US embassy cable - 04KATHMANDU1481

C O N F I D E N T I A L SECTION 01 OF 06 KATHMANDU 001481 
 
SIPDIS 
 
STATE FOR SA/INS AND INR 
STATE ALSO FOR CA/OCS/ACS 
STATE FOR DS/IP/SA AND DS/DSS/OSAC 
LONDON FOR POL/GURNEY 
NSC FOR GREEN 
 
E.O. 12958: DECL: 07/27/2014 
TAGS: ECON, PREL, PTER, ASEC, CASC, PINS, NP, Maoist Insurgency 
SUBJECT: NEPAL'S TOURISM SECTOR UNDER THREAT, BUT SIGNS OF 
RECOVERY? 
 
REF: A. IIR 7 112 1005 04 
     B. KATHMANDU 949 
     C. 03 KATHMANDU 2020 
 
Classified By: Ambassador James F. Moriarty, reasons 1.4 b,d. 
 
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SUMMARY 
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1.  (C) The eight-year Maoist insurgency in Nepal has taken a 
tremendous toll on the already impoverished Nepalese economy. 
 The impact of the insurgency is most visible in Nepal's 
floundering tourism sector.  The Maoists have reneged on 
repeated assurances not to target Nepal's struggling tourism 
with high-profile attacks against three hotels, the murder of 
two tourist entrepreneurs, and increasing the extortion 
network against Nepali businesses and tourists.  To date, 
tourists have not been intentionally harmed by Maoist action, 
but have been detained, threatened and extorted by the 
Maoists.  Official figures from 2003/04 show some signs of an 
improvement within the tourism sector over the previous 
year's figures.  However, when compared to the traditional 
base year of 1998/99, the sector still has a ways to go 
before full recovery.  END SUMMARY. 
 
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Vulnerable to Internal and External Threats 
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2.  (U) Several incidents over the past five years have 
contributed to a decline in the travel and tourism industry. 
These include the 1999 Indian Airlines hijacking, the 2001 
royal family massacre, the 2001 September 11th attacks, 
2002/03 Severe Acute Respiratory Syndrome (SARS), and, most 
importantly, continued escalation in Maoist violence and 
general political instability in the country.  In addition, 
news reports from July 2004 indicated that the Royal Nepal 
Army released a "threat analysis" revealing that Maoists 
could attempt to hijack an Indian Airlines airplane to 
pressure the Government of India to release Maoist cadres 
recently arrested in India. These internal and external 
threats adversely affect the tourism industry, one of Nepal's 
main sources of income.  Tourism comprises over 10 percent of 
Nepal's Gross Domestic Product (GDP). 
 
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Recent Targeting of the Tourism Sector 
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3.  (C) Despite repeated assurances that they would not 
target Nepal's struggling tourist sector, the Maoists 
recently engaged in high-profile attacks on two tourist 
hotels and separately murdered two tourist entrepreneurs 
during the Spring 2004 tourist season (REF B).  To date, the 
Maoists' tactics in their attacks against tourist facilities 
have involved ordering all tourists and staff out of the 
hotel prior to setting off a pressure cooker bomb, or setting 
fire within the premises. 
 
4.  (C) In addition, in March 2004 rumors surfaced that the 
Maoists planned "unspecified" action against the tourist 
sector for June 7-9.  Although the Embassy confirmed the 
Maoists' intentions against the tourism sector, the Maoists 
called off the strike and no action against the tourism 
sector occurred in this timeframe.  To date, tourists have 
not been intentionally or physically harmed by Maoist action, 
but have been detained, threatened and extorted by the 
Maoists. 
 
5.  (U) FISHTAIL LODGE, POKHARA:  On May 14, the Maoists 
forced the mostly Indian tourists staying at the Fishtail 
Lodge in Pokhara to leave the premises and then detonated a 
bomb.  According to police reports from the incident, the 
bomb caused approximately USD 40,500 in damage.  The Maoists 
allegedly targeted Fishtail Lodge because of its connections 
to the royal family. (NOTE: The lodge was owned by the 
late-Princess Jayanti, killed in the royal massacre in June 
2001. END NOTE)  The lodge is run by a trust with no American 
investment, and proceeds provide medical treatment to 
children with heart disease.  No injuries were sustained in 
the attack and there were no Americans staying at the lodge 
at the time of the attack. 
6.  (U)  HOTEL GAIDA, CHITWAN: On May 17, the Maoists 
detonated a bomb in a hotel storeroom at the Hotel Gaida 
Wildlife Camp in Chitwan.  This is the second time that the 
Maoists have targeted the hotel. (NOTE: The first attack 
occurred in October 2003. (REF C). END NOTE)  According to 
news reports from the event, approximately 42 tourists 
(mostly Indians and Chileans) were staying at the hotel when 
the incident occurred.  However, the damage was not 
discovered until the next morning; reports indicate that at 
the time of the blast most "were enjoying a dance party." 
The hotel is owned by Dipak Bikram Shah and Prabhu Shah, 
distant relatives of the King.  There were no Americans 
staying at the hotel at the time of the attack. 
 
7.  (U) GHANDRUK (located north of Pokhara):  On 10 May, the 
Maoists reportedly abducted five prominent tourist 
entrepreneurs from Ghandruk and later murdered two of the 
hostages. (Ghandruk is located north of Pokhara and is a 
trekking stop on the Annapurna circuit.)  To date, the 
remaining three hostages have not been released.  According 
to news reports, Pokhara in the second half of May 2004 saw a 
90 percent drop in arrivals as a result of the frequent 
politically-motivated strikes ("bandhs") and transport 
stoppages. 
 
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But, This is Not the First Time . . . 
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8.  (U)  These recent examples are not the first time that 
Maoists have attacked tourist facilities.  The first (and not 
widely known) Maoist attack against a tourist facility 
occurred on 28 September 2002 at the Begnas Lake Resort and 
Village outside of Pokhara.  According to a news report at 
the time, the Maoists entered the resort, ordered the 
tourists out and set off a IED which caused an estimated NRs. 
30 million (equivalent to USD 38,000) in damage. There were 
no reported injuries during this attack. 
 
9.  (SBU) HOTEL GAIDA, Chitwan has been the target of two 
Maoist attacks.  The first attack occurred on October 16, 
2003 when six armed Maoists entered the premises of the Gaida 
Wildlife Camp, a popular tourist resort owned by a relative 
of the royal family.  After ordering all of the guests out of 
the bungalows, the Maoists announced that they intended to 
burn down the resort.  Despite unsuccessful efforts by the 
local manager and German tourists to dissuade them, the 
insurgents poured kerosene on seven of the 25 cabins, burning 
them down.  None of the tourists or employees at the resort 
suffered any injuries.  No Americans were at the resort at 
the time of the attack.  (According to a report from the 
Australian Embassy, an Australian film crew who had been 
staying at the lodge were ordered to leave by the Maoists 
just before the incident.)  Arup Rajoria, head of King 
Mahendra Trust for Nature Conservation, later told 
then-Ambassador Malinowski that the resort had been 
experiencing "labor problems" with members of its staff for 
some time before the attack.  Although the resort is located 
only two miles from an Army encampment and from the National 
Park headquarters, Rajoria said that the Maoists had cut the 
lodge's sole telephone line before the attack, making it 
impossible for management to contact the authorities for help. 
 
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Extortion Network 
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10.  (C) In addition to these direct attacks against 
facilities, Maoist tactics include the systematic targeting 
for extortion of tourist related businesses and tourists. 
According to Narendra Bajracharya, President of the Hotel 
Association of Nepal, the Maoists have intensified their 
extortion efforts over the last six months (January - June 
2004).  Tourist entrepreneurs are forced to pay "protection 
money" and "taxes" to the Maoists.  The extortion amount 
ranges from NRs 500,000 to NRs 1 million (approximately USD 
6,800 to USD 13,500) per year for small hoteliers.  Four and 
five-star hotels on average pay between NRs 2 to 3 million 
(approximately USD 27,000 to USD 42,000).  In addition, 
commission agents of large projects financed by international 
funding agencies or donor countries can be targeted for as 
much as NRs 5 to 6 million (approximately USD 67,600 to USD 
81,000).  Dinesh Shrestha, Managing Director of ICTC Private 
Limited (one of the top ten Nepali business houses which 
handles a wide array of commission agent work in Nepal), 
admitted to Bajracharya that ICTC recently paid NRs 6 million 
(USD 81,000) in "protection money" to the Maoists.  Deepak 
Mahat, President of the Trekking Agents Association in Nepal, 
indicated that he received an extortion threat from the 
Maoists demanding that he pay his annual taxes directly to 
the Maoists and not to the government.  Mahat said he has not 
yet paid, but "might not have a choice" because of death 
threats for not conceding to the Maoists demands.  He has 
requested assistance from police and local security forces; 
however, he was allegedly told there was nothing the GON 
could do to assist, suggesting that "he should do what he had 
to do to survive." 
 
11.  (SBU) During a subsequent conversation, Janak Kumar 
Khatri, Section Officer in the Tourism Industry Division of 
the Ministry of Culture Tourism and Civil Aviation refuted 
the media's characterization of the Maoist's extortion ring 
being widespread and said the threat was being exaggerated. 
According to Khatri, to date written complaints had not been 
lodged with his division and therefore, the problem "must not 
be that widespread." 
 
12.  (C) Bajracharya indicated that most trekking and 
mountaineering firms build in a miscellaneous fee to cover 
extortion into the price of organized treks.  For example, 
organized group treks to Kailash Mansarovar (located in 
Tibet, but trekkers must cross through Humla in northwestern 
Nepal to reach this part of Tibet) now include a standard USD 
100 to cover the expected cost of Maoist extortions. 
 
13.  (SBU) To track reported Maoist incidents, the U.S. 
Embassy's Consular Section has developed a "radar screen" 
trekking incident database compiled from first-hand American 
Citizen reports and reports from a network of other 
diplomatic missions.  The report compiled from the most 
recent trekking season indicates that more trekking and 
tourist areas in Nepal are affected by Maoist violence than 
previously; tourists are expected to pay an extortion fee to 
the Maoists (fee varies by location) for which they receive a 
receipt; and, recent security engagements between the GON 
security forces and Maoists have put tourists at risk. (NOTE: 
The updated database of incidents has been e-mailed to SA/INS 
and CA/OCS/ACS.  END NOTE.) 
 
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Impact of Maoist Enforced Strikes and Political Protests 
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14.  (U) From January to June 2004 there have been 24 
Maoist-enforced or political party strikes within the 
Kathmandu Valley alone.  This figure does not account for 
regional strikes that occurred outside the Valley.  A study 
conducted by the Nepal Tourism Board indicates that one day 
of strike translates on average to 60 percent trip 
cancellation rate.  (NOTE: The Nepal Tourism Board surveyed 
65 tourist service providers, including travel agents, 
hotels, lodges, and trekking agents.  END NOTE.)  In 
addition, the Nepal Rastra Bank and Finance Ministry figures 
during Nepal's fiscal year 02/03 indicate that the tourism 
sector (hotel, trade and restaurants) contributed 
approximately USD 568 million of gross domestic product 
earnings.  Based on this information, a Nepal Rastra Bank 
survey estimates that the sector could possibly lose about 
USD 1.6 million for each day of strike. 
 
15. (SBU) Similarly, in March 2004, the Nepal Tourism Board 
indicated that the tourism sector loses an estimated USD 
385,000 per day for each day of strike.  Tek Bahadur Dangi, 
CEO of Nepal Tourism Board, indicated that the GON had formed 
a Tourism Crisis Coordination Committee headed by the 
Minister of Tourism and Civil Aviation and a Tourism Crisis 
Action Unit, headed by the CEO of the Nepal Tourism Board, to 
address a broad range of problems tourists might face while 
in Nepal from being stranded during bandhs or natural 
disasters.  Ideally, the committee and unit would be the 
front line of defense for tourists encountering problems 
while visiting Nepal; however, when asked for more specific 
details on how information is gathered and situations are 
monitored, Dangi explained that the unit is ad hoc and "not 
functioning" at the moment. 
 
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 . . . Despite All This, Are There Signs of Recovery? 
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16. (U) Overall, 2003 figures proved to be significantly 
better for the tourism industry than 2002.  Tourist arrivals 
increased by 19.8 percent from approximately 275,000 to 
330,000.  Overlapping this period, the first half of the 
Nepali fiscal year (FY) 03/04 continued to show strong 
growth, with tourist arrivals increasing 36 percent over the 
same six month period the year prior (NOTE: Nepal's fiscal 
year runs July-July. END NOTE.) 
 
17. (SBU) Tourist receipts more than doubled during the first 
half of 2004, although this figure may be inflated by 
remittances from Nepali workers abroad processed through 
Nepalese travel agents.  Using flight arrival data, total 
tourist arrivals in the first five months of 2004 are 49 
percent higher than the corresponding period in 2003.  This 
seems to suggest that improvement over 2002 tourist arrival 
numbers are significant and that the pace of improvement has 
accelerated throughout 2003 and into the first five months of 
2004.  Although this demonstrates significant improvement 
over the prior year, 2002 was the worst recorded year for 
tourism in Nepal for over a decade.  The current number of 
tourist arrivals, 330,000, is essentially at 1994 levels and 
still 160,000 below the peak year in the tourism sector, 
1999.  Even with 36 percent growth in tourist arrivals the 
first half of 2004, tourist arrivals are 62 percent below the 
corresponding peak arrival period of 2000. 
 
18.  (SBU) From a revenue perspective, total foreign exchange 
earnings from tourism in the worst year, 2002, totaled USD 
102.28 million.  Revenue exchange earnings increased by USD 
133.22 million in FY02/03 but remained substantially below 
the 178.15 million generated by tourism in FY98/99.  To put 
this in perspective, tourism has represented between 8-21.4 
percent of total foreign exchange earnings during the last 
decade and between 1.9 and 4.1 percent of the GDP. 
Currently, it represents near lows in both categories.  Using 
a base year of FY98/99, Nepal has lost approximately USD 130 
million in revenue due to reductions in tourism over the past 
three years.  Nepal Rastra Bank (Central Bank) figures 
released in June 2004 indicated an 82 percent increase in 
foreign exchange earnings during the first six months of 2004 
alone.  Tek Bahadur Dangi, CEO of Nepal Tourism Board, 
refuted this figure, stating that with the tourists' average 
length of stay declining from 12 to 8 days over the past year 
and hotels decreasing tariff rates, the Central Bank's figure 
could not be accurate and is likely inflated by money 
transfers from Nepali workers abroad. 
 
19. (U) There are important changes in the categories of 
tourists now traveling to Nepal.  Despite increases in the 
number of total tourists, the number of trekkers and 
mountaineers declined in both 2002 and 2003.  The 
mountaineering sector was the only sector not significantly 
affected by the slump in tourism in 2002.  However, the 
demand generated by the opening of new mountains may be the 
cause.  Overall, the effect of mountaineering is small in 
regard to the total tourism industry, representing only 
slightly over one percent of tourist arrivals.  However, 
mountaineers are disproportionately valuable in terms of 
revenue generation as they stay for longer periods of time 
and pay substantial peak/expedition fees to the Government of 
Nepal.  While the average tourist in FY01/02 spent USD 371, 
the average mountaineer spent USD 7,863.  A large portion of 
this, approximately USD 1,680 per mountaineer, went directly 
to the Government of Nepal in the form of climbing royalties. 
 The Government of Nepal has become increasingly effective in 
the last three years in extracting revenues from 
mountaineer-visa royalty fees.  Overall, one mountaineer has 
become the approximate revenue equivalent of 21 regular 
tourists, and thus a critical revenue source. 
 
20.  (SBU) Bhumi Lal Lama, General Secretary of the Nepal 
Mountaineering Association, stated that the GON's new policy 
was to direct 70 percent of the climbing permit fees directly 
into the government's coffers and 30 percent towards local 
development in the area of the climb. (NOTE: The GON's 
previous policy was to use a portion of all the 
mountaineering revenues for general rural development.  END 
NOTE)  This in essence means that each group climbing permit 
(6-12 individuals) for Mount Everest brings in revenues 
totaling USD 35,000 to the Government of Nepal's Treasury and 
USD 15,000 of local development funds targeted at the Everest 
region. The downside to this methodology is that more 
traditional climbing areas in Nepal (i.e., Everest) are 
likely to receive an over abundance of development funds at 
the expense of some of the less traditional climbing areas. 
Lama also lamented that traditional mountaineering 
communities might be adversely affected by the development, 
lose their traditional values and be overwhelmed by modern 
restaurants, hotels, bowling alleys and pool clubs.  A case 
in point is Namche Bazaar, where in just five years time, the 
traditional Sherpa atmosphere has been inundated by pool 
clubs, restaurants and bars. 
 
21. (U) Trekkers have represented between 21-27 percent of 
all tourists during the last decade, with 2002 representing a 
near low during this period.  Most trekers in Nepal tend to 
stay for longer periods of time and can be expected to again 
be disproportionately valuable to tourism revenues.  However, 
the average number of days per tourist visit has declined 
from a high of 12.3 days in 1999 to a last decade low of 7.9 
days in 2003.  The reduction in the percentage of trekers 
among the total tourist population presently reflects that 
decrease.  The greater decline in the trekking sector versus 
tourism as a whole is largely attributable to the 
deteriorating security situation over the past two years. 
Almost all trekking regions, with the exception of Mustang, 
Manang and Langtang have been significantly affected by 
Maoist violence.  With average tourist expenditures averaging 
approximately USD 47 per day, attracting longer-term 
tourists, such as trekkers, is critical to the economic 
recovery of the tourist sector. 
 
22.  (U) Narendra Bajracharaya, president of the Hotel 
Association of Nepal, stated that this decrease in 
longer-term tourists has had a detrimental impact on smaller 
hotels and lodges.  "They are having difficulty surviving" 
and are struggling with less than 30 percent average 
occupancy.  Five-star hotels, on the other hand, have slashed 
rates to attract tourists. As a result of this severe impact 
on non-star hotels, the Hotel Association of Nepal recently 
reached an agreement with four- and five-star hotels that 
they would not offer rooms below USD 60/night.  Although, 
this policy is in writing and all hotels have signed on, the 
Embassy is aware of certain five-star hotels offering rooms 
to regular customers for as little as USD 30/night. 
 
23.  (SBU) Public investment in the tourism sector is the 
domain of the Ministry of Culture, Tourism, and Civil 
Aviation.  Although specific numbers regarding public 
investment in tourism projects are not currently available, 
the Ministry's total budget declined by 10 percent over the 
past fiscal year as security expenses related to the 
insurgency have diverted public funding away from most other 
sectors.  Private investment in the tourism sector continues 
to be strong with increases in both the number of hotel beds 
and hotels in both star and non-star categories every year 
since 1994.  This has, however, certainly led to declining 
incomes for hotels/hostel owners during the past two years 
and will continue to do so until tourism rebounds to peak 
levels.  With over 38,000 total tourist beds, overall vacancy 
rates were well over 50 percent during most months in FY01/02 
and FY02/03. 
 
COMMENT 
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24.  (C) Despite the Maoists' continued assurances not to 
disrupt or threaten the tourism sector, the industry remains 
a vulnerable, visible target.  Although to date the Maoists 
have taken pains not to injure tourists, there always exists 
the possibly that Maoists tactics could change, particularly 
if their situation turns desperate.  Attacks over the past 
few months directed at the tourism industry pose a growing 
concern that tourists could be caught in the wrong place at 
the wrong time. More startling are the Maoists' recent 
threats to use "more violent means" if peace talks do not 
occur, or fail. 
 
25.  (C) COMMENT CONTINUED.  Businesses, including Nepal's 
tourist industry, are already hurting from recurrent bandhs, 
transport blockades and chronic political instability.  Given 
the Maoist campaign of violence, it seems unlikely that the 
industry will be spared during the next trekking season.  END 
COMMENT. 
MORIARTY