US embassy cable - 03KATHMANDU206

UNCLAS SECTION 01 OF 02 KATHMANDU 000206 
 
SIPDIS 
 
LONDON FOR POL/ERIEDEL 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, CASC, NP 
SUBJECT: NEPAL'S TOURISM INDUSTRY: WHERE IS THE BOTTOM? 
 
REF: 2002 KATHMANDU 680 
 
Summary 
======= 
 
1.  Nepal's tourism industry recorded a 28 percent decline in 
international arrivals for 2002.  Domestic air travel appears 
to have declined more dramatically due to the security 
situation.  The country's hotels and airlines are feeling the 
pressure and are cutting costs and restructuring their debts 
to avoid bankruptcy.  The country's financial institutions 
have significant investment in Nepal's tourism industry and 
may be a secondary casualty if tourists do not return. 
January 2003 did see a slight rise in arrivals, particularly 
from India, the US, and Japan.  It is too early to speculate 
if this means a turn around.  End summary. 
 
Symptoms of Decline 
=================== 
 
2. Nepal's tourism industry recorded a steep decline in 
visitors for 2002, making this once giant contributor to 
Nepal's economy a sector of economic depression (reftel). 
Overall arrivals through Nepal's Tribhuvan International 
Airport dropped from 298,000 in 2001 to 216,000 in 2002, a 28 
percent decline.  Pokhara's Tourist Information Center, 
located in the mountain resort city in central Nepal, reports 
only 25,000 arrivals in 2002, one-third of 2001's visitors. 
The decline is troubling news for Nepal's battered economy, 
since the tourism industry provides one-third of overall 
government revenues and 3 percent of Gross Domestic Product. 
 
Investors and Lendors Keep Hotels Limping Along 
============================================= == 
 
3. To cope with the drop in clientele, Nepal's hotels and 
restaraunts have laid off and deferred salaries to employees, 
reduced room rates, delayed payments on bills and taxes, and 
are competing vigorously when given the opportunity to bid on 
event contracts.  The cumulative effects of the downward 
spiral have taken their toll, forcing hoteliers to: 
-- Fix minimum room prices through the Hotel Association of 
Nepal to eliminate "unhealthy" competition; 
-- Establish payment plans with the Nepal Electricity 
Authority to spread current electricity bills over a 
twenty-month period; and 
-- Seek agreements with lenders to make reduced payments at 
no interest. 
 
4. According to a local bank executive, the leniency extended 
to hotels and restaraunts does not pose a liquidity problem 
as yet.  He estimates that the larger banks may be able to 
carry these assets on the books for at least one more year, 
but may be forced to liquidate them if the decline continues. 
 As the bank in question has lent nearly 20 percent of its 
capital to the nation's tourist hotels (including the 
Soaltee, Shangri-La, Hyatt Regency, and the Fulbari luxury 
hotels), the collapse of the tourism industry may put also 
put it and other financial institutions at risk. 
 
Airlines Reducing Their Fleets and Flights 
========================================== 
 
5. Nepal's remaining six domestic airlines are also suffering 
from the industry's overall decline.  The drop in arrivals to 
Kathmandu with onward travel within the country are putting 
the airlines in the red.  In 2002, it is estimated that 
airlines lost USD 3.1 million in business (a 16 percent 
decline) causing: 
-- Necon Air to lose three of its planes because it was 
unable to maintain its lease agreements and maintenance 
schedules, and to reduce its flights from six destinations to 
two; 
-- Mountain Air and Gorkha Air to go out of business after 
they could no longer make the lease payments on their small 
airfleets; and 
-- Shangri-La to reduce its fleet by two planes and eliminate 
66 percent of its regional flights. 
The remaining airlines cannot sustain themselves on domestic 
passengers alone.  Flights that would normally provide USD 67 
per passenger for tourists fetch only a fixed USD 20 for 
Nepali passengers.  According to Bikas Rana of the Airline 
Operators' Association of Nepal, the remaining domestic 
airlines may be forced to close, if foreign tourists do not 
return in number. 
 
Where's the Bottom? 
=================== 
 
6. The worldwide decline in tourism combined with Nepal's 
security issues have hit the economy hard.  Tourism operators 
are asking, "Where is the bottom?"  Nepal's Tourism Board 
reported the first ray of hope in January, with tourist 
arrivals growing by 19 percent (a total of 16,103 visitors) 
for the month over the same period last year.  While an 
improvement, the numbers are still off the high levels 
recorded in 2000 and 2001.  The Tourism Board's report 
provided an indication of arrivals by tourists' country of 
origin as follows: 
-- India up 38 percent to 5,535; 
-- US up 24 percent to 1,364; 
-- UK up 24 percent to 1,329; 
-- Japan up 23 percent to 1,285; 
-- Taiwan up 48 percent to 634; 
-- China up 53 percent to 446; and 
-- Germany down 24 percent to 494. 
(Note: The Government of Nepal has made an effort to attract 
Chinese tourists to Nepal, including making the Chinese Yuan 
convertible to Nepalese Rupees in June 2002.  End note.) 
 
Comment 
======= 
 
7. Tourism, garments, light industry, and agriculture are the 
four pillars of Nepal's economy. The lack of a diversified 
industry poses the risk of economic collapse if even one 
should fail.  For tourism, which supplies one-third of 
government revenues, the implications of failure are 
especially ominous.  Should it fail, the over-investment of 
the nation's financial institutions in tourism-dependent 
markets may undermine their solvency.  Investors and 
operators can only hope that the announcement of a cease-fire 
and January's rise in tourist arrivals indicates light at the 
end of the tunnel. 
MALINOWSKI