates to 11-13 percent, up from 5-7
percent last year. Manandhar linked the ongoing liquidity
crunch to the balance of payments deficit. The head of the
Nepal Banker's Association, Sashin Joshi, told Charge that
irresponsible bank lending also contributed to the liquidity
crisis, as bank lending exceeded deposits. Other factors
include the lack of government spending (the Maoist blockade
of parliament delayed passage of the budget vote for four
months) and last September's currency note shortage -- a
result of poor planning by the NRB. The latter decreased
confidence in the banking sector and led to more Nepalis
holding currency. To combat the liquidity crunch, the NRB
injected approximately Rs. 25 billion into the market, which
began to ease the credit crisis. IMF's representative in
Nepal, Alexander Pitt, is "confident" the NRB's interventions
will be effective. (Note: Pitt is the only expatriate IMF
staff in Nepal, and his office is inside the Nepal Rastra
Bank. End note.)
Remittances Still Increasing, but at Slower Rate
-------------- ---
4. (SBU) In recent years, banks have come to rely heavily on
the flow of remittances from Nepalis working abroad, Joshi
said. Last fiscal year, remittances, which amount to more
than 20 percent of GDP, grew by 65 percent, while the growth
rate so far this years has been just 6 percent. The dramatic
growth in remittances in recent years, IMF's Pitt reported,
has become "addictive" for banks, who rely on the flow of
hard currency for their operations. Banks are having some
difficulty adjust to the slower rate of remittance growth.
Pitt said that the continued strength of the Asian economies,
where many Nepalis work, has kept remittance flows from
dropping.
Banking Sector Exposed, Partially Unregulated
--------------
5. (SBU) The dramatic rise in real estate prices -- some
estimates suggest they have tripled in the past year --
creates risks for Nepal's banks. While the majority of
lending is for trade and manufacturing, some banks are
significantly exposed in the real estate market.
Additionally, as one prominent banker told the Charge,
regardless of their purpose, "all the loans are
KATHMANDU 00000084 002 OF 002
collateralized by real estate." It is unclear how many of
the real estate loans are purely speculative versus real,
according to IMF representative Pitt. NRB chief Manandhar
said his concern is not that real estate prices will begin to
fall, but rather the rate of increase will slow, which would
spell trouble for banks. Pitt agreed "danger signs are
there," but added a "mass banking collapse" is unlikely.
There is no deposit insurance in Nepal, increasing bank
instability, although the NRB has recommended to the GON that
they consider developing an insurance scheme.
6. (SBU) NRB's Manandhar is "seriously concerned" about the
growth of cooperatives, a Nepali financial institution
similar to credit unions. Cooperatives are beyond the
jurisdiction of the NRB, and while the Ministry of Finance
technically oversees the more than 15,0000 cooperatives, it
lacks resources and capacity needed for effective
regulations. Banker's Association President Joshi, who
estimates cooperatives' assets total Rs. 60 to 65 billion,
said managers of some of the large cooperatives invest
deposits largely in high-risk real estate deals, while
maintaining reserves as little as one percent. He cautioned
that, once the real estate market slows, cooperatives could
begin to fail, and, if one fails, it could create a panic.
Keep the Indian Currency Peg
--------------
7. (SBU) The IMF and NRB both strongly support the current
policy of pegging Nepal's currency to the Indian rupee.
NRB's Manandhar said allowing the Nepali rupee to float would
be a "lose-lose proposition." IMF's Pitt said the peg was a
"pillar of stability," adding the NRB does not have the
capacity to manage a floating exchange rate. Given the thin
market for Nepali rupees, the both argued, a floating
exchange rate would also invite speculation.
Macroeconomic Picture Generally Stable
--------------
8. (SBU) Despite the many economic challenges, Pitt reported
that Nepal's overall macroeconomic picture is generally
sound. This year's budget deficit may slightly exceed the
IMF recommended target of 2 percent, due to unbudgeted
demands such as increases in civil service salaries and
payments to former Maoist combatants, but revenues are doing
well. The IMF does not have a program in Nepal, but plans to
start discussions with Nepal on a precautionary program,
likely focused on financial sector reform. The next IMF
Article IV visit is scheduled for February 24.
ORDWAY