Political, Economic and Social Development in Nepal in the
Year 2003

Overview

Nepal faces a lack of legitimate monopoly of state power without which security, law and order and development cannot be organized. While the state structures are scarcely able to penetrate into rural areas, the district headquarters and the capital city, Kathmandu, have developed into a nerve center of state rule. The remote Western and mid-Western hills and mountain areas, excluded from economic opportunities and public services, are fuelling the source of latent and structural conflicts obstructing the stabilization of the state's authority and legitimacy. Women, ethnic groups, Dalits and marginalized citizens are facing discrimination over distributional questions. Political stabilization and institutional consolidation are suffering from pervasive factionalism within political parties and fragmentation of their power, which has tended to escalate, rather than reduce conflicts.

The breakdown of cease-fire and peace talks between the government and the Communist Party of Nepal-Maoist (CPN-Maoist) in August, following differences over the election of a Constituent Assembly to draft a new constitution marked the escalation of the conflict. The security situation in the country has postponed democratic exercises like elections. The consequent absence of elected parliament and local bodies and lack of representative government have created a legitimacy vacuum. It is this vacuum that the political forces are trying to fill, resulting in multi-polar conflicts among the government, a fragile coalition of parliamentary political parties-- Nepali Congress (NC), Communist Party of Nepal Unified Marxist-Leninist (CPN-UML), People's Front-Nepal, Nepal Workers and Peasants Party (NeWPP), and Nepal Sadbhavana Party (NSP-Anand Devi)- and the Maoists. Their recourse to various forms of legitimacy-traditional, electoral and revolutionary- to govern has produced a situation of constitutional and political deadlock and affected conflict mitigation and peace process.

The parliamentary political parties and several human rights organizations criticize Prime Minister Surya B. Thapa's government for driving the nation towards "militarization in the name of unified command," rendering constitutional bodies "dysfunctional" and trying to impose an "autocratic regime." Thapa, however, claims that his government is creating authority in society destroyed by the "bad governance of political parties." Each of these forces has put its own "reform agenda" to resolve the crisis. These agendas challenge the constitutional status quo, aim to restructure state-society relations and open the prospects for the resumption of dialogue since neither side can claim a military or political victory. But, in the absence of intermediaries, a serious dialogue process has yet to start. International community, human rights organizations and civil society organizations are exerting pressures on all sides for an "all-party government" in moving the peace-building process forward, seeking an inclusive negotiated peace settlement to address the root causes of the conflict and establish good governance.

Direct violence has preoccupied the government's attention to law and order, weakened the base of policy reforms for poverty alleviation, devastated the lives of Nepalese men, women and children and affected the supply of food and relief materials to victims in remote areas. The violent conflict has left Nepal's development infrastructure crippled, rural economy on the decline and human rights situation worsening. The unpredictable security situation is causing the withdrawal of many foreign aided development projects from rural areas, closure of schools and factories and exodus of rural people to urban areas and abroad. Due to weak implementation capacity of the government, prospects for economic growth and security of its citizens remain dim in spite of relief programs being frequently announced by the government.

The awkward relations among domestic political forces have attracted wider geopolitical attention and great powers' interests in the conflicts, such as India, the USA, the UK, China, the EU and the UN. Any political proposal for Nepal's future requires interest representation of all social and political groups and their active participation in the peace process as well as in the structures of democratic governance.

Party Politics and the King

The constitutional and political process of Nepal took a new turn last year when elected Prime Minister Sher Bahadur Deuba, on the advice of five parliamentary parties, postponed parliamentary elections. On October 4, 2002 King Gyanendra sacked Deuba for his "incompetence" to hold elections, assumed executive power and nominated a royalist politician, Lokendra Bahadur Chand, as Prime Minister. The coalition of five parliamentary political parties were called upon to join in to form an all-party government. But they refused, calling it "an illegitimate government," and instead initiated a street agitation. Premier Chand resigned on May 30, 2003 for he could not garner the support of the parties. The five parties, including Nepali Congress (Democratic) headed by Deuba, recommended to the King their candidate for the post of Prime Minister, secretary-general of CPN-UML Madhav Kumar Nepal.

But, on June 4, the King appointed his former critic Surya Bahadur Thapa due to, what the media reported, "growing foreign pressure." Owing to heavy aid dependence, the Nepalese political leadership is forced to base its legitimacy on the support of external forces. The British, the American and the Indian envoys in Nepal have been co-ordinating their policies to help the government to cope with the Maoist challenge and promote security, good governance and development. The public does not seem happy with the new government because of the fragile legitimacy it commands. Nor is there mass support to the agitation of parliamentary parties because corruption, cronyism and authoritarian rule had tarnished many of their leaders' images. After all, it was this political class, gripped by mutually acrimonious client groupings based on individual leaderships, had utterly failed in improving the livelihood of the rural poor.

The five political parties have seen a way out in hardening their position against the King. They have escalated their protests, On July 5, they demanded a secular state, abrogation of the King's advisory council, confinement of the royal title to King, Queen and Crown Prince, a new constitution, cessation of King's power to enact laws, operation of Royal Palace under the Ministry of Royal Palace, regular disclosure of the King's property, elevation of the position of Prime Minister from 13th to the fourth, civilian control of the army, a strong parliament, social and economic transformation, solution to Maoist insurgency, upliftment of marginalized people, decentralized governance, solution of the problem of citizenship certificates, non-aligned and UN friendly policies, etc.

Their hope for a decisive turn through a huge rally in Kathmandu on September 4 was prematurely diluted on the advise of the Indian, American and British envoys as they ignited a hope for a reconciliation with the King. As the King turned down the request for an audience with British Special Envoy to Nepal Sir Jeffrey James in September in connection with "exploring the road map" to conflict moderation, the leaders of these parties vouched for "not abating their future movement on the pressure of the King or ambassadors." The King, unable to find the prospect for a negotiated settlement owing to fractious opposition forces, claimed his role as a "constructive monarch" and wanted to go his own way. In December, Sir Jeffrey James met all political leaders, including the King, and suggested the inclusion of all parties in crisis resolution. Finding no way out of the current impasse, political leaders announced a series of street agitation against the government beginning December 16. Smaller parties within the five-party coalition, however, demand a "white paper" from NC and UML ensuring that they would not desert them again.

Growing factionalism and a weakened institutionalized structure in political parties has been telling on their performance. Influential CPN-UML leaders K.P. Oli and R. K. Mainali criticized the "aimless movement" and ruled out the possibility of reviving the dissolved parliament. The second generation NC leaders- Speaker Taranath Ranabhat, R. C. Poudel and Shailaja Acharya- have criticized their president G. P. Koirala for forging an alliance with the leftist forces to oppose the King. On March 26, the two rival groups of Nepal Sadbhavana Party (NSP) suffered a vertical split. The Badri Prasad Mandal faction supports the government while the Anand Devi faction is a part of the anti-government five-party coalition. The NC (Democratic) which is opposing the King's step in its own way has at the same time condemned the "unholy alliance" of the five parties citing it as sheer jockeying for power. Sensing this trend, the government announced local elections for May 2004, but, at the same time, began extending its party organization by filling the vacancies in the local bodies-- villages, municipalities and District Development Committees. All the parties have criticized the government's talk of local election as a ploy to prolong its clientalist regime, create rural-urban divide, weaken the forces of civil society and put off dialogue with the Maoists.

Annoyed with the way Premier Thapa personally chose ministers without his own party's consent, Rastriya Prajatantra Party (RPP) chairman Pashupati S. Rana urged the government to stop all political appointments so as to bridge the gap between the government and pro-constitutional forces. Rana feared that the alienation of major parties might push them into the Maoist camp, erode trust between the King and political parties and upset the existing political equation. The student unions of five parties have started chanting anti-King slogans and provoking a stir throughout the nation. On November 20, a majority of RPP central committee members demanded the resignation of Premier Thapa for his failure to include mainstream parties in the government, the collapse of cease-fire and the deteriorating law and order situation in the country. An assertive Premier replied, "I was appointed in special circumstances and, therefore, am accountable to the King and the people, not to the party." He also criticized the five parties for not joining his government.

Thapa's growing opposition, pressure from political parties on the King for reconciliation and the suggestion ny EU, India, the UK and other donors for an all-party government can be expected to unfold a new political scenario. Political parties are considering a number of options, such as restoration of the Deuba government, revival of the dissolved Parliament and formation of an all-party government and initiation of talks for national reconciliation by including Maoists in the mainstream politics, provided they give up violence. The latest initiative taken by M. K. Nepal on November 19 to convince the Maoist leaders in Lucknow, India to return to the negotiation table was, however, criticized by the government. The Thapa government rules out any option for negotiation or mediation offers from the international community until the military strength of the Maoists is reduced to a minimum level. While the Maoist insurgency came as a crucial challenge to the existing political class, the key political players have not yet changed their playing-politics-as-usual style and taking initiatives to solve the national crises. The media is partisan, self-shut and conflict-insensitive. The Judiciary is overloaded with cases. In such a scenario, ordinary citizens are forced to suffer from the fear of existential insecurity.

Breakdown of Dialogue and Conflict Escalation

The declaration of the cease-fire on January 29, preparation of a code of conduct and two rounds of peace dialogue of CPN-Maoists with the Chand government, and later another round with the Thapa government, yielded no political solution to the eight-year old Maoist insurgency. In the third round of dialogue on August 17, the Thapa government replaced the earlier negotiators by its own ministers-- Kamal Thapa and Dr. Prakash C. Lohani. The CPN-Maoist retained its earlier five-member negotiating team headed by Dr. Baburam Bhattarai. The Maoist side nominated Padma Ratna Tuladher and Daman Nath Dhungana and the government nominated Karna Dhoj Adhikari and Shailendra Kumar Upadhayay as dialogue facilitators.

Following Mao's strategy of "encircling the cities from the countryside," the CPN-Maoist claims its success in creating a triangular power equilibrium consisting of CPN-Maoist, parliamentary parties and the monarchists where it controls the villages and the establishment controls the district headquarters and Kathmandu. It accepts the king's de facto power due to his control over the army but perceives a bipolar confrontation between the old regime and the new forces. Considering the earlier peace talk, a product of "objective necessity" of civil war and the balance of national and international forces in the country, it demanded: integration of the Royal Nepalese Army (RNA) and the rebel's People's Liberation Army (PLA), a secular state; right to basic needs; new land rights conforming to the "rights of the tiller" concept; removal of foreign army personnel from Nepalese territory, military aid and any pact harmful to national interest or the current peace negotiations in the guise of anti-terrorism; regulation of the Nepal-India open border; closure of the Gurkha recruitment center; an end of foreign monopoly in industry, commerce and economic fields and foreign intervention, including those by NGOs and INGOs. But its immediate demands involved: roundtable talks of all relevant forces of society, an interim government and a constituent assembly.

The government agenda of forward-looking reforms, inter alia, involved: formation of a neutral government three months before elections, proportional representation, restructuring of the Upper House of Parliament to accommodate marginalized people, reservation of 25 % of all seats in representative institutions for women, etc. It agreed to fulfil the Maoists demands for roundtable talks and all-party interim government, but rejected the constituent assembly, which to the Maoists claim, is the bottom-line. The government also insisted on prior surrender of arms. On August 27, the Maoists unilaterally pulled out from the cease-fire declaring that the government refused to agree on the constituent assembly. The immediate cause for the breakdown of talks, according to facilitator S. Upadhayay, was the killing of 17-unarmed Maoists and two civilians in Ramechhap by security forces in the midst of the negotiation. This also evoked a criticism from the international community and human rights organizations. Other factors were: growing mistrust between the two sides, absence of any mechanism to monitor the violation of the code of conduct and human rights, single-track negotiation, discussion more on differences than on common points, inflexibility in the adjustment of goals as negotiators had only delegated power, and poor role definition of facilitators as a mere communicator. The government also failed to muster support from political parties for the negotiations.

After the breakdown of the cease-fire, the government branded the CPN-Maoist as a "terrorist outfit," relieved the facilitators of their duty, created a Unified Command comprising the RNA, Armed Police Force (APF) and Police and, since November, has begun to train and arm Village Defense Forces (VDF) to counter the Maoists. A VDF unit comprises 30 civilian volunteers and 15 armed personnel, and covers 3-4 Village Development Committees (VDC). While political parties viewed it as "militarization" of the country, Amnesty International (AI) feared that "these groups could lead to an increase in human rights violations carried out with impunity." On December 15, the German Embassy, which currently holds the presidency of the European Union (EU) responded, "We do not believe that the formation of Village Defense Forces (VDF) will contribute to the resolution of the conflict. Indeed, they pose a serious risk of escalation…. Experience indicates that the arming of civilians increases polarization and suspicion, undermines the distinction between combatants and non-combatants and leads to a higher level of violence. VDF may also present an additional barrier to a negotiated settlement and add to the challenge to post-conflict recovery."

The RNA is increasing its strength from 50,000, until 2000, to 72,000 and is preparing its second 10-Year Strategic Plan to augment its strength to 100,000. Regional Administrators' Offices have been empowered to look after personnel administration, corruption control, development programs and security. The government is also providing relief package to 18 Maoist-affected districts to rehabilitate women, minors and orphans.

The Maoists have filled the authority vacuum created by the abandonment of police stations and government offices by the government in the name of consolidating them with the district headquarters. The CPN-Maoist has devised a three-phased plan: "decentralized attacks" to keep security forces on the defensive; "relatively concentrated attacks" to exhaust the security forces and prepare the final ground for a "highly centralized offensive." Their recent military setbacks in Banke, Achham and Rolpa and disruption of their bases in western hills have forced them to resort to conventional guerrilla fights, such as targeting security and influential persons, (they targeted ex-premier Deuba and an ex-home minister, killed a Chief of APF, a colonel and later a brigadier), informers, school teachers, government officials, party cadres and 'feudals'. They also extended their People's War to the Tarai and have launched selective urban guerrilla attacks. The Maoists' current political strategy involves developing an understanding with the mainstream parties struggling against the Royal government, persuading them to work together for the establishment of a republican state, abstaining from criticizing India, mobilizing international support, especially with those who have differences with the US, and appealing to the UN to "play a creative role" in peacefully resolving the problem. In December, Maoist leader Dr. Bhattarai argued that the election of the constituent assembly could be held under the security of the UN after demobilizing the RNA and PLA.

Costs of Conflict and Human Rights Concerns

The scale of humanitarian tragedy that Nepal has had to withstand due to the direct violence is difficult to describe. Informal Sector Service Center (INSEC), in November, reported that the state has killed over 5,781 individuals in encounters with Maoists whereas over 2,740 were killed by Maoist rebels during the eight year insurgency. Some 200,000 persons, mostly teachers (143 killed), landowners and government employees, have been displaced from their homes and 250 gone missing while in government detention. The conflict has caused the deaths of 447 women (383 by the security forces and 64 by the Maoists), displaced 3,000 teachers from their job and caused the closure of several hundred schools. Just after the breakdown of the cease-fire two journalists were killed and 70 subjected to detention and interrogation. The trauma faced by widows and orphans, sexual violence, forceful eviction of women from their homes, beating, torture, arbitrary detention etc. have been appalling. The migration of conflict-affected people to India and abroad remains unrecorded. Child Workers in Nepal Concerned Center (CWIN), reveals a record of 1,158 children directly affected by the violence, 197 boys and 81 girls killed, 4,000 uprooted from their homes and 300 sustained injury.

The health budget stands at 4.5 per cent of the total while defense is allocated 23 per cent. To meet this cost, the government has raised taxes, diverted funds from development and resorted to extra borrowing. Macroeconomic stability has been disturbed due to a rising fiscal deficit, widening current account deficit, trade imbalances and increasing foreign aid and debt burden. The national economy has lost 66.2 billion rupees in GDP over last eight years.

The introduction of a 'visa system' in some hilly districts by the Maoists has worsened the supply of food in the food-deficit districts. Over one third of the 3,913 VDC buildings, and 600 post offices have been completely demolished. Physical infrastructure including bridges, telecommunication equipment, power stations, airstrips, school buildings, water supply schemes, have been destroyed. The rehabilitation cost of the damaged infrastructure stands at a whopping $400 million. Maoist bomb attacks on multi-national companies like Coca-Cola, Lever, Colgate, Palmolive, Dabur Nepal, Nepal Lever Ltd and Nepal Battery have scared prospective foreign direct investments. Private investors have diverted their capital elsewhere. The unpredictable security situation has caused the suspension of many construction works, such as Sindhuli-Bardibas Highway, Melamchi drinking water project and Surkhet-Jumla road. On December 3, the United Nations World Food Program, GTZ and the British Department for International Development (DFID) suspended field activities in parts of Dailekh district following a Maoist assassination of a social mobilizer. Earlier, in September, Maoists attacked the project office of GTZ in Bhojpur. Due to Maoist threats all American organizations have left their field offices. At least 13 cooperatives have come under attack by the Maoists since the breakdown of the cease-fire.

Responding to the precarious human rights situation in Nepal, the National Human Rights Commission of Nepal (NHRC) in November asked the government to invite the UN Human Rights Commission (UNHRC) to monitor the human rights situation. Earlier, on November 13, the UNHRC expressed its "profound concern over reports that dozens of individuals are being detained secretly in Nepal and are therefore at risk of suffering torture and other forms of ill treatment….Both sides in the conflict have committed human rights abuses since the cease-fire collapsed." It said that they have received information "about individuals, including some journalists arrested by security personnel on suspicion of supporting or being involved with the CPN-Maoist."

Cross-Border Linkages of the Conflict

Maoists have thrived due to the structural conditions of poverty, inequality, discrimination, corruption and bad governance over the years and their own ideological appeal-- liberation of people from centuries of elite rule. Nepal's 1,800-plus kilometers open border with India has provided them an opportunity to organize many poor people earning their livelihood in India and also to use India as a sanctuary. Their linkages with the People's War Group (PWG) and the Maoist Communist Center (MCC) in India and Revolutionary International Movement (RIM) worldwide have given them the ideological support to launch the guerrilla warfare. RIM had earlier concluded that in a favorable geo-strategic location like Nepal's, Maoist's capture of power could possibly trigger similar stirs across the South Asian region. The Coordination Committee of Maoist Parties and Organizations of South Asia (CCOMPOSA) unifies and coordinates their activities. The CPN-Maoist makes ritual denunciation of "American imperialism" and claims that the superpower is developing military arrangements with many countries bordering China to encircle it and create a base in Nepal. The Chinese Embassy in Kathmandu, however, does not share this view.

On March 27, US Assistant Secretary of State for South Asia Christina Rocca said, "in coordination with Great Britain, India and other partners, our security assistance will provide direly needed small arms, equipment and training to enable the Royal Nepalese Army (RNA) to counter the Maoist military threat. "The US government is extending cooperation to conduct human rights training for the RNA personnel. Similarly, under a Global Conflict Prevention Fund, the British government has provided two MI-17 helicopters and $20m military and development aid to Nepal. It has also agreed to supply the RNA with two spy aircraft, the Eye-lander. The Indian government, too, has offered two night vision helicopters and extended cooperation to improve Nepal's security, economic and social situation.

All these governments worry about the possibility of Nepal falling into a "failed state" between India and China and falling prey to global terrorism. America and India have labeled the Maoists as "terrorists." America has put Nepal on the list of "US foreign policy challenges," provided $17m military and $ 40 million development aid to support Nepal's initiative for strengthening accountable governance and development. It also provided 8,000 new M-I6 assault rifles. Media reports said that more than 100 soldiers of the US Pacific Command are involved in a "Joint Combined Operations" with the RNA soldiers since mid-January. Nepal and the US also signed an Anti-Terrorism Assistance (ATA) under which the latter assists in training, consultation and equipment. Due to the overt Maoist threat to American organizations working in Nepal, Washington has placed them on a "watch list" of organizations whose activities could be harmful to American interests and issued an executive order to freeze Maoist assets in the country. The US believes that one last military offensive can bring the Maoists to the negotiating table. During her visit to Nepal in the second half of December, Christina Rocca, raised the human rights concern, suggested reconciliation between the King and constitutional forces and requested the deployment of Nepalese army in Iraq. The RNA asked for more US military aid to target the command and control system of the Maoists and support the rehabilitation, reintegration and reconstruction and reconciliation of those Maoists who have surrendered. The Nepalese government has also purchased the 5,500 Minimi belt-fed machine guns from Belgium to beef up the strength of RNA.

The EU is insisting on peaceful resolution of the conflict by addressing the root causes. China calls the Maoists "anti-government forces," opposes external meddling fearing the convergence of anti-Chinese forces in its underbelly, Tibet, and suggests that the problem should be solved by Nepalese themselves. India fears that the insurgency in Nepal could spill over to the geopolitical heartland of India, and points out the possibility of smuggling sophisticated foreign arms to Indian insurgents. It insists on the resolution of the conflict by the Nepalese themselves. On August 13, Indian Ambassador to Nepal Shyam Sharan urged the Maoists to "cut off their links with the terrorist entities in India like the PWG and the MCC" and made it clear that "India was not in favor of any third party mediating in the Nepalese peace process." Speaking at a press conference at Rajbiraj on October 18, he said, "India is ready to help solve the Maoist problem."

Foreign Policy

Nepal's foreign policy success has remained meagre. It has become a member of the WTO and has also established an embassy in Malaysia. Strains continue to plague Nepalese foreign affairs. On the American war on Iraq, Nepal deviated from the UN principles of non-interference and expressed implicit "support to the American led coalition action against Iraq." On the Bhutanese and the Tibetan refugee problems, it committed serious diplomatic mistakes. And it could not prevent the Netherlands from terminating its five million annual Euro grants to Nepal. Swiss Contact terminated its small-scale industry promotion project and many other donors have downsized their activities. Finland postponed the visit of its mission to Nepal's far-west region and the Asian Development Bank (ADB) warned, "If the conflict persists, ADB might review its program."

The issue of repatriating 100,000 Bhutanese refugees has been lingering for the past 13 years. Among the 12,000 refugees verified by the Nepal-Bhutan Joint Verification Team (JVT), Bhutan has agreed to repatriate only a few eligible "bona-fide Bhutanese citizens" from the Khundunbari camp. The refugees categorized, as bona fide (Category No 1), make up only three per cent of the total. The number of those in the other three categories is 75 per cent "Bhutanese who willingly emigrated," about 20 per cent "non-Bhutanese" and around two per cent "Bhutanese with criminal records". The United Nations High Commission for Refugees (UNHCR), human rights organizations, the international community and Bhutanese refugees has, however, criticized these verification measures as biases. The latest fracas between refugees and the Bhutanese counterpart of JVT has halted the dialogue between the two countries.

Nepal's deportation of 18 Tibetan refugees to Chinese authorities evoked serious criticism from the US, the European Union and the UNHCR. The US alleged Nepal's government of "deviating from its long-standing policy towards Tibetan asylum seekers coming to Nepal" and, in retaliation, it withdrew a preferential trading bill tabled at the Finance Committee of the US Senate. The bill sought to provide duty-and-quota-free market access to Nepali garments in the US.

India is Nepal's southern neighbor with whom major social, economic and political interactions take place. Nepal has 54 disputed and encroached sections of the boundary with India covering an area of 720 sq. km and a joint commission is trying to settle this question. India has extended the facility of Duty Exemption Pass Book Scheme (DEPB) to two land customs stations under which imports are exempted from all taxes in India. The Railways agreement signed between the two countries provides the operation of multi-million dollar Inland Container Depot (ICD) in Birgunj and the railway cargo services facilitates Nepal's third country trade. The depot, said to reduce transport costs by 40 per cent, was inoperable in spite of its completion. India had been foot-dragging to extend its railway lines up to the depot situated near the border. A deal was finally reached when Nepal agreed to allow the operation of Indian railway in its territory according to Indian laws.

The Mahalisagar bund constructed by India, however, has created some irritants. Despite repeated Nepalese requests not to, the Indian government constructed the bund, and is preparing the gates to control the flow of water during the monsoon season. Nepali engineers argue that 600 bighas of Nepali land will be submerged after the grooves are put in the 15 gates. India, however, claims that the construction is not new but a renovation and it was done as per the 1901 Nepal-India treaty. On December 9, Indian ambassador to Nepal Shayam Sharan revealed that India would bring large projects to develop the areas along the border between Nepal and India. He said a project costing Rs. 40.6 million would be launched in the border areas.

Bilateral relations between Nepal and China remained just practical, rather than warm. Both the countries formed a joint committee for the promotion of tourism and to: develop border areas of Nepal and Tibet, simplification of visa procedures for Nepali tourists visiting Tibet, renovation of the Tato Pani-Lahsa highway, Nepali helicopters to be permitted to land in Tibet in rescue operations, mountain flights to be started to Mt. Kailash and the Mansarover region, Nepali airlines to be allowed to land in Lhasa, and the airfare between Kathmandu and Lhasa to be reduced to promote cross border tourism. China also agreed to provide a grant assistance of Rs. 190.4 million, a scanning mobile container system and training to customs officials to operate the system. Nepal and Tibet signed an MOU to facilitate bilateral trade and an agreement to open two new trade routes. China offered assistance worth 80 million yuan to Nepal for economic development. China wants Nepal to spend 20 million yuan, out of 80 million, to develop the northern part of the country.

Germany, which extends about 15 million euro in development aid each year, is one of Nepal's leading donor countries. It is involved in the development of 70-megawatt Middle Marsyangdi project. The German company had briefly stopped work citing security reasons after two workers died in an ambush set up by the Maoists and "violation of contractual obligation." After the German government was prepared to cover 80 million euro additional costs for the project and serious negotiation, the contractors resumed their work.

Traditionally, Germany is Nepal's third trading partner and a destination for Nepal's carpet exports. Arrival of German tourists in Nepal, however, declined from 40,000 to 15,000. German cooperation is confined to some main areas--basic health, promotion of local self-governance, renewable energy especially biogas and hydro-electricity and private sector promotion. There is direct German investment in infrastructure projects such as the Bhote Koshi power station.

Japan is Nepal's another major donor country, involved in the construction of Sindhuli-Bardibas road, and has provided a grant assistance of around $11.65 million for the extension of power transmission and distribution system in the capital and Rs. 174.2 million as grant assistance for the improvement of Kathmandu Valley water supply facilities.

The Asian Development Bank (ADB) granted $ 700,000 for the preparation of a commercial agriculture development project to improve the income and employment opportunities of small and marginal farmers in 11 districts of eastern Nepal including six hilly districts through the introduction of high yielding crop varieties and improved farming techniques, $30 million loan assistance for implementing Secondary Education Support Program (SESP) and a grant of $400,000 to strengthen Nepal's capacity to manage public debt. The Bank also provided $321 million from its concessional Asian Development Fund (ADF) for the next three years to focus on agriculture, rural infrastructure development, rural electrification energy, road network, water supply, sanitation, women's empowerment, eco-tourism and capacity building of the government in conflict-related areas, a loan assistance of $ 1.4 million for water supply and sanitation projects and $30 million for the implementation of the Urban and Environmental Improvement Project. On August 13, the Bank extended $321 million loan to Nepal over the next three years to alleviate poverty.

On April 3, the World Bank agreed to establish the Power Development Fund (PDF) and contributed $ 75.6 million for the PDF out of which $2.5 million is in the form of grant so as to support power development projects, community-based village electrification and improvement in grid transmission and distribution system. It approved a $ 75.6 million credit to provide electricity facility to 47,000 households and help the private sector to undertake small and medium sized hydro projects and a $ 5 million credit to support Nepal for the transfer of public school management to communities. On July 9, the International Development Association (IDA) of the World Bank agreed a $75.6 million financial assistance to Nepal for the implementation of the Power Development Project. Out of this amount, $25.2 million will be grant assistance while $50.4 million will be in loan assistance. On November 19, the Board of the World Bank approved $70 million for its Poverty Reduction Support Credit (PRSC) to Nepal for the implementation of the Poverty Reduction Strategy Paper (PRSP). The bank also committed $75 million loan for financing the privatization of two largest state-owned banks.

The British government agreed to provide a grant assistance of 12,597,500 Sterling pounds to implement the Agricultural Perspective Plan and Community Based Rural Water Supply and Sanitation. Nepal's other bilateral donors are the Netherlands which has provided a grant assistance of Rs. 117.4 million on Local Governance, Australia which provided a grant of Rs. 840 million to support Community Resource management and Livelihood Project, the European Commission which provided a grant of 15 million euro for the development of photovoltaic solar systems, Finland which provided a grant of Rs. 28,620,900 to conserve the biodiversity, Norway which provided a grant assistance of Rs. 164,600,000 to carry out a feasibility study for the Upper Tamakoshi hydroelectricity project and later a grant assistance of Rs. 99 million to implement poverty alleviation, food security and environmental protection. The UN organizations work in multiple areas, such as local governance, health, labor, environment, gender, etc.

Economy

Nepal's population stands at 26 million. Nearly half of them live below the poverty line, earning less than $ 1 per capita a day. The average per capita income remains at US$220-240. The economic growth of 3.41 per cent barely balances out the population growth rate of 2.2 per cent. On January 3, the King said, "The international agenda of the day - market economy, good governance, transparency and corruption-free practices - must be incorporated into our national agenda, too." Nepal's Tenth Five-Year Plan (2002-2007) has adopted the International Monetary Fund (IMF) and the World Bank initiated the Poverty Reduction Strategy aiming for pro-poor growth for poverty reduction, social sector development, targeted programs for the backward and vulnerable groups and safety nets, and good governance. Agriculture provides livelihood to 80 per cent of the population and accounts for 41 per cent of the GDP. Due to good harvest the sector recorded a growth rate of 3.5 per cent. The new Agriculture Perspective Plan-Support Program that came into effect in March aims to help poor farmers in 20 Maoist-hit districts through subsidy.

Industry contributes 22 per cent to GDP. Industrial activity mainly involves the processing of agro-products, such as tea, jute, tobacco, sugarcane and grain. Carpet and garment production, accounting for about 80 per cent of foreign exchange earnings, declined significantly due to global economic slowdown. Export of readymade garments to the US recorded a sharp decline of 60 per cent. Nepal exports 85 per cent of its total garment production to the US and a bulk of its carpets to Germany. Growth rate in the manufacturing sector stands at 4.5 per cent.

Foreign Direct Investment (FDI) amounted to just $11 million. In FDI projects, India tops the list (38.8 %) followed by USA, Japan and China. Lack of security, policy discontinuity, poor infrastructure and inefficient service sectors are largely attributable to the low level of FDI. The service sector contributes 37 per cent to GDP where the contribution of tourism in foreign currency earnings is 12 per cent. The country is landlocked and heavily dependent on trade and transit with India. It has a public debt of about $3.5 billion, or 62 per cent of the GDP. About 70 per cent of the development budget comes from donors and their cooperation is dependent on democracy, human rights, good governance, corruption control and resolution of the Maoist conflict.

The total budget for the current fiscal year (July 2002-2003) is Rs. 96 billion ($1 US=Rs 74), of which about 60 per cent goes to regular spending while the rest to development, but according to revised estimates, development expenditure came to about only 34 per cent. The share of domestic revenue is only about 19 per cent of the GDP. The Nepal Rastra Bank report on the "Macroeconomic Situation of Nepal," in September 2003 (based on the annual data for the Fiscal Year July 2002-03) revealed that gross foreign exchange reserves of the banking system in mid-July 2003 reached Rs.110.4 billion, sufficient to cover merchandise imports of 10.6 months and merchandise and service imports of 8.8 months. Total government expenditure grew marginally by 0.9 per cent (Rs. 72.2 bn) as against a rise of 4.0 per cent last year. Of the total expenditure, regular expenditure increased by 12.5 per cent (Rs.54.3 bn) compared to an increase of 13.5 per cent last year. Development expenditure, however, declined sharply by 24.1 per cent (Rs.16.5 bn) compared to a decline of 13.8 per cent last year. Adverse security situation is attributed for this decline.

Total non-debt resources (revenue, non-budgetary and other receipts and foreign grants) increased by 13.6 per cent (Rs. 60.5 bn). Revenue went up by 11.5 per cent due to the rise in imports. Foreign grants increased by 20.5 per cent (Rs. 2.5 bn). The decline in the total expenditure and rise in the non-debt resources caused the decline of budget deficit by 36.1 per cent (Rs.11.7 bn) financed by grants and concessional foreign assistance.

Total export increased by 4.9 per cent (Rs.49.2 bn) in contrast to a substantial decline last year. Total import increased by 16.9 per cent (Rs.125.5 bn) as against the decline of 7.2 per cent last year. With the growth of import exceeding the growth of export, the trade gap widened by 26.2 per cent (Rs. 76.3 bn) compared to the marginal growth of 0.7 per cent last year. Based on the available balance of payment statistics for the first ten months, trade deficit increased by 38.2 per cent (Rs.57.b) in contrast to the decline of 11.2 per cent last year. Trade deficit with India increased by 80.7 per cent in contrast to the decline of 15.7 per cent last year. Nepal's trade deficit with China stands Rs. 7.4 billion.

Due to a substantial inflow of remittances from half a million Nepalese working abroad, there has been a surplus of Rs. 15.7 billion in the current account. The gross foreign exchange reserve in mid-July reached Rs.110.4 billion. The national consumer price index increased by 6.1 per cent compared to a slower growth of 3.5 % during last year. The price index increased by 4.8 %.

Policy Innovation and Reforms

The government has defined 100 development projects, as priority projects, restructured the annual budget to achieve the focused targets and set up a Poverty Alleviation Fund (PAF) to penetrate to the rural based hard core poor. To prevent pervasive tax evasion, Voluntary Disclosure of Income has been devised and implemented. A Financial Ordinance was issued to revamp the ailing industrial and economic sectors and introduce a loan recovery scheme. There is a plan to transfer the management of 26 thousands government-run primary schools to local communities in a phase-wise manner.

The government is pushing a financial reform package to reschedule Rs.150 billion loans of the banking system. In order to attract investments from Non-Resident Nepalis (NRN), the first NRN Conference was organized in Kathmandu aiming to link Nepali business with global trade and attracts investments in tourism, hydro power and information and communications technology. Fifty more mountains have been opened for expedition. The government also promised to bring an Act in this regard within four months and legislate a separate act to attract investments from NRNs.

With donor support, the Nepalese government has started to curb the wheels of corruption and has signed the UN Convention against Corruption. The newly empowered Commission for the Investigation of Abuse of Authority (CIAA) filed a case against two ex-chiefs of Nepalese airlines, for their corruption in airplane deals. It summoned former Prime Minister G. P. Koirala for interrogation, based on the report of the Judicial Inquiry Commission on Property (JICP). The CIAA has summoned over 40 other politicians and high level bureaucrats on the charge of amassing illegal wealth. Absences of transparency and punishment for perpetrators have provided a favorable environment for endemic corruption. According to Chief Secretary of the government Bimal Koirala, "The government failed to ensure economic growth and security of citizens."

Social Development

The prevalence of traditional caste-based society, patriarchy, rigid social structures resulting in social exclusion and patronage-based service orientation have hindered achievements in social development and human rights. The growing insecurity in rural areas has led to rural-to-urban migration causing a high population growth (6 per cent) in urban areas. Life expectancy for males and females is 60 years. The literacy rate is 42 % for females and 62 % for males. Only 6.9 % of the annual budget goes to education, as compared to 23 % for security, including 13.9 % for home and 9.18 for defense ministries. About 20 % of the population has access to safe drinking water. ILO estimates that 127,000 children are trapped in the worst forms of child labor, 200,000 people are under a semi-bonded conditions and women face wage and other discriminations. The UNICEF reveals that 235 youngsters die every day from largely preventable diseases, while more than 40 per cent suffer from malnutrition and less than 40 per cent complete a basic five-year education. Violent conflict disrupted the movement of food items to markets. The share of health sector in national budget is 4.4 per cent. There are only five doctors for every 100,000 people and most of them are in the capital. Fertility rate is 4.48 children. Maternal mortality rate, at 539 in 100,000 live births, is one of the highest in the world, and under-five mortality rate is 118 per 1,000. Malnutrition is a serious problem, with almost half of children under five underweight and suffering from stunting. The WHO estimates that there are 61,000 HIV/AIDS infected people in Nepal.

Due to the decline in economic activities and a rise in conflicts, Nepal's labor market has suffered heavy losses. A large majority of the 11.7 million strong labor force is self-employed and 4.7 per cent remain totally unemployed. More than half a million Nepalese are working abroad. Increasing migration of Nepalese workers abroad in search of jobs has hit the trade unions hard. Their participation in the agitation of political parties has further exhausted their energies in building the powers of union. A common threat perception of the Maoists and the government have, however, helped the major trade unions- Nepal Trade Union Congress (NTUC) and General Federation of Nepalese Trade Unions (GEFONT) have come together on a number of issues to forge collective action. NTUC and GEFONT made common their campaign for effective implementation of labor laws; Collective Bargaining Agency (CBA) election at plant level and its effectiveness; verification of union membership in a systematic manner; check-off system; solidarity among national affiliates and formation of joint OHS committee. Their Joint Task Force is working to develop a mechanism to create a single National Center. The Democratic Confederation of Nepalese Trade Unions (DECONT) and NTUC also organized their national conventions and elected their executive members. Union agenda in Nepal involves social security, workers' right in the informal sector and gender equality in the workplace while the employer's agenda involves labor flexibility, exit policy and right to hire and fire the workers.

On November 12, the government announced 10 per cent quota in foreign employment for the under-privileged section of the society and Maoist affected people, collateral-free loans of up to Rs.100,000 to prepare for such employment and directed every manpower agency to do accordingly. On November 5, the government and ILO signed an agreement to implement the Master Plan for the elimination of child labor as well as a time-bound program against the worst forms of child labor. The action program will reach 4,500 child workers and 1,500 families.

Gender Development

The structure of governance and development in Nepal is male dominated. Women's participation in the civil service is only eight per cent, 19.4 per cent in the media, 12 per cent in central leadership of major trade unions and 5.8 per cent in the dissolved parliament. The process of democratization requires changing this patriarchal structure through affirmative action in education, entitlements and social opportunities for women. On December 11, the government decided to provide reservation for women and preparations are on to appoint at least one woman joint secretary in each ministry within six months to end the male dominance at the policy making level. The road map prepared by the government proposes a reservation of 20 per cent seats for women candidates in civil service for a period of five years. Earlier, it had introduced inheritance of property rights for women, gender auditing and allocation of separate budget for income generating activities by applying the formula of organization, skill and saving and rights-based governance. It also decriminalized abortion. The National Women's Commission draft report to be submitted to the government has already identified several discriminatory provisions in the Constitution, recommended measures to make the state, political parties and society gender-sensitive, revision in the laws and language, 33 per cent representation in governance and formulation of special programs for capacity building of women.

Regional Cooperation

A considerable warming of relations between India and Pakistan, following a series of confidence building measures, that include a common position at the Cancun WTO meeting, appointment of High Commissioners to each other's countries and the willingness to resume road and rail links between them have had a positive bearing on regional cooperation in South Asia. The Standing Committee Meeting of Foreign Secretaries of South Asian Association for Regional Cooperation (SAARC) in Kathmandu on July 9 agreed to move quickly from the existing Preferential Trading Arrangement (SAPTA) to South Asian Free Trade Area (SAFTA) and draft a treaty to be submitted at the 12th SAARC summit in Pakistan on January 4-6, 2004. Another meeting of the South Asian foreign secretaries is due to finalize the drafts on SAFTA, poverty alleviation, terrorism, drug and women trafficking and the Social Charter to be submitted during the summit. The secretaries also agreed to increase the budget for the five regional centers located in different member countries. A SAARC Standing Group on Standards, Quality Control and Measurement has been recently set up to harmonize regional standards. The Standing Committee has already recommended reconstituting the Technical Committees and reached an agreement on the formation of specialized working groups to identify the emerging areas of cooperation--biotech, intellectual property rights, tourism and energy. The 12th summit will endorse the establishment of three more regional centers-a Culture Center in Sri Lanka, Center for Coastal Zone Management in the Maldives and a Media Center in Nepal. Currently, Nepal holds the chairmanship of SAARC.

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