US embassy cable - 05KATHMANDU1320

UNCLAS SECTION 01 OF 02 KATHMANDU 001320 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON, PGOV, ETRD, PINS, NP 
SUBJECT: NEPAL: GARMENT EXPORTS DROP 43 PERCENT, BUT 
LOOKING TO OTHER MARKETS 
 
 
SUMMARY 
-------- 
1. (U) Nepal's ready-made garment exports to the United 
States declined by 43 percent in the first five months of 
2005 following the expiration of the Multi-Fiber Arrangement 
(MFA).  Entrepreneurs within the garment sector attributed 
the decline to the combined effects of MFA phaseout and the 
government's lack of effort to enhance the sector's 
competitiveness in the global market.  Foreign direct 
investment in Nepal's garment sector, however, has more than 
tripled during Nepal's last fiscal year; this should lessen 
the impact of MFA phaseout on the garment industry.  END 
SUMMARY. 
 
NEPAL'S GARMENT INDUSTRY FEELING THE MEDIA AND POST-MFA PINCH 
--------------------------------------------- ---------------- 
 
2.  (U) According to information published by the Garment 
Association of Nepal (GAN), export statistics showed the 
steady decline in garment exports that began in 2004 
continued in the first five months of 2005.  GAN statistics 
showed that in the first five months of 2005 ready-made 
garment exports totaled approximately USD 27 million, 
compared to USD 47.6 million for the same period in 2004. 
Both garment sector representatives and the media cited the 
industry's "erosion in competitiveness," particularly in the 
wake of the garment quota phaseout, as a main reason for the 
sharp decline in garment exports.  GAN President and 
entrepreneur Kiran Sakhya also cited the international 
media's hyperbole in reporting on Nepal's Maoist insurgency 
as a major reason for the decline in orders from abroad, as 
foreign importers feared garment orders would not reach 
markets in time.  Lamenting the sharp decline, garment 
industry representatives feared the sector's demise if 
immediate measures were not taken to boost competitiveness. 
 
3.  (U) Following the phaseout of the MFA, half a dozen 
companies--including three of Nepal's ten largest garment 
exporting firms--have shut down operations, affecting the 
jobs of more than 18,000 people.  Press reports attributed 
this trend to larger importers preferring cheaper suppliers 
like China.  According to garment entrepreneurs, no new, 
substantial orders were coming in from the U.S.; industries 
were fulfilling standing orders. 
 
FOREIGN INVESTORS ACTIVE IN GARMENT INDUSTRY 
-------------------------------------------- 
 
4.  (U) Despite the decline of Nepal's garment exports, the 
Nepalese ready-made garment manufacturing industry recorded a 
substantial inflow and commitment for new foreign direct 
investment (FDI) during the first four and a half months of 
2005.  According to statistics by the Department of Industry 
(DoI), six FDI projects worth USD 2.4 million have been 
registered during the first ten months of the current fiscal 
year (July 2004 to July 2005), as compared with FDI projects 
totaling USD 702,054 the previous fiscal year.  Tana Gautam, 
Director General of the DoI, noted that five of those 
projects were initiated in the "post-MFA era."  DoI data 
showed that new investments had come in from the EU, China, 
India, the U.S., Canada, Russia, and South Korea.  The 
largest of the newly registered FDI companies was J and P 
Apparels, a U.S.-Indian joint venture.  Its USD 1.5 million 
investment had the capacity to manufacture 1.8 million pieces 
of ready-made garments, according to DoI figures.  FDI coming 
into the garment sector now, officials noted, was primarily 
targeted for export to the EU, Canadian and Indian markets. 
"This is a striking shift as compared to the domestic 
investment that targeted the U.S. market," Rishi Raj Koirala, 
Director of the DoI, stated.  Nepalese garment manufacturers 
who had focused solely on the U.S. market were experiencing 
the biggest jolt after MFA expiration, according to both DoI 
and the GAN. 
 
NEPAL GARMENT SECTOR:  STILL HOPING FOR U.S. CONCESSIONS 
--------------------------------------------- ----------- 
 
5. (SBU) According to City Apparels, a private garment 
manufacturer based in Kathmandu, GAN continued to hope for 
bilateral U.S. concessions, similar to those granted under 
the African Growth Opportunity Act (AGOA), for Nepal's 
garment industry.  Joint Secretary of the Ministry of 
Industry, Commerce and Supplies Prachanda Man Shrestha 
predicted that the "shocks" felt by Nepal's garment industry 
were to be expected "for a couple of years" after the MFA 
phaseout.  Nepal's garment manufacturers who had relied 
primarily on Indian middlemen rather than establishing direct 
links with U.S. importers would be closing their factories, 
he noted.  Nepal remained, however, strategically located 
between two of the world's largest economies, Man Shrestha 
emphasized. 
 
COMMENT 
------- 
 
6. (SBU) Recent statistics indicate that Post's concerns that 
Nepal's ready-made garment exports to the U.S. would decline 
sharply after the expiration of the MFA have materialized. 
However, worries that the newly unemployed could be targeted 
for Maoist recruitment appear to be ameliorated by the 
increase in FDI, offsetting the closure of  garment 
factories.  The steady rise in FDI inflow into Nepal's 
garment sector shows that MFA expiration did not necessarily 
toll a death knell to Nepal's garment industry. 
MILLARD