US embassy cable - 03KATHMANDU2278

UNCLAS SECTION 01 OF 02 KATHMANDU 002278 
 
SIPDIS 
 
SA FOR DON CAMP; SA/INS 
 
E.O. 12958: N/A 
TAGS: ETRD, KTEX, NP 
SUBJECT: WITHOUT RELIEF, NEPAL'S AILING GARMENT INDUSTRY 
COULD AGGRAVATE DESTABILIZING PRESSURE ON THE GOVERNMENT 
 
REF: A. KATHMANDU 1741 
     B. IIR 6 867 0004 04 
 
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SUMMARY 
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1.  (U) The Maoist insurgency has had a devastating effect on 
Nepal's economy, including upon its fledgling manufacturing 
sector.  Despite its own substantial problems, Nepal 
continues to be a firm ally of the U.S. in the fight against 
global terrorism, supporting our policy in Iraq and 
continuing to contribute, despite its own pressing needs, to 
UN Peacekeeping Operations worldwide.  Compounding Nepal's 
economic woes, revenues from garment exports (which account 
for 52 percent of the total market share) have declined by 22 
percent in 2002.  The impending quota elimination under the 
Multi-fiber Arrangement (MFA) will likely be the death knell 
for this critical part of Nepal's private sector.  Granting 
preferential treatment for Nepal's garment exports, while 
clearly no panacea for this troubled sector, would send a 
strong message of USG support at a time when such help is 
clearly needed. 
 
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ECONOMIC COSTS OF THE INSURGENCY 
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2.  (U) The seven-year Maoist insurgency in Nepal has imposed 
a heavy toll on the already impoverished Nepalese economy. 
The loss to Gross Domestic Product (GDP) over the past seven 
years surpasses USD 830 million.  According to the Government 
of Nepal's (GON) National Planning Commission's report from 
July 2003, the cost to reconstruct public and private 
infrastructure destroyed by the Maoists will cost around USD 
54 million. 
 
3.  (U)  The private sector is faced regularly with hurdles 
like extortion demands, threats to security, abduction of 
personnel and the destruction of infrastructure.  The U.S. 
has provided a wide range of support during this period of 
historic crisis.  However, Nepal's garment industry, its top 
foreign exchange earner (with exports totaling over 52 
percent of Nepal's foreign exchange earnings), is in perilous 
straits.  The Maoist insurgency, coupled with greater market 
liberalization and the end to the quota regime, threatens to 
devastate the industry to the point of collapse. 
 
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PROBLEMS WITHIN THE NEPALESE GARMENT SECTOR 
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4. (U)  Overwhelmingly dependent on the U.S. market for its 
garment exports (comprising between 80 to 90 percent of 
Nepal,s total garment exports but less than 0.1 percent of 
U.S. total garment imports), the industry is unlikely to be 
able to compete once quotas are eliminated in December 2004 
under the Multi-fiber Arrangement (MFA).  Although any 
extension of duty-free or quota preferential treatment would 
have little long-term economic impact, it would symbolize 
strong U.S. support for Nepal's beleaguered government and 
its private sector.   Legislative relief on exports also 
would provide another source of U.S. economic support to a 
Government that will be devoting a substantial portion of its 
budget to the fight against Maoist terrorism over the next 
two strategically critical years. 
 
5. (U) Nepal,s garment industry has little economic market 
advantage in comparison to its regional neighbors.  Faced 
with constraints like an outdated manufacturing processes, 
inadequate and expensive transportation system, and lengthy 
delivery time, Nepali garment exporters will not be able to 
compete with countries like India, Bangladesh, Pakistan and 
China once the quota system is eliminated.  The production 
costs of Nepali garments are on average 25 percent more 
expensive than those of other exporters in the region.  The 
bottom-line is that when the garment trade is liberalized as 
a result of the MFA in 2004, the result will be disastrous to 
Nepal's garment industry and will have an overall negative 
impact on the Nepalese economy and government revenues. 
 
6. (U) In 2002, the garment industry reported that revenues 
declined by more than 20 percent.  The Garment Association of 
Nepal indicated that exports of ready-made garments to the 
United States declined by 60 percent in October 2003 alone, 
dropping to a total value of USD 3.81 million (in comparison 
to export value in October 2002 of USD 9.56 million). 
Garment manufacturers attribute recent losses in the industry 
to preferential treatment accorded to sub-Saharan African and 
Caribbean Basin countries.  In an effort to receive similar 
preferential treatment in the U.S., garment manufacturers and 
GON officials have traveled to the U.S. on two separate 
occasions (in January and July 2003) to lobby the U.S. 
Congress for similar treatment. 
 
7. (U) Once the garment quotas disappear, non-competitive 
Nepali exports are likely to be swallowed up by the volume of 
their giant, more competitive neighbors.  The impact on the 
Nepalese economy and Government will be very costly.  Garment 
exports account for over 50 percent of export revenues, and 
the Garment Association of Nepal (GAN) claims to employ 
50,000 low-wage, low-skilled workers, half of whom are women. 
 (Since most of the garment industry's labor force is 
employed on a contract and temporary basis, employment 
figures are difficult to confirm.) 
 
8. (U) Despite this impending blow to the industry, the 
Government of Nepal (GON) and garment manufacturers appear to 
be doing little to prepare for the impact.  Mr. Prachanda Man 
Shrestha, Joint Secretary, WTO Cell, Ministry of Industry, 
Commerce and Supplies, told us that there has been no 
official analysis of what the loss in revenue will be after 
the quota regime is abolished.  According to Shrestha, GON 
has no firm plans for diversifying or substituting Nepal,s 
garment industry. 
 
9. (U) In addition, Nepalese garment manufacturers have 
failed diversify its product range to take full advantage of 
its current U.S. quota allotment.  It consistently has 
exported in only three of the nine quota categories provided. 
 For example, from January to October 2003, only two quota 
categories used more than 50 percent of its allotment, and in 
five of the nine categories Nepal has used less than 10 
percent of its allotment.  Nepal is unable to meet the 50 
percent value added requirement to take full advantage of its 
duty and quota free access to Europe.  Nepal imports most of 
the finished cloth and other materials, including labor, from 
India, leaving the low-skill sewing component as the only 
value added in Nepal. 
 
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EFFECT OF US PREFERENTIAL TREATMENT 
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10. (U)  The GON, garment manufacturers and the Nepal-USA 
Chamber of Commerce have expended considerable resources and 
prestige on preferential treatment for the Nepalese garment 
industry.  Economically, any extension of preferential quota 
or duty free treatment would have little long-term impact. 
However, the garment industry representatives respond that 
any preferential treatment, even if only for the short-term, 
would provide great benefit to  the industry and the overall 
economy.  Textile quotas must be abolished in December 2004 
as a result of the MFA; and when Nepal meets its WTO 
commitments by September 2005 any duty-free status will be 
nullified. Nepal's economic prospects appear bleak due to 
global market liberalization in its top foreign exchange 
earner, poor infrastructure, and higher costs of production 
due to unskilled labor and geographic conditions.  The only 
real solution to Nepal's fledgling garment industry, and to 
Nepalese economy as a whole, would be greater diversification 
and improved efficiency. 
 
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COMMENT 
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11. (SBU) Nepal, despite its own serious internal problems, 
continues to contribute generously to UN Peacekeeping 
Operations and to strongly support U.S. policy in general 
(reftels).  Although clearly not a panacea, any preferential 
treatment accorded to Nepal by the USG would serve as a 
strong political symbol of support for the Nepalese private 
sector, which is under siege from Maoist extortions and 
destruction of infrastructure.  Preferential treatment would 
also spare the GON from another severe economic blow during 
the critical coming months, when it is trying to contain the 
insurgency and drive the Maoists back to the negotiating 
table.  Given the modest volume of exports (only 0.1 percent 
of total U.S. garment imports), extension of limited 
preferential treatment will have negligible impact on U.S. 
domestic industry. END COMMENT 
MALINOWSKI