US embassy cable - 05KATHMANDU2307

UNCLAS SECTION 01 OF 03 KATHMANDU 002307 
 
SIPDIS 
 
STATE FOR SA/INS; STATE FOR INR; LONDON FOR POL/GURNEY; NSC FOR 
DORMANDY; USAID FOR ANE/SA: BUNDY 
 
E.O. 12958: N/A 
TAGS: PREL, PTER, ECON, EAID, EFIN, NP, Maoist Insurgency 
SUBJECT: NEPAL: COST OF THE MAOIST INSURGENCY 
 
REF:  04 KATHMANDU 002367 
 
SUMMARY 
------- 
 
1.  The effect of the ongoing Maoist insurgency is palpable in every 
sector of Nepal's economy.  The estimated economic cost of the 
conflict, since 1996 when it started, is more than USD 2.3 billion. 
Insurgents have destroyed public and private property worth USD 71 
million.  The conflict has reduced the flow of foreign direct 
investment (FDI) to its lowest figure in 10 years.  Recent Maoist 
bombings and forced closures of schools and industries have put the 
lives of thousands of workers and students in jeopardy.  END SUMMARY. 
 
COSTS OF THE MAOIST CONFLICT 
---------------------------- 
 
2.  The estimated economic cost of the conflict is more than USD 2.3 
billion.  Although the Maoist insurgency started in 1996, it escalated 
and began to seriously affect the economy in 2001, when the Maoists 
embarked on a strategy of armed attacks against security forces and 
government infrastructure.  Maoist insurgents have systematically 
destroyed power installations, telecommunications facilities, bridges, 
government buildings and facilities, banks, schools, health posts, and 
hospitals.  The resulting loss of physical infrastructure and property 
exceeds USD 71 million. 
 
3.  According to media reports and various domestic and international 
agencies, more than 12,000 people have lost their lives as a result of 
the conflict.  According to the UNDP, more than 200,000 families have 
been internally displaced, and according to the Informal Sector Service 
Center (INSEC) more than 100,000 Nepalis have fled to India in search 
of employment, leaving behind vulnerable family members, including 
women, the elderly, and children.  The insurgency has not only 
increased the cost of delivery of goods and services but has also 
contributed to an economic slowdown. 
 
4.  A comparison of national budget figures reveals that annual growth 
in total security spending averaged 21 percent between the years 2001 
to 2005, compared to an average growth of 13.5 percent between 1996 and 
2000.  Total security spending more than doubled, from a total of USD 
410 million for the years 1996 to 2000, to a total of USD 895 million 
for the years 2001 to 2005.  The numbers demonstrate how the Maoist 
insurgency has increasingly strained Nepal's scarce national resources. 
 
MASSIVE DECLINE IN GROSS DOMESTIC PRODUCT 
----------------------------------------- 
 
5.  According to calculations based on the projected annual growth rate 
of 5 percent set by the National Planning Commission, Nepal has lost 
more than USD 1.75 billion in GDP during nine years of insurgency, 
which is more than 40 percent of Nepal's estimated real GDP of USD 4.2 
billion in FY 2004/05.  Violence and destruction carried out by Maoist 
insurgents have caused Nepal's economic growth to dwindle to an average 
of 2.02 percent in the period between FY 2001/02 and FY 2004/05.  The 
escalating armed conflict, coupled with industrial closures, transport 
blockades, abductions, killings, extortion, and internal and external 
displacement of large numbers of people, has crippled Nepal's economic 
growth rate.  According to the Economic Survey Report released by the 
Ministry of Finance on July 15, 2005, Nepal's economic growth rate slid 
to a meager 2 percent in FY 04/05.  The GDP growth rate during the 
first five years of the Maoist insurgency, from 1996 to 2000, averaged 
4.8 percent; when the insurgency turned violent, from 2001 to 2005, the 
growth rate plummeted to 2 percent. 
 
DESTRUCTION OF PHYSICAL INFRASTRUCTURE 
-------------------------------------- 
 
6.  Maoists have destroyed government and private property worth 
millions of dollars since 1996.  In their continued attacks on remote 
district headquarters starting in November 2001, the Maoists have 
destroyed government buildings, bridges, telephone facilities, 
electricity sub-stations, schools, health posts, banks, and private 
homes.  Although it is difficult to determine the exact extent of loss 
in dollar terms, based on the information provided by government 
agencies, newspaper reports, and independent analysis, the loss ranges 
between USD 70 and 80 million.  However, there is no central agency of 
HMGN which keeps records of destruction and physical property damage 
done by the Maoists. 
 
7.  The following figures illustrate the cost of destruction to 
property: 
-- Home Ministry infrastructure:  USD 7.31 million 
-- Civil Police & Armed Police property:  USD 4.21 million 
-- Telecommunications, radio and television facilities:  USD 10.12 
million 
-- Government  local development facilities:  USD 6.42 million 
-- Forest & Soil Conservation Ministry facilities:  USD 4.4 million 
-- Airports:  USD 1.94 million 
-- Electricity facilities:  USD 2.23 million 
-- Roads, bridges, buildings and equipment:  USD 0.76 
-- Postal service facilities:  USD 0.47 
-- Government banks and financial institutions:  USD 4.35 million 
-- Other government facilities:  USD 2.08 million 
-- Commercial banks (including property lost and cash looted):  USD 2.8 
million 
-- Private property:  USD 8.20 million 
-- Compensation to deceased police and civilians, families:  USD 13.41 
million 
 
SIGNIFICANT DROP IN FOREIGN DIRECT INVESTMENT (FDI) 
--------------------------------------------- ------ 
 
8.  The insurgency has severely affected the flow of Foreign Direct 
Investment (FDI) into Nepal.  The escalating armed conflict, coupled 
with insecurity and widespread Maoist extortion, has caused significant 
loss of confidence in the investment climate, and as a result FDI 
commitments decreased substantially.  The worsening security situation, 
coupled with Nepal's poor infrastructure and regulatory regime, reduced 
the flow of FDI to USD 12.2 million in FY 2004/05, the lowest figure in 
the last 10 years.  Nepal received foreign investment commitments worth 
USD 156 million between 1996 and 2000, the first five years of the 
Maoist insurgency, but between 2001 and 2005, Nepal received FDI 
commitments totaling only USD 130 million.  During the reform period 
between 1992 and 1993, the inflow of FDI to Nepal had reached USD 63 
million. 
 
SECTOR STUDIES 
-------------- 
 
A.  Massive Destruction of Industries: 
 
9.  The industrial sector has borne the real brunt of the Maoist 
insurgency.  The bombing of Nepal's two largest spinning mills in July 
and August caused combined damage worth roughly USD 7 million, and 
rendered more than 3,500 workers jobless.  Beleaguered by the Maoists 
frequent threats, Colgate Palmolive reduced its operations by seventy 
percent in July.  Unilever Nepal, which provides direct employment to 
135 people, shut down its plant for two weeks in August due to Maoist 
threats.  In December 2004, Indian Hotels Company Ltd. (IHCL), the 
owner of the Taj hotel chain in India, pulled out of a contract with a 
five-star hotel in Kathmandu, citing security concerns.  Madhav 
Adhikari, President of Hetauda Chamber of Commerce and Industry, told 
EmbOff, "if the present turmoil in industries continues, other foreign 
investment industries will also relocate to India." 
 
10.  In July 2005, the All Nepal Trade Union Federation Revolutionary 
(ANTUF-R), the Maoist-affiliated trade union, called for the indefinite 
closure of all tea estates in eastern Nepal.  The closure, announced on 
July 16, caused a daily loss of USD 285,000.  According to the National 
Tea and Coffee Development Board (NTCDB), more than 40,000 workers, 
6,252 small farmers and about 100 large business firms involved in the 
tea industry were directly affected by the three week closure. 
Wageworkers and small farmers, who were the worst hit, are the main 
stakeholders in Nepal  tea industry. 
 
B.  Education Sector in the Doldrums:  A Caveat 
 
11.  Nepal's education sector has also borne the brunt of the Maoist 
insurgency.  From the beginning of the insurgency, Maoists have made 
the education sector their main target, calling for frequent and 
prolonged academic closures and routinely abducting hundreds of 
students for what they call "indoctrination sessions."  Most of the 
students are released after a few days of captivity, although some are 
recruited into the Maoist militia.  Parents are moving increasing 
numbers of children to India for schooling due to the fear of Maoist 
abduction and continuous disruption of academic sessions. 
 
12.  Reports estimate that Maoists have abducted more than 25,000 
students since 1996.  According to a recent report released by the 
local NGO Informal Sector Service Center (INSEC), from January to 
August 2005 alone, Maoists abducted more than 3,000 students and 600 
teachers from various parts of the country.  According to the Economic 
Survey of Nepal released recently by the Ministry of Finance, 2,077 
primary schools, 518 lower secondary schools, and 22 secondary schools 
have closed down since 2004 due to the escalating insurgency. 
 
COMMENT 
------- 
 
13.  The Maoist insurgency has not only resulted in a near halt of 
Nepal's economy and development, it has also made the prospects of 
bringing the economic and developmental activities back on tract 
extremely bleak. 
MORIARTY