COUNTRY REPORT
May 2001
The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through our digital portfolio, where our latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.
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Contents
3 Summary
Nepal
5 Political structure 6 Economic structure 6 Annual indicators 7 Quarterly indicators 8 Outlook for 2001-02 8 Political forecast 8 Economic forecast 9 The political scene 13 Economic policy and the economy 17 Foreign trade and payments
Mongolia
19 Political structure 20 Economic structure 20 Annual indicators 21 Quarterly indicators 22 Outlook for 2001-02 22 Political forecast 22 Economic forecast 24 The political scene 26 Economic policy and the economy 31 Foreign trade and payments
Bhutan
32 Political structure 33 Economic structure 33 Annual indicators 34 Quarterly indicators 35 Outlook for 2001-02 35 Political forecast 35 Economic forecast 36 The political scene 39 Economic policy and the economy
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List of tables
10 Nepal: insurgency-related killings, Feb 1996-Dec 2000 16 Nepal: electricity demand forecast, 2001-10 17 Nepal: national urban consumer price index 18 Nepal: current account 26 Mongolia: central government budget, Jan-Feb 2001
List of figures
8 Nepal: real interest rates 9 Nepal: gross domestic product 9 Nepal: Nepalese rupee real exchange rates 18 Nepal: current-account balance 23 Mongolia: gross domestic product 23 Mongolia: togrog real exchange rates 26 Mongolia: consumer price inflation 31 Mongolia: external trade 34 Bhutan: money supply 34 Bhutan: foreign reserves 36 Bhutan: gross domestic product 36 Bhutan: exchange rate 40 Bhutan: revenue and expenditure 40 Bhutan: electricity, gas & water
EIU Country Report 2nd quarter 2001 © The Economist Intelligence Unit Limited 2001 3
Summary
May 2001
Nepal
Outlook for 2001-02 Opposition attacks on the prime minister, Girija Prasad Koirala, will continue. The government will seek to implement its “hearts and minds” programme to contain Maoist violence, which has already hit industry. The economy will continue to grow in the wake of India’s economic expansion, but political instability remains a threat.
The political scene The Maoist insurgency has spread, with an escalation of violence in April. Parliament has not ratified new security measures, although a new internal security programme has begun. A cabinet reshuffle has backfired and two ministers have quit. Opposition parties have pushed for Mr Koirala’s resignation, and anti-corruption investigations continue. A new citizenship law has been ruled unconstitutional. Bhutanese refugee verification has begun. Senior diplomatic exchanges with China have taken place.
Economic policy and the The government’s spending on salaries has increased. Revenue collection may economy be boosted by a customs crackdown. Ways to cut public expenditure have been suggested. The Supreme Court has ordered the reinstatement of the central bank governor. Some financial sector reforms have been delayed. The government has banned strikes in hotels. Power shortages have reappeared. Rice production has increased, but industrial growth has eased. Consumer price inflation remains low.
Foreign trade and Growth in foreign trade has slowed. Trade relations with India remain payments complicated. The current-account deficit has widened. Foreign-exchange reserves have increased. The rupee has depreciated further.
Mongolia
Outlook for 2001-02 The presidential election will take place on May 20th. The government is hoping to secure US$400m in pledges of support at the mid-May donor conference. The government, with IMF encouragement, has committed itself to selling most of its holdings in large companies. The government will be under strong pressure to introduce measures to prevent more losses in natural disasters. The government has big infrastructure development plans for the next two years.
The political scene Parliament resumed sitting on April 5th to face a 27-item agenda. The 23rd congress of the Mongolian People’s Revolutionary Party met in February- March. Nastsagin Bagabandi is the favourite to win the presidential election. The Democratic Party has complained about government surveillance. A by- election due on May 20th has just one candidate. The prime minister has
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visited the EU and Tokyo. The president has visited South Korea, Singapore and the United Arab Emirates.
Economic policy and the The government is planning to sell shares in three companies. Economic zones economy may be re-drawn. A development plan for Ulaanbaatar will be drafted. Inflation has risen. Unions have squeezed more pay rises from the government. Industrial output has fallen. Leather manufacturers have asked the government for help. The IMF has said “no” to a raw cashmere export tax. Gold production will increase. Gold works have polluted pastures. Donors have responded to an appeal by the UN. Foot-and-mouth disease has struck. The government plans to increase arable production by 2005. The government has been preparing Mongolian International Air Transport for privatisation. The Millennium Road project has got under way. The World Bank has approved new loans for the transport sector. Construction of a power station has been halted. Herdsmen are being encouraged to invest in renewable energy sources. A power station has received Japanese funding. Internet services via mobile telephony have been made available.
Foreign trade and The merchandise trade deficit has widened. A new foreign trade licensing payments system has come into force, and meat exporters must now be registered. The ban on timber exports has been lifted.
Bhutan
Outlook for 2001-02 Progress towards resolving the refugee issue will be slow. It seems most likely that the government’s current ambivalent policy towards taking military action to evict north-east Indian rebels based in Bhutan will continue. Bhutan should be able to sustain economic growth of 5.5-6% in 2001-02, underpinned by tourism receipts and the export of hydroelectric power to India. The trade deficit will narrow.
The political scene Progress has been made towards resolving the refugee issue, but the process has been tortuously slow. The US will support the funding of refugee camps. The UN has been positive on human-rights progress in Bhutan. The government has warned that conflict with Indian rebels could have serious effects. Tensions with the Assam state government have risen. Bhutan has purchased weapons from Russia.
Economic policy and the Strong ties between India and Bhutan have been emphasised. Foreign members economy have left the board of the Bhutan Trust Fund. Hazardous chemicals are causing concern. The Ninth Plan (a government programme for social and economic development) will emphasise the environment and culture. Hydroelectric potential will be further exploited. Interest rates have been cut.
Editors: Duncan Wrigley (editor); Graham Richardson (consulting editor) Editorial closing date: May 15th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule
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Nepal
Political structure
Official name Kingdom of Nepal
Form of state Constitutional monarchy
Head of state The sovereign, currently King Birendra, is head of state and supreme commander-in- chief of the armed forces
The executive The prime minister presides over a Council of Ministers appointed from among the elected members of the House of Representatives
National legislature Bicameral: upper house, National Assembly, 60 members (35 elected by the lower house, 15 elected by heads of local committees and others in the electoral college, 10 appointed by the sovereign); lower house, House of Representatives, 205 members elected to five- year terms from single-member constituencies
Legal system Supreme Court acts as the court of appeal and review as well as having powers of original jurisdiction; it presides over 16 appellate courts and 75 district courts
National government The Nepali Congress won 111 seats in the general election in May 1999 and formed a majority government; it now has a total of 113 seats, bolstered by by-election victories
National elections May 3rd and 17th 1999; next election due by May 2004
Main political organisations Nepali Congress (NC); Communist Party of Nepal-Unified Marxist Leninist (CPN-UML); Rastriya Prajatantra Party (RPP) (National Democratic Party, NDP); Communist Party of Nepal-Marxist Leninist (CPN-ML); Nepal Workers’ and Peasants’ Party (NeWPP); Nepal Sadbhavana Party (NSP); National People’s Front (Rastriya Jana Morcha); United People’s Front (Sanyunkta Janamorcha Nepal)
Council of Ministers Prime minister, minister of royal palace affairs, general administration & water resources Girija Prasad Koirala Deputy prime minister, home affairs Ram Chandra Poudel Local development Govinda Raj Joshi Finance Ram Sharan Mahat Defence Mahesh Acharya Foreign affairs, agriculture & co-operatives Chakra Prasad Bastola Health Ram Krishna Tamrakar Law, justice & parliamentary affairs Mahantha Thakur Education & sports Amod Prasad Upadhyaya Information & communications Shiva Raj Joshi Culture, tourism & civil aviation Omkar Prasad Shrestha Labour & transport management Palten Gurung Population & environment Siddha Raj Ojha Forest & soil conservation Prakash Koirala Science & technology Surendra Prasad Chaudhury
Central bank governor Tilak Bahadur Rawal
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Economic structure
Annual indicatorsa
1996 1997 1998 1999 2000 GDPb (NRs bn) 248.9 280.5 300.8 339.4 376.4 Real GDP growthbc (%) 5.7 4.8 3.4 4.0 6.0 Consumer price inflation (av; %) 9.3 4.0 10.0 8.0 n/a Population (mid-year; m) 20.8 21.3 21.8 22.4 n/a Exports fob (US$ m) 388.7 410.5 482.0 708.8 n/a Imports fob (US$ m) 1,494.7 1,691.9 1,239.1 –1,589.5 n/a Current-account balance (US$ m) –326.6 –388.1 –67.2 10.6 n/a Reserves excl gold (mid-Dec; US$ m) 571.4 626.2 756.3 843.1 n/a Public external debtd (year-end; US$ m) 2,411 2,398 2,646 2,970 n/a Exchange rate (av; NRs:US$) 57.0 58.0 66.0 68.2 71.1
May 11th 2001 NRs74.93:US$1 % of % of Origins of gross domestic product 1999/2000be total Components of gross domestic product 1999/2000bf total Agriculture, forestry & fishing 39.9 Private consumption 75.9 Finance & real estate 10.4 Government consumption 8.6 Social services 10.2 Gross fixed capital formation 20.9 Manufacturing 9.7 Change in stocks 2.7 Construction 9.6 Exports of goods & non-factor services 23.7 Trade, hotels etc 9.6 Import of goods & non-factor services –32.0 Transport, communications & storage 8.4 GDP at producer prices 100 Electricity, gas & water 1.7 Mining & quarrying 0.5 GDP at factor cost 100
Principal exports 1999/2000bg NRs m Principal imports 1999/2000bg NRs m Garments 13,925 Petroleum products 8,123 Woollen carpets 9,842 Gold 7,293 Vegetable ghee 2,711 Transport equipment, vehicles, aircraft & parts 6,906 Toothpaste 2,263 Other machinery & parts 6,025 Jute goods 1,103 Textiles 4,570 Total incl others 51,623 Total incl others 106,967
Main destinations of exports 1999/2000bh % of total Main origins of imports 1999/2000bh % of total India 44.3 India 35.6 US 26.8 Switzerland 8.9 Germany 14.7 China 7.3 UK 2.3 Singapore 6.9 Belgium 1.6 Hong Kong 5.9 France 1.4 Kuwait 2.6 Japan 1.3 Japan 2.5 a All figures are sourced from the IMF’s International Financial Statistics unless otherwise indicated. b Fiscal years ending July 15th. c Nepal Rastra Bank, Quarterly Economic Review. d World Bank, Global Development Indicators 2000. e Central Bureau of Statistics, GDP at 1984/85 prices, preliminary estimates. f Central Bureau of Statistics, GDP at current prices, preliminary estimates. g Nepal Rastra Bank, Nepal Foreign Trade Statistics. h Trade Promotion Centre, Nepal Overseas Trade Statistics, provisional data for 1999/2000.
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Quarterly indicators
1998 1999 2000 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Prices Consumer prices (1995=100) 128.5 135.8 129.4 132.4 136.9 137.5 133.7 n/a % change, year on year 11.8 17.3 11.2 11.0 6.5 1.3 3.3 n/a Financial indicators Exchange rate NRs:US$ (av) 68.2 67.8 67.7 68.0 68.6 68.7 68.8 69.7 NRs:US$ (end-period) 68.3 67.7 67.7 68.5 68.7 68.7 69.0 70.8 M1 (middle of last month of period; NRs m) 43,824 45,509 48,060 51,818 48,025 55,107 58,426 57,646 % change, year on year 19.7 17.9 15.4 18.7 9.6 21.1 21.6 11.2 M2 (middle of last month of period; NRs bn) 128.3 135.4 144.2 151.2 152.4 164.6 176.2 178.6 % change, year on year 24.2 24.0 25.0 24.5 18.8 21.6 22.1 18.2 Foreign trade (NRs m) Exports fob 7,361 8,949 9,328 9,573 9,814 12,373 13,491 14,391 Imports cif –18,945 –18,960 –23,510 –23,260 –24,758 –25,529 –27,599 –27,852 Trade balance –11,584 –10,011 –14,182 –13,687 –14,944 –13,156 –14,108 –13,461 Foreign payments (US$ m) Merchandise trade balance –144.1 –174.9 –212.8 –241.2 –195.1 –231.6 n/a n/a Services balance 68.5 91.7 64.2 101.4 48.6 72.8 n/a n/a Income balance 2.6 4.6 7.9 9.9 6.4 3.2 n/a n/a Current-account balance –12.7 9.4 –20.8 21.0 6.5 3.9 n/a n/a Reserves excl gold (middle of last month of period) 708.0 756.3 790.5 778.6 779.9 843.1 928.8 928.4 Source: IMF, International Financial Statistics.
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Outlook for 2001-02
Political forecast
Domestic politics Political uncertainty may continue as long as the prime minister, Girija Prasad Koirala, remains in charge of both party and government. His opponents accuse him of corruption, charges now being investigated by the statutory anti- corruption body. Mr Koirala initially said that he would step down if the investigation pointed towards him—and he almost did, only to pull back under pressure of his supporters. The prime minister now says that he will not retire in 2004. Support for his party, the Nepali Congress (NC) party, has begun to erode. The local government elections are due by May 2002.
Mr Koirala may yet be forced out by the NC, whose electoral prospects will depend on its ability to regroup, not just for next year’s local government polls, but also for the next general election, due by May 2004. The NC has ruled Nepal for most of the past ten years of democracy, and, by association, is also held largely responsible for current problems. Continued failure to deliver will fuel radicalisation in the villages, and sustain support for the Marxist insurgency. For its part, the main opposition communist party, the Communist Party of Nepal-Unified Marxist Leninist (UML), will continue to try to unseat Mr Koirala, in order to mobilise support in the local elections, hold on to its smaller communist allies, and discourage its grassroots cadres from joining the radical left.
Prospects for containing Maoist violence—which has now spread from a handful of villages in February 1996 to 22 of Nepal’s 75 administrative districts—will depend on how effectively the government can implement its new “hearts-and-minds” campaign. The possibility of a protracted civil war remains a real one. Political instability has already begun to affect industry, and increased violence, strike action and other work disruptions, can only do more harm. Mr Koirala’s exit—should that occur—might moderate the Maoists and give his successor time to plan ways to end the violence.
Economic forecast
The economy will continue to grow on the back of growth in India, with the government forecasting growth of 5-6% in fiscal year 2000/01 (ending July 15th). But sustained growth will depend on the ability of the government to tame political instability. Growth in agriculture also depends on the weather. Tourism receipts have slowed and so have services receipts, while government spending is up, partly owing to civil service pay rises, and private credit is low. A further escalation of Maoist violence would put more pressure on government spending, while revenue collection may not grow fast enough, partly because expected foreign grants may not materialise. The budget deficit may therefore widen further. One hope is that development spending does not grow as fast as budgeted, ameliorating any year-end cash shortfall.
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The political scene
The Maoist insurgency Initially dismissed as adventurism, the six-year-old Maoist insurgency has spreads grown into a major problem. The insurgency entered its sixth year in February, and has now spread from a handful of remote villages to over 20 of Nepal’s 75 districts. The Maoists aim to set up a communist republic by overthrowing the constitutional monarchy. On February 25th the Communist Party of Nepal (Maoist) announced the adoption of a new “set of ideas” to guide the revolution alongside Marxism-Leninism-Maoism. “Prachanda Path”—named after Puspa Kamal Dahal, the general secretary of the Communist Party of Nepal (Maoist), who goes by the nom de guerre Comrade Prachanda—advocates armed struggle and mobilising the masses. The party also made a new demand, that an all-party conference be held to elect an interim government, that would, in turn, guarantee a “people’s constitution”. Top Maoist leaders have met several politicians since—including a nominee of King Birendra in the upper house of Parliament. It has not been revealed what was discussed.
Analysts initially interpreted the new Maoist position as reflecting a willingness to return to mainstream politics, which prompted the government to meet one long-standing rebel demand in the hope of starting negotiations. On March 6th the government made public the whereabouts of around 300 people in custody and preventive detention, and repeated its willingness to discuss peace. The government also disclosed that the Maoists were holding 131 people whose whereabouts were not known. The Maoists responded by saying that the official list of those who had “disappeared” was incomplete. Human- rights groups suspect that some of those not listed may have been killed.
Violence escalates in April Whatever prospects there were for peace faded, following an escalation of violence in early April. Between April 2nd and 7th Maoists killed over 70 policemen in separate attacks. On April 2nd they gunned down 31 of 76 policemen at the Rukumkot outpost in mid-west Nepal and took 23 hostages.
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They killed another 32 policemen at Naumule in Dailekh district on April 7th, some of whom were shot at close range.
Maoist attacks have, over the years, tended to intensify in February, during the anniversary of the uprising, and in April, when they protest against Nepal’s “incomplete democratisation” of 1990. By the official count, 1,680 people were killed between February 13th 1996 and mid-April 2001: 1,045 Maoists, 347 police and 288 civilians. Classified by the declared political affiliation of the civilians killed, the Nepali Congress (NC) has lost 152 supporters, the Communist Party of Nepal-Unified Marxist Leninist (UML) 24 and the Rastriya Prajatantra Party (or National Democratic Party) 24. The Maoists have also looted rural banks and financial institutions and taken NRs205m (US$2.7m) in cash. The Maoists may have amassed more than NRs1bn (US$13m) from bank heists, forced donations and levies. Statistics compiled by the Informal Sector Service Centre, a human-rights group, clearly show that the odds have tilted in favour of the Maoists since January 2000.
Nepal: insurgency-related killings, Feb 1996-Dec 2000
Year Killed by police Killed by Maoist rebels 1996 59 22 1997 16 32 1998 334 75 1999 328 141 2000 179 218 Total 916 488 Sources: Human Rights Yearbook Documentation Centre; Informal Sector Service Centre.
Parliament fails to ratify Nepalese policemen have begun surrendering arms—largely antiquated new security measures weapons, such as Enfield 303 rifles—and some have even deserted their posts. The government has set up a paramilitary force to enhance its counter- insurgency capability and has already appointed regional administrators to co- ordinate security operations. King Birendra endorsed two ordinances for this purpose on January 22nd, but the bills failed to get the necessary parliamentary ratification. The law-making winter session ended without any business after 57 days on April 5th. (By law, all ordinances become null and void if not ratified by parliament within 60 days after commencement.)
A new internal security King Birendra reissued the ordinances on April 12th. The king also approved a programme has begun new government plan to use the Royal Nepal Army (RNA) to counter the insurgency. The government’s Internal Security and Development Programme (ISDP) is modelled along the lines of the US army’s Vietnam-era counter insurgency strategy. It is to be implemented in seven districts immediately and extended to a further 16. It aims to use the police, the armed police force and the RNA to ensure security, thus enabling government and non-governmental organisations to implement development activities and win over the “hearts and minds” of locals. (Last year, the rebels set up “people’s governments” in three remote administrative districts.) The government says that troops will engage only if provoked and that police will handle civilian law and order. The estimated cost of the ISDP package up to mid-July is NRs254m.
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Support of all the political parties for the ISDP has not so far been forthcoming. There is also a fuzzy constitutional issue regarding the chain of command. The king, as supreme commander of the army, orders deployment, but on the recommendation of the National Security Council, made up of the prime minister, the defence minister and the commander-in-chief. The issue of whether the elected government or the king controls the army has cropped up every time that using the RNA has been discussed. Mr Prachanda takes this as evidence of the irrelevance of parliament and parliamentary parties.
The ruling party remains The prime minister, Girija Prasad Koirala, is failing to control his party, the fractured rebellious NC. He had promised to unite the NC within weeks of re-election as president in January, but the party remains distinctly divided into two camps. The opposition camp is led by two former prime ministers, Krishna Prasad Bhattarai and Sher Bahadur Deuba. (Mr Koirala ousted Mr Bhattarai to become prime minister in March 2000.)
Mr Deuba, who has the support of about one-third of NC MPs, and the occasional backing of some “fence-sitters”, remains a particular threat. The NC president can appoint key members of the Central Working Committee (CWC), the party executive, namely, his deputy and the powerful party general secretary—but so far he has not. The rebels have remained unco-operative on this issue, to ensure that Mr Koirala does not fill the CWC vacancies with cronies.
The party president has already defeated Mr Deuba in three previous leadership bouts. The two faced each other first in March 2000, when Mr Koirala won to become prime minister. Mr Deuba tried to oust Mr Koirala through a no- confidence motion but lost in early January, weeks before challenging him and losing again at the party’s tenth convention.
The cabinet reshuffle NC infighting has rendered government ineffective. Mr Koirala attempted to backfires include some of his party opponents by reshuffling his cabinet in early February, only to be embarrassed when a ministerial appointee, Khum Bahadur Khadka, refused to join the government. Mr Khadka, formerly a supporter of the prime minister, had an old score to settle. Mr Koirala had sacked him in August 2000 for allegedly conspiring to topple him, after which Mr Khadka changed sides. An influential CWC member, Mr Khadka is among those aiming to become the NC general secretary. Another potential candidate is Sushil Koirala, a former general secretary, who is not just a supporter of the prime minister but also a distant cousin. Mr Koirala’s niece, Sailajha Acharya, is another hopeful, as is Chiranjibi Wagle, a supporter of Mr Deuba.
Two ministers quit Amid this confusion, on March 15th Mr Koirala lost a trusted aide from the cabinet, Jaya Prakash Prasad Gupta, the minister of agriculture and co-operatives. Mr Gupta quit because another minister reversed an earlier decision taken by him, to revoke a satellite-broadcasting licence. Another senior minister, Baldev Sharma Majgaiya, resigned on May 1st. Mr Majgaiya was unhappy that he had not been consulted about the new secretary at the water resources ministry, which he headed. (The government appointed 17 new senior bureaucrats on April 19th.)
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Opposition parties push for On February 5th a group of five parties, including the non-communist Mr Koirala’s resignation National Democratic Party, handed Mr Koirala a memorandum asking him to step down. Picking up an earlier decision by parliament’s Public Accounts Committee, which said that the jet-leasing deal for Royal Nepal Airlines Corporation was “irregular” (February 2001, page 39), they argued that Mr Koirala should step down to facilitate an impartial probe into the matter.
Other opposition charges included Mr Koirala’s alleged intent to bypass parliament (because the session had been convened only after the two new ordinances were approved by the king), and his failure to contain Maoist violence. The government tried to clarify questions on the jet-lease deal in parliament, but stepped back after a brawl between a minister and opposition MPs. There were also street protests, and on April 16th the UML and five other left-wing factions tried to prevent Mr Koirala from commuting to work, leading police to detain communist MPs. The same evening Mr Koirala went live on state-run radio and television and appealed to the opposition parties to come to talks, but his overtures were rejected. The parliamentary session had ended without examining important new laws on financial reforms and—ironically— laws that would have given more powers to the Commission for the Investigation of Abuse of Authority (CIAA).
Anti-corruption The CIAA began investigating alleged corruption charges against Mr Koirala investigations continue earlier this year. On May 2nd it sought the prime minister’s clarification on five questions related to the lease of a jet by the state-run airline from the Austrian company, Lauda Air. The prime minister responded the next day, saying that the decision to approve the foreign exchange needed by the airline had been taken upon the recommendation of the ministry concerned. He did not provide details, and instead invoked a constitutional clause which says that advice or recommendations made by the Council of Ministers cannot be raised in court. The investigation is still underway.
The opposition parties charge the government with overriding a CIAA directive issued in September 1999 that all aircraft leases should be done through open bidding. (The Lauda Air deal was done through direct negotiations.) Mr Koirala has been dragged into the controversy because the cabinet had approved the foreign currency needed to seal the deal.
The new citizenship law is On April 25th the Supreme Court ruled that a new citizenship law pending ruled unconstitutional royal approval (November 2000, page 38) was unconstitutional. The Nepal Citizenship (Amendment 1999/2000) bill had been passed by parliament last year. Instead of approving the law, King Birendra sent it to the Supreme Court, seeking advice on its legality. The court ruled that the new law was tantamount to an amendment of the constitution. The bill includes a controversial provision granting citizenship to those who could prove their father’s residence in Nepal before 1962—even if the father had not obtained Nepalese citizenship.
Bhutanese refugee Officials from Nepal and Bhutan began verifying the authenticity of close to verification begins 100,000 Bhutanese refugees on March 26th, the first step in the long road to eventual repatriation. Altogether 233 families, comprising 1,380 individuals,
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were screened in the first month. The residents of the seven camps in Nepal, run by the United Nations High Commissioner for Refugees (UNHCR), say that they are Bhutanese and claim to have proof of their status. (See the Bhutan section for further discussion of the UN’s role.)
The first asylum seekers arrived in 1990, after Bhutan began enforcing its 1985 citizenship law, which retroactively classified all those who had settled there after 1958 as illegal immigrants, irrespective of previous status. Its census in 1988 then excluded all of this group. Most of the refugees say that they were forced to leave Bhutan. By the UNHCR’s count, in March 2001 there were 99,260 asylum seekers. Nepal estimates that another 10-15,000 Bhutanese are living outside the camps. Between 1992 and 1999 the UN and other donors spent US$92m on the care and upkeep of the refugees.
The Joint Verification Team hoped to screen ten refugee families a day, but had screened only 233 of the total of 15,025 families by April 26th. Repatriation may not follow verification because, as refugee leaders and donors have begun to suspect, Bhutan may haggle over refugee categorisation, in order to delay the return. According to refugee leaders, Bhutan has already re-allotted much of their land and homes to new settlers—an indication that it would do all it could to take back the smallest possible number of refugees. The refugees in Nepal make up about one-sixth of Bhutan’s 640,000 people.
China and Nepal exchange The Chinese defence minister, General Chi Haotian, visited Nepal on February diplomatic visits 21st-24th. The general met top government officials and King Birendra, but did not call on communist leaders, and the results of any discussions on security issues were not revealed. Nepal sought Chinese help for the training of senior RNA officials and for the setting up of a regional centre for training UN peacekeepers. King Birendra then visited China for a week (February 26th- March 4th) and met top Chinese leaders, including the president, Jiang Zemin, and the prime minister, Zhu Rongji.
Economic policy and the economy
The government’s spending Public spending went up by almost 22.4% in the first eight months of fiscal on salaries increases year 2000/01 (compared with fiscal year 1999/2000) to NRs38bn (US$500m), boosted by a 27.1% spurt in regular spending. New salary and pension payments to government employees, effective since mid-July 2000, together with higher security spending were behind the increase. Debt-servicing payments also increased in rupee terms, because of the depreciation of the Nepalese rupee. The government expects the salary and pension bill of around 300,000 government employees, including the army, the police and teachers, to reach NRs21bn for the full fiscal year 2000/01 (ending in July), compared with the budgeted NRs17.3bn. The government had planned to set up a pension fund this year, in order eventually to ease budgetary pressures, but this remains to be done.
Development spending grew by just 14.4% in the first eight months of 2000/01, caused by disbursement delays despite early approval of the spending
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bill by parliament. The slower than budgeted growth, as in past years, will help to balance the books. The budget deficit for 2000/01 had reached NRs7.6bn by mid-March. The gap was plugged by issuing bonds (NRs2bn) and Treasury bills (NRs1.2bn), and by obtaining foreign loans (NRs2.8bn) and an overdraft from the central bank (NRs1.6bn). By law, the deficit has to come down to NRs1bn by mid-July.
Customs crackdown may Revenue collection increased by 18.1% to NRs28.2bn in the first eight months aid revenue collection of 2000/01, which was equivalent to around 53% of the budgeted target of NRs53bn for the full year. Collection generally improves in the last quarter of the fiscal year, and this could be bolstered further by some new initiatives that the government is taking. The government has assigned the Royal Nepal Army to patrol major customs points, many of which have already begun to report increases in revenue collection. Troops guard five customs points along the Indian border and one at the Nepal-Tibet border. The government received NRs1.56bn in foreign cash grants during the first eight months of 2000/01.
Ways to cut public The government has promised to implement gradually the recommendations expenditure are suggested of the Public Expenditure Review Commission (PERC), a government committee that had been formed in August 2000. The government is likely to begin with the more feasible recommendations, and delay the more difficult ones. The recommendations amount to the “redefining” of government, limiting its role to policymaking, monitoring and evaluation only. The PERC has also suggested handing over functions to district-level governments and introducing measurable performance appraisal systems for public employees. In order to reduce civil service numbers, the PERC has recommended a cap on hiring support staff and the outsourcing of some jobs. Other specific suggestions include:
• bringing down the regular spending ratio from 83% of revenue in 1998/99 to 70% within five years;
• keeping internal security and defence expenses within 7% of revenue from fiscal year 2001/02;
• not using foreign loans to fund projects with a rate of return below 15%, the projects of corporations with accumulated losses or the projects of those companies that do not audit their accounts within nine months of year-end;
• keeping government functions at the district level, except for security and general administration;
• amending the civil service law to incorporate performance standards, and to allow action to be taken against those not meeting pre-set targets;
• and capping civil service salary rises to 5% a year or less for the next ten years.
The central bank governor In March the Supreme Court ordered the reinstatement of Tilak Bahadur is reinstated by court order Rawal, the governor of the Nepal Rastra Bank (NRB, the central bank) sacked in August 2000. Mr Rawal rejoined the NRB on April 10th. The tug of war between Mr Rawal and Mahesh Acharya, then finance minister and now defence minister, goes back to January 2000 (February 2000, page 37), when
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 Nepal, Mongolia, Bhutan 15
the latter resigned after failing to block Mr Rawal’s appointment. Mr Acharya returned as finance minister in March 2000 and sacked Mr Rawal. Mr Acharya tendered his resignation once more on March 29th (the day after the court order), claiming full responsibility for sacking the governor. The prime minister asked Mr Acharya to continue in his job. Whatever the status of the tussle between Mr Rawal and Mr Acharya, the issue of the NRB’s leadership seems finally settled: the outgoing governor, Dipendra Purush Dhakal, has not appealed against the verdict.
Some financial sector Mr Rawal has promised to continue the financial sector reforms, including reforms are delayed handing over two troubled banks to international management consultants. Nepal Bank Limited (NBL) and the Rashtriya Banijya Bank (RBB) are said to have negative net worth of billions of rupees (February 2001, page 43). The target for handing the banks over was mid-April, but the process got caught up with the change in the NRB leadership, opposition by directors at the NBL (where the government holds only a minority stake), employee protests and a protracted parliamentary hearing.
The NRB is evaluating proposals by four short-listed companies to take over the NBL, while the company to manage the RBB has not yet been announced. The handover is expected to take place by mid-July. The selected companies will manage the banks for two years, with a possible third-year extension. The RBB is fully state-owned, and the government owns 41% of NBL stocks. The two banks together handle over 60% of Nepal’s banking and employ 10,000 people.
Revamping the financial sector is a pre-condition for borrowing from the IMF’s poverty reduction growth fund. The government has also drafted a new central bank act, which could not be tabled in parliament because of opposition boycotts and disruption. The new law is expected to enhance the NRB’s ability to monitor and supervise banks and Nepal’s 86 non-bank financial institutions. The World Bank is giving a US$20.5m loan to support the reforms.
The government bans In March the government declared hotels to be “essential services” shortly after strikes in hotels workers at tourist-class hotels began what was intended to be an indefinite strike. The Hotel Association of Nepal had tried to pre-empt the strike by seeking a court order for a ban. The court refused to issue such an order, and on March 15th workers stayed away—only for the government to ban the strike the same evening, using powers granted under a 1957 law. The labour unions have challenged the decision in the Supreme Court.
The root problem centres on a 10% service charge, proposed since August 2000. The unions want it to be included in guests’ bills to replace tipping, while hoteliers say doing that would negatively affect Nepal’s competitiveness, by making it more expensive than competing regional destinations. Nepalese tourism contributes 3-4% of GDP.
Power shortages reappear Nepal suffered electricity blackouts in April. These had been avoided since July 2000, when the first independent power producer (IPP) with a capacity of 60 mw came on line, with another one starting in February 2001 with a capacity of 36 mw. But it is now clear that the IPPs can produce to
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capacity only in the rainy months, when the rivers swell with floodwater. In April run-of-river projects were generating about one-third of capacity and, without adequate storage capacity, the Nepal Electricity Authority (NEA) was forced to “manage” supply. The NEA blamed this year’s dry winter and low snowmelt.
As Nepal’s electricity generation is dominated by run-of-river schemes and another storage facility remains unlikely for another seven or eight years, solving the problem will be difficult. Even the brand new 144-mw run-of-river project coming on line later in 2001 will be unable to meet dry-season demand for beyond two to three years.
Nepal: electricity demand forecast, 2001-10
Year Peak (mw) % change 2001 408 – 2002 449 10.0 2003 482 7.3 2004 525 8.9 2005 571 8.8 2006 617 8.1 2007 667 8.1 2008 719 7.8 2009 771 7.2 2010 830 7.7 Source: Nepal Electricity Authority.
The economy will continue The government has forecast 5-6% GDP growth in fiscal year 2000/01 (ending to grow July 15th 2001), backed by a second consecutive bumper harvest and continued growth in other sectors. Agriculture is forecast to grow by more than 4%, whereas growth in the non-agricultural sector is expected to be about 6%. This is good news for an economy caught between an escalating Maoist insurgency and political instability. Real GDP grew by 6.3% in fiscal year 1999/2000, up from 4% in 1998/99.
Rice production increases, Paddy production is officially forecast to grow by 7-8% in fiscal year 2000/01. but industrial growth eases Increased rice production is expected easily to offset the expected decline in wheat output, caused by low winter rain and higher irrigation costs resulting from higher fuel prices. Cheap Indian imports, and production disruptions caused by strikes and law-and-order problems are expected to hold down industrial growth to about 4%. Electricity production—contributing about 1.7% of GDP—is expected to increase by almost 16%.
Consumer price inflation Inflation has remained low throughout the eight months of fiscal year remains low 2000/01, owing mainly to a bumper harvest and cheap imports from India. The national urban consumer price index (NUCPI) was just 1.4% higher in February-March 2001 than in the year-earlier period with a marked drop in food prices. Non-food prices rose by 6.9%, partly owing to higher oil prices. Consumer prices rose fastest in the hills and mountains (5.9% year on year).
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Prices in Kathmandu Valley—where the capital is located—grew by 1.4%. Prices in the food-growing strip of plains along the border with India fell by 0.3%.
Nepal: national urban consumer price index (February-March; 1995/96=100) Weighting (%) 1998/99 1999/2000 2000/01a Food & beverages 53.20 131.0 131.0 126.3 of which: foodgrains & cereals 18.00 137.7 138.6 115.9 rice & rice products 14.16 136.7 137.3 112.5 Non-food & services 46.80 125.4 135.3 144.7 of which: housing 14.87 119.5 130.9 141.5 fuel, light & water 5.92 123.2 145.8 163.9 Transport & communication 4.03 130.6 151.6 160.8 Education, reading, recreation 7.09 129.6 142.2 162.8 Overall index 100 128.4 133.0 134.8
a Provisional.
Source: Nepal Rastra Bank.
Foreign trade and payments
Foreign trade grows more Nepal’s total exports grew by around 20% to NRs38.9bn (US$520m) in the slowly first eight months of fiscal year 2000/01, compared with NRs32.5bn in the year-earlier period. Nepal’s total imports over the same period grew by 8.5% from NRs69.3bn to NRs75.2bn. The slowdown in foreign trade growth— imports had grown by around 29% in the first eight months of fiscal year 1999/2000 compared with the year-earlier period—was mainly owing to the rise of the US dollar, and oil-price related increases in transportation costs.
According to customs data compiled by the NRB, exports to India reached NRs17.6bn in the first eight months of fiscal year 2000/01, a 27.2% increase compared with the NRs13.9bn achieved in the year-earlier period. However this compares poorly with the 80.7% increase achieved in the year-earlier period compared with the first eight months of fiscal year 1998/99. Imports from India grew by 13.9% to NRs29.97bn in the first eight months of 2000/01—imports in the year-earlier period had represented a 40.7% increase compared with the corresponding period of 1998/99. Nepal’s exports to India have grown continually since December 1996, when the two countries signed a preferential trade treaty. This treaty, which comes up for automatic renewal in December 2001, allows Nepalese manufactures—except for those of alcohol, tobacco and cosmetics—duty-free access to Indian markets. In the first eight months of 2000/01 Nepal’s most important export to India was pashmina garments, followed by vegetable ghee (hydrogenated vegetable oil), toothpaste, threads and copper wire rods.
Trade relations with India Despite the trade treaty, trade links with India remain susceptible to pressure remain complicated by Indian industry lobbies or government policy changes, which are often
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aimed at all imports, but end up affecting Nepalese products particularly acutely. Indian industry lobbies charge that many Nepalese products are not genuine manufactures but repackaged semi-finished products. At the top of the problem product list are: vegetable ghee; polymer woven bags; polyester yarns; copper wires; and zinc oxide.
Business leaders of Nepal and India met in mid-February, amid Indian media reports advocating a treaty review. The Federation of Nepalese Chambers of Commerce and Industry has agreed to review the entire export list for possible introduction of a new “value-added” criterion to deal with the repackaging allegations. India has also been leaning on Nepal to address “surges” in exports of certain items. The treaty has no quantitative restrictions, but a protocol allows both countries to take “appropriate measures” to address such “surges”, which have been left undefined. Toothpaste sales to India have already been damaged by the introduction of countervailing duties in the Indian budget in March, based on the maximum retail price and not the transaction price.
The current-account deficit The current-account deficit reached NRs4.8bn in the first six months of fiscal widens year 2000/01, a 7.8% increase year on year. The slowdown in imports helped to reduce the merchandise trade deficit by 3.5% to NRs27.4bn, but this was offset by a 9.4% slump in services exports (travel/tourism receipts dropped by 14% to NRs5.3bn.) Non-aid imports grew by 8.6% compared with the year-earlier period to NRs53.4bn in the first six months of 2000/01.
Nepal: current account (mid-July to mid-January; NRs m) 1999/2000 2000/01 Exports fob 23,434 28,768 Imports cif –51,873 –56,167 Merchandise trade balance –28,403 –27,399 Services (receipts) 21,666 19,632 of which: travel/tourism 6,172 5,308 Services (payments) –8,448 –8,551 Services balance 13,218 11,081 Net transfers 10,777 11,566 Private 5,190 6,698 Official 5,587 4,868 Current-account balance –4,408 –4,752 Source: Nepal Rastra Bank, provisional data.
Foreign-exchange reserves Helped by a substantial capital-account surplus of NRs8.3bn in the first six increase again months of 2000/01, foreign-exchange reserves had grown to NRs107bn by mid-March—enough to finance imports for over 11.6 months, based on the eight-month import average of fiscal year 2000/01. Of the reserve, 79.1% was held in convertible currencies and the rest mainly in Indian rupees.
The rupee depreciates The Nepalese rupee has continued to fall against the US dollar in line with the further Indian rupee. (Since 1993 the Nepalese rupee has been pegged to the Indian rupee at NRs1.60:Rs1.) The buying rate for US dollars rose from NRs68.65:US$1 in April 2000 to around NRs74.9:US$1 in early May 2001.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 Mongolia 19
Mongolia
Political structure
Official name Mongolia
Form of state Republic
The executive Cabinet made up of members of the ruling Mongolian People’s Revolutionary Party (MPRP)
Head of state The president, Natsagiin Bagabandi
National legislature A single-chamber parliament, the State Great Khural, which has 76 members, of whom 72 are members of the Mongolian People’s Revolutionary Party (MPRP)
National elections May 18th 1997 (presidential) and July 2nd 2000 (parliamentary); the next elections due by June 2004 (parliamentary) and May 20th 2001 (presidential)
Main political organisations Government: Mongolian People’s Revolutionary Party (MPRP); Opposition: Democratic Party (DP)
Chief members of the cabinet Prime minister Nambaryn Enkhbayar
Key ministers Defence Jügderdemidiin Gürragchaa Education, culture & science Ayurzanyn Tsanjid Environment Ulambayaryn Barsbold Finance & economics Chültemiin Ulaan Food & agriculture Darjaagiin Nasanjargal Foreign affairs Luvsangiin Erdenechuluun Health Pagvajavyn Nyamdavaa Industry & trade Chimidzorigiin Ganzorig Infrastructure Byambyn Jigjid Justice & internal affairs Tsendiin Nyamdorj Social welfare & labour Shiilegiin Batbayar Without portfolio Ölziisaikhany Enkhtüvshin
Central bank governor Ochirabatyn Chuluunbat
Chairman of the State Great Khural (parliament) Lhamsuren Enebish
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 20 Mongolia
Economic structure
Annual indicatorsa
1996 1997 1998 1999 2000 GDP at current prices (Tg m)b 646,559 823,636 817,393 873,679 n/a GDPc (US$ m) 1,069.5 960.8 1,041.7 978.7 n/a Real GDP growth (%) 2.4 4.0 3.5 3.2b 0.5b Consumer price inflation (av; %) 49.3 36.7 9.5 7.6 8.1d Populatione (m) 2.4 2.4 2.4 2.4 2.4 Merchandise exports fob (US$ m) 423.4 568.5 462.4 454.3 n/a Merchandise imports cif (US$ m) 459.7 453.1 524.2 510.7 n/a Current-account balance (US$ m) –100.5 55.2 –128.5 –112.2 n/a Reserves excl gold (year-end; US$ m) 107.4 175.7 94.1 136.5 178.8 Total external debtf (US$ m) 531.3 607.7 710.6 890.9 n/a Exchange rate (av; Tg:US$) 548.4 789.9 840.8 1,021.9 1,076.7
May 15th 2001 Tg1,092:US$1
% of % of Origins of gross domestic product 1999b total Components of gross domestic expenditure 1999b total Agriculture, hunting & forestry 37.3 Private consumption 61.1 Trade & services 20.6 Government consumption 16.6 Mining & quarrying 9.4 Gross fixed capital formation 28.0 Transport, storage & communications 8.7 Change in stocks 0.0 Manufacturing 5.8 Net exports of goods & services –5.7 Electricity, gas & water supply 4.7 Statistical discrepancy 0.0 GDP at constant prices incl others 100.0 GDP at current prices 100.0
Principal exports 1998g US$ m Principal imports 1998g US$ m Copper 119.0 Mineral & oil products 90.7 Textiles 75.5 Vehicles 59.9 Food 43.7
Main destination of exports 1999d % of total Main origins of imports 1999d % of total China 58.2 Russia 45.9 United States 13.8 China 16.9 Russia 12.5 Japan 12.5 Japan 4.5 South Korea 6.8 UK 3.7 US 6.8 Italy 3.2 Germany 5.9 a IMF, International Financial Statistics, unless otherwise indicated. b Asian Development Bank, Asian Development Outlook 2001. c EIU estimates. d Bank of Mongolia. e National Statistics Office of Mongolia. f World Bank, Global Development Finance. g Asian Development Bank, Economic and Development Resource Centre.
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Quarterly indicators
1999 2000 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Prices Consumer prices (1995=100) 230.0 247.7 241.2 240.8 n/a n/a n/a n/a % change, year on year 5.1 6.1 9.4 9.8 n/a n/a n/a n/a Financial indicators Exchange rate Tg:US$ (av) 970.47 1,013.84 1,033.63 1,069.54 1,087.22 1,047.36 1,077.91 1,094.17 Tg:US$ (end-period) 1,041.24 1,014.73 1,058.62 1,072.37 1,090.00 1,065.00 1,085.62 1,097.00 Interest rates (%) Bank (end-period) 23.3 17.5 17.5 11.4 11.0 12.6 8.6 8.7 Deposit (end-period) 24.3 24.3 23.7 19.8 19.8 16.8 16.8 13.8 Lending (end-period) 42.2 38.2 36.5 37.7 34.1 33.0 36.0 30.3 M1 (end-period; Tg m) 66,290 92,600 100,773 114,826 116,237 143,684 143,563 130,775 % change, year on year 3.9 17.7 27.3 39.0 75.3 55.2 42.5 13.9 M2 (end-period; Tg m) 153,683 184,635 199,230 220,167 222,434 255,258 264,491 258,843 % change, year on year 0.0 15.2 20.0 31.6 44.7 38.3 32.8 17.6 Foreign trade (US$ m) Exports fob 59.4 78.5 92.4 105.3 n/a n/a n/a n/a Imports cif –82.1 –111.5 –115.0 –117.2 n/a n/a n/a n/a Trade balance –22.7 –33.0 –22.6 –11.92 n/a n/a n/a n/a Foreign payments (US$ m) Merchandise trade balance –25.6 –12.1 –11.3 –7.4 n/a n/a n/a n/a Services balance –12.9 –16.7 –15.2 –25.1 n/a n/a n/a n/a Income balance 0.6 –1.0 0.8 –0.3 n/a n/a n/a n/a Current-account balance –34.7 –25.5 –22.3 –29.7 n/a n/a n/a n/a Reserves excl gold (end-period) 69.58 80.79 109.66 136.49 147.99 155.98 174.28 178.77 Source: IMF, International Financial Statistics.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 22 Mongolia
Outlook for 2001-02
Political forecast
Domestic politics The current president, Natsagiin Bagabandi, of the ruling Mongolian People’s Revolutionary Party (MPRP), is the favourite to win the presidential election on May 20th. He may also gain support from a favourable outcome to the international aid donors’ meeting in Paris in mid-May.
After the election, the government will continue to be closely observed, not least by its own MPs, for signs of returning to strategies more in line with the old command system than a democratic one. The still unresolved question of the legality of constitutional amendments is likely to reappear. The constitutional court has twice judged that, under the present constitution, members of the present government—including the prime minister Nambaryn Enkhbayar—are illegal because they are also members of Mongolia’s parliament, the State Great Khural. The government wants to amend the constitution to do away with this ban on double roles, and the State Great Khural again passed the required amendments in December 2000, despite a veto from Mr Bagabandi. The underlying issue remains whether the State Great Khural has the right to amend the constitution and, if so, how.
Late news Mr Bagabandi was declared to have been re-elected as president of Mongolia on May 21st. He took 58% of the vote, compared with the 36.6% won by his Democratic Party opponent, Radnaasumbereliin Gonchigdorj. Donor countries at the mid-May meeting in Paris pledged US$330m in loans and grants to Mongolia over the next year. This was a favourable outcome, as the sums pledged were around the same value as those agreed in 1999, when the assistance was for 18 months rather than one year.
Economic forecast
Economic policy The government, perhaps with some pressure from the IMF, has now committed itself to the sale of most of its shares in large companies. This will mean more income for the government in the near term, with the prospect of higher tax revenue in the future if these companies are rejuvenated by their new owners. A new energy law has also paved the way for the privatisation of the sector (see Economic policy and the economy), and raised hopes that its many debts could eventually be cleared. However, a rapid solution to the problems of the manufacturing industries is not likely, and manufacturers will continue to lobby hard for concessions over the coming months.
At the last count (in December 2000), there were 30m head of livestock in Mongolia. In future the animal census will be taken in the summer, which planners believe will give a more realistic indication of the economic potential of the herds. The count to be taken this summer will be particularly valuable as an indication of the true scale of the damage incurred in the bad weather in the early months of 2001, and will help the authorities and humanitarian
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agencies in their efforts to restock and take appropriate measures against future disasters. Whatever the result of the census, the government will remain under strong pressure to introduce what measures it can to prevent losses from natural disasters (such as harsh weather, or the recent outbreak of foot-and- mouth disease). Draft legislation is being considered to increase state fodder reserves, and to make livestock insurance compulsory—at present only 6% of herds are covered. There are even indications that the government is rethinking the whole structure of the traditional rural economy, and may try to introduce a greater degree of settlement of nomadic herding families.
Over the next two years there will be considerable expansion in the provision of roads, the supply of electricity and access to information technology. Hydroelectric stations in western areas and the implementation of the government’s Millennium Road project (see Economic policy and the economy) will give impetus to the development of regions far from the existing main networks. A new regional development plan is being drafted. However, environmental issues could obstruct these developments. The government has already halted construction of the Maikhan Tolgoi hydroelectric power station, and the Worldwide Fund for Nature is unhappy about another at Dörgön in Khovd aimag (province). Since such large-scale projects are almost always funded externally, halting them is not likely to inspire confidence in potential lenders.
It is unlikely that the foreign trade deficit will be substantially reduced in 2001. Prices for raw materials that Mongolia exports remain low. Furthermore, Russia and China closed their borders to imports of live animals and animal products when cases of foot-and-mouth disease were diagnosed in three aimags and the capital, Ulaanbaatar. However, the outlook is not all gloomy and new agreements with parts of Siberia bordering on Mongolia (Kemerovo, Irkutsk, and the Tuvan and Buryat republics) should boost trade in the longer term.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 24 Mongolia
The political scene
Parliament resumed sitting The June 2000 to February 2nd 2001 session of Mongolia’s parliament, the on April 5th State Great Khural, saw the passage of 30 laws and 28 amendments. Legislation included the Millennium Road project (see Economic policy and the economy), the establishment of the Mongolian Human Rights Commission, a power and energy bill, amendments to tax laws and a revision to the law on the status of foreigners. Representatives resumed their seats on April 5th to face a 27-item agenda, including bills on corruption, broadcasting, employment, land, regional development and the formation of a free economic zone at Altanbulag.
The ruling party remains The 23rd congress of the Mongolian People’s Revolutionary Party (MPRP) met “revolutionary” from February 28th to March 2nd 2001, and marked the 80th anniversary of the first congress on March 1st. The prime minister, Nambaryn Enkhbayar, was re-elected as party chairman, and the president, Natsagiin Bagabandi, was chosen to stand as the MPRP candidate in the forthcoming presidential election. The congress had been expected to debate a proposal to change the party’s name, by removing the word “revolutionary”. But the party’s governing body, the 219-strong Political Conference, decided that there was insufficient support for the motion, and omitted it from the congress agenda. Opposition forces claimed that many members had threatened to leave the party if the name changed.
May 20th is election day Electors go to the polls on May 20th 2001 to chose a new president. Presidential candidates are selected by the parliamentary parties. Three are standing this year:
• the incumbent president, Natsagiin Bagabandi, for the ruling MPRP; • Radnaasümbereliin Gonchigdorj, chairman of the State Great Khural 1996- 2000, for the Democratic Party (DP);
• and Luvsandambyn Dashnyam, for the Civil Courage Party (CCP).
A fourth political party, the Mongolian Democratic New Socialist Party, supports Mr Bagabandi, who, judging by recent opinion polls, is likely to win.
The DP complains of In late March the leader of the Democratic Party (DP), Dambyn Dorligjav, told bugging the press that listening devices had been discovered in the party’s headquarters, and claimed that the government was responsible. The matter was investigated by the Mongolian authorities, who concluded that there was insufficient evidence to hold the government responsible.
A by-election has just one A by-election will be held in Zavkhan aimag (province) on May 20th. The seat candidate became vacant when Shagdaryn Otgonbileg, of the MPRP, was killed in an air crash on January 14th. Only one candidate is standing, D Tuya (MPRP), the widow of Mr Otgonbileg. Two potential candidates, the former president, Punsalmaagiin Ochirbat (DP) and Ts Gankhuyag (CCP), withdrew when became clear that Mrs Tuya would stand.
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The prime minister tours On January 22nd Mr Enkhbayar set off on a working visit to Europe. He Europe attended the World Economic Forum in Davos, Switzerland, and also held meetings with officials of the World Bank and the IMF. He continued to Luxembourg and the European Union (EU), which is a large provider of developmental aid to Mongolia. Mongolia has received E42.5m (US$41m) for more than 80 projects under the EU’s Tacis programme. In Brussels, Mr Enkhbayar met the secretary-general of the Council of Europe, Javier Solana, with whom he discussed the possibility of co-operation in rural development. He also held talks about co-operation with the secretary-general of NATO, Lord Robertson.
A visit to Tokyo secures Mr Enkhbayar then went on to Japan in mid-February. Here he met the then new loans and aid prime minister, Yoshiro Mori, and the Japanese emperor, Akihito. Mr Enkhbayar reiterated Mongolia’s support for Japan’s bid to obtain a permanent seat on the UN Security Council. Japan is Mongolia’s largest provider of aid and has invested ¥5.6bn (US$45m) in Mongolia since 1990. Mr Enkhbayar expressed the hope of further investments, particularly in the livestock, mining, and wool and cashmere sectors. During the visit he secured a ¥6.1bn loan for further upgrading of Ulaanbaatar’s No. 4 power station and an additional US$3m in aid to counter the effects of recent harsh weather. The two countries signed agreements on bilateral investment protection and promotion, and Japan offered US$2.7m in support for Mongolian provincial telecommunications.
Mr Bagabandi visits South Mr Bagabandi led a delegation to visit South Korea in mid-February, Korea and Singapore reciprocating the visit to Mongolia in May 2000 by South Korea’s president, Kim Dae-jung. Mr Bagabandi signed a “knowledge partnership” agreement under which South Korean experts will advise Mongolia on fiscal and financial matters. Opportunities for South Korean investment in Mongolia were discussed, particularly in the energy sector, which is due to be privatised, and in farming. South Korea is Mongolia’s third-largest investor, fourth-largest bilateral provider of developmental aid and fifth-largest trading partner. During the visit, Mongolia’s social welfare and labour minister, Shiilegiin Batbayar, signed a youth exchange agreement with South Korea’s minister of culture and tourism, Kim Han-gil. The two countries are due to negotiate a double taxation treaty later this year.
The president next stopped in Singapore to rally support for Mongolian membership of organisations such as the Asia-Pacific Economic Co-operation forum and the Asia-Europe Meeting. Trade and investment were also discussed and agreements on cultural and academic exchange signed. A double-taxation agreement is due to be negotiated later this year.
The president visits the The president visited the United Arab Emirates in February. During the visit it United Arab Emirates was announced that Mongolia would be eligible to apply for project loans from the Abu Dhabi Fund for Development (ADFD). The ADFD is considering funding a hydroelectric power station in Gov’-Altai aimag in the south-west. Support for part of the Millennium Road project was also discussed, as well as co-operation in oil exploration. The two countries are due to negotiate agreements on double taxation and tax avoidance later in 2000.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 26 Mongolia
Economic policy and the economy
Budget deficit shows signs In the first two months of 2001 there was a budget deficit of Tg12bn of falling (US$11m), Tg3bn less than in the year-earlier period. The government plans to shore up its budget balance by selling three large enterprises in June and several other companies by the year-end. The enterprises that will be up for international tender in June are Trade and Development Bank (Mongolia’s leading commercial bank), Gobi Cashmere (which sells cashmere and camel wool garments and other made-up articles) and the fuel importer and distributor, NIC (originally known as Neftimport Concern). Whoever buys NIC must maintain its national distribution services, including those to remote areas, for at least five years. All three companies should be auctioned off by November.
Mongolia: central government budget, Jan-Feb 2001
Tg bn Revenue 42.1 Current revenue 40.8 Expenditure 54.1 Current expenditure 49.4 Current balance 8.6 Source: Mongolian E-mail Daily News.
Government will sell shares The government also hopes to sell the national airline, Mongolian in three companies International Air Transport (MIAT), and Ulaanbaatar’s No. 2 power generator before the year-end. The government intends to privatise the main alcohol producer, APU (Arkhi Pivo Undaa—spirits, beer and soft drinks), but will only sell it to domestic buyers. Altogether the government plans to sell 27 large companies by 2004. The state will, however, retain control of the power transmission system and some road construction companies. Mongolia cannot privatise its shares in the Ulaanbaatar railway and the Mongol-Russian joint mining ventures, Erdenet and Mongolrostsvetmet, without the agreement of its partner, the Korean conglomerate, Samsung. Samsung, which also has copper mining interests in Kazakhstan, has recently expressed an interest in acquiring more shares in Erdenet. (Samsung and Erdenet have already set up an import/export joint venture, called Erdsam, with headquarters in Hong Kong.)
Economic zones may be re- Before 1990 Mongolia was divided into three economic zones, of which the drawn central zone is the most developed. A parliamentary working group is looking at a new five-zone arrangement for socioeconomic development that could help to redress the balance. The new plan envisages the development of regional cities, including Khovd in the west, Tsetserleg in the mid-west, Darkhan in the central zone and Choibalsan in the east.
A new plan for the capital For decades the population of the capital city, Ulaanbaatar, has grown faster aims prioritises housing than the city’s ability to build new housing. The population grew from 548,000 in 1989 to 774,000 in 2000 and, in the past five years alone, 67,000 have migrated from the countryside, despite the imposition of levies on families and
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their livestock. A new development plan to 2005 foresees the construction of dormitory towns on the periphery and the rehousing of some of the families that live in the city’s tent (ger) districts. At present, 57% of the city’s population live in gers.
Mongolia is to receive US$15m for an urban development and housing project from the Asian Development Bank (ADB). The ADB is discussing possible support for ongoing reforms in education with the Ministry of Education.
Uncertainties surround A recent law requires companies to pay a charge equivalent to double the local new foreign worker levy average wage for each foreign worker that they employ. Certain highly skilled foreign consultants or teachers could be exempt from this. The charge is due to come into force on July 1st 2001, but how often it must be paid has not yet been decided. It is intended to serve two purposes: to discourage the employment of foreigners in positions that could be filled by Mongolian citizens; and to provide the government with additional income. The money that will be generated has been earmarked for fighting unemployment.
Inflation rises and civil Higher food, energy and rent prices have pushed up prices this year. Meat and servants will get a pay rise milk prices were driven upwards as a result of bad weather. Prices of oil products have risen, as individual companies have used up reserves and have had to import more, at higher cost, but now show signs of stabilising. The consumer price index rose by 2% in April, to a level 12.6% higher than in December 2000.
The trade unions negotiated a 10% increase in the wages of government employees and pensions of former civil servants, with effect from April 15th. This means that the government will need to find an extra Tg8.2bn in this year’s budget. The unions had originally demanded a 20% increase, and the government countered with a suggestion for a 7% rise payable in two stages before they came to an agreement.
Increased prices for electricity and heating were offset by the introduction of off-peak reductions from January 1st 2001. Domestic consumers get a cut of Tg4.5 (0.4 US cents) per kwh whereas businesses receive a Tg17 per kwh reduction between the hours of 10 pm and 6 am. Peak prices are Tg45 per kwh for households and Tg41 per kwh for businesses.
Heavy industry is in need In the first two months of 2001 industrial output fell by 2.7% year on year to of renovation Tg27.9bn. A decline in mining and energy contributed to this fall. The government’s drive to rejuvenate industry will begin with the renovation of heavy industrial plants including Erdenet Metal (a steel products plant), the cement plant at Khötöl and the Darkhan metal works. The government aims to increase the competitiveness of such industries. Proposals under consideration include exempting spares and new equipment from customs duties and holding export taxes on heavy industrial products steady, according to the minister for industry and trade, Chimidzorigiin Ganzorig. There have already been exemptions on a case-by-case basis for important foreign-invested ventures in mining.
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Leather manufacturers ask Manufacturers continue to lobby the government for support. Representatives for help of the leather industry at a Hong Kong trade fair in April claimed to have identified potential markets for Mongolian furs, skins and leather goods. But they said that they would need tax and customs concessions and support for retraining. The industry is running at only 10% of capacity.
The IMF says “no” to a raw Cashmere manufacturers want tax concessions for the production of finished cashmere export tax cashmere goods. According to the manufacturers, although processing of the raw product has increased since 1989, knitting capacity has not, while spinning capacity has decreased. During his visit to Japan, the prime minister, Nambaryn Enkhbayar, expressed the hope that Mongolia would become a producer of finished goods rather than a supplier of raw materials. But the IMF is unlikely to support this kind of industrial policy; it recently warned the government not to impose a tax on the export of raw cashmere.
Gold production will In 2001 Mongolia is expected to produce 12 tonnes of gold, two tonnes more increase than in 2000. Around 2,000 gold companies are licensed and more gold ventures are likely in the future. On February 6th Mr Ganzorig signed an agreement on gold production with Buryatia, an autonomous republic within the Russian Federation. Under the agreement, the two sides are to co-operate in gold production in Selenge aimag (province), which borders on to the extensive Buryat goldfield. The Buryats will supply machinery, equipment and vehicles.
Gold works pollute In February it was reported that the Boroo river in Selenge aimag was heavily pastures polluted with mercury from an old gold recovery factory. At least 10 tonnes of mercury have leached into surrounding pasture and arable land. Selenge aimag is a major grain-producing region of Mongolia.
A health and safety In April four out of 12 of the companies that process and export metal were clampdown shuts plants closed down after government investigators decided that they did not meet the required standards of health and safety. Soft drinks manufacturers in Ulaan- baatar were also warned that they would be forced to shut if they continued to fail to comply with standards for hygiene, ingredients and labelling.
An explosion in April at the large Baga Nuur coal mine killed nine people, seriously injured seven others and destroyed a building. A worker was also killed recently at the Erdenet copper joint venture. Both accidents were attributed to poor safety standards.
Donors respond well to UN Donors have responded positively to the UN’s end-January appeal for aid for appeal Mongolia after another harsh winter that hit livestock herds. By April it was estimated that 2m head of livestock had been lost in a second winter of deep snow and frozen pastures. But the full extent of the damage will not be clear until the birthing season is over and the results of a new livestock census, due in June, are published. The UN requested US$11.8m in aid. In response, Japan has given US$13m, China Rmb2m (US$240,000), the EU E1.03m (US$1m), the UK £1m (US$1.4m) and Germany DM80,000 (US$36,000). There were more violent snowstorms in April in which at least 22 people and 100,000 animals died.
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Foot-and-mouth disease Foot-and-mouth disease broke out in eastern Mongolia in February, but had strikes been broadly contained by May. Khentii, Dornod and Sükhbaatar aimags, as well as Ulaanbaatar, were all affected. A programme of quarantine and vaccination restricted the disease so that movement quarantine regulations could be lifted on May 2nd. However, foreign trade was disrupted. The Buryat Republic, and the regions of Irkutsk and Chita, all within the Russian Federation, banned imports of livestock at the end of March. China banned imports of live animals and animal products to its Inner Mongolian Autonomous Region. Illegal trading, however, especially in Mongolian cashmere, has been a problem. Russia also briefly forbade the export of animal feed to Mongolia and oil exploration was also disrupted. (SOCO, the oil company working in Dornod aimag, had a fire at its installations late last year, which it was unable to repair because the quarantine rules prevented movement in or out of the area.) The government has allocated Tg426m (US$390,000) for disease prevention and restocking.
Sowing begins in May Seed sowing began in May. The government is encouraging farmers to use high-yield seed strains. To plant the 180,000 ha of land to wheat, 38,000 tonnes of seed will be required. The government is providing 15,000 tonnes of seed to 300 farms at Tg165,000 (US$151) per tonne. Russian high-yield seed, of which 2,000 tonnes is being imported, will cost Tg250,000 per tonne. Farmers will pay 30% of the cost immediately and the remainder after harvest. The government has recently drawn up a national seed programme to make high quality seed more widely available. Some 3,000 tonnes of harsh-weather wheat seed is also being imported from the Buryat Republic.
There are plans to increase The government has declared 2001 the year of intensive agricultural develop- arable production by 2005 ment. In March government officials, agricultural experts and farmers met to formulate a plan to ensure that grain and vegetable needs will be met by 2005. Yields per hectare have declined since 1989, partly because of a shortage of fertiliser. A Japanese proposal under the government’s Expanding Partnership programme will help to set up small enterprises to produce manure and mulch from organic waste.
The MIAT is prepared for In preparation for privatisation of the national airline, MIAT, the government privatisation is considering how to improve its financial position and improve safety and flight technology. The company has struggled with debt for some years, having made losses on its domestic routes for much of the 1990s. Flights are often cancelled when airports are fogbound. Flights were also cancelled in the east during the recent outbreak of foot-and-mouth disease.
The government is considering building a new international airport to serve Ulaanbaatar, leaving the existing international airport, Buyant Ukhaa, to handle domestic flights only. The Asian Development Bank and Japan are possible sources of funding. The MIAT will operate a new direct weekly flight to Hong Kong from June 1st to August 28th, bringing the company’s international destinations to a total of eight.
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The Millennium Road In April the government drew up a plan for building the Millennium Road, an project gets under way east-west highway (February 2001, page 55) that envisages a list of works that will cost an estimated Tg2.1bn. The workforce will include young unemployed people, servicemen and convicts. There has already been some foreign interest in participating in the project, and ICT, an Indian company, is due to start surveying. Voluntary donations have been flowing in from individuals and organisations. Critics fear, however, that the project is too large a commitment for a government that is struggling to reduce the budget deficit. The project is expected to be completed by 2007.
New loans are available for The World Bank approved a US$34m loan for the road and transport sector the transport sector with a further US$6.7m available from the Nordic Development Fund and US$8.84m from the Mongolian government. The money will go towards building and upgrading roads in the aimags of Övörkhangai and Zavkhan. A 177-km paved stretch of road between Erdenesant and Arvaikheer in Övörkhangai aimag will be constructed, and existing roads will be upgraded to a gravel surface—93km on the route between Arvaikheer and Khovd, and 86km between Kharkhorin in Övörkhangai and Tosontsengel in Zavkhan aimag. The loan also covers technical assistance and training in the road maintenance industry.
Construction of a power Construction of the Maikhan Tolgoi hydroelectric power station in Bayan Ölgii station is halted aimag was halted on the grounds that it would affect water levels in Khar Nuur lake and the Khoton River, to the detriment of wildlife. Erel, the surveying and construction company building the power station, was founded by opposition MP, Erdenebat (of the Mongolian Democratic New Socialist Party), who claims that the government’s action was politically motivated.
Herdsmen are encouraged The Zoos Bank is offering herdsmen loans at 1% interest to buy solar energy to get renewable energy equipment from the Solar Battery Company. The government plans to provide 100,000 herdsmen with wind-powered generators by 2004.
A power station receives The Japanese International Co-operation Agency is to provide a soft loan of Japanese funding US$50.7m, repayable over 40 years, for the second stage of the regeneration of Ulaanbaatar’s No. 4 power station. The loan was agreed when the prime minister, Mr Enkhbayar, visited Japan in February (see The political scene). The work was due to commence in April 2001 and be completed by 2005.
Internet services via mobile Mongolia’s first cellular telephone service provider, Mobicom, became phones are available Mongolia’s sixth Internet service provider on February 1st. It also offers mobile- phone Internet access. The Korean state-owned company, Korea Telecom, which holds a 40% share in the Mongolian state-owned company, Mongol Telecom, will provide Mongol Telecom with asymmetric digital subscriber line systems, which enable fast data transfer, and Internet marketing technology.
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Foreign trade and payments
The trade deficit widens, Foreign trade in the first two months of 2001 amounted to US$101.8m. trade licences are revised Exports in January-February fell by 15% year on year to US$38.3m, whereas imports rose by 15.7% to US$63.5m. The deficit was US$15.4m higher than a year ago.
A revised foreign trade licensing system came into force on April 1st, to bring labelling into line with international standards. Export licences are now required for trade in animals and animal products; plants; knitted textiles; toxic waste; and cultural and historical objects. Goods that require an import licence include toxic chemicals, veterinary medicines and instruments. Trade in certain categories of goods has also been banned (including toxic materials, materials and components for weapons of mass destruction, pornography, spirits, blood and blood products not tested for AIDS, certain animals, and historical and cultural items). Textile companies have complained that the Tg12,500 (US$11) per licence that they must now pay on export orders could put them out of business.
Standards are set for The government is trying to upgrade the meat industry. From April 2001 meat export meat production producers have had to be registered under one of the following three categories:
• AAA, producing for the external market; • AA, producing for the domestic market and, with veterinary approval, for a specific external market;
• A, producing for the domestic market only.
New regulations on the production of meat for export are due to come into force on August 1st—40 meat inspectors are being trained under the US Agency for International Development’s “Farmer to Farmer” programme.
Meat exports are disrupted In recent years Russia has imported a lot of meat from the EU. Worried about by foot-and-mouth BSE (bovine spongiform encephalopathy, or mad-cow disease) contamination, Russia is looking to diversify its sources of meat supply. In February an agreement for the supply of 20m tonnes of horsemeat to Buryatia, an autonomous republic within the Russian Federation, was signed. A warehouse to store Mongolian meat is to be constructed there. But outbreaks of foot-and- mouth disease in February and March led Russia to prohibit the import of animals and animal products from Mongolia.
The timber export ban is The government has agreed to lift the ban, imposed in 2000, on the export of lifted wood, and will permit the export of 250,000 cu metres in 2001. The income generated, will be used for forest regeneration.
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Bhutan
Political structure
Official name Kingdom of Bhutan
Government Monarchy with no written constitution. The king’s position requires confirmation by a two-thirds majority in the Tshogdu Chenmo (national assembly) every three years
National elections The unicameral Tshogdu Chenmo has 152 members, 99 of whom are elected, with the remainder either representatives of religious groups or nominated by the government. The tenure of the chinmis (elected members) is three years, but elections are staggered
National government The king is head of state. A royal advisory council (Lodoi Tsokde) advises the chairman of the council of ministers—a position that changes annually—and supervises the administration
Main political organisations Political parties are banned; some anti-government Nepalese groups are based in Nepal
Head of state (dragon king) King Jigme Singye Wangchuk
Council of ministers Chairman & minister of finance Yeshey Zimba Minister of foreign affairs Jigmi Yozer Thinley Minister of health & education Sangay Ngedup Dorji Minister of agriculture Kunzang Dorji Minister of trade & industry Khandu Wangchuk Minister of home affairs Thinley Gyamtsho Law minister Sonam Tobgye Chair of the Royal Advisory Council Kungang Tsangbi
Chairman of the Royal Monetary Authority Yeshey Zimba
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Economic structure
Annual indicatorsa
1996 1997 1998 1999 2000 GDP at market prices (Nu m) 11,714 14,477 16,420 n/a n/a GDP (US$ m) 330.6 398.7 398.0 n/a n/a Real GDP growth (%) 6.1 7.3 n/a n/a n/a Consumer price inflation (av; %) 8.8 6.5 n/a n/a n/a Population (mid-year; m) 1.81 1.86 2.00 2.06 n/a Exports fob (Nu m)b 3,553.8 4,274.1 n/a n/a n/a Imports cif (Nu m)b 4,525.2 4,978.0 n/a n/a n/a Reserves excl gold (US$ m) 184.0 181.2 249.6 274.4 n/a Total external debt (US$ m)c 113.0 119.6 171.0 183.8 n/a Exchange rate (av; Nu:US$) 35.43 36.31 41.26 43.06 44.94
May 11th 2001 Nu46.9 :US$1
Origins of gross domestic product 1998d % of total Components of gross domestic product 1998d (% of total) Services & others 43.0 Private consumption 36.3 Agriculture 35.1 Government consumption 25.8 Electricity, gas & water 10.7 Investment 47.3 Manufacturing 10.1 Exports 33.2 Mining 1.2 Imports –42.6 GDP at factor cost 100.0 GDP at market prices 100.0
Principal exports 1998d US$ m Electricity 32.5 Calcium carbide 14.1 Cement 9.0 Particle board 6.9 Total incl others 108.0
Main destinations of exports 1997e % of total Main origins of imports 1997e % of total India 94.6 India 69.4 Bangladesh 4.2 Japan 16.9 Singapore 2.8 Germany 0.9 US 0.6 a All figures are sourced from IMF, International Financial Statistics, unless otherwise indicated. b Fiscal years ending June 30th. c World Bank, Global Development Finance. d Asian Development Bank, Key Indicators of Developing Asian and Pacific Countries 2000. e IMF, Bhutan: Statistical Annex 1999.
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Quarterly indicators
1999 2000 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr Financial indicators Exchange rate Nu:US$ (av) 42.47 42.88 43.43 43.45 43.58 44.10 45.45 46.63 Nu:US$ (end-period) 42.43 43.36 43.61 43.49 43.62 44.68 46.07 46.75 M1 (end-period; Nu m) 2,715 2,685 3,210 3,724 4,020 3,584 4,456 3,939 % change, year on year 34.1 13.9 29.5 41.7 48.1 13.3 38.8 5.8 M2 (end-period; Nu m) 7,156 7,176 7,952 8,465 8,969 8,823 10,271 9,935 % change, year on year 29.3 21.4 25.0 32.0 25.3 23.0 29.2 17.4 Foreign reserves (US$ m) Reserves excl gold (end-period) 270.89 251.09 262.26 274.41 277.70 268.57 283.06 295.35 Source: IMF, International Financial Statistics.
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Outlook for 2001-02
Political forecast
Progress towards resolving Although the process of verifying the status of the Lhotsampa (Bhutanese of the refugee issue is slow Nepalese origin) refugees in Nepal has begun, progress towards a resolution of the problem will be slow. Bhutan will continue to fear that an influx of repatriated refugees would severely unbalance the domestic political situation. However, international pressure on Bhutan to accept the repatriation of some refugees—which Bhutan appears to accept are genuinely Bhutanese—will remain high, forcing some concessions. On April 29th the Nepalese foreign minister, Chakra Prasad Bastola, announced a plan to hold a ministerial meeting to discuss means of expediting the verification of refugees, which would take around ten years if the current rate is maintained.
Bhutan remains unwilling The government has yet to decide whether to begin military operations against to attack Indian rebels north-east Indian rebels based in southern Bhutan. Despite sporadic reports that Bhutan will seek Indian assistance in combating the problem, the government will be keen to evict the rebels without outside help. However, given that the size of the rebel groups is little less than that of the Royal Bhutan Army, military action would be difficult. The rebels could also disrupt trade between Bhutan and India, and thus largely isolate Bhutan. However, allowing the rebels to remain in Bhutan diminishes Bhutan’s sovereignty, and would lead to strains in Bhutan’s relationship with India. It seems most likely that the current ambivalent policy towards military action will continue.
Economic forecast
Growth will be sustained Bhutan should be able to sustain economic growth of 5.5-6% a year in 2001-02, underpinned by tourism receipts and the growth in the production, and exports to India of, hydroelectric power. Bhutan will continue to balance the advantages of economic growth against the preservation of both the environment and Bhutanese culture. India will continue to have a major influence on Bhutan—the currency, the ngultrum, is tied to the Indian rupee at parity, and grants from India help to finance both the government budget and hydroelectric projects.
The EIU forecasts that the Indian rupee will fall to Rs46.8:US$1 at end-2001 and Rs47.5:US$1 at end-2002. Inflation is likely to remain around the same level as in India, in the range of 5-7% in 2001-02. The main risk to this central forecast is the threat of the border being closed, or trade with India severely limited, as a result of conflict with rebels from north-east India.
The trade deficit will Bhutan’s trade deficit will narrow through the forecast period as electricity continue exports to India increase, but the economy will continue to run a trade deficit, and imports will fluctuate depending on the need for capital imports in power projects. The current-account deficit in 1999 stood at US$102.2m, according to the Asian Development Bank, but foreign grants to the government of Bhutan
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to fund infrastructure programmes totalled Nu3.58bn (US$82.3m), almost covering the current-account deficit. Bhutan’s foreign-exchange reserves will remain high, given the size of the economy. According to the IMF, at end- December 2000, total reserves excluding gold totalled US$295.4m.
The political scene
Progress is made on the A joint Nepal-Bhutan inspection team visited Lhotsampa (Bhutanese of refugee issue Nepalese origin) refugee camps in eastern Nepal on January 26th and 27th. The seven UN-supervised camps—one in Morang district and six in Jhapa district—are home to around 98,000 refugees claiming to be Bhutanese. The inspection, which sought to ascertain the nationality of the refugees, followed a suggestion by two former US assistant secretaries, Karl Inderfurth and Julia Taft, who visited the region in December 2000. Their proposal increased the international pressure on Bhutan, primarily from the EU and the UN, to address the refugee problem. The officials inspected some of the refugees’ documents to assess their nationality status as a prelude to repatriation to Bhutan. The ten officials in the joint verification team (JVT) were led by Sonam Tenzin, from the Bhutanese Ministry of Home Affairs, and Usha Nepal, a joint secretary at the Nepalese Ministry of Home Affairs. Mrs Nepal retired in late March and was replaced by Jung Bahadur Rana, the chief district officer of Jhapa.
Dr Tenzin indicated that he believed that some, but not all, of the refugees were likely to be genuinely Bhutanese—an important admission as Bhutan had previously not accepted that any Bhutanese citizens were in the camps. No protests against the Bhutanese inspectors took place, and the inspection raised hopes that the verification process would proceed quickly. However, the deputy camp secretary at the Pathri camp, Tikaram Basnet, claimed that the visit would not herald a breakthrough, and was merely a Bhutanese “consolation doled out under international pressure”. After the inspection, the JVT agreed to establish an office for the team in Damak (Jhapa district).
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That subsequent progress is likely to be slow was indicated by an initial four- hour meeting of the JVT on January 24th. The meeting stalled on the issue of whether to begin the inspection in the largest camp, Beldangi, holding around 60,000 refugees, or the smallest, Golchhap, which holds 8,000. The Nepalese members favoured Beldangi, and the Bhutanese Golchhap.
The arrival of the JVT followed the 10th ministerial-level committee, which met in December. The JVT meeting agreed that the family would be considered as the unit of verification, which would be done through examining documents and interviewing family heads. Bhutan had previously insisted on identifying refugees individually.
The process is tortuously Actual verification began in late March, and by mid-April anger at the slow slow progress of the verification was rising. By April 13th, 19 days after verification began, only 625 refugees from 106 families had been interviewed. The refugees are being divided into four categories—genuine Bhutanese, Bhutanese who willingly left Bhutan, Bhutanese with criminal backgrounds and non-Bhutanese.
The issue of repatriation of the refugees is unlikely to be dealt with until the process is complete, which, at the current rate, will take many years. Human- rights groups have begun to speak out against the slow progress of the verification, and the general secretary of the People’s Forum for Human Rights, Bhutan, D P Kafle, expressed his belief that donor agencies are exerting pressure on Bhutan to expedite the process. A number of human-rights groups have also requested that the UN play a role as intermediary between Nepal and Bhutan in the verification process, and have questioned the lack of clarity regarding the documents required for the verification process.
The US will support the The US will provide US$1m in funding for the refugee camps in Nepal—this is funding of the camps the first time that the US has announced direct assistance for the camps. The UN High Commissioner for Refugees (UNHCR) had requested US$3m to enable it to continue running the camps. Donor fatigue appears to be affecting the ten-year-old camps, and in 2000 two UK-based non-governmental organisations, Oxfam and Save the Children Fund UK, withdrew funding.
Meanwhile, the Nepal-based Bhutan National Democratic Party (BNDP), which celebrated its ninth anniversary on February 7th 2001, announced its intention to raise the matter of the Bhutanese refugees in India with Bhutan, and to demand their early repatriation. The BNDP also called on Bhutan to end the settlement of Bhutanese from northern and eastern districts on land in southern areas previously owned by the refugees.
The UN is positive on Despite the slow progress in relation to the refugees, an evaluation of Bhutan’s human-rights progress co-operation on human-rights issues by the UNHCR was positive. Louis Joinet, who visited Bhutan in 1994 and 1996 as vice-chairman of the UN Commission on Human Rights working group on arbitrary detention, completed an evaluation of human rights in April 2001. He praised the change towards a legal system based on strong and professional institutions, rather than one based on individuals, and he recognised the high level of education and
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professionalism among legal officials and law-enforcement officers in Bhutan. During his first visit, Mr Joinet found only three lawyers in Bhutan, compared with the current tally of 33, with 56 more in training.
The human-rights progress was underlined when, in mid-February, the government allowed a human-rights leader, Tek Nath Rijal, to travel to Calcutta for medical treatment, after he had been released from 11 years of “arduous detention”. Mr Rijal had been extradited from Nepal to Bhutan in 1989, and was released from prison in December 1999.
Conflict with Indian rebels The government continues to warn about the potential effects of any conflict would have serious effects between Bhutan and the 2,000-3,000 rebels from north-east India that have established camps in southern Bhutan. Both the interior minister, Thinley Gyamtsho, and the king have warned of the likelihood of casualties and of damage to the economy in the event of a clash with the United Liberation Front of Assam (ULFA) and the National Democratic Front of Bodoland (NDFB). Mr Gyamtsho stated that a decision on whether to attack the camps would be made in July, at the next parliamentary session.
Bhutan is determined to combat the groups without Indian help, although India said in 2000 that it was training Bhutanese soldiers. Bhutan believes that any external assistance, whether from India or the UN, would diminish Bhutanese sovereignty. At the same time, the government recognises the catastrophic effects of a conflict. Mr Gyamtsho said that Bhutan had failed to persuade the rebels to leave, and claimed that they were becoming bolder in moving around southern Bhutan. The longer they remain encamped, the more they will be able to dig in, and hence be harder to evict. In the event of war, Bhutan’s 266-km border with Assam, through which three of its four major connecting roads pass, would probably be effectively closed, with a devastating effect on trade. An attack on the camps would directly affect 12 of Bhutan’s 20 dzongkhags (districts).
Tensions with Assam state The deaths of 12 Bhutanese in the Indian state of Assam in December 2000 government rise have raised tensions between the state government of Assam and Bhutan. Assam claims that the NDFB was responsible for the killings, which may, according to the Assam government, even have taken place in Bhutan, with the bodies later dumped in Assam. This claim reflects a growing resentment with Bhutan for failing to evict the NDFB from its territory. Bhutan, however, claims that the Bodo Liberation Tigers (BLT) perpetrated the killings. The BLT, which opposes the NDFB, is involved in peace talks with the Assamese government. It is possible that the BLT carried out the killings, in the hope that it would force Bhutan to take action against the NDFB, thereby strengthening the BLT’s position.
North-east Indian rebels in Bhutan
The ULFA and NDFB rebel groups began moving into Bhutan in 1990-91, after the Indian army attacked their bases in Assam. The groups, which are demanding independence for Assam and Bodoland, respectively, have taken advantage of the Indo-Bhutan treaty of 1949, which allows the free movement
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of individuals between the two countries. The dense jungles of the border region have proved ideal for both groups.
In 1994 Bhutan discovered that the rebel groups had established camps in Bhutan. Subsequently, the Royal Bhutan Army built ten camps along the border with Assam, and deployed around 3,000 soldiers there. Recognising the disastrous effects that would follow any conflict with the rebels, the government of Bhutan has held two rounds of talks with ULFA and one with the NDFB, in an attempt to persuade them to leave. However, both rebel groups have refused to leave Bhutan until they succeed in creating their own independent states—a highly unlikely outcome. There are reports that the Isaac-Muivah group of the National Socialist Council of Nagaland has also established training camps in Bhutan.
Bhutan purchases weapons Viktor Komardin, the deputy general director of the Russian arms company, from Russia Rosoboronexport, stated in February that Russia had sold more than 1,000 Kalashnikov AK-103 assault rifles to Bhutan in December 2000, in a contract worth about US$1m. The deal is Russia’s first with Bhutan, which had previously bought weapons from India.
Economic policy and the economy
Strong ties with India are The minister for health and education, Sangay Ngedup, visited India for six emphasised days from April 4th, and attributed Bhutan’s progress in providing basic amenities to its population to assistance from India. He highlighted the provision of basic healthcare to 90% of the population, and the 72% enrolment rate in education. Two hospitals in Bhutan are being built with assistance from India, and India is also assisting an anti-malaria programme in Bhutan.
Foreign members leave the Management of the Bhutan Trust Fund for Environmental Conservation board of the BFTEC (BTFEC) was passed to an all-Bhutanese board on March 29th 2001. Previously, the World Wildlife Fund and the United Nations Development Programme had sat on the management board. Henceforth, the board will comprise four government representatives and one representative each from Bhutanese civil society and the private sector. The BTFEC, which was established in 1992 and legally incorporated under a Royal Charter in 1996, is intended to create sustainable conservation and has assets of more than US$30m. It spends more than US$1m a year on conservation grants.
Hazardous chemicals cause The method of disposal of around 33 tonnes of hazardous chemicals, pesticides concern and insecticides has caused concern. The chemicals, pesticides and insecticides have been stored in temporary accommodation in Paro for two years, using a Nu1.7m (US$36,000) grant in 1998 from the Danish development agency, Danida. Negotiations with India either to ensure the safe disposal of the chemicals in India, or to carry them through India to a third country, are continuing. Bhutan is also considering building an incinerator to destroy the chemicals in Bhutan.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001 40 Bhutan
Interest rates are cut The Bhutan National Bank (BNB), a commercial bank, cut its interest rates for business loans and overdraft facilities from 16% to 15% in April 2001. The BNB recently announced that its profits more than doubled to Nu102.4m. This increase in profits seems to have been at the expense of the Bank of Bhutan.
The ninth plan emphasises The king and the chairman of the council of ministers, Yeshey Zimba, environment and culture addressed a meeting in Punakha on March 11th to outline policy contained in the Ninth Plan, which begins in mid-2002. The national socioeconomic development plan emphasises the objective of self-reliance and balanced development throughout Bhutan. The need to create jobs is balanced against the need to preserve the environment, and Bhutan’s language, customs and religion. In the district of Punakha, the budget for the Eighth Plan (1997-2002) was Nu720.9m (US$15.4m), compared with Nu211m in the previous plan. Agricultural productivity has so far risen by 56% in the Eighth Plan period.
Energy experts from South Asia met in Dhaka, Bangladesh, in mid-March to discuss means of meeting regional power needs. The conference, organised by the Centre for Policy Dialogue and Coalition for Action on South Asian Co-operation, called for increased trade in power, with Bhutan utilising its hydroelectric potential as part of the process of reducing the region’s dependence on petroleum imports. Bhutan has an agreement with India to generate, transmit and distribute hydroelectricity. Bhutan also buys electricity from India for some border regions that are not connected to the national grid. A Bhutanese power official, Pradeep Pradhan, said that by 2005 Bhutan will generate around 1,485 mw of electricity, with domestic demand of only 112 mw. The power sector, which is 99% based on hydroelectric energy, accounts for 41.7% of total annual state revenue and about 10% of GDP. Bhutan exports 30 mw of power to India, which will import 90% of the surplus power from the Tala Hydro Electric Project, due to be completed in 2003.
The state-owned Chukha Hydro Power Corporation (CHPC) announced net profits of Nu1.44bn (US$30.8m) for 2000, despite suffering serious damage during the 2000 monsoon—repairs are expected to cost around Nu90m. Profits rose by 9.4% compared with 1999, as a result of an upward revision in the export tariff to Nu1.50 (three US cents) per kwh. Generation fell slightly compared with the record output of 1999, owing to low river inflow in October and December. Around 80% of CHPC’s output was exported to India. Domestic consumption dropped because of the temporary closure of the two main power consumers, Bhutan Carbide and Chemicals Ltd, which mines and processes limestone, and Bhutan Ferro Alloys Ltd, which mines quartzite. CHPC paid Nu1.93bn in taxes and dividends to the government, up from Nu1.76bn in 1999.
The ADB president visits In late January the president of the Asian Development Bank (ADB), Tadao Bhutan Chino, visited Bhutan. Mr Chino emphasised that the ADB’s mission, to improve the quality of life and reduce poverty, was consistent with Bhutan’s goal of “gross national happiness”. The ADB began operating in Bhutan in 1983. Since then, it has approved 17 loans to Bhutan, totalling US$86m, of which six are ongoing. The repayment schedule has been amended to 32 years, comprising an eight-year grace period, with an interest rate of 1%, followed by an interest rate of 1.5% for the rest of the repayment period.
EIU Country Report May 2001 © The Economist Intelligence Unit Limited 2001